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Reporting Foreign Bank Accounts

By Michael B. Nelson, Esq. - Email Editor

Aug, 2010

Reporting Foreign Bank Accounts; Where are we now?

As stated in my last article dated September 2009, the Internal Revenue Service mandated a deadline of October 15, 2009 for reporting foreign bank accounts on a voluntarily basis.

I had noted that the voluntary reporting program offered by the IRS was designed to bring vast revenues into the government coffers while allowing American taxpayers to avoid the harsh penalties for non-compliance filing of the annual report, Report of Foreign Bank and Financial Accounts, form TD 90-22.1 as well as criminal proceedings by the IRS's Criminal Investigation Division, CID. Since last October's deadline, the U.S. Treasury has been quiet about the amounts of revenue generated as well as the real success in encouraging Americans to come forward voluntarily.

HOW SUCCESSFUL WAS THE VOLUNTARY AMNESTY PROGRAM?

Whether or not the amnesty program was a success is a question of whom you ask. The IRS points out that the amnesty program caused over 14,000 taxpayers to voluntarily come forward in admission of foreign bank accounts that were not disclosed on the aforementioned form TD 90-22.1 Many tax practitioners complain that the amnesty process is taking too long even though the IRS has announced that these cases are being given its "highest priority." Even in view of the backlog of open cases of non-reporting, the IRS considers the number of amnesty applicants as a marked success to bring taxpayers into conformity with U.S. tax laws. It is worth noting that the U.S. Treasury had placed the expected number of amnesty filers to be considerably higher than approximately 14,000.

WHY IS THE AMNESTY PROGRAM FACING UNEXPECTED DELAYS?

One reason for the delay in reviewing these amnesty applications may be the open issue of funds from U.S. private equity funds and foreign private equity funds with American investors where investments are made in portfolio companies organized outside the United States. These funds mentioned in the preceding sentence can fall into the definition of a U.S. passive foreign investment company, or "PFIC." The legislation of PFIC rules were created and enacted into law as part of the Tax Reform Act of 1986. PFIC was meant to heavily financially penalize the act of deferring tax on investment income by holding passive investments through non-U.S. companies that do not distribute their earnings currently and, therefore, are not taxed currently. In addition, the PFIC rules were intentionally drafted with a broad brush to apply not only to passive investment corporations, but also to large for-profit companies and high growth tech entities.

The IRS attempted to answer the above dilemma with regulatory Notice 2010-23, created to give some guidance to taxpayers that may be required to file Form TD F 90-22.1 for calendar year 2009 and years earlier. The IRS addressed the issue of commingled foreign funds:

Persons with a financial interest in, or signature authority over, a foreign commingled fund that is a mutual fund are required to file an FBAR unless another filing exception, as provided in the FBAR instructions or other relevant guidance, applies. The IRS will not interpret the term "commingled fund" as applying to funds other than mutual funds with respect to FBARs for calendar year 2009 and prior years. Thus, the IRS has determined that it will not apply its enforcement authority adversely in the case of persons with a financial interest in, or signature authority over, any other foreign commingled fund with respect to that account for calendar year 2009 and earlier calendar years. A financial interest in, or signature authority over, a foreign hedge fund or private equity fund is included in the administrative relief provided in the preceding sentence.

Of course this raises the pragmatic question of what to do when the 2010 tax year filing requirement is upon us.

WHAT HAPPENS WHEN DOJ UNEXPECTEDLY BECOMES INVOLVED?

Another problem has arisen that was not envisioned by the IRS: the Department of Justice, "DOJ" is now involved in a type of tug-of-war with the amnesty filers. DOJ is increasingly active in taking over individual amnesty case files from the IRS's Criminal Investigation Division. Why is this a concern? Tax practioners believe that a much more favorable conclusion will be made by CID rather than by DOJ. DOJ is relying on agreements made with United Bank of Switzerland, "UBS AG" that provide direct information to be granted to DOJ without the need to await CID's analysis on the merits of each individual's amnesty application. DOJ's main thrust is for criminal prosecution while CID's goal is to have tax compliance from taxpayers.

HOME DETENTION FOR NON-FILING?

The most recent DOJ case involving foreign bank accounts and the UBS release of information is the Jack Barouh matter that was decided only this April. Barouh admitted to opening bank accounts with UBS in Switzerland and not filing form 90-22.1 for all years he had monies with UBS. He also admitted to other tax violations. He became nervous about the possible exchange of information between UBS and the IRS. As a result of his concerns over possible private tax information being given to the IRS, Barouh began efforts in earnest to withdraw his bank balances from UBS Switzerland in 2007. A Swiss attorney advised Barouh to transfer the money from Switzerland to a newly created bank account in Hong Kong in the name of a nominee Hong Kong corporation. The Swiss attorney comforted Barouh by stating that UBS did not disclose his name to the U.S. Treasury and if a voluntary disclosure were to be made by Barouh; it would be through a Swiss lawyer and not an American lawyer. Barouh was advised to then begin compensating himself a consulting fee until all of the funds were exhausted from Hong Kong and paid into the United States. Barouh admitted that there was no economic reality to this compensation payment scheme and that it was used merely to effectuate a transfer of this money from Switzerland to the U.S., albeit indirectly. Barouh became the seventh American taxpayer with an account at UBS AG sentenced to 10 months in prison.

U.S. District Court Judge Adalberto Jordan in Miami announced sentencing. Judge Jordan ordered Barouh to surrender to the custody of U.S. Marshals by June 25, 2010. What makes the Barouh case unique from the others brought against former UBS clients is the reason he gave for failing to disclose the more than $10 million in off-shore accounts to the US government. Barouh claimed that as a child of Holocaust survivors, he had a compulsion to "hide and hoard" money and to create a secret nest egg in case there ever was another attempt to exterminate Jews. During World War II, Barouh's parents fled Nazi persecution and settled down in Bogota, Colombia, where Barouh was born. Barouh also said that he was harassed as a Jewish child living in Colombia and again in the U.S. for being a Jew with a Colombian accent. The Judge, while sympathetic with Barouh's family's personal history, did not agree that his connection to the Holocaust completely excused his behavior or his crime nor accept Barouh's request for home detention as his punishment. Judge Jordan ultimately sentenced Barouh to less time than the three year maximum available under law and the 20 months requested by the prosecution, mostly due to his cooperation with authorities by providing the prosecution with important information about two UBS money managers and one Swiss attorney who were involved in not only helping him hide his assets from the U.S. government, but also in helping other UBS clients achieve the same goals. I expect that the DOJ will utilize these new names to continue their investigations into seeking more American's that may have been advised by these two managers and the Swiss attorney.

5% PENALTY, 20% PENALTY OR 50% PENALTY?

Another perceived source of delay is Revenue Agents' resistance to reasonable cause claims proffered by taxpayers for failure to file FBARs, leading to higher penalties than the expected 20 percent in-lieu-of audit fine. This type of thought by Agents has led to much confusion by the amnesty filers as to asserting defenses for non-filing. Many tax practitioners and amnesty filers are still pondering the best approach to take with an Agent since the decision to fine verses a percentage penalty is subjective with the Agent assigned to each particular case. There are also known realities in which Agents have threatened criminal prosecution. This type of conduct by the individual Agents brings pause and chilling effects to the taxpayer and advisor since the IRS Agent has the ability to "tick" the box on his investigation report as subjecting the taxpayer to the 5% or 20% penalty. (If you are too vigorous in the defense of the taxpayer by the tax attorney, this may bring a "tick" in the box for a 20% penalty or, even worse, passing the file on for criminal prosecution.) . Should the prosecution believe that you are not cooperating in your own amnesty filing, then the 50% penalty for willful non-filing of the FBAR will be asserted by the IRS.

CRIMINAL PROSECUTION EVEN WHEN YOU HAVE FILED FOR THE AMNESTY PROGRAM?

In past IRS voluntary disclosures or amnesty programs, the IRS Agents are guided by the Internal Revenue Manual, "IRM," specifically section 9.5.11.9 and overseen by the IRS Criminal Investigation Division. This manual allows taxpayers and advisors some comfort against criminal prosecution of the taxpayer if the particular taxpayer's case is accepted by the IRS and the taxpayer makes timely, complete, and truthful disclosures to the IRS and, of course, full pay any assessed tax, interest, and penalties. However, if you read the IRM, your reliance will diminish considerably.

TAX CRIMES - GENERAL

IRM 9.5.11.9
Voluntary Disclosure Practice

(1) It is currently the practice of the IRS that a voluntary disclosure will be considered along with all other factors in the investigation in determining whether criminal prosecution will be recommended. This voluntary disclosure practice creates no substantive or procedural rights for taxpayers, but rather is a matter of internal IRS practice, provided solely for guidance to IRS personnel. Taxpayers cannot rely on the fact that other similarly situated taxpayers may not have been recommended for criminal prosecution.

(2) A voluntary disclosure will not automatically guarantee immunity from prosecution; however, a voluntary disclosure may result in prosecution not being recommended. This practice does not apply to taxpayers with illegal source income.

(3) A voluntary disclosure occurs when the communication is truthful, timely, complete, and when:

a. the taxpayer shows a willingness to cooperate (and does in fact cooperate) with the IRS in determining his or her correct tax liability; and

b. the taxpayer makes good faith arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable.

(4) A disclosure is timely if it is received before:

a. the IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation;

b. the IRS has received information from a third party (e.g., informant, other governmental agency, or the media) alerting the IRS to the specific taxpayer's noncompliance.

c. the IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer; or

d. the IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena).

(5) Any taxpayer who contacts the IRS in person or through a representative regarding voluntary disclosure will be directed to Criminal Investigation for evaluation of the disclosure. Special agents are encouraged to consult Area Counsel, Criminal Tax on voluntary disclosure issues.

IF YOU HAVE A GREEN CARD, DO YOU NEED TO BE CONCERNED ABOUT FILING FORM 90-22.1?

Remember: The responsibility to file this form, 90-22.1, is that of a "United States person" which means a citizen or resident of the United States, or a person in and doing business in the United States. If you are a Green Card Holder, this responsibility is even more onerous and imperative. As a Green Card Holder, you are allowed to reside and work in the United States, but you are also within the definition of a "United States person" and may be required to file the Report of Foreign Bank and Financial Accounts. Failure to do so may cause you to lose your Green Card status and be subject to deportation. While the deportable crimes may be clear types of what are known as "aggravated felonies" the line does blur in real life applications. One unfortunate example involved Carlos Pacheco who entered the US with a Green Card as a 6-year old child. In 2000, a Federal Appeals Court agreed that he was an "aggravated felon" based on his misdemeanor conviction in Rhode Island for stealing some Tylenol and cigarettes. In doing so, the court expressed its own "'misgivings" that Congress, in its zeal to deter deportable non-citizens from re-entering this country," equated misdemeanors with felonies. In this case, the immigration consequences were much more severe than the criminal consequences. Most non-citizens who are deported from the United States are not eligible to apply to return legally to the country for a period of 5 to 20 years depending on their circumstances. Aggravated felons are permanently disqualified from ever returning to the United States for any reason.

CONCLUSION:

If you have failed to disclose a reportable offshore account or are under investigation for tax evasion, filing a false tax return or other criminal charges related to your holdings in an offshore account, contact an experienced tax attorney today. Federal criminal tax charges carry very serious penalties, including prison time. An attorney knowledgeable in federal income tax law can help you determine the best course of action to take.

Call 888.916.7070 or email info@trustmakers.com

By Michael B. Nelson
TrustMakers.com

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