On December 12, 2018, Matthew D. Lee will participate in a ABA Tax Section webinar entitled “Transparency Tide or Tsunami? The New Wave of Global Reporting Rules and IRS Tools To Unearth Foreign Financial Accounts.” This webinar will address the latest developments with respect to the foreign financial asset reporting rules and recent offshore tax enforcement efforts by the Internal Revenue Service and the Justice Department. More details are available here.
On September 29, 2018, the Internal Revenue Service closed for good the long-running Offshore Voluntary Disclosure Program (OVDP), its hugely successful tax amnesty program for undisclosed offshore financial assets. Since March 2009, the IRS has maintained an offshore voluntary disclosure program in some form or fashion, and more than 56,000 taxpayers have taken advantage of such programs to voluntarily return to tax compliance. The U.S. Treasury has collected a whopping $11.1 billion in back taxes, interest, and penalties from taxpayers participating in the OVDP. The IRS’s decision to close the OVDP last month was driven by declining participation in the program, falling from its peak in 2011, when about 18,000 taxpayers came forward, to only 600 disclosures in 2017.
The closure of OVDP does not, however, mark the end of the U.S. government’s crackdown on offshore tax evasion. To the contrary, IRS and Justice Department efforts to combat noncompliance in this area continue to be aggressive, as evidenced by public announcements by both just yesterday.
First, the Justice Department announced the guilty plea of yet another taxpayer with an offshore bank account. A California resident pleaded guilty to maintaining a secret bank account containing millions of dollars at Bank Leumi in Israel. According to the Justice Department’s press release, the taxpayer had an account at Bank Leumi from 1994 to 2011. In 2011, he closed that account and moved $2.4 million to another Israeli bank. The taxpayer also had undisclosed accounts at other bank in three different countries, each with a balance exceeding $1 million.
In December 2014, Bank Leumi entered into a deferred prosecution agreement with the Justice Department, pursuant to which the bank admitted to conspiring from at least 2000 until early 2011 to aid and assist U.S. taxpayers in preparing and presenting false tax returns by hiding income and assets in offshore bank accounts in Israel and other foreign locations. Under the terms of the deferred prosecution agreement, Bank Leumi paid the U.S. government a total of $270 million and is continuing to cooperate with respect to ongoing civil and criminal tax investigations.
Next, the IRS’s Large Business and International Division – responsible for, among other things, conducting audits of taxpayers with international activities – announced that it was adding two more offshore-focused campaigns to its growing list of “compliance campaigns.” LB&I is moving toward issue-based examinations and the compliance campaigns represent the issues identified by LB&I that present the greatest risk of tax noncompliance. A number of the previously-announced issue-focused campaigns center on offshore issues, such as the “OVDP Declines-Withdrawal Campaign” – which targets taxpayers who entered OVDP but later declined to participate or withdrew from the program – and the “Swiss Bank Program Campaign” – which leverages the legacy phase of the Swiss Bank Program by utilizing the mountain of data handed over to the Justice Department by the 80 participating Swiss banks.
The two new offshore-based campaigns unveiled by LB&I yesterday focus on offshore service providers and FATCA filing accuracy. The “Offshore Service Providers” campaign addresses taxpayers who utilized the services of offshore service providers to create foreign entities and structures to conceal the ultimate beneficial ownership of offshore assets. Perhaps the most well-known offshore provider in this area is the Panamanian law firm Mossack Fonseca of “Panama Papers” fame, but there are plenty of other firms throughout the world who catered to U.S. taxpayers and whose interactions with such clients will be the subject of this campaign.
The second campaign announced yesterday – entitled “FATCA Filing Accuracy” campaign – will focus primarily on the accuracy of annual reporting by offshore financial institutions required by the Foreign Account Tax Compliance Act (FATCA). Enacted in 2010, and effective as of July 1, 2014, FATCA requires foreign financial institutions and related offshore entities to annually disclose to the IRS the identities of their U.S. customers, or face severe financial penalties in the form of 30 percent withholding on U.S.-source payments. This campaign will presumably focus on the accuracy of the annual FATCA disclosures made by offshore financial institutions, with the potential penalty for noncompliance being termination of FATCA-compliant status.
These two latest developments – announced on the same day by the Justice Department and the IRS – should dispel any suggestion that the U.S. government may be ramping down its offshore tax compliance agenda in the post-OVDP world. By all accounts both the Justice Department and the IRS will continue to aggressively press their enforcement efforts in this area, both civilly and criminally (where appropriate). At the same time, even in the absence of OVDP, other voluntary disclosure options still exist for taxpayers seeking to come clean. Taxpayers with noncompliant offshore financial assets who fail to take prompt action do so at their peril.
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The Internal Revenue Service has issued its annual reminder to taxpayers that they report their foreign assets on their individual tax returns due on April 17, 2018. Individuals with offshore assets such as bank accounts generally have up to three reporting obligations with respect to such assets. First, individuals with foreign bank accounts must answer a series of questions that appear on Schedule B of the Form 1040 tax return. Second, individuals with foreign bank accounts may have to file FinCEN Form 114 (commonly known as the “FBAR” form). Third, individuals with foreign financial assets may have to file Form 8938 (called “Statement of Specified Foreign Financial Assets”) with their tax return. These requirements apply to U.S. citizens and resident aliens (green card holders), including those with dual citizenship. The FBAR form now has the same deadline as individual tax returns (April 17), although an automatic six-month extension is available if more time is needed.
The text of the IRS reminder is as follows:
Deadline for reporting foreign accounts
The deadline for filing the annual Report of Foreign Bank and Financial Accounts (FBAR) is the same as for a federal income tax return. This means that the 2017 FBAR, Form 114, must be filed electronically with the Financial Crimes Enforcement Network (FinCEN) by April 17, 2018. FinCEN grants filers missing the April 17 deadline an automatic extension until Oct. 15, 2018, to file the FBAR. Specific extension requests are not required. In the past, the FBAR deadline was June 30 and no extensions were available.
In general, the filing requirement applies to anyone who had an interest in, or signature or other authority, over foreign financial accounts whose aggregate value exceeded $10,000 at any time during 2017. Because of this threshold, the IRS encourages taxpayers with foreign assets, even relatively small ones, to check if this filing requirement applies to them. The form is only available through the BSA E-Filing System website.
Reminder: IRS to end Offshore Voluntary Disclosure Program
The Offshore Voluntary Disclosure Program will close on Sept. 28, 2018. Taxpayers with undisclosed foreign financial assets still have time to use OVDP before the deadline. For further details about the OVDP, see the OVDP FAQs.
The IRS noted it will continue to use tools besides voluntary disclosure to combat offshore tax avoidance, including taxpayer education, whistleblower leads, civil examination and criminal prosecution. The IRS continues to use streamlined filing compliance procedures that will remain in place and be available to eligible taxpayers. But, as with OVDP, the IRS said it may end the streamlined filing compliance procedures at some point. Full details of the OVDP and the streamlined filing compliance procedures are available at Options Available for U.S. Taxpayers with Undisclosed Foreign Financial Assets.
Most people abroad need to file
An income tax filing requirement generally applies even if a taxpayer qualifies for tax benefits, such as the Foreign Earned Income exclusion or the Foreign Tax credit, which substantially reduce or eliminate U.S. tax liability. These tax benefits are only available if an eligible taxpayer files a U.S. income tax return.
A special extended filing and payment deadline applies to U.S. citizens and resident aliens who live and work abroad. For U.S. citizens and resident aliens whose tax home and abode are outside the United States and Puerto Rico, the income tax filing and payment deadline is June 15, 2018. The same applies for those serving in the military outside the U.S. and Puerto Rico.
Interest, currently at the rate of five percent per year, compounded daily, will apply to any payment received after the regular April 17 deadline. See U.S. Citizens and Resident Aliens Abroad for details.
Nonresident aliens who received income from U.S. sources in 2017 also must determine whether they have a U.S. tax obligation. The filing deadline for nonresident aliens is April 17. See Taxation of Nonresident Aliens on IRS.gov.
Special income tax return reporting for foreign accounts and assets
Federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts. In most cases, affected taxpayers need to complete and attach Schedule B to their tax return. Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires U.S. citizens to report the country in which each account is located.
In addition, certain taxpayers may also have to complete and attach to their return Form 8938, Statement of Foreign Financial Assets. Generally, U.S. citizens, resident aliens and certain nonresident aliens must report specified foreign financial assets on this form if the aggregate value of those assets exceeds certain thresholds. See the instructions for this form for details.
Specified domestic entity reporting
For tax year 2017, certain domestic corporations, partnerships and trusts that are considered formed for the purpose of holding (directly or indirectly) specified foreign financial assets must file Form 8938 if the total value of those assets exceeds $50,000 on the last day of the tax year or $75,000 at any time during the tax year.
For more information on domestic corporations, partnerships and trusts that are specified domestic entities and must file Form 8938, as well as the types of specified foreign financial assets that must be reported, see Do I need to file Form 8938, “Statement of Specified Foreign Financial Assets”? and Form 8938 instructions.
Report in U.S. dollars
Any income received or deductible expenses paid in foreign currency must be reported on a U.S. tax return in U.S. dollars. Likewise, any tax payments must be made in U.S. dollars.
Both FinCen Form 114 and IRS Form 8938 require the use of a Dec. 31 exchange rate for all transactions, regardless of the actual exchange rate on the date of the transaction. Generally, the IRS accepts any posted exchange rate that is used consistently. For more information on exchange rates, see Foreign Currency and Currency Exchange Rates.
Taxpayers who relinquished their U.S. citizenship or ceased to be lawful permanent residents of the United States during 2017 must file a dual-status alien return, attaching Form 8854, Initial and Annual Expatriation Statement. A copy of the Form 8854 must also be filed with Internal Revenue Service, Philadelphia, PA 19255-0049, by the due date of the tax return (including extensions). See the instructions for this form and Notice 2009-85, Guidance for Expatriates Under Section 877A, for further details.
Choose Free File or e-file
U.S. citizens and resident aliens living abroad can use IRS Free File to prepare and electronically file their returns for free. This means both U.S. citizens and resident aliens living abroad with adjusted gross incomes (AGI) of $66,000 or less can use brand-name software to prepare their returns and then e-file them for free. A limited number of companies provide software that can accommodate foreign addresses.
A second option, Free File Fillable Forms, the electronic version of IRS paper forms, has no income limit and is best suited to people who are comfortable preparing their own tax return. Both the e-file and Free File electronic filing options are available until Oct. 15, 2018, for anyone filing a 2017 return. Check out the e-file link on IRS.gov for details on the various electronic filing options. Free File is not available to nonresident aliens required to file a Form 1040NR.
More information available
Any U.S. taxpayer here or abroad with tax questions can refer to the International Taxpayers page and use the online IRS Tax Map and the International Tax Topic Index to get answers. These online tools group IRS forms, publications and web pages by subject and provide users with a single-entry point to find tax information.
Taxpayers who are looking for return preparers abroad should visit the Directory of Federal Tax Return Preparers with Credentials and Select Qualifications.
To help avoid delays with tax refunds, taxpayers living abroad should visit Helpful Tips for Effectively Receiving a Tax Refund for Taxpayers Living Abroad on IRS.gov.
More information on the tax rules that apply to U.S. citizens and resident aliens living abroad can be found in Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, available on IRS.gov.
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The Internal Revenue Service has issued a warning to taxpayers about avoiding taxes by hiding money or assets in unreported offshore accounts, a tax scam that remains on the annual “Dirty Dozen” for 2018. Offshore tax compliance has been a major focus for the IRS in recent years, and taxpayers should remain wary given the continuing focus on such schemes by both the IRS and the Justice Department.
Compiled annually by the IRS, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter any time of the year, but many of these schemes peak during filing season as people prepare their tax returns or seek help from tax professionals. To help protect taxpayers, the IRS is highlighting each of these scams on twelve consecutive days to help raise awareness.
The text of the IRS announcement follows:
As the IRS intensified efforts on offshore issues in recent years, many taxpayers have voluntary disclosed their participation in these schemes.
There have been more than 56,400 disclosures and the IRS has collected more than $11.1 billion from the Offshore Voluntary Disclosure Program (OVDP) since it opened in 2009. With applications dwindling in recent years to a few hundred annually, the IRS announced earlier this month the voluntary program will end Sept. 28.
In addition, another 65,000 taxpayers have made use of separate streamlined procedures to correct prior non-willful omissions and meet their federal tax obligations. The IRS conducted thousands of offshore-related civil audits that resulted in the payment of tens of millions of dollars in unpaid taxes. The IRS has also pursued criminal charges leading to billions of dollars in criminal fines and restitutions.
Illegal scams can lead to significant penalties as well as interest and possible criminal prosecution. The IRS Criminal Investigation Division works closely with the Department of Justice to shut down scams and prosecute the criminals behind them.
Hiding Income Offshore
Over the years, numerous individuals have been identified as evading U.S. taxes by attempting to hide income in offshore banks, brokerage accounts or nominee entities. They then access the funds using debit cards, credit cards or wire transfers. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.
The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as bankers and others suspected of helping clients hide their assets overseas.
While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting requirements are breaking the law and risk significant fines, as well as the possibility of criminal prosecution.
Since 2009, tens of thousands of individuals have come forward to voluntarily disclose their foreign financial accounts, taking advantage of special opportunities to comply with the U.S. tax system and resolve their tax obligations. Information on the existing Offshore Voluntary Disclosure Program can be found be found on IRS.gov More details on the program closing can be found in these questions and answers.
Under the Foreign Account Tax Compliance Act (FATCA) and the network of intergovernmental agreements between the U.S. and partner jurisdictions, automatic third-party account reporting has entered its third year The IRS continues to receive more information regarding potential non-compliance by U.S. persons because of the Department of Justice’s Swiss Bank Program. This information makes it less likely that offshore financial accounts will go unnoticed by the IRS.
With the Offshore Voluntary Disclosure Program coming to a close on Sept. 28, the IRS reminded taxpayers there is a limited amount of time to take advantage of this option.
Potential civil penalties increase substantially if U.S. taxpayers associated with participating banks wait to resolve their tax obligations.
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The Justice Department’s Tax Division has recently announced a major policy shift that will invariably result in longer jail sentences for individuals convicted of failing to report their offshore bank accounts on the FBAR form. Since 2009, the Justice Department and Internal Revenue Service have aggressively prosecuted individuals with secret offshore bank accounts, and the defendants in those cases are typically charged with one of two felonies (or both): (1) a tax offense (due to the unreported income generated in the foreign bank account); and/or (2) failure to file the FBAR form (a separate felony).
At sentencing in offshore bank account cases, the Justice Department has for nearly a decade consistently taken the position that the provision of the Sentencing Guidelines applicable to tax crimes should apply, rather than the harsher guideline applicable to FBAR offenses. In the overwhelming majority of these cases, judges have imposed relatively lenient sentences, oftentimes varying below the advisory Sentencing Guidelines range, and in many cases, imposing a sentence of probation only. In October 2017, the Justice Department surreptitiously announced that it was changing its sentencing policy for FBAR cases, and in December publicly confirmed that it would seek to have courts utilize the FBAR sentencing guideline in future cases. The government’s policy change was no doubt motivated by its desire to see longer jail sentences imposed in these types of cases, and this decision will have an immediate, and long-lasting impact in FBAR cases.
United States v. Hyung Kwon Kim
To illustrate the potentially significant sentencing disparities that can result from using the FBAR guideline instead of the tax guideline, we will focus on the facts of United States v. Kim, the very case in which the Justice Department announced its policy change. Kim is a citizen of South Korea who, since 1998, resided in the United States with a green card. Kim inherited millions of dollars that he deposited in secret Swiss bank accounts held at Credit Suisse, UBS, and other institutions. Kim utilized the services of numerous foreign “enablers” to set up and maintain his offshore bank accounts, including the creation of sham corporate entities to hold certain accounts. Among the individuals that Kim worked with was Dr. Edgar H. Palzer, a Swiss attorney who pleaded guilty in 2013 in the United States to conspiracy to defraud the United States government. By 2004, Kim had amassed more than $28 million in his Swiss accounts.
Last fall, the Justice Department announced that Kim had pleaded guilty to failing to report his Swiss bank accounts on the FBAR form. According to documents filed with the Court, however, it appears that Kim agreed to plead guilty five years earlier, shortly after he was contacted by government investigators, and thereafter provided extensive cooperation to the government in its investigation of himself and others. On October 26, 2017, Kim appeared in court and pleaded guilty to a single count of willfully failing to file an FBAR. He was not charged with, nor did he plead guilty to, any tax offense. As part of his plea agreement, Kim agreed to pay a civil FBAR penalty of over $14 million, representing one-half of the highest account balance in his Swiss bank accounts.
Sentencing Guidelines Analysis for Tax Cases
In the federal criminal justice system, sentencing decisions are driven in part by Sentencing Guidelines which are enacted by the United States Sentencing Commission. Although no longer mandatory, many federal judges still rely upon the Sentencing Guidelines calculation as a starting point in fashioning an appropriate sentence.
In tax cases, the Sentencing Guidelines calculation is based upon the “tax loss,” which is a monetary calculation of the unpaid federal taxes. The larger the amount of the “tax loss,” the longer the resulting Sentencing Guidelines calculation. The Sentencing Guidelines contain a “tax table,” which assigns an offense level based upon the amount of the tax loss. As the following tax table demonstrates, the offense level increases as the tax loss increases:
In the Kim case, the parties agreed that the tax loss was approximately $104,699 based upon the defendant’s failure to report income from his undeclared Swiss accounts on his 2007 federal income tax return, resulting in a base offense level of 16. As part of the plea, the parties also stipulated to a 2-level increase because the offense involved “sophisticated means,” a commonly employed sentencing adjustment in tax cases. The defendant’s resulting base offense level was 18. With a 3-level reduction for pleading guilty, the total offense level was 15, which corresponded to an advisory sentencing range of 18 to 24 months of imprisonment.
Sentencing Guidelines Analysis for FBAR Cases
In contrast to the tax guideline, the sentencing guideline applicable to FBAR violations – U.S.S.G. § 2S1.3 – is generally based upon the dollar amount of the funds in the unreported foreign account(s). In virtually every case, that amount will far exceed the tax loss amount. The U.S.S.G. § 2S1.3 guideline contains a cross-reference to the guideline applicable to theft and fraud (§ 2B1.1), and sets the base offense as 6 plus the applicable number of offense levels from the following table based upon the account balances:
The guideline also provides for an upward adjustment if two conditions are satisfied. First, the defendant must be convicted of certain offenses under Title 31 of the United States Code, which includes FBAR charges. Second, the defendant must have “committed the offense as part of a pattern of unlawful activity involving more than $100,000 in a 12-month period.” The Application Note to this guideline defines a “pattern of illegal activity” as “at least two separate occasions of unlawful activity involving a total amount of $100,000 in a 12-month period, without regard to whether any such occasion occurred during the course of the offense or resulted in a conviction for the conduct that occurred on that occasion.” The government should be able to establish that this adjustment applies relatively easily if the defendant files a false tax return with a false FBAR (or fails to file an FBAR).
Of critical importance, the FBAR guideline contains another cross-reference, which provides that “[i]f the offense was committed for purposes of violating the Internal Revenue laws, apply the most appropriate guideline from Chapter Two, Part T (Offenses Involving Taxation) if the resulting offense level is greater than that determined above.” It is this cross-reference that the government has historically relied upon to support its view that the tax guideline, not the FBAR guideline, applies in offshore bank account cases.
In the Kim case, the defendant’s offshore bank accounts had a maximum value of $28 million. If the FBAR guideline applied, the base offense level would be 28 (starting at level 6 with an increase of 22 levels based upon the value of the funds). Two additional levels would be added because the defendant engaged in a pattern of unlawful activity which, according to the government, consisted of filing two false FBARs (for 2006 and 2008) and a false tax return (for 2007) within a 12-month period. The defendant’s resulting base offense level under this scenario is 30. With a 3-level reduction for pleading guilty, the total offense level is 27, which corresponds to an advisory sentencing range of 70 to 87 months of imprisonment.
When comparing the sentencing range applicable to the tax guideline as opposed to the FBAR guideline in the Kim case, the disparity is readily apparent:
Advisory sentencing range per tax guideline: 18 to 24 months
Advisory sentencing range per FBAR guideline: 70 to 87 months
Kim’s Plea Agreement Foretells Policy Shift
The Justice Department issued a press release on October 27, 2017 announcing Kim’s guilty plea. Kim had appeared in federal court in the Eastern District of Virginia one day earlier and formally entered his guilty plea. Buried in Kim’s written guilty plea agreement is a provision revealing – for the first time – that the government was changing its sentencing policy in FBAR cases. The agreement first provides that the government contends that the applicable sentencing guideline for the single offense of conviction – willful failure to file the FBAR form – is the FBAR guideline. The agreement next provides that at the time the defendant agreed to plead guilty (five years earlier), the government had consistently taken the position in similar cases that the tax guideline applied. The agreement then concludes that in order to ensure equitable treatment of the defendant, the parties agreed that the tax guideline should nonetheless apply.
The full text of this highly unusual provision follows:
The Government contends that the applicable Guideline in this matter should be U.S.S.G. § 2S1.3(a)(2), § 2B1.1, and § 2S1.3(b)(2) because the defendant filed two false FBARs and a false U.S. Individual Income Tax Return, Form 1040, within a 12-month period. However, at the time that the defendant agreed to plead guilty, the Government consistently took the position with similarly situated defendants that the applicable Guideline was U.S.S.G. § 2T1.1 and § 2T1.4 due to the cross reference in 2S1.3(c)(1).
Therefore, in order to ensure that the defendant receives equitable treatment, and in accordance with Federal Rule of Criminal Procedure 11(c)(1)(13), the United States and the defendant will recommend to the Court that the following provisions of the Sentencing Guidelines apply:
a. The base offense level for this offense is 16 pursuant to U.S.S.G. § 2T1.1(a)(1) and § 2T4.1(F), because the tax loss exceeded $100,000;
b. The base offense level is increased by 2 levels pursuant to U.S.S.G. § 2T1.1(b)(2) because the offense involved sophisticated means; and
c. the parties agree that they are free to argue other provisions of the Sentencing Guidelines not referenced herein or the sentencing factors under 18 U.S.C. § 3553(a).
Justice Department Publicly Confirms Policy Shift
In December 2017, at the American Bar Association’s National Institute on Criminal Tax Fraud, the Justice Department confirmed publicly what had been revealed in the Kim plea agreement – that it would now seek to have defendants in offshore bank account cases sentenced under the FBAR guideline, rather than the tax guideline that had been used for years.
One month later, in January 2018, the government filed its sentencing memorandum in United States v. Kim. In that filing, the government noted that in the Presentence Investigation Report, the Probation Office calculated the advisory Sentencing Guidelines range using the FBAR guideline. The government asserted that the FBAR guideline, U.S.S.G. § 2S1.3, was “the proper Guideline,” but acknowledged that Kim had agreed to plead guilty five years earlier, at a time when the Justice Department employed the tax guideline “in virtually every other FBAR case”:
While 2S1.3 may be the proper Guideline, the government respectfully requests that the Court sentence the defendant under U.S.S.G. § 2T, the Tax Guidelines. As stated in the Plea Agreement, “at the time that the defendant agreed to plead guilty, the Government consistently took the position with similarly situated defendants that the applicable Guideline was U.S.S.G. § 2T1.1 and § 2T1.4 due to the cross reference in § 2S1.3(c)(1).”2 Plea Agreement, Dkt. # 10, pp. 3-4.
In 2012, Kim and the government commenced plea negotiations with the defendant’s counsel. At that time, the government had entered into plea agreements with a number of several other legal permanent residents that required those individuals to plead guilty to FBAR charges, and not tax charges. In each of those cases, the plea agreements specifically set forth a Guidelines calculation using the Tax Guidelines and not § 2S1.3. After Kim and the government had reached an agreement in principle, the government continued to employ the Tax Guidelines in virtually every other FBAR case. In order to ensure that this defendant receives equitable treatment, the government believes that the appropriate Guidelines which should be applied in this case are the alternative calculation under § 2S1.3(c)(1).
Kim was sentenced by January 25, 2018. With the parties in agreement that the tax guideline should apply, Kim faced an advisory Sentencing Guidelines range of 18 to 24 months of imprisonment. For its part, the government advocated for a jail sentence of 9 months, an evident acknowledgment that Kim had provided substantial assistance to the government in its investigation of offshore tax evasion by U.S. citizens using Swiss accounts. The defense argued for a sentence of probation based upon numerous factors, including Kim’s acceptance of responsibility; extensive cooperation over a five-year period; and that fact that as a green-card holder, Kim was subject to deportation as a result of his felony conviction.
After taking account of the advisory Sentencing Guidelines range as well as the other sentencing factors, the Court imposed a jail sentence of 6 months, a substantial reduction from the advisory range under the tax guideline (18 to 24 months) and a colossal variance from the range had the FBAR guideline been employed (70 to 87 months).
Impact of the Justice Department’s New Policy
The government’s decision to no longer request that judges utilize the tax guideline for sentencing will have an immediate, and profound, impact on defendants in FBAR cases. As the Kim case demonstrates, the tax loss in FBAR cases is almost always substantially less than the value of the funds in the offshore accounts. As a consequence, shifting to a sentencing regime based upon the FBAR guideline, rather than the tax guideline, will result in dramatically increased sentences in these cases. In addition, the government will oftentimes be able to seek a 2-level increase under the FBAR guideline for a “pattern of illegal activity” if the defendant filed a false tax return and either filed a false FBAR or failed to file an FBAR.
Individuals with offshore bank accounts who are still non-compliant with their U.S. tax obligations would be well-advised to take immediate remedial action so as to avoid being subjected to a significantly harsher sentencing regime for FBAR violations if they are charged. The Internal Revenue Service continues to offer a number of voluntary disclosure options for non-compliant taxpayers, including the well-publicized Offshore Voluntary Disclosure Program which provides participating taxpayers with protection from criminal prosecution.
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Today the Treasury Department’s Financial Crimes Enforcement Network posted a “FBAR Due Date Clarification” on its website, which confirms that the annual filing deadline for FinCEN Form 114 (commonly referred to as the FBAR form) is April 15. in 2015, Congress passed a law changing the FBAR due date from June 30 to April 15 in order to coincide with the federal income tax filing deadline. Like the tax filing deadline, the FBAR filing deadline will be delayed to the next business day if April 15 is a Saturday, Sunday, or legal holiday. For the 2017 calendar year, the tax return and FBAR filing deadline is April 17, 2018, because April 15 is a Sunday, and April 16 is a legal holiday in the District of Columbia (see prior coverage here).
FinCEN’s notice also confirmed that filers may take advantage of an automatic six-month filing extension if they wish. It is not necessary to file any form in order to request an extension; such extensions are granted automatically. Filers who fail to file their FBAR by April 17 will be granted an automatic extension to October 15, 2018.
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Last week the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) again extended the deadline for certain financial professionals to file foreign bank accounting reporting forms known as FBARs. In FinCEN Notice 2017-1, FinCEN announced a further extension of time for certain FBAR filings in light of proposed rules issued on March 10, 2016. Specifically, one of the proposed amendments would expand and clarify the exemptions for certain U.S. persons with signature or other authority over foreign financial accounts. This proposed amendment seeks to address questions raised regarding the filing requirement and its application to the individuals with signature authority over, but no financial interest in, certain types of accounts as outlined in FinCEN Notice 2016-1.
The FBAR is a calendar year report ending December 31 of the reportable year. Beginning with the 2016 tax year, the due date for FBAR reporting is April 15 of the year following the December 31 report ending date. In addition, if an individual or entity does not file their FBAR by April 15 they will receive an automatic extension of six months to October 15 of the same calendar year.
On December 16, 2016, FinCEN issued Notice 2016-1 to extend the FBAR filing date for certain individuals with signature authority over but no financial interest in one or more foreign financial accounts to April 15, 2018. In the past five years, FinCEN has issued identical extensions that applied to similarly situated individuals. On May 31, 2011, FinCEN issued Notice 2011-1 (revised on June 2, 2011), to extend to June 30, 2012, the due date for filing the FBAR, for certain individuals with signature authority over but no financial interest in one or more foreign financial accounts, specifically individuals whose FBAR filing requirements may be affected by the signature authority filing exemption in 31 CFR § 1010.350(f)(2)(i)-(v). On June 17, 2011, FinCEN issued Notice 2011-2 similarly extending the FBAR filing due date to June 30, 2012, for certain employees or officers of investment advisers registered with the U.S. Securities and Exchange Commission who have signature authority over but no financial interest in certain foreign financial accounts. On February 14, 2012, FinCEN further extended the FBAR due date to June 30, 2013 via FinCEN Notice 2012-1, for filers that met the requirements of Notice 2011-1 or 2011-2. FinCEN has provided identical extensions each year since then.
As noted in these previous Notices, FinCEN received questions that required additional consideration with respect to the exemptions addressed in these Notices. As stated above, the proposed amendments in the NPRM seek to address these exemptions. Because the proposal is not yet finalized, FinCEN is further extending the filing due date to April 15, 2019, for individuals whose filing due date for reporting signature authority was previously extended by Notice 2016-1.
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Tomorrow morning (November 17) the International Consortium of Investigative Journalists (ICIJ) is set to release publicly the first set of comprehensive data from the recent “Paradise Papers” leak. The initial data will include information on approximately 25,000 offshore entities and trusts registered in more than 30 jurisdictions, primarily from client records of the Appleby law firm. It will include information about shareholders, officers, addresses, and more. This new “Paradise Papers” data will be added to ICIJ’s existing Offshore Leaks Database, which already includes data from prior leaks, including the “Panama Papers,” and is fully searchable.
The Paradise Papers consist of nearly 13.5 million leaked files from Appleby, a leading offshore law firm based in Bermuda and elsewhere. The files were initially obtained by German newspaper Süddeutsche Zeitung (which also obtained the Panama Papers), which shared them with ICIJ and a consortium of media partners. According to ICIJ, the Paradise Papers include loan agreements, financial statements, emails, trust deeds, and other documents spanning a 50-year period.
Of particular note, the Paradise Papers contain far more information about U.S. citizens, residents, and companies than previous leaks such as the Panama Papers. According to ICIJ, the Paradise Papers contain information about at least 31,000 U.S. individuals and companies.
The ICIJ and other media outlets began reporting on the Paradise Papers on November 5, 2017. Since that time, numerous articles have been published about prominent companies and individuals named in the Paradise Papers. Numerous multi-national corporations are identified in the leaked documents as owning offshore companies, and high profile elected officials, celebrities, and businesspeople are also named.
To date, there have been no public indications that U.S. government has gained access to the Paradise Papers data. That will change, of course, tomorrow morning when the data will be made available to the public, and any government agency will be able to view the data by simply accessing the ICIJ Offshore Leaks Database. As occurred following the Panama Papers leak, we fully expect the IRS and Justice Department to mine the data and to use it as a basis for future enforcement action.
Individuals who believe they may be identified in the Paradise Papers as the beneficial owner of an offshore company or a foreign bank account, or the beneficiary of an offshore trust, and have not disclosed such interest to the Internal Revenue Service, should consider prompt action to mitigate the risk of criminal prosecution and harsh financial penalties. The IRS has long maintained a number of well-publicized voluntary disclosure programs that afford non-compliant U.S. taxpayers the opportunity to avoid criminal prosecution by self-disclosing their non-compliance to the IRS, explaining the facts and circumstances of non-compliance, and paying back taxes, interest, and penalties. The most popular voluntary disclosure program offered by the IRS is the Offshore Voluntary Disclosure Program (OVDP), which is directed at non-compliant taxpayers with secret offshore assets. U.S. individuals identified as beneficial owners of secret offshore companies may take advantage of the OVDP to avoid criminal prosecution, but only if they commence the voluntary disclosure process before the IRS learns of their non-compliance from third-party sources, including whistleblowers. Thus, time is of the essence, and individuals concerned about being named in the Paradise Papers database should act quickly and consider whether a voluntary disclosure to the IRS is warranted.
Since 2009, the United States government has undertaken an aggressive enforcement campaign to combat offshore tax evasion by individuals using secret bank accounts in numerous other tax havens around the world, and the use of offshore structures to obscure beneficial owners. The following statistics present a compelling case:
- The Justice Department has criminally charged more than 100 U.S. accountholders who have evaded U.S. tax laws using hidden offshore accounts, and nearly 50 individuals (mostly foreign nationals) who assisted them.
- As a result of the Justice Department’s “Swiss Bank Program,” 80 Swiss banks admitted to aiding and abetting tax evasion by their U.S. customers, and paid more than $1.3 billion in penalties.
- Under threat of criminal prosecution, more than 55,000 individuals have come forward to disclose their offshore accounts to the IRS through the OVDP and other voluntary disclosure programs, paying more than $8 billion in tax, penalties, and interest.
- Under the Foreign Account Tax Compliance Act (FATCA) signed into law in 2010, financial institutions in over 100 countries around the world have agreed to report information regarding their U.S. clients to the United States, in an effort to ensure that tax cheats cannot hide assets offshore.
With tax reform a hot topic in Washington, key Republican lawmakers in Congress are considering a major change to the U.S. tax system: eliminating citizenship-based taxation and moving to a residence-based system, according to a report in today’s Financial Times (subscription required) and also reported by Bloomberg. Under current law, U.S. citizens are taxed on their worldwide income, no matter the source and no matter where they live, and must file a U.S. income tax return (and pay applicable U.S. taxes) each year. The proposal under consideration would shift the U.S. tax system to a residence-based regime, which would tax only income earned in the United States.
The United States is one of the few countries in the world with a worldwide system that taxes its citizens regardless of where they live and work. To be sure, U.S. citizens living and working abroad are afforded some tax breaks under the current regime, including the ability to exclude nearly $100,000 of their foreign earnings from U.S. tax and the opportunity to claim credit on their U.S. return for certain foreign taxes paid in order to avoid, or at least minimize, the risk of double taxation.
In the article published in today’s Financial Times entitled “US expats hope for lower tax bills as shake-up seeks to end levies at home,” Demetri Sevastopulo and Barney Johnson write that “[m]illions of US citizens working overseas could see their tax bills lowered by an overhaul of the tax system as Republicans eye the elimination of a requirement for American expatriates to pay taxes both overseas and in the US.” According to the article, Republican Kevin Brady, who chairs the powerful House Ways and Means Committee, said that lawmakers were “seriously” considering moving to a residence-based tax regime. “It is under consideration. They have made the case,” Congressman Brady told the Financial Times.
According to the Association of Americans Resident Overseas, 8.7 million Americans reside in more than 160 countries around the world. That number is likely understated, as it does not appear to include individuals who are foreign nationals who also have U.S. citizenship.
In addition to being subject to tax on their foreign earnings, U.S. citizens residing abroad face additional U.S. tax compliance burdens, particularly those requiring all U.S. taxpayers to disclose information regarding their non-U.S. bank accounts and other non-U.S. financial assets under the “FBAR” and “FATCA” reporting regimes. The Taxpayer Advocate has expressed significant concerns about what she calls “FATCA-Related Hardships” imposed upon U.S. expatriates, including banking “lock-out” by foreign banks that have elected to eliminate their U.S. clientele. These burdens on U.S. citizens abroad have no doubt contributed to growing number of individuals who choose to renounce their U.S. citizenship or long-term residency status. Moving to a residence-based tax system in the U.S. would be welcome relief for the large community of U.S. expatriates and dual citizens residing around the world.
The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) announced today that California wildfire victims in affected areas of California have until January 31, 2018, to file their Report of Foreign Bank and Financial Accounts (FBAR) report for the 2016 calendar year. The FBAR for calendar year 2016 would otherwise have been due October 15, 2017.
FinCEN is now offering this expanded relief to any area designated by the Federal Emergency Management Agency (FEMA) as qualifying for individual assistance or public assistance. Currently, nine counties in California are eligible for individual assistance or public assistance: Butte, Lake, Mendocino, Napa, Nevada, Orange, Solano, Sonoma, and Yuba. Should FBAR filers in other localities affected by the California wildfires be deemed eligible for individual assistance or public assistance at a later date, they will automatically receive the same filing relief.
In addition, FinCEN will work with any FBAR filer who lives outside the disaster area but whose records required to meet the deadline are located in the affected area regardless of where the filer resides. FBAR filers who live outside the disaster area seeking assistance in meeting their filing obligations (including firefighters and workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization), should contact the FinCEN Resource Center at 800-767-2825 (703-905-3591 not toll free) or FRC@fincen.gov.