INTERNATIONAL TAX CONTROVERSY

BY

MISHKIN SANTA | PETER MITCHELL

About Us

◦Who we are◦What we do◦Why we’re here

Part I: International Tax Controversy

◦Voluntary Disclosure◦Attorney-client privilege

IRM 9.5.11.9 Voluntary Disclosure Practice

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

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

◦ 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.

Direct (Noisy) vs. Quiet Disclosure

Direct Disclosure - Contact IRS, referred and discussed with CI.◦ Contact Special Agent in Charge for IRS Area and arrange

conference.◦ Provide summary of the criminal conduct but do not disclose

taxpayer◦ Provide any other additional facts to bring taxpayer into

alignment with policy◦ Seek assurance that no prosecution will occur if taxpayer

identity is disclosed◦ Disclose taxpayer and allow CI to conduct investigation to

determine if facts disclosed were a fair representation.

Direct (Noisy) vs. Quiet DisclosureQuiet Disclosure◦ File amended or delinquent returns with service center.

◦ CI not involved before filing.

◦ See US vs. Zwerner.

Timeliness, Truthfulness, and CompletenessIf the tax return needs to have additional information to be deemed truthful and complete then provide a complete discussion of the facts as an attachment.

Typical Roadblocks:

◦ What if the taxpayer did not keep good records?

◦ What if the taxpayer destroyed the records?

◦ What if third party sources of relevant information no longer have the information?

Timeliness, Truthfulness, and CompletenessAnswer: ◦ Provide documented attempts made toward procuring or finding the information.

◦ Make a good faith (even if expensive, i.e. forensic accountant) effort to reconstruct taxpayer’s income, deductions, credits.

◦ Provide disclosure of the estimates or indirect methods of reconstruction used.

◦ Good faith is the key to this process and will ensure proper application of the process.

Taxpayer CooperationKey words: forthcoming and cooperative.

What about penalties asserted?◦ Judgment Call: Do you let the IRS assert 20% negligence penalty in return for a cursory

review without independent investigation? Or do you risk the 75% fraud penalty and a detailed investigation?

Full payment of penalties are not required. ◦ Can pay as much as possible upon disclosure or assessment. Request IA on the residual

amount by submitting 433-A.

◦ Once again, good faith governs.

Events that Prevent Voluntary DisclosureCivil Investigation (Audit, Examination, etc.)◦ Soft Discovery Form 2848 – Practitioner Priority Service, Account Transcripts

◦ What about CP 2000 correspondence examination in progress?

◦ What about civil audit not related to foreign financial accounts or FBARs in progress?

Criminal Investigation◦ Foreign financial institution disclosure

Third-Party information◦ Whistleblower

Attorney-Client Privilege

Federally Authorized Tax Practitioner (FATP)◦ Certified Public Accountant

◦ Enrolled Agent

26 U.S. Code § 7525 - Confidentiality privileges relating to taxpayer communications

(a)(1) General rule

◦ With respect to tax advice, the same common law protections of confidentiality which apply to a communication between a taxpayer and an attorney shall also apply to a communication between a taxpayer and any federally authorized tax practitioner to the extent the communication would be considered a privileged communication if it were between a taxpayer and an attorney.

(a)(2) Limitations

◦ (A) any noncriminal tax matter before the Internal Revenue Service; and

◦ (B) any noncriminal tax proceeding in Federal court brought by or against the United States.

Attorney-Client Privilege (Continued)What about criminal matters – OVDP?

Answer: Kovel Letter

◦ The accountant is performing tax accounting and return preparation, but reporting as a subcontractor to the lawyer.

◦ Properly executed, it imports attorney-client privilege to the accountant’s work and communications.

◦ The attorney is the client in a Kovel engagement so the accountant should address all correspondence to the lawyer.

◦ That means information acquired by an accountant under a Kovel agreement should be distinguished from information collected by the accountant as an auditor or in some other capacity. Keep things as separate and well-documented as you can.

◦ See US v Kovel, US v Richey, US v Hatfield, US v. Adlman

Attorney-Client Privilege (Continued)What about Streamline Filing?

Answer: Non-Willful, so technically non-criminal and covered under IRC 7525.

Best Practices Pointer

◦ An attorney should always prepare the non-willful certification under attorney-client privilege.

Part II: International Tax Compliance

◦Review International Tax Compliance Forms◦Review Important Terms and Definitions

International Tax ComplianceWhat is a financial account?

◦ “A financial account includes, but is not limited to…

◦ Securities & Brokerage

◦ Savings, demand, checking, deposit, time deposit

◦ Other account maintained with a financial institution

◦ A financial account also includes a commodity futures or options account, an insurance policy with a cash value (such as a whole life insurance policy), an annuity policy with a cash value…”

(Ref. IRS Sch. B, Part III instructions)

International Tax ComplianceSchedule B – Part III

International Tax ComplianceSchedule B – Part III & FinCEN Form 114 (FBAR)

◦ Sch. B filed with Tax Return - Form 114 (FBAR) filed with FinCEN (Financial Crimes Enforcement Network)

◦ Potential $10,000 Civil Penalty – Applies separately to other information returns

◦ Potential greater of $100,000 Civil Penalty or 50% of account balance at time of violation. Willful violations may also be subject to criminal penalties.

International Tax ComplianceForm 8938 – Statement of Specified Foreign Financial Assets

◦ Introduced in 2011◦ Includes stocks not issued by U.S. Person◦ Some account information overlaps with FBAR◦ Residing in U.S. – Reporting Threshold

◦ Single - >$50,000/$75,000◦ MFJ - >$100,000/$150,000

◦ Residing outside the U.S. – Reporting Threshold◦ Single - >$200,000/$300,000◦ MFJ - $400,000/$600,000

International Tax Compliance

•Double-taxation relief•Form 1116 – Foreign Tax Credit

•Form 2555 – Foreign Earned Income Exclusion

•Form 8833 – Tax Treaty Position Disclosure

International Tax Compliance

Information Returns◦ Form 926 – Transfer of property to a Foreign corporation

◦ Form 5471 – Information Return of U.S. Persons With Respect to Certain Foreign Corporations

◦ Form 5472 – Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business

International Tax ComplianceInformation Returns◦ Form 8621 – Information Return b a Shareholder of a Passive

Foreign Investment Company (PFIC) or Qualifying Election Fund (QEF)

◦ Form 8865 – Return of U.S. Persons With Respect to Certain Foreign Partnerships

◦ Form 3520 – Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts

◦ Form 3520-A – Annual Information Return of Foreign Trust With a U.S. Owner

Part III: Voluntary Programs and Procedures◦Willful vs. Non-willful

◦OVDP, SFCP (Domestic & Foreign) Programs

◦Delinquent International Information Return Submission Procedures

◦Delinquent FBAR Submission Procedures

◦Expatriation

Genesis of Offshore Voluntary Disclosure Programs

2009 OVDP 2011 OVDI 2012 OVDP 2014 OVDP

Began March 26,

2009.

Began February 8,

2011.

Began January 9th,

2012. Transitioned to

2014 OVDP on July 1st,

2014.

Began July 1st, 2014.

Still open.

Closed on October 15th,

2009.

Closed on September

9th, 2011.

Eligibility for reduced

rates of 5% and 12.5%

Introduced Transitional

Treatment from OVDP

to Streamline

Covered Period = 6

Years. Title 26 Misc

Penalty = 20%

Covered Period = 8

years. Title 26 Misc

Penalty = 25%

Covered Period = 8

years. Title 26 Misc

Penalty = 27.5%

Covered Period = 8

years. Title 26 Misc

Penalty = 27.5% or

50%.

Streamlined Filing Compliance Procedure

◦Foreign Procedure

◦ Eligibility

◦ Must meet Physical Presence Test (330 out of 365 days)

◦ May have unfiled tax and/or information returns

◦ May have unreported foreign income and accounts

◦ No Title 26 Penalty

◦ Form 14653

Streamlined Filing Compliance Procedure

◦Domestic Procedure

◦ Eligibility

◦ Must have filed original tax returns during the 3-year period (1040X only)

◦ Unreported accounts, income, and/or information returns

◦ 5% Title 26 Penalty

◦ Use Form 14654

SFCP (Domestic) vs. OVDP ComparisonSFCP OVDP

Covered Period 3 years Form 1040X/6 years FBAR 8 years both 1040/1040X & FBAR

Penalty Calculation Highest Aggregate Year End

Balance

Highest Aggregate Balance minus

Transfers

Legal Documents Form 14654, Non-Willful

Certification – Legal Memo

Pre-Clearance, OVDP

Letter/Attachments, Submission

Explanation Letter

Processing 16 – 20 Weeks, Backup Audit

Package for 3/6

1-2 Years, Backup Audit Package

for all 8 Yrs

SFCP (Domestic) Form 14654

SFCP (Domestic) Form 14654 – Cont’

SFCP – Duties of the Tax Preparer

•Tax Treaty Position Review

•Financial Recreation

•Currency Conversion

•Backup Documents

•Circular 230 Considerations

SFCP – Duties of the AttorneyNon-Willful Certification – Legal Memo

◦ IRS expects “actual statements of facts“

◦ Will match evidence submitted in statement to that submitted by bank (see PFSB)

◦ Page 3 of 14654

◦ You must provide specific facts on this form or on a signed attachment explaining your failure to report all income, pay all tax, and submit all required information returns, including FBARs. Any submission that does not contain a narrative statement of facts will be considered incomplete and will not qualify for the streamlined penalty relief.

Disclosing Reliance on a Tax Preparer◦ Page 4 of 14654

◦ If you relied on a professional advisor, provide the name, address, and telephone number of the advisor and a summary of the advice.

What about married taxpayers where one spouse is the only person that has foreign financial accounts or where the accounts are not all joint?

◦ Page 4 of 14654

◦ If married taxpayers submitting a joint certification have different reasons, provide the individual reasons for each spouse separately in the statement of facts.

Delinquent International Information Return Submission Procedures

When to Use◦ Taxpayers who do not need to use the OVDP or the Streamlined

Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax, but who:◦ have not filed one or more required international information returns,

◦ have reasonable cause for not timely filing the information returns,

◦ are not under a civil examination or a criminal investigation by the IRS, and

◦ have not already been contacted by the IRS about the delinquent information returns

Delinquent International Information Return Submission Procedures – Cont’How to Use◦ All delinquent international information returns other than Forms 3520 and

3520-A should be attached to an amended return and filed according to the applicable instructions for the amended return.

◦ All delinquent Forms 3520 and 3520-A should be filed according to the applicable instructions for those forms.

◦ A reasonable cause statement must be attached to each delinquent information return filed for which reasonable cause is being requested. As part of the reasonable cause statement, taxpayers must also certify that any entity for which the information returns are being filed was not engaged in tax evasion.

Delinquent FBAR Submission Procedures (DFBAR)

When to Use◦ Taxpayers who do not need to use either the OVDP or the Streamlined Filing

Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax, but who:

◦ have not filed a required Report of Foreign Bank and Financial Accounts (FBAR) (FinCEN Form 114, previously Form TD F 90-22.1),

◦ are not under a civil examination or a criminal investigation by the IRS, and

◦ have not already been contacted by the IRS about the delinquent FBARs

Delinquent FBAR Submission Procedures (DFBAR) – Cont’

How to Submit◦ File Electronically and Provide Explanation

◦ Prepare Statement of Reasonable Cause for each Delinquent FBAR. See Duties of the Attorney for Non-Willful Certification.

U.S. Expatriation

Obtain U.S. Certificate of Loss of Nationality, must be dual-citizen

Forfeit U.S. Passport, if applicable

Form 8854 and Mark to Market Analysis, pay “Exit Tax”, if applicable

Must be current with Latest 5 Years Form 1040

May utilize Streamline Foreign Procedure

ConclusionThank you for having us.

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