New FBAR Reporting Regulations: Navigating Offshore...

New FBAR Reporting Regulations: Navigating Offshore Voluntary Disclosure Programs Balancing Benefits and Burdens; Best Practices in Determining Program Applicability; Avoiding Harsher Penalties for Willful Conduct

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WEDNESDAY, SEPTEMBER 10, 2014

Presenting a live 90-minute teleconference with interactive Q&A

Dennis Brager, Principal, Brager Tax Law Group, Los Angeles

Deborah J. Jacobs, Owner, The Law Office of Deborah J. Jacobs, New York

Asher Rubinstein, Partner, Rubinstein and Rubinstein, New York

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New FBAR Reporting Regulations:

Navigating Offshore Voluntary Disclosure Programs

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September 10, 2014|1:00-2:30pm Eastern

DENNIS N. BRAGER CERTIFIED TAX SPECIALIST STATE BAR OF CALIFORNIA BRAGER TAX LAW GROUP

A PROFESSIONAL CORPORATION 10880 WILSHIRE BLVD, SUITE 880

LOS ANGELES CA 90024 (310) 208-6200 FAX (310) 478-8030

www.bragertaxlaw.com www.taxproblemattorneyblog.com

Dennis Brager • Ex-IRS Trial Lawyer • State Bar Certified Tax Specialist • 30+ Years Tax Dispute Experience

with IRS, EDD, BOE, FTB Problems

• Nationally Recognized Tax Litigation Attorney

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http://www.martindale.com/Dennis-N-Brager/135093-lawyer.htm?view=cr

Dennis Brager

Having worked for the IRS for six years, he gained valuable insight into the inner workings of that organization. This not only helps in developing the right strategies, but facilitates working with the system quickly and efficiently. Mr. Brager has limited his practice to representing clients having disputes with the IRS, the Franchise Tax Board, the State Board of Equalization and the Employment Development Department--both at trial and administrative levels. He has appeared on ABC Television’s Good Morning America show, Fox Business News, and TV One Access. He has also spoken before the California Continuing Education of the Bar, the California Society of CPAs, the UCLA Tax Controversy Institute, the California State Bar Tax Section, the Consumer Rights Litigation Conference, the California Trial Lawyers Association, the American Bar Association, the Warner Center Estate and Tax Planning Council, and the National Association of Enrolled Agents. Dennis Brager has been an instructor at Golden Gate University's Masters in Taxation Program and a guest speaker at the University of Southern California. Mr. Brager has testified as an expert witness on Federal tax matters. His articles have appeared in the California Lawyer, Daily Journal, Taxation for Lawyers, Los Angeles Lawyer, The Consumer Advocate, Family Law News, California Tax Lawyer, Journal of Tax Practice and Procedure, and Journal of Taxation of Investments. They include “Offshore Voluntary Disclosure – The Next Generation,” “Partial Offshore Tax Amnesty – Voluntary Disclosure 2.0,” Anatomy of an OPR Case (Definitely Not R.I.P.),” “FBAR and Voluntary Disclosure,” “The Tax Gap and Voluntary Disclosure,” “Circular 230: An Overview,” “Recent Developments in Tax Procedure,” “Damages, Rescission and Debt Cancellation as Client Income,” “Ponzi Scheme Victims May Be Able to Mitigate Losses with Tax Deduction,” “Prevailing Party-Recovering Attorneys Fees From the IRS,” “The Taxpayer Bill of Rights--A Small Step Toward Reining in the IRS,” “Challenging the IRS Requires a Cohesive Strategy,” “The Innocent Spouse Defense,” “IRS Guidelines for Installment-Payment Agreements,” “Expert Advice: New Rules on 1099 Forms,” “Tax Brakes: The Taxpayer Bill of Rights 2,” and “Expert Advice: Avoiding Payroll Taxes.” Mr. Brager received his undergraduate degree from Pace University (B.B.A., magna cum laude, 1975, Accounting/Finance), and his law degree from New York University (J.D., 1978). He is a former chair of both the Tax Compliance, Procedure and Litigation Committee of the Los Angeles County Bar Association, and the California State Bar, Tax Procedure and Litigation Committee. He is admitted to practice before the U.S. Supreme Court, the Ninth Circuit Court of Appeals, U.S. Claims Court, U.S. Tax Court, U.S. District Court and the U.S. Bankruptcy Court.

Dennis Brager is a California State Bar Certified Tax Specialist and a former Senior Trial Attorney for the Internal Revenue Service's Office of Chief Counsel. In addition to representing the IRS in court, he advised the Service on complex civil and criminal tax issues. He now has his own four attorney firm in Westwood, and has been named as a Super Lawyer in the field of Tax Litigation by Los Angeles Magazine. He has been quoted as a tax expert, by Business Week, the Daily Journal, the National Law Journal, The Daily Beast, USA Today, Palm Beach Daily News, Money Laundering, the Los Angeles Daily Journal and Tax Analyst.

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The Problem

• U.S. Persons who have signatory authority over, or a financial interest in an offshore account must file an FBAR- Form FINCEN 114 (formerly Form TD F 90-22.1) for accounts with combined balances over 10k U.S. dollars.

o U.S. Person = U.S. Citizen or U.S. “resident”

o Currently a resident means: • a resident alien under IRC Section 7701(b) includes:

o Green card test o Substantial presence test

• any entity including but not limited to, a corporation, partnership, trust, or limited liability company created, organized, or formed under the laws of the United States

o Substantial presence test may not apply prior to the issuance of latest FINCEN regulations on March 28, 2011

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o Schedule B Question: At any time during 2013, did you have a financial

interest in or signature authority over a financial account (such as a bank account, securities account, or brokerage account) located in a foreign country? See instructions…..

• If “Yes,” are you required to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), formerly TD F 90-22.1, to report that financial interest or signature authority? See FinCEN Form 114 and its instructions for filing requirements and exceptions to those requirements

o Checking the box that says "No", subjects a taxpayer to a possible criminal

charge of filing a false income tax return which is a felony.

The Problem (Continued)

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Offshore Enforcement History

• The requirement to report foreign bank accounts has its origins in the Bank Secrecy Act of 1970!

• The Job Creation Act of 2004 ("Jobs Act) added a new civil penalty for non-willful violations and increased willful penalty.

• In February 2008 IRS announced it was investigating 100 Americans with accounts in Lichtenstein

• In April 2008 the DOJ filed an indictment against Bradley Birkenfeld former UBS banker

• July 2008 federal court approves John Doe Summons against UBS

• March 2009 IRS announces the Offshore Voluntary Disclosure Initiative

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OVDP-History • OVDP Provided for a 20% Penalty for Disclosures Prior to Oct. 16,

2009 o OVDI (as originally drafted) permitted a Taxpayer to argue for less than a 20% penalty without

“opting out”

• OVDI 2011 Provided for a 25% Penalty for Disclosures Prior to Sept 10, 2011

• OVDP 2012 Provides for a 27.5% Penalty

o Announced Jan. 9, 2012. IRS Notice 2012-5

• OVDP 2014 Announced June 18, 2014. Generally effective for submissions after June 30, 2014 o 27.5% penalty continued o Currently there is no ending date, but IRS reserves the right to terminate the program at

any time

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History of Streamlined Procedures

• Greatly expands, and supersedes old streamlined procedures announced Aug. 31, 2012 o Eliminates compliance risk evaluation

• Multi-factor test o Opens the program to U.S. citizens and residents o Eliminates the non-filer requirement for non-U.S. citizens and

residents o Creates a different program for U.S. taxpayers residing

outside the U.S., and those residing in the U.S. o Elimination of the $1,500 tax threshhold

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Pre-Clearance Letters Require More Information than Before

• Complete names, dates of birth, tax identification numbers, addresses, and telephone numbers

• Identifying information of all financial institutions at which undisclosed OVDP assets were held. This includes complete names (including all DBAs and pseudonyms), addresses, and telephone numbers.

• Identifying information for all foreign and domestic entities through which the undisclosed OVDP assets were held

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Various Lower Offshore Penalty Provisions Have Been Withdrawn. See Below for Old Provisions

• For accounts that do not exceed $75,000 the penalty is 12.5% of the highest aggregate balance o All other terms remain the same o Non-financial assets are taken into account for determining the $75,000

threshold

• 5% Penalty o Category 1 “Inherited” Accounts

• Taxpayer did not open the account • Minimal Infrequent Contact • Did not withdraw more than $1k in any one year • Prove that all taxes were paid on the principal balance going back to Jan. 1,

1991.

o Category 2. The Brain Dead Citizen • Taxpayers who are foreign residents and who were unaware they were

U.S. citizens.

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Limited OVDP Relief (Continued)

o Category 3. Foreign Residents Who Meet All of the Following Conditions:

• Taxpayer resides in a foreign country • Has made a “good faith showing” that she has timely complied with all tax

reporting and payment requirements in the country of residence; and • Has $10,000 or less of U.S. source income each year

• Category 3 taxpayers may exclude the value of non-financial assets from the penalty base.

• Category 3 did not exist under the 2009 OVDP, and therefore

qualifying taxpayers may reopen their cases with the IRS.

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Slide Intentionally Left Blank

Asher Rubinstein, Esq. Rubinstein & Rubinstein, LLP www.assetlawyer.com (212) 888-6600

Strafford Webinar

http://www.assetlawyer.com/


2014 OVDP PROCEDURE: THE “THREE DOORS”

1. REQUEST FOR PRE-CLEARANCE IS THE TAXPAYER “CLEAR” TO DISCLOSE? I.E., DOES THE IRS ALREADY HAVE TAXPAYER’S NAME? -FROM THE BANK? -FROM A TREATY REQUEST? -FROM A JOHN DOE SUMMONS? -FROM AN AUDIT OR INVESTIGATION? -FROM A WHISTLEBLOWER? -FROM SOMEONE ELSE’S VOLUNTARY DISCLOSURE? FAX TO IRS CRIMINAL INVESTIGATIONS (CI): (267) 941-1115 NEW TO 2014 OVDP: PRE-CLEARANCE FAX DISCLOSES INCRIMINATING INFORMATION, E.G., NAME OF BANK. APPROX. 30-60 DAYS FOR PRE-CLEARANCE RESPONSE FROM IRS

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2014 OVDP PROCEDURE THE “THREE DOORS”

2. VOLUNTARY DISCLOSURE LETTER AND ATTACHMENT(S)

- TO CRIMINAL INVESTIGATIONS (CI)

- SIGNED BY THE TAXPAYER UNDER PENALTY OF PERJURY

- IN-DEPTH QUESTIONNAIRE: SOURCE OF FUNDS, INTERACTION WITH ACCOUNT, WHO ASSISTED (FACILITATORS), ESTIMATE OF ACCOUNT VALUES, TAXABLE INCOME

- EACH ACCOUNT SEPARATE ATTACHMENT

- DUE 45 DAYS AFTER PRE-CLEARANCE

- 2-3 MONTH RESPONSE TIME FROM CI.

- “PRELIMINARY ACCEPTANCE”

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2014 OVDP PROCEDURE THE “THREE DOORS” 3. CIVIL PROCESS - OVDP PACKAGE - ORIGINAL FILED TAX RETURNS - AMENDED RETURNS NOW REPORTING PREVIOUSLY UNREPORTED FOREIGN INCOME - PAYMENT - TAX - INTEREST - 20% “ACCURACY” PENALTY - FAILURE TO PAY (FTP), FAILURE TO FILE (FTF), IF APPLICABLE. - OVDP PENALTY - 27.5% (OR 50% FOR ACCOUNTS AT CERTAIN BANKS) - FBARS - ACCOUNT QUESTIONNAIRES - STATUTE OF LIMITATIONS WAIVERS (FBARS AND FORM 872) - PENALTY CALCULATION WORKSHEET - STATEMENT RE: ENTITIES (CORPORATIONS, TRUSTS, FOUNDATIONS, ETC., SEE FAQ 7.2) - STATEMENT RE: PFICS - IRS WILL CASH CHECKS IMMEDIATELY - THE SOONER YOU PAY TAX, INTEREST STOPS RUNNING - 6-12 MONTHS TO ASSIGN TO IRS REVENUE AGENT - AGENT MAY ISSUE IDR [INFORMATION DOCUMENT REQUEST(S)] - UPON COMPLETION, TAXPAYER AND IRS SIGN FORM 906 (CLOSING AGREEMENT) - 3 LEVELS OF REVIEW BEFORE IRS SIGNS 906 - TOTAL TIME FOR OVDP COULD BE TWO YEARS

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2014 OVDP DOCUMENTARY SUBMISSION - Penalty check (27.5% OR 50%)

- Separate checks for each year: tax, interest, 20% “accuracy” penalty (+ FTF, FTP, if applicable)

- Amended tax returns (1040X) showing foreign income - Copies of originally filed tax returns - Copy of Voluntary Disclosure letter and Attachments to Criminal Investigations (CI) - Foreign Account or Asset Statement for each account/asset (Form 14452) - Foreign bank statements, documents re: other foreign assets - FBARs (FinCEN Form 114) - Waivers of Statute of Limitations, for FBARs and IRS Form 872 - Statement re: foreign entities (corporations, trusts, etc.) - If disclosing foreign entities, the applicable IRS forms (e.g. IRS Form 3520/A for

trusts, 5471 for corporations, etc.) - PFICS? - RRSPs? [FAQ 54] - Documents may be submitted on CD/USB [FAQ 25.2]

Documentary submissions are in 2014 OVDP FAQ 25.

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2014 OVDP WHAT’S DIFFERENT?

1. TAXPAYER TO DISCLOSE NAME AND CONTACT INFO OF BANK WHERE

ACCOUNT IS/WAS HELD, IN THE REQUEST FOR PRE-CLEARANCE. YOU PROVIDE SELF-INCRIMINATING INFORMATION INITIALLY, EVEN BEFORE PRE-CLEARANCE.

2. TAXPAYER TO DISCLOSE IDENTIFYING INFORMATION FOR ALL DOMESTIC AND FOREIGN ENTITIES (CORPORATIONS, PARTNERSHIPS, TRUSTS, FOUNDATIONS) THROUGH WHICH UNDISCLOSED FOREIGN ASSETS ARE HELD. YOU PROVIDE SELF-INCRIMINATING INFORMATION INITIALLY, EVEN BEFORE PRE-CLEARANCE. - CAN/WILL BE USED BY IRS/DOJ IF PRE-CLEARANCE DENIED?

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2014 OVDP WHAT’S DIFFERENT? 3. INCREASED PENALTIES: 50% (NOT 27.5%) IF ACCOUNT IS AT A FOREIGN FINANCIAL INSTITUTION (FFI) WHERE AN EVENT OCCURS WHICH IS A “PUBLIC DISCLOSURE” (FAQ 7.2). AS OF JUNE 20, 2014 (LAST UPDATE): 1. UBS AG 2. CREDIT SUISSE AG, CREDIT SUISSE FIDES, AND CLARIDEN LEU LTD. 3. WEGELIN & CO. 4. LIECHTENSTEINISCHE LANDESBANK AG 5. ZURCHER KANTONALBANK 6. SWISSPARTNERS INVESTMENT NETWORK AG, SWISSPARTNERS WEALTH MANAGEMENT AG, SWISSPARTNERS INSURANCE COMPANY SPC LTD., AND SWISSPARTNERS VERSICHERUNG AG 7. CIBC FIRST CARIBBEAN INTERNATIONAL BANK LIMITED, ITS PREDECESSORS, SUBSIDIARIES, AND AFFILIATES 8. STANFORD INTERNATIONAL BANK, LTD., STANFORD GROUP COMPANY, AND STANFORD TRUST COMPANY, LTD. 9. THE HONG KONG AND SHANGHAI BANKING CORPORATION LIMITED IN INDIA (HSBC INDIA) 10. THE BANK OF N.T. BUTTERFIELD & SON LIMITED (ALSO KNOWN AS BUTTERFIELD BANK AND BANK OF BUTTERFIELD), ITS PREDECESSORS, SUBSIDIARIES, AND AFFILIATES WHAT CONSTITUTES “PUBLIC DISCLOSURE”? - ANNOUNCEMENT BY BANK? - ARTICLE IN PUBLIC MEDIA (NEWSPAPER, RADIO, ETC.)? - BLOG? PENALTY (50%) APPLIES TO ALL FOREIGN ASSETS DISCLOSED, NOT ONLY TO ACCOUNTS SUBJECT TO FAQ 7.2.

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2014 OVDP WHAT’S DIFFERENT? 4. 12.5% AND 5% PENALTIES ARE ELIMINATED. -BUT NOTE STREAMLINED 5% 5. OFFSHORE PENALTY CHECK (27.5% OR 50%) IS NOW DUE WITH THE OVDP SUBMISSION. (IN PREVIOUS OVDP, IT WAS DUE UPON SIGNING THE FORM 906, CLOSING AGREEMENT.) 6. NEW VOLUNTARY DISCLOSURE LETTER AND ATTACHMENTS www.irs.gov/pub/irs-utl/OVDIntakeLtr.pdf www.irs.gov/pub/irs-utl/OVDIntakeLtrAttach.pdf 7. NEW PENALTY CALCULATION WORKSHEET NEW FORM 14453 8. NEW FORM 14452- FOREIGN ACCOUNT AND ASSET STATEMENT

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ALTERNATIVES TO A VOLUNTARY DISCLOSURE 1. DO NOTHING

A. SWISS-U.S. SETTLEMENT AGREEMENT (DOJ PROGRAM FOR NON-PROSECUTION AGREEMENTS OR NON-TARGET - LETTERS FOR SWISS BANKS) (AUGUST 29, 2013) - BANKS FREEZING ACCOUNTS. - BANKS PLACING LIENS = PENALTIES ON ACCOUNTS. B. FATCA - BANKS DEMANDING W-9s, FBARs, PROOF OF COMPLIANCE. C. JOHN DOE SUMMONS D. TREATY REQUEST E. PENALTIES OUTSIDE PROGRAM > PENALTIES INSIDE OVDP - U.S.A. v. ZWERNER (2014) 2. FILE FBARS A. FORMER FAQ 17, STILL VIABLE IF NO UNREPORTED FOREIGN INCOME (SEE 2014 FAQ 1.1 AND “DELINQUENT FBAR SUBMISSION PROCEDURES”) 3. QUIET DISCLOSURE A. FBARS + AMENDED RETURNS = HUGE RISK 4. STREAMLINED DOMESTIC/OFFSHORE - LACK OF CLARITY/GUIDANCE RE: “WILLFULNESS” - POSSIBLE TRAP - SWORN STATEMENT/PERJURY 5. OVDP, THEN OPT-OUT 6. WHAT IF I CLOSE THE ACCOUNT? MOVE THE MONEY TO A NEW BANK? BUY GOLD? BUY REAL ESTATE? A. PAPER TRAIL B. SOURCE OF FUNDS/ “KNOW YOUR CLIENT” C. FATCA

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2014 OVDP COMMON QUESTIONS

- HOW LONG WILL THE PROCESS TAKE? PRE-CLEARANCE 30-60 DAYS FOR IRS RESPONSE VOLUNTARY DISCLOSURE LETTER AND ATTACHMENTS DUE 45 DAYS FROM PRE-CLEARANCE 2-3 MONTHS FOR IRS RESPONSE (PRELIMINARY ACCEPTANCE) CIVIL PROCESS OVDP PACKAGE DUE WITHIN 90 DAYS OF PRELIMINARY ACCEPTANCE 6-12 MONTHS TO ASSIGN TO IRS REVENUE AGENT TOTAL: 1-2 YEARS

- WHAT WILL IT COST? - TAX - INTEREST - 20% “ACCURACY” PENALTY - OVDP “MISCELLANEOUS” PENALTY (27.5%/ 50%) - FAILURE TO FILE (FTF) AND FAILURE TO PAY (FTP) PENALTIES, IF APPLICABLE + LEGAL FEES + CPA FEES TRANSLATIONS?

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2014 OVDP COMMON QUESTIONS - CAN PENALTIES OR TAXES BE NEGOTIATED? - WHEN WILL I HAVE TO PAY? - WHAT IF I CAN’T PAY IT ALL AT ONCE? - SHOULD I HIRE A LAWYER? - WILL THE OVDP LEAD TO AN AUDIT? - WILL MY EMPLOYER FIND OUT? - CAN I LEAVE THE COUNTRY? MUST I SURRENDER MY PASSPORT? - WHAT IF THE FOREIGN FUNDS WERE ILLEGALLY OBTAINED? - CAN I DISCLOSE ONE ACCOUNT, BUT NOT DISCLOSE A DIFFERENT ACCOUNT OR ASSET? - WHAT IF FAMILY MEMBERS WERE ON AN ACCOUNT? WILL THEY GET INTO TROUBLE? - WHEN WILL THE OVDP END? WHEN SHOULD I DO THIS? - WHAT IF I JUST CLOSE THE ACCOUNT? - WHEN CAN I BRING THE MONEY BACK?

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Asher Rubinstein, Esq. Rubinstein & Rubinstein, LLP www.assetlawyer.com (212) 888-6600 ASHER RUBINSTEIN BIO

Asher Rubinstein, Esq. concentrates his law practice on asset protection, wealth preservation, tax planning, tax compliance and tax controversy. Asher has advised hundreds of clients around the world on IRS compliance issues, including international banking and cross-border taxation. He has represented clients before the IRS including in connection with offshore voluntary disclosures. Asher is a frequent commentator on tax, banking and offshore issues in major media, including the New York Times, Bloomberg, CNBC, Forbes, NPR, Tax Notes International, CNNMoney.com and Reuters, as well as media in Switzerland, Austria, the United Kingdom and India. Asher may be reached at (212)888-6600 and [email protected]

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31

New FBAR Reporting Regulations

Wednesday, September 10, 2014 at 1-2:30 EST/10-11:30 PST

Speakers: Dennis Brager, Deborah J. Jacobs & Asher Rubinstein

The Law Office of Deborah J. Jacobs (212) 332-3248 (Tel) 45 Rockefeller Plaza, Suite 2000 (212) 332-3249 (Fax) New York, NY 10111 www.jacobstaxlaw.com

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Streamlined Filing Compliance Procedures • On June 18, 2014, the IRS announced changes to the prior Streamlined Filing Compliance Procedure that had been in effect since September 1, 2012. • The prior program applied only to non-resident, non-filer US taxpayers, including dual residents, with low compliance risk and with less than $1,500 in tax due. • US resident taxpayers and US non-resident taxpayers who filed tax returns, but failed to include offshore income on their tax returns or to file FBARs, were unable to participate.

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What is the Purpose of the New Streamlined Filing Compliance Procedures? • The new Streamlined Filing Compliance Procedures are designed to provide new options to help both US taxpayers residing overseas and in the US comply with their US tax obligations. • These two new procedures, called (1) the Streamlined Foreign Offshore Procedures (the “SFOP”) and (2) the Streamlined Domestic Offshore Procedures (the “SDOP”) include a broader section of non-compliant, but non-willful, US taxpayers. • For the first time, US taxpayers who are out of compliance with

reporting their foreign source income or filing information returns such as the FBAR, can now participate.

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Purpose of the New Streamlined Filing Compliance Procedures, con’t.

• The new Streamlined Filing Compliance Procedures are designed to provide US taxpayers a streamlined procedure for (1) filing amended or delinquent tax and information returns and (2) for resolving their tax and penalty obligations. • These two new procedures will be available for an indefinite period of time—until otherwise announced.

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• The changes announced on June 18 include:

• The elimination of the requirement that the taxpayer owe less than $1,500 in tax due;

• The elimination of the required risk assessment questionnaire; • The new requirement that the taxpayer certify that prior failures to comply were due to non-willful conduct; and • All penalties are waived for eligible US taxpayers residing

outside the US; but for eligible US taxpayers residing in the US, there is a miscellaneous offshore penalty equal to 5% of the taxpayer’s foreign financial assets in the highest year.

Overview of the Changes to the Streamlined Filing Compliance Procedures

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General Eligibility for the New Streamlined Filing Compliance Procedures • The new Streamlined Filing Compliance Procedures are designed only for individual taxpayers, including estates of individual taxpayers. • In order for a US taxpayer to be eligible for the SFOP, the taxpayer must meet the definition of a non-resident taxpayer; and • In order for a US taxpayer to be eligible for the SDOP, the taxpayer must fail to meet the non-residency requirement .

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General Eligibility for the New Streamlined Filing Compliance Procedures, con’t. • Taxpayers must certify under penalties of perjury that their

conduct for the failure to report all income, pay all tax and file all information returns, including FBARs, was due to non-willful conduct. • Taxpayers are not eligible if the IRS has initiated a civil

examination of a taxpayer’s return for any taxable year, regardless of whether the examination relates to undisclosed offshore assets.

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General Eligibility for the New Streamlined Filing Compliance Procedures, con’t.

• Taxpayers eligible to use the new Streamlined Filing Compliance Procedures who have previously made quiet disclosures outside any of the prior OVDPs may still use the new procedures. • However, any penalty assessments previously made with respect to those filings, such as the 20% accuracy related penalty, will not be abated.

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General Eligibility for the New Streamlined Filing Compliance Procedures, con’t.

• All tax returns submitted under the new Streamlined Filing Compliance Procedures must have a valid TIN, which is either a valid SSN or a valid ITIN.

• Tax returns submitted without a valid SSN or a valid ITIN will not be processed under these procedures.

• However, Taxpayers who are ineligible for an SSN but do not have a valid ITIN, may submit tax returns under these procedures if accompanied by a complete ITIN application.

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General Treatment under the New Streamlined Filing Compliance Procedures

• Tax returns submitted under these procedures will be processed like any other returns submitted to the IRS. • Thus, the receipt of returns will not be acknowledged by the

IRS and these procedures will not result in the signing of a Closing Agreement.

• Tax returns submitted under these procedures will not be subject to IRS audit automatically, but they may be selected for audit and subject to verification procedures.

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Inherent Risks in the New Streamlined Filing Compliance Procedures

• Tax Returns under these procedure may be subject to IRS Examination, unlike under the OVDP, which results in a Closing Agreement.

• The IRS might receive or discover evidence of willfulness, fraud, or criminal conduct, leading it to open an examination or investigation that could lead to civil fraud penalties, FBAR penalties, information return penalties or even referral to Criminal Investigation. Taxpayers who are concerned that their failure to report income, pay tax, and/or to file required information returns was due to willful conduct should consider participating in the OVDP.

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Coordination with the OVDP • Once a taxpayer makes a submission under either of the new streamlined procedures, then she/he may not participate in the 2014 OVDP. • Similarly, a taxpayer who submits an OVDP voluntary disclosure

letter and its attachments on or after July 1, 2014 is not eligible to participate in the new streamlined procedures.

• There are also Transition rules, to be discussed later in this program, which allow Taxpayers in the 2012 OVDP to transition into the new streamlined procedures.

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Differences Between the SDOP and the SFOP

The primary differences between the SDOP and the SFOP are: 1. Residency versus non-residency: in the SFOP, the Taxpayer qualifies as a non-resident US Taxpayer whereas in the SDOP, the Taxpayer qualifies as a resident US Taxpayer; 2. Penalties: in the SFOP, all penalties are waived: the Taxpayer only needs to pay taxes and interest due over a three-year period; in the SDOP, the Taxpayer must pay taxes and interest due over a three-year period AND a 5% miscellaneous penalty on the highest account balances of the Taxpayer’s offshore assets (using a six-year look back period and using the year end balances).

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Eligibility Requirements for the SFOP In addition to the general eligibility requirements discussed before, the Taxpayer must:

1. Meet the applicable non-residency requirement (for joint filers, both spouses must meet the applicable non-residency requirement); 2. Have failed to report the income from a foreign financial asset and pay tax on it; 3. May have failed to file an information return, such as an FBAR; and 4. Such failures resulted from non-willful conduct.

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Non-Residency Requirement of the SFOP

Individual US citizens or lawful permanent residents (Green Card Holders) or their estates meet the applicable non-residency requirement if:

1. In any one or more of the most recent three years for which the US tax return due date (or properly extended due date) has passed, the Taxpayer did not have a US abode and the Taxpayer was physically outside the US for at least 330 days. 2. Neither temporary presence of the Taxpayer in the US nor maintenance of a dwelling in the US by an individual necessarily means that the Taxpayer’s abode is in the US.

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What is a US Abode? 1. Abode has been defined as one’s home, habitation, residence, domicile, or place of dwelling. 2. It does not mean your principal place of business. 3. Abode has a domestic rather than a vocational meaning and and does not mean the same thing as “tax home.” 4. The location of your abode often will depend on where you maintain your economic, family, and personal ties. 5. You are not considered to have a tax home in a foreign country for any period in which your abode is in the US. 6. However, your abode is not necessarily in the US while you are temporarily in the US. 7. Your abode is also not necessarily in the US merely because you maintain a dwelling in the US.

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What is a US Abode? Examples

• Example One: Taxpayer was born in the US but moved to France with his parents when he was six years old, has lived there ever

since, and does not have a US abode. Taxpayer meets the non- residency requirement applicable to individuals who are US citizens or green card holders. • Example Two: Assume the same facts except that Taxpayer moved

to the US and acquired a US abode in 2012. The most recent 3 years for which the Taxpayer’s US tax return due date (or properly extended due date) has passed are 2013, 2012 and 2011. Taxpayer meets the non-residency requirement applicable to individuals who are US citizens or green card holders.

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Non-Residency Requirement For Taxpayers Who are not Citizens or Green Card Holders

• The SFOP provides a different non-residency requirement for

Taxpayers who are not US citizens or green card holders. • Taxpayers in this category will meet the non-residency requirement if, in any one or more of the last three years for which the US tax return due date (or properly extended due date) has passed, the Taxpayer did not meet the substantial presence test.

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Non-Residency Requirement For Taxpayers Who are not Citizens or Green Card Holders

Example : Taxpayer is not a US citizen or a green card holder. Taxpayer was born in Italy and resided in Italy until May 1, 2012, when her employer transferred her to the US. Taxpayer was physically present in the US for more than 183 days in both 2012 and 2013. The most recent 3 years for which the taxpayer’s US tax return due date (or properly extended due date) has passed are 2013, 2012 and 2011. While Taxpayer met the substantial presence test for 2012 and 2013, she did not meet it for 2011. Taxpayer meets the non-residency requirement.

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The SFOP Procedure Once it is determined that a Taxpayer is eligible to participate in the SFOP, the Taxpayer must:

• File delinquent or amended tax returns, together with all required information returns for each of the most recent three years and pay any tax and interest due; • File delinquent or amended tax returns FBARs for each of the most recent six years; and • File a Certification in which the Taxpayer certifies under penalty of perjury that the failure to file tax returns, report all income, pay all tax, and submit all information returns, including FBARs was due to non-willful conduct. • There are special rules if the Taxpayer is seeking relief for failure to elect deferral of income from retirement plans.

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Eligibility Requirements for the SDOP In addition to the general eligibility requirements discussed before,

the Taxpayer must: 1. FAIL to meet the applicable non-residency requirement (for joint filers, one or both spouses must FAIL to meet the applicable non-residency requirement); 2. Have previously filed a US tax return for each of the most recent 3 years for which the US tax return due date (or properly extended due date) has passed; 3. Have failed to report gross income for a foreign financial asset

and pay tax on it and may have failed to an information return, such as an FBAR, with respect to such asset; and

4. Such failures resulted from non-willful conduct.

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The SDOP Procedure Once it is determined that a Taxpayer is eligible to participate in the SDOP, the Taxpayer must:

• File amended tax returns, together with all required information returns for each of the most recent three years and pay any tax and interest due; • File delinquent FBARs for each of the most recent six years; and • File a Certification in which the Taxpayer certifies under penalty of perjury that the failure to file tax returns, report all income, pay all tax, and submit all information returns, including FBARs, was due to non-willful conduct. • There are special rules if the Taxpayer is seeking relief for failure to elect deferral of income from retirement plans.

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The SDOP Miscellaneous Penalty

• In addition to paying any tax and interest due, a Taxpayer Participating in the SDOP must pay a 5% miscellaneous penalty on the highest aggregate balance/value of the Taxpayer’s foreign financial assets that are subject to the miscellaneous offshore penalty during the years in the covered tax return period and the covered FBAR period. • In this case, year-end account balances and year-end asset values are used in lieu of the highest balances over the course of the year—and the 5% penalty is assessed on the highest year.

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What is Non-Willful Conduct? • In order to participate in the SFOP or the SDOP, a Taxpayer must certify under penalty of perjury that his conduct was non- willful. • The IRS has said that non-willful conduct is conduct that is due to

negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.

• When asked at the NYU tax controversy conference on June 20, John McDougal, special trial attorney and division counsel for the IRS’ SBSE division, said that “he defines non-willfulness as applying to someone who isn’t really worried about being prosecuted.”

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What is Non-Willful Conduct? Con’t. • The IRS requires that a Taxpayer write a personal statement on on the Certification Form to provide specific reasons for the failure to report all income, pay all tax, and submit all required information returns, including FBARs. • The IRS also requests that, if the Taxpayer relied on a professional

advisor, then the Taxpayer should provide the name, address, and telephone number of the advisor and a summary of the advice. • Moreover, if married Taxpayers submitting a joint certification have different reasons, then each Taxpayer should provide his/her reasons separately in the statement of facts.

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Risks in Certifying Non-Willful Conduct • The IRS states on the Certification Form that if it receives or

discovers evidence of willfulness, fraud, or criminal conduct, it may open an examination or investigation that could lead to civil

fraud penalties, FBAR penalties, information return penalties, or even referral to Criminal Investigation. • What kind of evidence is applicable to demonstrate willfulness under the new Streamlined Filing Compliance Procedures when the definition of non-willfulness encompasses such a wide range of conduct—from negligence to a good faith misunderstanding of the law?

FAQ 17 Superseded • OLD FAQ 17. If all taxable income was reported then the

taxpayer could file the delinquent FBAR with an explanation, and no penalty would be imposed.

• New Delinquent FBAR Submission Procedures: Very similar.

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FAQ 18 Eliminated! Possibly Very Bad News

• Old FAQ 18. A taxpayer who has failed to file tax information returns, such as Form 5471 for controlled foreign corporations (CFCs) or Form 3520 for foreign trusts but who has reported, and paid tax on, all their taxable income with respect to all transactions related to the CFCs or foreign trusts, could file delinquent information returns. No penalty.

• New Delinquent International Information Return Submission Procedures. A statement of reasonable cause with a statement of all facts establishing reasonable cause for the failure to file must be submitted.

• Must include a certification that the entity for which the return is being submitted did not engage in tax evasion.

• But c.f. OVDP FAQ 32 and 35 excepting from penalties accounts and assets which generated no gross income.

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Transitional Relief: Eligibility

• Taxpayers who are “currently participating” in OVDP may elect transitional treatment. o Only those taxpayers who before July 1, 2014 had mailed their full voluntary disclosure

letter, and attachments o Taxpayers who already had received a fully executed Form 906 are not eligible o Taxpayers who opted out of OVDP, but not yet received a letter starting an exam, and a

Notice 609 are eligible. • N.B. The IRS has been changing the rules midstream

o Taxpayers who had been removed from OVDP by the IRS are not eligible o Taxpayers must meet the eligibility requirements of either the SFOP or the SDOP

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Transitional Relief: Benefits

• Allows for two bites at the apple. Taxpayers who do not receive transitional treatment remain in the OVDP, and will either receive the “normal” OVDP penalty, or still have the opportunity to opt-out of the OVDP entirely.

• Unlike other taxpayers who must elect between streamlined or OVDP under transitional relief a taxpayer may remain in OVDP, but obtain some of the benefits of the streamlined program.

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Transitional Relief: Penalty Structure

• No offshore penalty, or a 5 percent penalty depending upon whether the taxpayer qualifies under the SDOP, or SFOP

• The 20% accuracy penalty continues to apply • Failure to file, and failure to pay penalties continue to apply • The 8 year disclosure period remains the same • Protection from criminal prosecution continues to apply • Payment of tax is still due for all 8 years • The alternative mark to mark PFIC calculations are available

(unlike “regular” SDOP or SFOP)

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Obtaining Transitional Relief

• Opt-out of the OVDP is not required • All submissions which are required under OVDP must still be

provided • A certification of non-willfulness in the same form as would be

submitted under SFOP or SDOP must be submitted • Every request for transitional relief will be reviewed to determine

eligibility including the non-willfulness certification • The case will be reviewed by the examiner, and the examiner’s

manager • Some cases will be reviewed by a “central committee” for

consistency • There are no appeal rights from a determination that transitional

relief is unavailable

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Brager Tax Law Group

Los Angeles 10880 Wilshire Boulevard, Suite 880

Los Angeles, California 90024 Phone: 310.208.6200

Toll Free: 800.380.TAX LITIGATOR Fax: 310.478.8030

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@TaxProblemEsq www.bragertaxlaw.com www.taxproblemattorneyblog.com

Tax Litigation & Tax Controversy Services We Provide

• Criminal Tax Defense • FBAR and Offshore Account Problems • Office of Professional Responsibility

(OPR) Defense • Tax Audits & Tax Appeals • Tax Fraud Defense • Tax Preparer Penalty Defenses • Innocent Spouse Defenses • California Sales Tax Problems • IRS and California Payroll Tax Problems • Offers in Compromise • Installment Payment Agreements

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