Foreign-account holders may face double trouble

Not all are aware that non-bank offshore assets must be reported to Treasury as well as IRS

By Darla Mercado, Investment News

After the headlines about the IRS’ going after secret Swiss bank accounts, investors are learning to their dismay that they could face fines and prosecution for failing to report other foreign assets, such life insurance, to both the IRS and the Treasury Department.
Numbered bank accounts used to shelter wealth from the Internal Revenue Service are in the spotlight in the wake of the recent UBS AG scandal, but clients who own other types of foreign assets may be unaware that those accounts also must be disclosed to the Department of the Treasury, said Melissa Gillespie, a New York-based international tax attorney.

In addition to reporting investment income and capital gains on their income tax returns, U.S. citizens and residents with a financial interest or signature authority over a foreign financial account that’s worth more than $10,000 at any time of the year must report that account to the Treasury Department through a form called the Foreign Bank Account Report.

Along with foreign bank ac-counts, that treatment applies to foreign life insurance policies with a cash surrender value greater than $10,000, trusts with foreign financial accounts, investments in gold bullion and foreign-type individual retirement accounts, or pension plans that are in the client’s control.

Foreign annuities with a balance that exceeded $10,000 any day during the year must also be reported to the Treasury.

“There are many clients who may have received an inheritance from a foreign-based relative which may be maintained in a foreign account — or foreign clients who moved to the U.S. many years ago and maintained a foreign account or have an inheritance,” Ms. Gillespie said.

“They had no intention of avoiding taxes, and all of a sudden, they’re in trouble,” she added.

HEAVY PENALTIES

Penalties for those who non-willfully fail to file FBARs and report the income from those foreign financial accounts on their income tax returns — as well as fail to join the IRS’ voluntary-disclosure program by Sept. 23 — can be as high as $10,000 per year. The punishment is even greater for those who deliberately avoid reporting to the Treasury Department and the IRS.
Even those who join the voluntary-disclosure program on time but don’t report the income from those foreign financial accounts on their tax return will face penalties on the last six years of underreported income, and a flat 20% FBAR penalty on the highest balance in the foreign account over that period. Plus, they still have to file six years’ worth of amended income tax returns and FBARs.

Clients don’t have to be sophisticated overseas investors to get in trouble. For example, immigrants who obtain residency in the United States could receive assets from their parents back home and not realize that they have to file FBARs.

“It’s very common for European and Asian families with significant wealth,” said Troy E. Thompson, a tax attorney and adviser at Thompson Advisory Services LLC of Portland, Ore. “The father will distribute shares of stock in a privately held family firm, but it might not be clear to the kids, or they may not think it’s really theirs, because the dad is still alive.”

Trusts with foreign financial accounts are also tricky. Trustees of U.S. trusts with foreign accounts must file FBARs. Meanwhile, beneficiaries of foreign or U.S. trusts who have a present interest in more than 50% of the trust’s assets or who receive more than 50% of the income must also file FBARs.

Discretionary beneficiaries of these trusts also need to file, regardless of the size of their interest, Ms. Gillespie added. This can be especially troublesome, as sometimes these beneficiaries are children, she said.

An insurance policy inside an insurance trust will also require the beneficiary to file, said Gideon Rothschild, a partner at Moses & Singer LLP who specializes in domestic and international estate planning. He has been working on several dozen late FBAR filings that are in the voluntary disclosure program.

Complicating the ordeal for clients, advisers may not know how to direct their clients if foreign financial accounts aren’t their specialty or if a client’s tax practitioner doesn’t bring it to their attention.

Anja Luesink: Plans to tell clients to file, but doing so remains up to them. Such was the case for Anja Luesink, an adviser with Luesink Financial Planning LLC in New York. A citizen of the Netherlands, Ms. Luesink holds bank accounts overseas, including retirement accounts and annuities.
Though she had been reporting the income from those assets on her tax returns, her tax adviser never told her that she also needed to file a FBAR.

It was last year at a Financial Planning Association meeting that she first heard about the reporting requirements.

Since Ms. Luesink had reported the income from the accounts on her tax returns, she was able to file her FBAR without penalties from the IRS.

A LESSON LEARNED

The ordeal came with a lesson for Ms. Luesink.
“I intend to write a newsletter to my clients and people I know just to inform them about the FBAR,” she said. She will e-mail clients this week to notify them of the IRS’ voluntary-disclosure deadline.

“All I can do is give them the advice to file, and they’ll have to implement it themselves,” Ms. Luesink said.

As long as taxpayers correctly report income from the foreign accounts on their tax return and come forward to file their late FBARs by Sept. 23, they won’t face a fine. But for those who neglected to pay taxes on the foreign accounts, it’s another story.

Mr. Thompson has a client who not only missed past FBAR filings but also failed to report income from the foreign account on his tax return. Such cases need to be reported to the IRS’ criminal-investigations unit before the client can apply for voluntary disclosure.

“Although it seems the IRS isn’t looking to prosecute people unless there’s a lot of unreported income involved or they’re promoters of tax evasion strategies, people have to write out big checks,” Mr. Rothschild said. “It’s going to cost about 40% of the account balance for most people by the time you’re done with taxes and penalties.”

E-mail Darla Mercado at dmercado@investmentnews.com.

IRS Is Building “Elite Division” to Audit Taxpayers With Offshore Accounts

IRS Corporate Audit Division Will Examine UBS Tax Evasion Cases
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By Ryan J. Donmoyer

Sept. 1 (Bloomberg) — The U.S. Internal Revenue Service is shifting audits of wealthy Americans suspected of offshore tax evasion to an elite division that usually examines businesses as it prepares to receive data on 4,450 UBS AG Swiss bank accounts.

The tax agency posted internal job listings yesterday seeking auditors to work for a newly created office within its Large and Mid-Size Business division that will be tasked with monitoring what it called the “global high-wealth industry.”

The move centralizes responsibility for auditing wealthy individuals suspected of offshore tax evasion in a unit with the most experience navigating international tax treaties and untangling complex cross-border business structures.

“That’s where the most sophistication is at IRS,” said Michael Murphy, a former deputy IRS commissioner who is now a consultant for the law firm Sutherland Asbill & Brennan LLP in Washington.

Responsibility for auditing wealthy individuals is currently split among IRS divisions devoted to small businesses and self-employed wage earners and investors, which don’t have as much experience in cross-border transactions, Murphy said.

The IRS says it anticipates handling up to 10,000 new cases related to UBS, including thousands of people who come forward voluntarily in exchange for reduced penalties before Sept. 23.

52,000 Accounts

UBS agreed Aug. 19 to hand over the account information to settle a U.S. lawsuit seeking the names of Americans suspected of evading taxes through 52,000 Swiss accounts. The bank will give the material to the Swiss government, which will then determine how much will go to the IRS.

The new global high-wealth industry sector will be one of six industry-specific offices within the IRS’s Large and Mid- Size Business division. Other industry sectors focus on financial services; retailers, food, pharmaceuticals and health care; natural resources and construction; communications, technology and media; and heavy manufacturing and transportation.

“The establishment of this group is a step in our ongoing effort to align our resources around our long-term enforcement strategy,” IRS spokesman Frank Keith said. “The new group will focus on examinations involving webs of entities and arrangements controlled by the high wealth taxpayer segment.”

Murphy said the IRS’s business auditing division is better equipped to handle the complexities of offshore bank accounts that often are linked to a labyrinth of dummy corporations, partnerships and other foreign entities designed to hide account holders’ identities from the authorities.

Tax Treaties

The Large and Mid-Size Business division has more experience in dealing with violations of tax treaties, better access to data gained from information-exchange agreements, and an embedded legal organization, Murphy said.

“You’re going to marshal your tax resources that are most experienced in dealing with global entities,” Murphy said.

IRS Commissioner Doug Shulman said Aug. 19 that the 4,450 accounts that will be turned over by UBS at one point held $18 billion and included a range of securities, commodities and cash.

It will take up to a year for the Swiss government to decide whether to give the information to the IRS, and UBS clients will be allowed to appeal the determination.

Switzerland said it received a formal request for the accounts from the IRS. The Swiss authorities now have 90 days to decide whether they can pass on details on the first 500 accounts to the U.S., according to a statement on the Federal Tax Administration’s Web site in Zurich. The remaining accounts have to be processed within a year.

Right to Appeal

UBS will inform affected customers they have a right under Swiss law to appeal to the Swiss Federal Administrative Court to keep their accounts secret. The account holders also will be told they are required by U.S. law to notify the Justice Department of any appeal.

It is legal for Americans to have offshore bank accounts, so long as they declare the accounts to the Treasury Department and pay taxes on any earnings.

The IRS, meanwhile, is seeking additional resources from Congress to beef up its enforcement of tax rules governing cross-border financial transactions.

The House last month approved the hiring of 784 new fulltime IRS workers at a cost of $128.1 million. The measure is awaiting action in the Senate.

The expanded workforce would include 109 employees to investigate U.S. taxpayers with offshore activities and 113 to audit smaller international businesses. None would be fully trained until 2012.

Managing Information

Frank Ng, who left the IRS as head of the Large and Mid- Size Business division to join the accounting firm Ernst & Young LLP this month, said shifting responsibility for the UBS cases to his former division signals the IRS is searching for ways to best manage the flow of information from UBS and related cases.

“It’s more a way of coordinating the issues and inventory around that segment of taxpayers,” Ng said. “In the end, it’s probably more efficient.”

The case is U.S. v. UBS AG, 09-cv-20423, U.S. District Court, Southern District of Florida (Miami).

To contact the reporter on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net

Obama agenda: Taxes, not just health care

The president’s next 200 days will be as full, if not fuller, than the first. And tax questions will underlie a lot of key debates ahead.

By Jeanne Sahadi, CNNMoney.com senior writer

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NEW YORK (CNNMoney.com) — President Obama’s fall agenda has grown larger as some of the biggest decisions — and fights — over health care reform have been punted to September … at the earliest.

But health reform is not the only major initiative he wants to get done. Far from it. There’s climate change. There’s reforming Wall Street. And, of course, there’s passing a budget for 2010 at a time of huge deficits.

Running in the background to all of this will be one of the biggest issues the Obama administration must address: taxes.

“As soon as they can clear health care off the plate, it will be taxes, taxes, taxes,” said Anne Mathias, director of research at Concept Capital’s Washington Research Group.

Health reform taxes: Before health care can be cleared off the plate, Obama will have to answer some key tax questions.

For starters, he will need to be more explicit about what he will accept in terms of increasing taxes to pay for health reform and indicate exactly which of the revenue raisers on the table in Congress he considers deal-breakers.

The president originally proposed limiting the itemized deductions that high-income tax filers could take, an idea that fell flat with lawmakers. He doesn’t like what had been a leading idea in the Senate to help fund reform — taxing what are currently tax-free health benefits that workers receive from their employers. But at various times he has indicated indirectly he might be open to it in some limited form.

Now the idea gaining currency in the Senate is to tax insurers who offer very expensive plans. Critics say such a tax could either be passed on to workers through higher premiums or reduced benefits. In the House, meanwhile, the leading idea is to impose a surtax — or additional tax — on the highest-income households.

“The problem here is there are no good ideas,” said Clint Stretch, managing principal for tax policy at Deloitte Tax.

Translation: Only proposals to cut taxes typically generate support. Winning the debate over a tax hike is guaranteed hard slogging.

Estate taxes: Regardless of what happens with health reform, lawmakers and the administration will have to make a decision about what to do about the estate tax. Otherwise, it will be repealed for one year, starting on Jan. 1, 2010.

Since that’s revenue the country can’t afford to lose, what’s most likely to happen is that Congress will extend the estate tax for one year at the 2009 exemption levels, Mathias and Stretch said. In that case, the first $3.5 million of an individual’s estate would be exempt from the federal estate tax. And the taxable portions of the estate would then be taxed at rates up to 45%.

Then in 2010, lawmakers are likely to address what to do with the estate tax on a more permanent basis. Obama has proposed making the estate tax permanent at the 2009 exemption levels.

But doing so will look like a revenue loser over 10 years. That’s because it would raise less tax money than what’s set to happen under current law. If nothing is done by 2011, the first $1 million of an estate would be exempt from the tax and the top rate would be 55%.

Climate change taxes: Whether or not lawmakers succeed in getting a climate change bill ready for the president’s signature before the year is out, there is likely to be discussion over several revenue issues. For example, what to do with revenue generated from a cap-and-trade program in which carbon-emission permits are bought and sold?

Corporate taxes: Obama has said he wants to close what he calls corporate tax loopholes.

The administration laid out a few proposals to that effect earlier in the year, particularly with regard to U.S. companies doing business overseas. And Obama created a tax reform panel and asked it to make suggestions by Dec. 4 about how to raise more revenue. Corporate tax breaks are a focus for the group.

But it’s not clear how Obama’s corporate tax proposals will fly given that tax writers on Capitol Hill have already crafted many of their own proposals. Some lawmakers only want to curb corporate breaks and simplify the corporate tax code if rates are lowered, a step Obama has not yet proposed.

“The Hill knows where it wants to go on tax reform generally. They want to close the tax gap and they want to do international tax reform,” Stretch said. But he doesn’t envision the changes as big revenue raisers per se. Rather, he said, the overarching goal would be to make U.S. businesses operating abroad more competitive.

“It won’t be about raising revenue, but about lowering rates. The point of doing it is to generate more business,” Stretch said.

Although discussions will be had, he only thinks there’s a 50/50 chance that international corporate tax reform will be completed in the next year.

Kitchen sink taxes: There are a host of tax provisions that, barring lawmaker action, will expire in 2009 and 2010. Many are tax breaks that companies and individuals have come to expect and which lawmakers typically extend every year. Among these are the research and development credit for businesses, relief from the Alternative Minimum Tax for middle- and upper-middle-income families and various renewable energy tax credits.

What’s very possible is that extensions for most such expiring provisions will be bundled into one bill at some point next year. “There’s no way they can get through 2010 without a tax bill,” Mathias said.

The midterm elections provide added incentive, she noted. “Democrats will want to campaign on extending popular provisions.”

First Published: August 5, 2009: 2:54 PM ET

Partnership, Trust and Corporation Tax Returns are due September 15th

The IRS moved the filing date up from October 15 to September 15 for partnership and trust income tax returns for tax year 2008.

Wall Street stumbles into September

After a bleak 2008, equities are looking up. But whatever the market, our trademark long-term portfolio can help you build a nest egg for a secure future.
NEW YORK (CNNMoney.com) — Markets tumbled Tuesday afternoon, as investors took a big step back at the start of what is typically a rough month, betting that stocks have risen too far too fast without any underlying support.
“I think we’ve had a nice run and it’s time for a bit of a pullback,” said Tom Schrader, managing director at Stifel Nicolaus. “I wouldn’t be surprised if we moved back to the 880 level (on the S&P 500) before moving back up.”
A drop to the 880 level would constitute a slide of about 12% from the current levels.
Investors nitpicked through the morning’s better-than-expected reports on housing and manufacturing but found little reason to jump back into the fray.
With around 40 minutes left in Tuesday’s session , the Dow Jones industrial average (INDU) had lost 160 points, or 1.7%. The S&P 500 (SPX) index fell 18 points, or 1.8%. The Nasdaq composite (COMP) fell 33 points, or 1.7%.
“I think the ‘whisper number’ for [the manufacturing report] was higher and once people digested that, the market swung in the other direction,” said Schrader.
Schrader said that investors were also reacting to the “calendar influence,” amid a variety of reports about the tendency for September to be a weak month on Wall Street. September is typically the biggest percentage loser of the month for the Dow, S&P 500 and Nasdaq composite, according to the Stock Trader’s Almanac.
“The reports this morning were positive, but investors are basically saying that stocks have had a good run up and now it’s time to take some profits,” chimed in Phil Orlando, chief equity market strategist at Federated Investors.
Stocks have essentially been on the rise since March, as investors have welcomed extraordinary fiscal and monetary stimulus and signs that corporate profits and the economy have stabilized. The major gauges ended last week at the highest levels in 9 to 10 months. Financial shares took a beating Tuesday after enjoying a nice ride through the late summer, fueled largely by speculation and momentum.
But with the S&P up 52% from the March 9 lows, market participants are now looking for concrete evidence that the economy is recovering. The morning’s reports were positive, but perhaps not as positive as the most optimistic forecasts.
Manufacturing: The Institute for Supply Management’s manufacturing index for August showed growth in the sector for the first time since January 2008. The index rose to 52.9 from 48.9 previously. Economists surveyed by Briefing.com thought it would rise to 50.5.
Pending home sales rose for the sixth straight month, jumping 3.2% in July, to the highest point in nearly two years, according to a report from the National Association of Realtors released Tuesday morning. The index rose 3.6% in June. Economists surveyed by Briefing.com thought sales would rise 1.5% in July.
Construction spending fell 0.2% in July versus forecasts for an unchanged reading. Spending rose a revised 0.1% in June.
Financials: Many of the summer’s big bank sector winners led the declines Tuesday.
Dow component Bank of America (BAC, Fortune 500) slipped 5% in active NYSE trading. BofA was the biggest Dow gainer in the June through August period, rising 56%.
Dow component American Express (AXP, Fortune 500) lost 4% Tuesday. Over the last three months, AmEx has gained 36% and was the second-best Dow performer.
Dow component JPMorgan Chase (JPM, Fortune 500) lost 3% after rising 17% this summer.
Among other movers, Citigroup (C, Fortune 500) lost 6% after rising 34% in the summer. Regional bank Fifth Third Bancorp (FITB, Fortune 500) lost 5% after rising 59% this summer.
The KBW Bank (BKX) index fell 4.6% after rising 20% over the summer.
Oil prices and stocks: U.S. light crude oil for October delivery fell $1.91 to settle at $68.05 a barrel on the New York Mercantile Exchange. Oil prices have been slipping since hitting a ten-month high just below $75 a barrel late last month.
The decline in oil prices dragged on heavily-weighted energy stocks including Dow components Chevron (CVX, Fortune 500) and Exxon Mobil (XOM, Fortune 500).
Auto sales: The government’s popular Cash for Clunkers program gave a boost to sales in August, major automakers said. Although a plunge in sales in the last week of the month, following the program’s end, suggests the impact will not be far reaching.
Company news: Online auctioneer eBay (EBAY, Fortune 500) said it will sell a large stake in its Skype Internet phone business to a group of investors for $2.75 billion.
World markets: European markets tumbled, while Asian markets ended higher.
Bonds: Treasury prices rose, lowering the yield on the benchmark 10-year note to 3.37% from 3.40% late Monday. Treasury prices and yields move in opposite directions.
Other markets: COMEX gold for December delivery rose $3.50 to settle at $957 an ounce.
In currency trading, the dollar gained versus the euro and the Japanese yen.
Market breadth was negative. On the New York Stock Exchange, losers beat winners by over four to one on volume of 1.09 billion shares. On the Nasdaq, decliners topped advancers by over three to one on volume of 2.19 billion shares.