New Reporting Requirement for Individuals with Foreign Financial Assets

 

New for 2011 is a requirement for any individual who, during the tax year, holds any interest in a “specified foreign financial asset” to complete and attach Form 8938 to his or her income tax return if a reporting threshold is met. The reporting threshold varies depending on whether the individual lives in the U.S. and files a joint return with his or her spouse. For example, someone who is not married and doesn’t live abroad will need to file Form 8938 for 2011 if the total value of his or her specified foreign financial assets was more than $50,000 as of December 31, 2011, or more than $75,000 at any time during 2011. For married taxpayers filing a joint return and living in the U.S., the threshold amounts are doubled. The thresholds also are higher for taxpayers residing abroad.

Specified foreign financial assets include financial accounts maintained by foreign financial institutions and other investment assets not held in accounts maintained by financial institutions, such as stock or securities issued by non-U.S. persons, financial instruments or contracts with issuers or counterparties that are non-U.S. persons, and interests in certain foreign entities. However, no disclosure is required for interests that are held in a custodial account with a U.S. financial institution.

The penalty for failing to report specified foreign financial assets for a tax year is $10,000. However, if this failure continues for more than 90 days after the day on which the IRS mails notice of the failure to the individual, additional penalties of $10,000 for each 30-day period (or fraction of the 30-day period) during which the failure continues after the expiration of the 90-day period, with a maximum penalty of $50,000.

To the extent the IRS determines that the individual has an interest in one or more foreign financial assets but he or she doesn’t provide enough information to enable the IRS to determine the aggregate value of those assets, the aggregate value of those assets will be presumed to have exceeded $50,000 (or other applicable reporting threshold amount) for purposes of assessing the penalty.

No penalty will be imposed if the failure to file the 8938 is due to reasonable cause and not due to willful neglect. The fact that a foreign jurisdiction would impose a civil or criminal penalty on the taxpayer (or any other person) for disclosing the required information isn’t reasonable cause.

In addition, if it is shown that the individual failed to report the income from the foreign financial account on his or her income tax return, a 40% accuracy-related penalty is imposed for underpayment of tax that is attributable to an undisclosed foreign financial asset.

If you have questions related to this issue or are uncertain if you are required to file Form 8938, please give this office a call to discuss your particular situation.

 

For Form 8938 and instructions from Stuart Rohatiner, CPA, JD click here

Need additional information about this article? Please contact my office at 305-868-3600 ext 3105

4 more Credit Suisse bankers charged in tax case

By JESSICA GRESKO

Associated Press

WASHINGTON — Federal prosecutors in Virginia have charged four more bankers with Zurich-based Credit Suisse Group with conspiracy in what they say was a long-running scheme to help U.S. taxpayers hide as much as $4 billion in assets.

Prosecutors originally charged four people in the scheme in February, so the charges announced Thursday bring the total number of people charged up to eight. Charging documents filed in the case do not specify what bank the group worked for, but The Associated Press previously reported its identity.

Prosecutors wrote in February that as of late 2008 Credit Suisse was maintaining thousands of secret accounts for U.S. customers with approximately $3 billion in assets, but that amount was increased to $4 billion in a document filed Thursday. Prosecutors previously alleged that the conspiracy goes back as far as 1953.

The four individuals charged Thursday were: Markus Walder, who was the head of North American Offshore Banking; Susanne D. Ruegg Meier, a member of the bank’s senior management; Andreas Bachmann and Josef Dorig, both of whom worked for a Credit Suisse subsidiary. Court documents did not include Dorig’s nationality, but all three others charged are Swiss.

Credit Suisse itself is not charged in the case, but prosecutors wrote that bank officials “knew and should have known that they were aiding and abetting U.S. customers in evading their U.S. income taxes.”

“Credit Suisse is committed to a fully compliant cross-border business. Subject to our Swiss legal obligations and throughout this process we will continue to cooperate with the U.S. authorities in an effort to resolve these matters,” the bank said in an emailed statement.

The four individuals previously charged in the case were Italian citizen Marco Parenti Adami and Swiss citizens Emanuel Agustoni, Michele Bergantino and Roger Schaerer. Schaerer has dual citizenship with the United States.

Revised court documents released Thursday discuss how the group is alleged to have worked with 35 clients including people in New York, New Jersey, California, Florida and Virginia to conceal assets and income in secret accounts. The original court papers noted 17 customers, none of them by name.

Revised draft of Form 8938, Statement of Specified Foreign Financial Assets

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The IRS posted a revised draft of Form 8938  (click to download), Statement of Specified Foreign Financial Assets.  What do you think about the new proposed form? Post your comments:

Deadline looms for US citizens to file tax returns and FBAR reports

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Attention! United States persons meaning US citizens residing abroad, dual citizens with the United States, green card holders (Permanent Residents) and US residents for income tax purposes, deadlines are fast approaching for compliance with US reporting and filing obligations. Specifically, for individuals, there are two tax reporting and filings due this month: the Report of Foreign Bank and Financial Accounts (the ‘FBAR’) and the US Individual Income Tax Return.

What is an FBAR? The FBAR is used to report a financial interest in or signature authority over a foreign financial account. The report for the calendar year 2010, although linked to the US Individual Income Tax Return, is not sent to the US Internal Revenue Service. It goes to the US Department of the Treasury and must be received by the Treasury on or before June 30th 2011. Postmarked by June 30th is not acceptable, and note that no extension for later filing is available.

Who Must File an FBAR?

A United States person that has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year.

A very common misconception is that only one account has to be over $10,000. This is incorrect. It is the aggregate value of all foreign accounts. If the individual has five accounts with $2,000 in each of four, and $3,000 in number five, all accounts must be reported. Foreign financial accounts also mean accounts held jointly with others, such as foreign national spouses, friends, and as guardian for children, etc.

What kind of Financial Account are we talking about?

Foreign Financial Accounts are accounts and financial interests held in Bermuda or other jurisdictions outside the United States by US persons – see description above.

A financial account includes, but is not limited to, a securities, brokerage, savings, demand, checking, deposit, time deposit, or other account maintained with a financial institution (or other person performing the services of 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, and shares in a mutual fund or similar pooled fund.

This comprehensive list includes foreign pensions, foreign whole of life insurance policies, foreign annuities, and investment accounts holding foreign mutual funds, foreign money market funds and related type accounts.

What does a Financial Interest mean?

A United States person has a financial interest in a foreign financial account for which:

(1) the United States person is the owner of record or holder of legal title, regardless of whether the account is maintained for the benefit of the United States person or for the benefit of another person; or

(2) the owner of record or holder of legal title is one of the following:

(a) An agent, nominee, attorney, or a person acting in some other capacity on behalf of the United States person with respect to the account;

(b) A corporation in which the United States person owns directly or indirectly: (i) more than 50 percent of the total value of shares of stock or (ii) more than 50 percent of the voting power of all shares of stock;

(c) A partnership in which the United States person owns directly or indirectly:

(i) an interest in more than 50 percent of the partnership’s profits or

(ii) an interest in more than 50 percent of the partnership capital;

(d) A trust of which the United States person:

(i) is the trust grantor and

(ii) has an ownership interest in the trust for United States federal tax purposes.

(e) A trust in which the United States person has a greater than 50 percent present beneficial interest in the assets or income of the trust for the calendar year; or

(f) Any other entity in which the United States person owns directly or indirectly more than 50 percent of the voting power, total value of equity interest or assets, or interest in profits.

This is a daunting list of financial interest situations and requires complex research in many instances. Those who may have signatory authority, but no financial interest, are generally assessed more on a case by case basis due to the complex nature of a compound structure.

Why do you have to report these accounts and financial interests?

Most importantly, the FBAR reports are also linked to new reporting requirements under the US Internal Revenue Service initiative and part of the Hire Act legislated by US Congress. The Foreign Account Tax Compliance Act FATCA as it is called placed new and very significant reporting requirements on foreign financial entities (FFE) and non-financial foreign entities (NFFS): your foreign bank, your foreign trustee, your foreign pension administrator, your foreign mutual fund investment provider, your foreign insurance company, your foreign small business private corporation if you own shares and others.

FFEs are required to report all US person’s accounts, balances, transactions, and identifiers to US Internal Revenue Service. Non-cooperation with this mandate by FFEs will trigger an onerous withholding tax penalty on the foreign financial institutions. It is an understatement to say that this new mandate has generated controversy offshore.

These are complex and taxing times for US persons abroad. The discussion above only covers one required form. There are a number of others that are linked to the FBAR that US citizens abroad may have no knowledge of. A good rule to follow is that every time you open/close an account, transfer monies, receive/give gifts, earn, invest, sell/buy an acquisition, die or otherwise implement estate and succession planning, there is a tax consequence.

If you misinterpret IRS instructions, miss deadlines, or inadvertently file incomplete returns, the penalties range from significant to very, very severe. Therefore, it is not recommended, when it comes to US and international tax matters, to rely upon the advice of anyone who does not have an extensive background, license and most importantly competency and experience in US and international tax matters. Well intended friends, foreign brokers, foreign counsel, foreign trustees, foreign pension administrators or even professionals such as CPAs who have had no experience in international tax law practice (they specialized in audit or investments) may not have the expertise to understand current US tax law regarding international tax issues affecting US persons residing abroad.

It is always preferable not to be exposed to significant tax errors or missed tax obligations. If you are audited by US Internal Revenue Service, you may be asked to provide the names of the foreign advisors who provided the advice to you, not a comfortable position to be in.

US Internal Revenue Service has instituted a complex licensing program for tax professionals who advise and prepare US tax returns for compensation. The practitioners are required to take a competency exam, demonstrate tax experience, complete continuing education programs every year, pass a background check (with fingerprints for non-CPA practitioners), be current on all personal individual and related tax reporting and liabilities, and submit to announced office audits by IRS personnel. The Service has implemented severe fines, disbarment from practice before the US Internal Revenue Service, and criminal prosecution for violations of professional conduct and lack of due diligence in conducting a tax practice.

The Internal Revenue Service has made it very clear through various pronouncements, meetings with experienced tax professional groups and in speeches by the Commissioner, Mr. Douglas Shulman, that there will be no relenting of the pressure to bring US persons back into compliance with US tax law.

American Citizens Abroad are aggressively lobbying Congress and various interested representatives on the disincentives of the current US citizenship-based tax system.

This could be a taxing summer for those not in compliance.

By Martha Myron

Draft of Form 8938, Statement of Foreign Financial Assets

Attached IRS draft Form 8938 released July 2010

Reporting by U.S. Persons Holding Foreign Financial Assets

FATCA requires any U.S. person holding foreign financial assets with an aggregate value exceeding $50,000 to report certain information about those assets on a new form (Form 8938) that must be attached to the taxpayer’s annual tax return.  Reporting applies for assets held in taxable years beginning on or after January 1, 2011.  Failure to report foreign financial assets on Form 8938 will result in a penalty of $10,000 (and a penalty up to $50,000 for continued failure after IRS notification).  Further, underpayments of tax attributable to non-disclosed foreign financial assets will be subject to an additional substantial understatement penalty of 40 percent.

DOWNLOAD THIS FORM AS A PDF

DOWNLOAD THIS FORM AS A PDF

Distinguished Colleague Leads FBAR Seminar Tuesday March 1

You are cordially invited to attend…

 

Register Online

Filing FBARs in 2011:
What are the Rules? How to Resolve Noncompliance?

With the IRS focusing on taxpayers with unreported offshore accounts, it is never too early to begin thinking about filing 2011 FBARs to report foreign accounts held in 2010. Final regulations were issued on February 23, 2011, to amend the regulations under the Bank Secrecy Act provisions that apply to the FBAR.

Holland & Knight International Tax Partner Kevin E. Packman will review the state of the FBAR filing in 2011 – who needs to file, which accounts must be reported and what to do about signature authority.

Mr. Packman will also discuss the implications of the new IRS Offshore Voluntary Disclosure program, which was announced on February 8, 2011, and how taxpayers can benefit from it. He will explain the eligibility requirements, penalty structure and compare it to the 2009 voluntary disclosure program.

The Speaker

Kevin Packman, Esq

Kevin E. Packman, a partner in the Private Wealth Services Section, chairs the firm’s Offshore Tax Compliance Team and focuses his practice on IRS tax controversies. He also assists clients with estate and gift tax planning for domestic and international clients as well as on pre-immigration planning for international clients.

WEBINAR DETAILS

Date/Time

Tuesday, March 1, 2011
3:00 p.m. EST

Continuing Legal Education

Holland & Knight will make all reasonable efforts to seek CLE credits for this online program. In certain instances, some programs may not be awarded CLE credits because of either content, jurisdictional restrictions, or the online platform. For New York attorneys, this program’s format does not qualify for CLE credit for transitional (newly admitted) attorneys. It is appropriate for experienced attorneys.

Continuing Professional Education (CPE) for CPAs

Attendance verification forms will be provided for CPAs who can claim self-study CPE credit for attending this webinar.

Register Online

For more information contact Holland & Knight: Kevin Packman 305-349-2261/ kevin.packman@hklaw.com

Tax Havens’ Days Are Numbered

Robert Olsen, 05.03.10

The era of banking secrecy may be coming to an end.

HONG KONG — As Democrats and Republicans haggle over the details of financial reform in the Senate, a new tax law is quietly approaching that will force all overseas banks to reveal the overseas holdings of American account holders.

“I don’t think a lot of people have paid attention to this,” said Scott D. Michel, president of Caplin & Drysdale law firm.

“The whole purpose of this is to put American account holders around the world in a position where they can have no safe haven in any bank that wants to offer U.S. investments to any of its clientele,” he added.

American citizens are required to report all of their worldwide income every year when filing their tax returns. As a part of that process, they are also required to disclose any offshore bank accounts they may have or hold signature authority over.

If an individual falsifies his or her tax claim by concealing their income in offshore accounts, banking secrecy laws in countries like Switzerland have in the past helped to keep that income hidden by making it a crime for the banks and their employees to disclose information about clients.

U.S. lawmakers designed the Foreign Account Tax Compliance Act (FACTA) to “force foreign financial institutions, foreign trusts, and foreign corporations to provide information” on undisclosed assets held by Americans after Dec. 31, 2012. If they fail to do so, the Internal Revenue Service (IRS) can hit the banks with 30% withholding on all income originating from the U.S.

The full details of FACTA have yet to be ironed out between the U.S. Treasury and the IRS, but one of its requirements will include a document for new account holders to sign that waives whatever rights they may have under local banking secrecy laws.

The U.S. estimates that it will raise an additional $8.5 billion in tax revenue over the next 10 years by forcing Americans to disclose income they are hiding from tax collectors.

Spurred by rising fiscal deficits, the United States and other members of the Organization for Economic Cooperation and Development (OECD), particularly Germany and France, have been using a variety of methods to clamp down on tax cheats, tax havens and overseas financial centers.

The most high profile of these were the UBS ( UBS – news – people ) AG case and the OECD’s attempt to name and shame those countries that fail to comply with internationally agreed standards.

Tax havens are usually characterized by extremely low tax rates, strong banking secrecy laws and flexible regulations in terms of licensing, incorporation and supervision. So-called shell companies, trusts and other legal entities are often used to shield assets from overseas authorities.

The OECD had initially singled out 47 jurisdictions that included the likes of Hong Kong, Macau, the Philippines and Malaysia, but hasty commitments to improve transparency along with some backroom deal-making led to all four being removed from the blacklist.

The U.S. tax authorities, however, have recently introduced another far more effective means of collecting information on tax evaders: They pay informers for it.

The IRS Whistleblower Office can pay anywhere between 15% and 30% of the taxes, penalties and interest collected for cases valued at $2 million or more. (See: “Tax Informants Are On The Loose”)

The IRS has yet to make any payments under the new scheme, but that hasn’t dissuaded people like Bradley C. Birkenfeld from trying. Formerly an employee of Switzerland’s largest bank UBS, Birkenfeld was sentenced to 40 months in jail for helping billionaire California real estate developer Igor M. Olenicoff hide $200 million offshore. (See: “April 15 Plea: Pardon Tax Whistleblower”) Motivated in part by the possibility of a reward, Birkenfeld provided evidence to U.S. tax authorities detailing how the secretive Swiss bank helped wealthy Americans hide money offshore.

As a result, UBS was forced to admit wrongdoing, pay a fine of $780 million and to turn over data on as many as 4,450 UBS accounts to the Swiss government, which will pass the information to the U.S.

A number of banks from some of Europe’s best-known tax havens are facing similar investigations. Germany launched over 1,000 tax evasion probes against clients of Credit Suisse ( CS – news – people ) last month. In December the French authorities said that it had the details of 24,000 Swiss bank accounts provided by a former HSBC ( HBC – news – people ) employee.

Fearing the possibility of heavy fines and prosecution, many tax evaders from the U.S., Germany and France have come forward to report their assets.

Michel believes the disclosure of banking secrets will continue to grow. “When you combine the whistleblower regime with the template that the [U.S.] government used in the UBS case, with the information they’re getting with all these voluntary disclosure cases and now FACTA, I think the era of bank secrecy is fairly rapidly eroding in front of our eyes,” he said

Related articles:

Foreign Investment’s New Landscape

CPAs Provide Expertise for Transfer Pricing Analyses

MAY 2010

Transfer pricing, the process by which multinational companies set arm’s-length prices for cross-border transactions within a corporate group, is complex and consistently ranks as the No. 1 international tax issue facing multinational companies, according to Ernst & Young’s 2009 Global transfer pricing survey. To avoid penalties and potential interest, most tax authorities require taxpayers to prepare annual transfer pricing reports when they file tax returns.

During its infancy, transfer pricing was dominated by economists. However, as global transfer pricing regulations developed, international examiners gained experience and financial accounting standards evolved. Consequently, companies now need experienced tax accountants not only to validate the reliability of the data during tax controversies but also to guide taxpayers during implementation. There is definitely still a role for economists on project teams, but CPAs are probably more conversant with such steps as making a compensating adjustment journal entry or quantifying FIN 48 risks (FASB Interpretation no. 48, Accounting for Uncertainty in Income Taxes, now codified in FASB ASC Topic 740) for financial reporting purposes.

Stuart Rohatiner, CPA, JD

Below are examples of transfer pricing issues where expert accounting skills are important:

Financial reporting. Certain industries have unique accounting revenue and expense treatment, and to calculate the appropriate benchmark ratios for transfer pricing purposes, an accountant needs to analyze the financial statement footnotes and understand which items are characterized as operating, pass-through, etc. For example, the income statements for a professional services firm include a special line item called “reimbursements” under the revenue and cost-of-sales categories. Reimbursements are generally pass-through contractor costs and reimbursed expenses and would likely be excluded from the operating revenue and operating expense calculations for transfer pricing purposes. In addition, with the currently volatile economy and corresponding impact on profitability, companies are increasingly monitoring their taxable income in each jurisdiction and likely making year-end compensating adjustments to the books and records to get profit margins within the arm’s-length ranges.

Transfer pricing audit document requests. The IRS and other tax authorities historically requested that taxpayers provide copies of their transfer pricing reports to support their pricing during audit years. Fast-forward to the current environment, and a typical audit request specifies tying the transfer pricing data from reports to general ledgers, consolidating income statements and balance sheets.

FIN 48 analysis. Public companies and their auditors are now required to analyze the income tax calculations and determine if the company needs to quantify and include in the financial statements any tax exposures that are “more likely than not” to be sustained upon examination. Auditors have increasingly identified transfer pricing risks, especially adjustments and penalties proposed by tax authorities, and forced taxpayers to disclose the details in SEC public filings and book reserves.

Reliability of financial data. Since much of transfer pricing financial analysis involves comparing unaudited financial statements with audited ones, a tax accountant who can validate the reliability of the unaudited data is invaluable, especially in tax controversy settings.

IRS analysis of adjustments and methods. The trend toward an increased focus on the accounting details of intercompany transactions may be a result of the IRS’ hiring international examiners with accounting backgrounds. Whatever the reason, the IRS has placed a new emphasis on reviewing all accounting and functional differences between the taxpayer-tested party and the comparable companies selected in the transfer pricing report. For example, during a recent meeting of a taxpayer with the IRS, the IRS international examiner compared each accounting line item from the taxpayer’s annual report with those of the comparable companies to make sure that adjustments were considered for any differences in functions or risks. Similarly, the examiner insisted on analyzing all potential transfer pricing methods and profit level indicators available, even though the IRS had agreed to the same method and profit level indicator with the taxpayer twice previously and the facts hadn’t changed significantly.

It shouldn’t come as a surprise that with the increasing complexity of transfer pricing and diminishing taxable income of corporations, the level of scrutiny by tax authorities has risen exponentially. In fact, in 2009, the IRS announced plans to hire an additional 800 agents in fiscal 2010 to focus on international examinations, and the agency’s proposed fiscal 2011 budget contains funding for 800 more. The field of transfer pricing will continue to grow and present employment opportunities for practitioners with the desired blend of economics and tax accounting skills.

 By Steve Snyder, CPA/CFF, CVA

IRS Announces Release of Draft Schedule to Report Uncertain Tax Positions

APRIL 19, 2010

Stuart Rohatiner, CPA, JD

The IRS on Monday announced that it was releasing draft Schedule UTP and draft instructions as part of its initiative to require certain business taxpayers to report uncertain tax positions on their returns (Announcement 2010-30). (See previous JofA coverage of this proposal. The AICPA Tax Division has prepared a briefing on the IRS proposal; click here to read more.)

According to the announcement, taxpayers with uncertain tax positions and assets of $10 million or more will be required to file Schedule UTP beginning with the 2010 tax year if they, or a related entity, filed audited financial statements. Affected taxpayers include corporations required to file Form 1120, U.S. Corporation Income Tax Return, insurance companies required to file Form 1120L, U.S. Life Insurance Company Income Tax Return, or 1120PC, U.S. Property and Casualty Insurance Company Income Tax Return, and foreign corporations required to file Form 1120F, U.S. Income Tax Return of a Foreign Corporation.

For 2010 tax years, the IRS will not require Schedule UTP from taxpayers who file other forms in the 1120 series, or from pass-through entities or tax-exempt organizations.

Under the draft instructions, a taxpayer who properly files Schedule UTP will be treated as having filed Form 8275, Disclosure Statement, or 8275-R, Regulation Disclosure Statement, and the IRS says it is considering other circumstances in which a tax position reported on Schedule UTP need not be reported elsewhere on the return or another disclosure statement.

The IRS has requested comments on the draft schedule and instruction, as well as on its proposal to require reporting of uncertain tax positions on the tax return, by June 1. Comments can be submitted via e-mail to announcement.comments@irscounsel.treas.gov, with “Announcement 2010-9” in the subject line.

Health Care Law Adds Even More Taxes

The Heritage Foundation, Reconciliation Bill Adds Even More Taxes:

By signing the legislation, Obama already broke his campaign promise not to raise “any form” of taxes on families making less than $250,000 per year. The reconciliation bill adds even more taxes for Americans — an estimated $52.3 billion over 10 years, according to a new analysis from Americans for Tax Reform. … Heritage’s Robert Book, Guinevere Nell and Paul Winfree have been documenting these tax changes, noting how the legislation imposes new taxes on employers, the sick, and low-income and moderate-income workers.

Below is a table showing taxes that apply to everyone regardless of income.