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

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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

FinCEN Proposes Changes in FBAR Reporting Requirements

 

FinCEN (web site here) has announced here a Notice of Proposed Rule Making (NPRM) for changes in the FBAR requirements.  The press releases advises that, in formulating the NPRM, FinCEN worked closely with the Department of Treasury, Office of Tax Policy and the IRS, but FinCEN retained authority to revise the regulations.

The press release says:

The proposed rule:

•  Includes provisions intended to prevent persons from avoiding reporting requirements.
•  Defines a “United States person” required to file the FBAR and defines the types of reportable accounts such as bank, securities, and other financial accounts.
•  Exempts certain persons with signature or other authority over, but no financial interest in, foreign financial accounts from filing FBARs.
•  Exempts certain low-risk accounts e.g., the accounts of a government entity or instrumentality for which reporting will not be required.
•  Exempts participants/beneficiaries in certain types of retirement plans and includes a similar exemption for certain trust beneficiaries.
•  Clarifies what it means for a person to have a “financial interest” in a foreign account.
•  Permits summary filing by persons who have a financial interest in 25 or more foreign financial accounts, or signature or other authority over 25 or more foreign financial accounts. Also permits an entity to file a consolidated FBAR on behalf of itself and the subsidiaries of which it owns more than a 50 percent interest.

Swiss Court Halts Release of Some UBS Account Holder Data

From The Journal of Accountancy.  A Swiss court has held that the Swiss bank UBS does not have to hand over to the IRS confidential data on 26 accounts under a settlement agreement between the United States and Switzerland negotiated in August 2009. Under the agreement, UBS is supposed to turn over for investigation information concerning approximately 4,450 accounts. Failure to provide a Form W-9 to the IRS for at least three years is one of the IRS’ selection criteria for account holders who have engaged in “continued and serious tax offense.” UBS must identify such account holders under the agreement. However, in a suit brought by 26 unnamed account holders (U.S. Taxpayers v. Swiss Federal Tax Administration), Switzerland’s Bundesverwaltungsgericht (federal administrative tribunal) held on Jan. 22 that the mere failure to file a Form W-9 does not by itself amount to tax fraud. Therefore, the court ruled that the account holders’ data cannot be handed over to the IRS. While this case only concerned 26 account holders, it is unclear what effect it will have on the other approximately 4,400 accounts potentially subject to the agreement. According to the tribunal’s press release, the decision cannot be appealed in Swiss federal court. The August settlement agreement represented a compromise between the two governments over a contested “John Doe” summons in U.S. v. UBS AG, a case filed in the U.S. District Court for the Southern District of Florida.

IRS extends amnesty for international tax dodgers

The Associated Press

Published: September 20, 2009

WASHINGTON – The IRS is extending the Wednesday deadline for international tax dodgers to apply for an amnesty program in order to give a rush of applicants more time to prepare their paperwork.

More than 3,000 Americans hiding assets overseas have applied for the program, which promises no jail time and reduced penalties for tax cheats who come forward, said a government official who spoke on condition of anonymity.

The Internal Revenue Service plans to announce Monday that the program will be extended until Oct. 15, said the official, who was not authorized to speak on the record ahead of the public announcement.

The IRS long has had a policy that certain tax evaders who come forward before they are contacted by the agency usually can avoid jail time as long as they agree to pay back taxes, interest and hefty penalties. Drug dealers and money launderers need not apply. But if the money was earned legally, tax evaders can usually avoid criminal prosecution.

Fewer than 100 people apply for the program in a typical year, in part because the penalties can far exceed the value of the hidden account, depending on how long the account holder has evaded U.S. taxes.

But in March, the IRS began a six-month amnesty program that sweetened the offer with reduced penalties for people with undeclared assets.

As the initial deadline approached, the IRS was contacted by tax advisers from across the country requesting more time to prepare applications from a rush of tax cheats looking to come clean, the government official said.

The amnesty program is part of a larger effort by federal authorities to crack down on international tax evaders. In August, the U.S. and Switzerland resolved a court case in which Swiss banking giant UBS AG agreed to turn over details on 4,450 accounts suspected of holding undeclared assets from American customers.

The process of turning over that information is expected to take several months. But once the IRS obtains information about international tax dodgers, they will be ineligible for the amnesty program.

Publicity from the UBS case, even before the agreement was announced, had many wealthy Americans with offshore accounts nervously running to their tax advisers.

Lawyers and advisers from several firms have said they were swamped with calls from people hiding assets overseas. Their advice: Call the IRS before the IRS calls you.

IRS Amnesty: Less than 2 Weeks Remain for Voluntary Disclosure Filings

September 9th, 2009

The deadline for foreign investors to participate in the IRS voluntary disclosure program is September 23, 2009.

Taxpayers who want to participate must amend their income tax returns to properly reflect any previously unreported foreign earned income and must file the appropriate foreign account disclosures.

If you want your CPA to help you in this process you need to move quickly. He or she will need at least a week to gather the correct information and prepare the necessary documents. At this point you need to move swiftly and with accuracy if you have not already gathered your necessary documentation. Remember: This is not a game of IRS “chicken” they mean business. An undisclosed source has already turned over 4500 names to the US government.

Voluntary Disclosure of Foreign Accounts

Q1. Why did the IRS issue internal guidance regarding offshore activities now?

A1. The IRS has had a voluntary disclosure practice in its Criminal Manual for many years. Once IRS Criminal Investigation has determined preliminary acceptance into the voluntary disclosure program, the case is referred to the civil side of IRS for examination and resolution of taxes and penalties. Recent IRS enforcement efforts in the offshore area have led to an increased number of voluntary disclosures. Additional taxpayers are considering making voluntary disclosures but are reportedly reluctant to come forward because of uncertainty about the amount of their liability for potentially onerous civil penalties. In order to resolve these cases in an organized, coordinated manner and to make exposure to civil penalties more predictable, the IRS has decided to centralize the civil processing of offshore voluntary disclosures and to offer a uniform penalty structure for taxpayers who voluntarily come forward. These steps were taken to ensure that taxpayers are treated consistently and predictably.

Q2. What is the objective of these steps?

A2. The objective is to bring taxpayers that have used undisclosed foreign accounts and undisclosed foreign entities to avoid or evade tax into compliance with United States tax laws.  Additionally, the information gathered from taxpayers making voluntary disclosures under this practice will be used to further the IRS’s understanding of how foreign accounts and foreign entities are promoted to United States taxpayers as ways to avoid or evade tax.  Data gathered will be used in developing additional strategies to inhibit promoters and facilitators from soliciting new clients.

Q3. Why should I make a voluntary disclosure?

A3. Taxpayers with undisclosed foreign accounts or entities should make a voluntary disclosure because it enables them to become compliant, avoid substantial civil penalties and generally eliminate the risk of criminal prosecution.  Making a voluntary disclosure also provides the opportunity to calculate, with a reasonable degree of certainty, the total cost of resolving all offshore tax issues.  Taxpayers who do not submit a voluntary disclosure run the risk of detection by the IRS and the imposition of substantial penalties, including the fraud penalty and foreign information return penalties, and an increased risk of criminal prosecution.

Q4. What is the IRS’s Voluntary Disclosure Practice?

A4. The Voluntary Disclosure Practice is a longstanding practice of IRS Criminal Investigation of taking timely, accurate, and complete voluntary disclosures into account in deciding whether to recommend to the Department of Justice that a taxpayer be criminally prosecuted.  It enables noncompliant taxpayers to resolve their tax liabilities and minimize their chances of criminal prosecution.  When a taxpayer truthfully, timely, and completely complies with all provisions of the voluntary disclosure practice, the IRS will not recommend criminal prosecution to the Department of Justice.

Q5. How do I make a voluntary disclosure and where should I submit my voluntary disclosure?

A5. A voluntary disclosure is made by following the procedures described in I.R.M. 9.5.11.9. Tax professionals or individuals who want to initiate a voluntary disclosure, should call their local CI office. Taxpayers with questions may call the IRS Voluntary Disclosure Hotline at (215)516-4777, visit www.irs.gov, or contact their nearest CI office.

Q6. What form should my voluntary disclosure take?

A6. [Revised July 31, 2009] You may either contact the nearest Special Agent in Charge, IRS Criminal Investigation, stating that you wish to make a voluntary disclosure, or provide a letter outlining information needed to assist the IRS in determining your acceptance into the voluntary disclosure program.  You should also include a power of attorney (Form 2848), if you are represented by a third party, and daytime contact information for you or your representative.  If you have already completed the amended or delinquent returns, those should be submitted with the letter, but it is not necessary to include them with the initial submission if you are unable to do so. 

Q7. I’m currently under examination.  Can I come in under voluntary disclosure?

A7. No.  If the IRS has initiated a civil examination, regardless of whether it relates to undisclosed foreign accounts or undisclosed foreign entities, the taxpayer will not be eligible to come in under the IRS’s Voluntary Disclosure Practice.

Q8. I have an offshore merchant account upon which I have not reported all of the income.  Can I come in under the IRS’s voluntary disclosure practice?

A8. Yes.  Taxpayers with unreported income from an offshore merchant account can make a voluntary disclosure.

Q9. I have properly reported all my taxable income but I only recently learned that I should have been filing FBARs in prior years to report my personal foreign bank account or to report the fact that I have signature authority over bank accounts owned by my employer.  May I come forward under the voluntary disclosure practice to correct this?

A9. The purpose for the voluntary disclosure practice is to provide a way for taxpayers who did not report taxable income in the past to voluntarily come forward and resolve their tax matters.  Thus, If you reported and paid tax on all taxable income but did not file FBARs, do not use the voluntary disclosure process.

Voluntary Disclosure Form: Important, Necessary

In a recent Wall Street Journal article:   Tax Evaders Flock to IRS to Confess Their Sins, by Laura Saunders & Carrick Mollenkamp:

Wealthy taxpayers have inundated the IRS in recent weeks with requests to come clean for past tax evasion, amid a government crackdown on undeclared income from overseas accounts.

The volume has been so great that Wednesday, the IRS issued a streamlined, three-page form for taxpayers seeking entry into its temporary voluntary-disclosure program.

“Last week we had 400 [applicants] — four times as many as in all of last year,” said IRS spokesman Frank Keith, who declined to provide more detailed figures.

Two main factors appear to be driving the clemency-seeking spree. The IRS disclosure program, which began in March and is set to end Sept. 23, offers Americans the possibility that they may face civil charges, which can carry lower penalties than criminal charges, for volunteering details of tax evasion.

At the same time, the IRS and the U.S. Justice Department are pressing ahead with efforts to investigate taxpayers who failed to report income earned from undeclared accounts with Swiss bank UBS AG.