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.

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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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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

You owe the IRS 99 days of hard work

Stuart Rohatiner, CPA, JD

By Blake Ellis, staff reporter

NEW YORK (CNNMoney.com) — This year, it’s going to take the average American 99 days to earn enough money to pay the IRS. That’s one day longer than last year.

“Tax Freedom Day” marks the date that most Americans have earned enough money to pay their federal, state and local taxes, and this year that day arrives on April 9, according to the Tax Foundation’s annual calculation, which is based on government tax and income data.

Tax Freedom Day arriving one day later than it did last year means most Americans will have to work that much harder — for more than three months — just to pay their 2010 taxes.

The number of days Americans have to work to pay off their taxes has declined steadily since 2007. That’s due to a handful of tax cuts, certain income tax provisions that were repealed for 2010 and because the recession has reduced tax collections faster than it has cut income, according to the Tax Foundation.

But while it will take people less time to earn the money this year than it did in 2007, Americans will still spend more on taxes in 2010 than they will on food, clothing and shelter combined, the Tax Foundation said.

State-by-state:

Each state has its own Tax Freedom Day. The day arrived earliest in Alaska and Louisiana — on March 26 — because of “modest incomes and low state and local tax burdens,” the Tax Foundation said.

Mississippi, South Dakota and West Virginia celebrated soon after, on March 28, March 29 and March 30, respectively.

Connecticut, the state with the highest per capita income, will be the last to celebrate. Tax Freedom Day won’t arrive until April 27, the 117th day of the year.

New Jersey, New York, Maryland and Washington will join Connecticut as the last states to celebrate. In these states, Tax Freedom Day will fall on April 25, April 23, April 19 and April 15, in that order.

Business Tax Tip of the Day Apil 9 2010

The amount of investment interest expense deduction is limited to the amount of the taxpayer’s net investment income. The excess is carried forward and treated as an amount of investment interest expense incurred in the next year.

IRS Extends Moratorium on Tax Shelter Enforcement

By Paul Bonner December 28, 2009

IRS Commissioner Doug Shulman announced in a letter to Sen. Chuck Grassley, R-Iowa, that the IRS is extending until March 1, 2010, a moratorium on collection enforcement of the IRC § 6707A penalty for failure to disclose tax shelters and other reportable transactions.

Shulman first announced the moratorium July 6 in response to congressional concerns that the penalty amounts—$100,000 for individuals and $200,000 for other taxpayers—in many instances far exceed the tax benefit of the targeted transactions. The moratorium, which applies to cases in which the annual tax benefit from the transaction is less than the otherwise applicable penalty, initially ran until Sept. 30, 2009, which Shulman said would give Congress time to amend the statute. Shulman later extended the moratorium to Dec. 31, 2009.

On Nov. 16, 2009, Rep. John Lewis, D-Ga., introduced the Small Business Penalty Relief Act of 2009, HR 4068. An identical bill, S. 2771, was introduced in the Senate by Sen. Max Baucus, D-Mont.

The bills would limit the penalty for listed transactions to the lesser of the current statutory amounts or 75% of the tax benefit shown on the return as a result of the transaction. Listed transactions would carry a minimum penalty of $5,000 for individuals and $10,000 for other taxpayers. The 75%-of-tax-benefit limit would also apply to other reportable transactions, for which the maximum penalty would be the current statutory penalty amounts under section 6707A(b)(1) of $10,000 for individuals or $50,000 for other taxpayers (with no minimum penalty amounts). The bills would apply to penalties assessed after Dec. 31, 2006.

Both bills were still in committee as Congress adjourned last week.

In a letter last week to Shulman and Treasury Secretary Timothy Geithner, Grassley protested what he said was the IRS’ continuing to place liens on small businesses despite the moratorium, and he threatened in a press release to block nominations of Treasury officials until the issue was resolved.

Shulman responded on Dec. 23, further extending the moratorium.  He also said that earlier in December, the IRS stopped filing new lien notices where the amount due was solely related to a section 6707A penalty and would refrain from placing such liens through the latest extension period. Grassley’s office has told the The Washington Post that he will allow the Treasury nominations to go forward.

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.

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.