Friday, July 13, 2012

Form 8938 Resource (7/13/12)

I wanted to make readers aware of this resource article:

Hale Sheppard, The New Duty to Report Foreign Financial Assets on Form 8938: Demystifying the Complex Rules and Severe Consequences of Noncompliance, International Tax Journal 13 (May - June 2012), here.

I have paged through it but have not studied it.  Still, it looks excellent, consistent with Hale's reputation.  When (if) I have time to study it, I may offer some comments.  However, I hope readers who have the interest will also read the article and make comments as well.

26 comments:

  1. It's a good article.  But... dear gods!  It's death by complexity.  What an abominable mess.  The unstated agenda here is plainly to make it so hard to invest outside the US that folk just give up.  Capital controls, in other words.  FATCA should be taken out into the woods and shot.  It's simply remarkable that Americans, not generally a people afraid to speak their minds, have meekly let their own government get away with this.

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  2. Thanks for highlighting that one Jack, I also posted it at Isaac Brock and it is on the ACA web site.  Looks like I have some drudgery reading for the weekend!  LOL   http://bit.ly/LXAZ00

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  3. As you know, Americans have no idea about FATCA.  Totally unreported by MSM.  Now, with "offshore" being smeared as evil, and Romney not mounting any meaningful defense, it certain that if they did know, they would think that FATCA is a GREAT idea! Just listened to the first offshore defense I have heard on NPR yesterday.  It was on the Brian Lehrer WNYC program.  Here is a link if you are interested. http://wny.cc/P6AcNY  Maybe there has been some active defense on Fox, but I don't go there. :)

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  4. According to the article, penalties for form 8938 can not be contested in Tax Court as they are not penalties related to a deficiency. This works to the disadvantage of smaller taxpayers (I presume) since they may not be able to afford lawyers, and would it find it harder to bring a lawsuit in District Court pro se (whereas Tax Court has special procedures for small claims).

    Mr. Sheppard also mentions that the Government would have to bring a lawsuit in Federal Court to collect FBAR penalties. There still seems to be some uncertainty over whether the lawsuit is actually required or not to turn the penalty over to Treasury for collection. I think it is required (the penalty needs a judgement), but we may not know for sure until we have actual litigation.

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  5. I have high regards for Hale Sheppard's reputation when it comes to scholarship and understanding the law - I would be interested to know if he has been effective at all when trying to apply this knowledge and representing the tax payers.....in the end, IT IS ALL UP TO THE IRS AGENT.

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  6. I have high regards for Hale Sheppard's reputation when it comes to scholarship and understanding the law - I would be interested to know if he has been effective at all when trying to apply this knowledge and representing the tax payers.....in the end, IT IS ALL UP TO THE IRS AGENT.

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  7. Anyone filling out the new Form 8938 - beware!

    Unless your favorite occupation is studying tax forms, this 2-page form with 10 pages of convoluted instructions may tax your common sense and lead you into (willful?) mistakes.

    If you skim the form to find out whether it applies to you, you learn that if you are a "specified individual" who has an "interest in specified foreign financial assets" with a value that exceeds a "reporting threshold", then you must report the SFFAs on Form 8938. You turn to the definitions of these terms and discover quickly that you are a "specified individual" and your foreign assets exceed the threshold that applies to your situation - say you are a resident alien on a visiting appointment with more than $50,000 in accounts in your home country. Now you need to determine which of your accounts to report. Various "later"s on you read:

    "You have an interest in a specified foreign financial asset if any income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the asset are or would be required to be reported, included, or otherwise reflected on you income tax return."

    This seems to be a reasonable definition; after all, you fill out Form 8938 because you are filing your income tax return. But if you conclude that you don't have to report your interest-free checking account in your home country (because it doesn't generate any income and thus doesn't affect your income tax), you just made a grave mistake, for the next paragraph reads:

    "You have an interest in a specified foreign financial asset even if there are no
    income, gains, losses, deductions, credits, gross proceeds, or
    distributions from holding or disposing of the asset included or reflected on you income
    tax return for this year."

    So the first paragraph of the definition says: You have a financial interest in a SFFA if condition (A) holds, and the second paragraph says: You have a financial interest in a SFFA if condition (A) does not hold. By common logic, this means that you have a financial interest in your SFFA anyways (whether or not it affects your income tax), and need to report it on Form 8938. (This was also pointed out on page 15 of Hale Sheppard's excellent article, though I would disagree that the second paragraph of the definition "clarifies" the first.)

    Aha! Now the reason for option (d) in part I, line 3 of Form 8938 dawns on you (though you might have been better off not to turn to the instructions, which line 3 instructs you to see.)

    It gets even worse if you have previously filled out FBARs, got confused by the obvious duplications in the two forms, and try to figure your responsibilities from the IRS's own "Comparison of Form 8938 and FBAR Requirements" (3/26/2012): the table comparing the two forms blithely omits the second part of the definition of having an interest in an account, providing you with a reasonable but incorrect definition that may cause you to make a potentially costly mistake (the IRS threatens a $10,000 penalty).

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  8. Both the new form 8938 (SFFA) and FBAR require to report each account separately. Most of my foreign passbook savings have a balance below $10, and have not been accessed for at least 20 years, i.e. they have been "virtually closed" for several decades. (I didn't close them at the time because the closing fee was more than the balance in the account. I own a considerable number of those passbooks, because withdrawal without penalty was restricted to $1000 per month, thus having several passbooks ensured an immediately available emergency fund.)

    Is the requirement to report each account ironed in stone, or would the IRS be satisfied if I put these passbook savings into a single category "Small Passbook Savings" totaling less than $100, instead of listing each separately?

    In case of FBAR, separate listing might raise the number of accounts above 25, which no longer allows to give information about the accounts at all and thus might raise totally unwarranted suspicions (and subsequent demands for even more information).

    How did OVDP/OVDI veterans handle such a situation?

    Thanks, Henry.

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  9. What is the SOL for criminal prosecution for failure to file an information return such as 3520 or 709? My understanding is that the SOL is 6 years for tax returns but did not know if it was 6 years or 3 years for informational returns such as 709?

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  10. Jack - quick question

    Do you have data on whether all Swiss account holders (4000+) have entered OVDI? If not, do think the IRS will or has the appetite to go behind all of them considering that even from Liechtenstein they have required accounts with balances greater than $500K

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  11. Reasonable logic for multiple misc small account would say group into a single category, but I have long ago learned not to apply logical thinking to IRS requirements.


    I do things now by the technical requirements which means I list each of my accounts with separate numbers individually, even the accounts that are still open, but with zero balance for years.


    Look at it this way, you are giving them worthless information and taking up clerical time for one of their agents to enter into the system. That is time which now won't be spent on real tax evasion issues. If they want to waste good resources on doing stupid stuff like that, then fine. They deserve it. I would not worry about any unwarranted suspicions. They are suspicious of everything offshore anyway, so what does it matter?

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  12. 1. I have good reason to believe that all 4,000+ did not enter the OVDP/OVDI programs.
    2. I don't know what the IRS's parameters are into who it will pursue either civilly or criminally. I do suspect as to the levels of action (stepping up the civil audit to the willful FBAR penalty and/or pursuing criminal prosecution) will have one or more thresholds in amounts, although in particularly egregious cases, lower thresholds might be used.

    Jack Townsend

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  13. The SOL is six years for failing to file returns. Section 6531(4), see here http://www.law.cornell.edu/uscode/text/26/6531

    Jack Townsend

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  14. guilty of foreign accountsJuly 25, 2012 at 1:34 PM

    I understand that under the federal sentencing guidelines, the jail time is determined by the tax loss, for less than $5K of tax loss, the guideline is 0 to 6 months.
    This would suggest that IRS would have little to no incentive either from the tax or sentencing perspective to prosecute minnows unless an FBAR jail time of 5 years can be added on top of the tax loss sentence?

    Can they (IRS) stack different violations relating to the returns and
    even if they do so wouldnt the sentencing be based on tax loss which
    seems minimal.Thoughts would be appreciated.

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  15. What is the penalty for failing to file a gift tax form if no gift tax is due and IRS discovers that a form was required. This relates to gift of foreign assets.

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  16. When I started to work on my 2011 taxes on Sunday, April 15, I noticed the new 8938 and realized that I would need an extension. This was also when I first became aware of the FBAR. I recalculated my taxes now including the effect of Form 8938 and attached full payment to my extension request.

    The complexities of the new form made me also consult with a local attorney. He let me sign a Power of Attorney but, unfortunately, did not point out the importance of the June 30 FBAR deadline. Does the fact that my 2011 taxes have already been paid in full with my extension request on April 17, relieve me of any type of FBAR penalty for 2011?

    My 1040 hasn't been submitted yet. What is the best time for submitting the delinquent FBAR? Should I submit it at the same time when I submit my 1040? Should I then attach a copy of the 1040 to show that taxes have already been paid?

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  17. 1. Submit the delinquent FBAR immediately with an explanatory note re your consultation with a local attorney about the 8938 but he did not advise you about the FBAR. You can include a representation that, although the 2011 1040 is on extension, it will be fully compliant for the foreign accounts. Assuming the IRS believes that you were in a compliance mode by 6/30/12 when you became noncompliant on the 2011 FBAR because the attorney failed to advise you, there will likely be no penalty for 2011.

    The key issue will be an earlier noncompliant years. You need to develop a strategy based on your unique facts and risk tolerances.

    Best,

    Jack Townsend

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  18. Regarding the first question, other attorneys have stated in published articles that there are account holders who after consulting with them, decide not to enter OVDI/OVDP. I have heard the same from mine. (I happen to have entered OVDP.) They did not specify whether or not these were people whose account information had been turned over. Also, a portion of account holders move without leaving a forwarding address, have major medical or mental problems, die, etc. and may not be aware of the need to file FBARs and/or their identity being disclosed.

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  19. When a person files 1040 but does not file supplemental forms such as 8938, 3520A, 5670, 709 etc. is this considered a failure to file even though the remainder of the form is filed. Or failure to file is only considered for an entire return - if parts are missing is it still failure to file for misdemeanor purposes.

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  20. You have raised a good question which occupies some time in my Tax Procedure class. The extremes are well known -- no return at all is failure to file and filing a complete return with all forms is not a failure to file. The IRS has some leeway in cases in between. For example, the IRS could treat filing a return with identifying information but all zeros is as a failure to file.

    However, if you file a return with all information properly filled out for the forms that are attached, but you fail to attach some forms, the IRS would likely treat that as a filing (perhaps a filing subject to civil or criminal penalties related to filing an incorrect return, but a filing).

    For example, if you filed a 1040 reporting foreign account income but failed to file the Form 8938, I think the IRS would treat that as a filing and that filing treatment would be recognized by the courts for purposes of penalties for filing.

    The actual test for a return is generally referred to as the Beard test:

    First, there must be sufficient data to calculate [the] tax liability; second, the document must purport to be a return; third, there must be an honest and reasonable attempt to satisfy the requirements of the tax law; and fourth, the taxpayer must execute the return under penalties of perjury.

    In discussing this Beard test in my Tax Procedure book, I say the following:

    A return is still a return even if it is missing schedules that are otherwise required. Thus, for example, if the individual taxpayer had significant capital gains during the year, Schedule D is required. If he files his Form 1040 without the Schedule D, it is still a return. Why is that? Because it purports to be a return and is not so irregular on its face (in contrast to a protestor facially deficient return) that it should not be a return. The requirement that it be a return is not a requirement that it be a correct return.

    If it is treated as a return, this would mean that the IRS can prosecute for evasion of assessment by false return, can impose the standard civil penalties related to return filings (accuracy related and civil fraud), etc.

    Best,

    Jack Townsend

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  21. Great clarification. What happens when 709 is required and not filed due to lack of knowledge that it needed to be filed, there have been cases in 15 states where IRS has requested property transfer details from state records, would these people be guity of failure to file (even though they filed 1040 but not 709) a misdemeanor, or filing a false return - a felony. More over states have requested data for last 5 years, does it mean they would not pursue gifts made more than 5 to 6 years ago.

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  22. Jack

    Regarding the penalties for form 8938, is it the IRS's position that the penalties for form 8938 are also on a per foreign asset basis (like the IRS claims with the FBAR) ? If so, that would give them yet another way to impose massive penalties for minor foot faults. I realize this form is very new, so there may be no background.

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  23. Rereading the statute for form 8938, I see it says

    'If any individual fails to furnish the information described in subsection (c) with respect to any taxable year at the time and in the manner described in subsection (a), such person shall pay a penalty of $10,000. ' (also up to 40K more if the individual fails to report within 90 days after the IRS informs him)



    Since the statute mentions any taxable year, the assumption would be that the penalty is per year.

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  24. I think that is right. Keep in mind that there are other sanctions that will likely attend a failure to file the Form 8938 (or file it properly). Usually, there will be an omission of income which will have serious consequences and there might be a failure to file the FBAR which will also have serious consequences.

    Jack Townsend

    Jack Townsend

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  25. Every tax form I have ever sent to the IRS has been sent Certified Mail, Return Receipt Requested. Of course this only proves that a return was sent, but there is no proof of what forms were included.

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  26. The threshold for filing is 50K on the last day of the year or 75K at any time during the tax year

    I have two accounts: Saving (about 45K) and Checking (about 1K)
    I transfer 40K from Saving to Checking

    Does that transfer make me subject to Form 8938 filing?

    In other words, how is that “ 75K at any time during the tax year” calculated? As max balance of all accounts combined (in my case would be 45+41=86) or the actual value of the assets (in my case 45+1=46)

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