Wednesday, May 28, 2014

FBAR Plea for U.S. Wegelin Depositor (5/28/14)

The USAO SNDY announced, here, a plea for Viktor Kordash for
willfully failing to file Reports of Foreign Bank and Financial Accounts (“FBARs”) with the IRS regarding a secret Swiss bank account that he maintained and controlled at Wegelin & Co. (“Wegelin”), a Swiss bank formerly headquartered in St. Gallen, Switzerland, which separately pled guilty in January 2013 to assisting U.S. taxpayers in maintaining undeclared accounts.
The conduct is described as follows:
In the early 1980s, KORDASH opened an account at Wegelin. At that time, KORDASH was living in Russia and was a Russian citizen. In 1984, however, KORDASH emigrated to the United States, and in 1986, KORDASH applied for and was granted citizenship in the United States. After emigrating to the United States, and after becoming a United States citizen, KORDASH continued to maintain his account at Wegelin, and failed to declare it to the IRS, up until approximately November 2010. KORDASH used the undeclared account as an operating and investment account for his antique reproductions business, which he operated out of New York, New York. 
During the time period that KORDASH maintained his undeclared account at Wegelin, capital gains and losses were generated in the account from KORDASH’s investments in foreign securities. Between 2007 and 2010, the high value of KORDASH’s undeclared account was over $1.5 million. Further, between at least April 2008 and June 2010, KORDASH received a series of cash distributions from the undeclared account from Wegelin’s correspondent account in Stamford, Connecticut, which totaled over $168,000. In November 2010, KORDASH closed the undeclared account and transferred the balance to his wife. The balance of the undeclared account at the time of its closure and transfer was nearly $1 million. 
For each of the calendar years from at least 1986 through 2010, Kordash was required to, but failed to, file an FBAR with the IRS disclosing his signatory or other authority over his undeclared account at Wegelin. He was required to identify the financial institution with which his account was held, the type of account, the account number, and the maximum value of the account during the calendar year for which the FBAR was being filed. He willfully failed to do so.

18 comments:

  1. John Audit,


    Thanks again for your comments.


    May I suggest two ways that your experiences and assessments of the situation can be better publicized. First, you could write a guest blog that I would be pleased to publish provided that it is in basically the same measured and fair tone that you have set in your comments. The blog could be either with your name or anonymous.


    Second, you could write an article, which could offer more extensive comment than perhaps a blog could. With the same qualifier, I would be pleased to submit it to a publication called Tax Notes Today (TNT). TNT is widely circulated among the tax community. Tax Analysts, the publisher of TNT would probably give me permission to post the article on my blog.


    Each of the blog and article approaches would permit a broad array of tax practitioners and others whose experience, perhaps anecdotal as to any of them, would in the aggregate offer a fair picture of the real world for U.S. expats.


    And, these approaches would probably reach the ears of key persons involved in the process at DOJ and IRS that might be able to do something to alleviate at least some of the inconveniences.


    Please think about it and let me know. I do like your comments even as I am skeptical that they fairly represent the universe of expats' treatment. Skeptical is not saying that I don't believe your comments are representative, it is just saying that I want more data before reaching that conclusion.


    Thanks again,


    Jack

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  2. GlobalCapitalismMay 28, 2014 at 11:31 AM

    ....."reach the ears of key persons involved in the process at DOJ and IRS
    that might be able to do something to alleviate at least some of the inconveniences....."
    You gotta be kidding us... this has been going on for more than 2 years and now you want to "alleviate" it !! Jack Townsend , April 1st. is already behind us.

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  3. A couple of points:

    - I would agree with the point about US banks in Europe. There are very few that provide retail banking services. Indeed, the only one I know of is Citibank, and it has been scaling back its operations for some time.

    - In terms of evidence for the denial of banking stories, the ACA and AARO (organisations representing Americans Abroad) have quite a lot of information and anecdotes on their websites. Also, the AARO is currently doing a survey, which should provide some quantifiable evidence for the impact. The evidence is out there; some companies are pretty upfront about it: http://www.investmentweek.co.uk/investment-week/news/2342915/redmayne-bentley-closes-door-on-us-clients-ahead-of-fatca-deadline

    - In terms of articles, I think it would be fantastic to see coverage (both in the industry and popular media) on the difficulties Americans Abroad face with the US tax. This applies not just to the impact of FATCA but also to FBAR, double taxation and phantom income. For a decent summary of these issues, this submission to the Senate Finance Committee from (among others) a former senior attorney in the Office of Associate General Counsel (international) at the IRS is pretty good: http://americansabroad.org/files/3013/9101/9146/richardson-yatesKishJan-232014-sfc-submission.pdf

    - finally, I agree with your point about ranting, but I can also understand the frustration out there. I think it is fairly clear that the inherent bias of the IRC towards anything offshore and the disproporate impact of the offshore enforcement initiatives on expats is fairly well known. However, many at the legislative and/or enforcement level seem indifferent.

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  4. GlobalCapitalismMay 29, 2014 at 6:30 AM

    I guess more to come : Zurich University Hospital has stopped treating North American ‘medical tourists’, and US visitors fearing million-dollar claims from litigious patients if operations go wrong. Hospitals in Kanton Valais have also adopted measures to protect themselves against visitors from the United States. This seems to be connected to FATCA and the ability of the US to force banks to pay the fine from the bank account held by the physician in Switzerland (and also the hospital) if there has been a judgement against him in the US courts.

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  5. GlobalCapitalismMay 29, 2014 at 9:20 AM

    Thank you EDELWEISS for taking the time to share your evidence with us. Your raise some very interesting points and your comments are good.

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  6. Edelweiss,

    Thanks for your details.


    Still, what you offer is anecdotal. I poked around the web site for American Citizens Abroad ("ACA") and the only reference I found to this being a problem was: "some foreign banks refuse to do business with Americans." Note that ACA, which is a prominent and credible lobby and support organization for U.S. expats, does not claim that all or most banks are refusing; rather, just some are.



    I don't doubt the sincerity of commenters beliefs or their anecdotal experiences. But I do know.that banks, not just Swiss banks, are profit seekers -- the more profit the better. All Swiss banks know that, so long as they require U.S. depositors to fill out correctly all required forms and undertake all actions required of them when FATCA kicks in, they can service U.S. customers without any risk whatever. And, every bank of any size will become FATCA compliant, which will permit them to service U.S. persons without risk. So, if I understand the claims being made here, these banks are now and will in the future turn away profitable business because they are licking their wounds -- real or imagined -- about how Swiss banks have been treated or mistreated in the U.S. offshore bank initiatives since 2009. That doomsday scenario just makes no sense and, indeed, would give a huge marketing edge to those FATCA compliant banks that started servicing this alleged pent up demand by U.S. expats for banking services.


    So, again, I am without the data sufficient to draw reasonable conclusions that this is a systemic issue -- whether in Switzerland or any other non U.S. country.


    Perhaps if you get ACA to take up the torch on this issue, ACA could easily develop real and credible data permitting fair conclusions as to what is really happening with all banks or even most banks. Better still, as a service to its members and others, ACA could publish a list of banks willing to take fully U.S. tax compliant deposits from U.S. citizens.


    I do appreciate your comments.


    Jack Townsend

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  7. Not to be pedantic, but the definition of anecdotal is: "not necessarily true or reliable, based on personal accounts rather than facts or research." To be fair, Edelweiss' post is anything but anecdotal, as it represents factual evidence backed by original sources. I guess one can say that the evidence is from a limited data set and therefore, no conclusions about the extent of the problem can be drawn. Again, I think reasonable people can disagree about that. It would be great if someone would put together a multi-country report, researching the terms and conditions of the largest retail banking institutions and noting whether they accept US persons or not. Having said that, I wonder if that is the point. I am not sure the fact that "not all but only some" banks are denying services is as important as you make it out to be. I don't think the standard for justifiable criticism of FATCA should be based on the question as to whether it completely denies financial services to expats. FATCA is incredibly broad in scope and often duplicative: take, for example, an expat with a retail account at at a foreign bank that complies with QI disclosure with 1099s; an expat could be nevertheless subject to 4 different reporting regimes: FBAR, Form 8938, QI 1099s and FATCA. FATCA imposes additional costs on banks (which ultimately will be passed on to consumers), increases the size of government and makes life more difficult for expats. There is a reasonable argument that a much more tailored law would have achieved the same goals at lower cost to everyone

    I disagree with your assertion that these banks are "licking their wounds" about perceived slights. The UK financial institutions have not been (and I imagine won't be) investigated for enabling US tax evasion. Rather, I imagine they are making rationale economic decisions about cost, risk and reward. They are looking at the size of the US customer base and associated reporting costs and deciding that there is not enough demand from the former to justify the latter. True, other banks may step in, but one would expect them to do so at a higher cost to consumers. Again, not a good result.


    I understand the public anger towards offshore tax evasion, but I don't think it should be used to justify or excuse lazy and/or indifferent legislation and enforcement.

    As I said in a previous post, both the ACA and the AARO are very much "on top" of this issue and are lobbying with respect to it, not that they have had much luck to date.

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  8. GottaloveUStax1:

    First, your comments are excellent thank you.

    As to the use of the word anecdotal, I used in the first sense that Wikipedia uses it under the topic of "anecdotal evidence" as follows (cut and paste):

    I used anecdotal in the first sense described in the following wikipedia entry:

    Anecdotal evidence

    The expression anecdotal evidence refers to evidence from anecdotes. Because of the small sample, there is a larger chance that it may be unreliable due to cherry-picked or otherwise non-representative samples of typical cases.[1][2] Anecdotal evidence is considered dubious support of a claim; it is accepted only in lieu of more solid evidence. This is true regardless of the veracity of individual claims.[3][4][5]

    http://en.wikipedia.org/wiki/Anecdotal_evidence

    But, we need not quibble about these things, since doing the work necessary to get a statistically valid sample is within the scope of the mission of ACA. I would think that, if indeed it is a systemic problem, ACA would have either identified it and sought solutions or will do so soon.

    As I said earlier, at a minimum, ACA's sources should permit it to list banks which do permit banking relationships with U.S. persons.

    I have been pretty impressed with ACA's activities. What has been your impression of their advocacy for overseas U.S. citizens?



    And finally, I encourage all who are encountering this problem to contact ACA. Like I say, if ACA thinks it is a systemic problem, I suspect ACA will get on top of it and attempt to be helpful.


    Jack Townsend

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  9. I think they are doing the best they can; they have put forward a number of proposals to address these issues. Unfortunately,I am not sure anyone in Washington is really listening. But one can always hope.

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  10. I, too, didn't understand the anecdotal characterisation and was feeling a bit miffed but understand now where you are coming from.

    Sadly, a full review of the UK market is impossible as it would mean reviewing T&Cs for 75,000 FFIs (HMRC's estimate of FFIs impacted by FATCA). This is as scientific as I can make it for a defined sub-sector.

    I focused specifically on the availability of online brokerage accounts available via online application for a number of reasons. First, the documents I need to review were readily available. Second, this is where the rank and file go for accounts with $18/trade transaction fees, no account minimums, no separate custody fees, and low dividend reinvestment costs. As ever, if you have millions, there is more choice. Finally, as these are FFIs who hold third party assets and typically offer investment in US equities they are severely at risk if deemed FATCA non-compliant because they would have to replace the "withholding" for the 99%+ of their customer base who are not US persons. For that reason, it was an interesting litmus test for risk appetite.

    I also thought it would be interesting to look at a country other than Switzerland to isolate solely on the response to FATCA without the combined effect of DOJ.

    In total, I have about 40 institutions on my list. As near as I can tell that is the entirety of the online brokerage account market. Of the 40, 18 have made a decision of whether to implement FATCA or FATCA "light" (ie onboarding but not reporting) and have amended their T&Cs to reflect either the requirement for a W-9 from a US person or the unavailability of the account to a US person. Of the 18, 16 have decided that the cost of implementing a FATCA reporting system is higher than the marginal revenue available from their US person customer base and/or they are unwilling to take the "black swan" catastrophic risk that a US person customer entails. The remaining 22 haven't made it clear in their T&Cs which way they are headed. However, I'm very confident that the number implementing US person bans will increase (probably substantially) for two reasons. One, there are multiple HSBC subsidiaries on the list that have yet to declare but HSBC has been implementing US person bans in other parts of the world. Two, a number of the remaining entities are wholesaling the product of one of the 16 who have already implemented the ban.

    We will find out July 1 what the remainder will do. Personally, I think it is unlikely that a provider, who has exited the market, will re-enter in the future. TD Waterhouse implemented their US person ban in 2004, and, despite having brand recognition amongst US persons, has not re-entered. Equally, it will be interesting to monitor the developments at those who remain in the market. Barclays is particularly interesting. They, like all non-US investment banks, will have to have FATCA reporting or they won't be able to have US person employees outside the US (because of the equity component of variable compensation). They currently offer US person accounts at the retail level but it wouldn't surprise me if they withdrew from that market and made US person accounts subject to high minimums and high fees through Wealth Management. We'll also see whether Selftrade and Hargreaves Lansdown implement discriminatory pricing or cross-subsidise from their existing customer base.

    While the polls haven't closed, early returns suggests it would be difficult to conclude that there will be anything but a severe reduction in choice for everyday US persons in the UK. That's due to the cost of implementing FATCA reporting alone without the heightened risk aversion resulting from FFIs being forced to accept liability for the action (or inaction) of their US person customers.

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  11. Thanks for your comment. You have done your homework and present it very well. I do encourage you to send it to ACA for its consideration along with other such evidence it may receive. In the aggregate, ACA could make a powerful presentation to the IRS and even to Congress about what needs to be fixed. The U.S. has no interest in making life harder to expats, so long as mechanisms are in place to assure U.S. tax compliance. So, I suspect that, within that parameter, with enough evidence of systemic disruption / inconvenience to U.S. expats, some tweaking might be done.


    One other thing, if you are willing to consider online banking, couldn't you do that with a U.S. brokerage house. Why do you need an offshore brokerage account if your relationship will be handled by internet?


    My relationship with my broker is in the U.S. I have never talked with anyone there. If I had to, I would but, it works smoothly and I doubt that they would care where I forwarded my internet instructions (through my investment adviser) from.


    Thanks again. I like your diligence, your reasoning and your writing style.


    Jack Townsend

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  12. I did send a very long email to ACA about a year ago but I didn't receive a
    response. I also wrote to all 7 European Ministers of Parliament for
    London and got blanked.

    Not entirely
    sure what you mean by US brokerage house(ie a brokerage in the US or a
    US firm in the UK). I have a Fidelity account in the US dating back to
    the 90s. As a result of Fidelity's interpretation of the Patriot Act I
    can sell but not buy and the USD AmEx card linked to the account was
    cancelled years ago. They get extremely nervous if I call them and refuse to answer questions about anything other than historical transactions. They are happy to
    accept money but it's a nightmare to transfer funds out. I tried to wire
    transfer funds out of the US Fidelity account and gave up after an hour on the phone as
    they felt they needed to establish the origin of the funds (even though
    they have been in situ with them for decades), the recipient of the
    funds, the purpose for transferring funds, exactly how the funds would
    be used etc. I ultimately used a cheque which took 35 days to clear but
    have since been informed that because both JPM and HSBC will not clear a
    USD cheque anywhere in the world outside the US my private bank can no
    longer accept USD cheques.

    The
    issue, more broadly, is that I want to invest in European companies
    because they are the ones I know, they offer (in general) better value
    than US companies and pay better dividends, and I want to match assets
    to liabilities. That requires GBP, EUR and CHF which, as another poster
    pointed out, are much better handled through a non-US firm.

    Next time you are outside the US, just for fun, try calling your broker to transmit an instruction or ask for advice on something. If they interpret the Patriot Act similarly to Fidelity, you'll probably get the Somali warlord treatment.

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  13. I am checking with some financial services firms sources to see if they are prohibited from dealing with U.S. citizens abroad. I will report back what I hear.


    Jack Townsend

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  14. Jack, this is another bit of anecdotal evidence, and one I mentioned a few days ago. As I understand it, the Patriot Act is ambiguous on this point, but it would seem American financial institutions have taken a conservative approach. The question I posed earlier was whether it would violate federal law for an expat to be creative about an address to get an account

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  15. Jack,

    Keep in mind that financial services accounts and bank accounts are different.

    Financial Services = SEC

    Bank Accounts = FATCA/IRS/USDOJ witchhunt

    Most investment firms cannot deal with US DOMICILED persons because they (the investment firms) are not registered with the SEC. The SEC makes it a crime for anyone to provide investment advice (or services) to any US citizen that is within the US borders unless the provider is registered with the SEC. This was a big part of the Credit Suisse dust up:

    http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540816517

    Banks (for straight banking) are not influenced by the SEC...

    What the SEC registration shows is that large investment houses/brokers have refused to signup with the SEC for the past decades. Where are there bigger fees? Banking fees or brokerage fees? This alone should tell you that if banks did not sign up for the SEC crap, they are not going to get involved with the FATCA crap.



    The above really only has an effect on those living with the USA borders. A US citizen who is living outside the US borders can receive investment advice from someone who is not SEC registered. Make sure you specifically state "for US citizens who are legally residing in the country of the financial services providers".



    Lastly, please note in the SEC press release:

    "According to the SEC’s order, it was not until after a much-publicized
    civil and criminal investigation into similar conduct by Swiss-based UBS
    that Credit Suisse began to take steps in October 2008 to exit the
    business of providing cross-border advisory and brokerage services to
    U.S. clients. Although the number of U.S. client accounts decreased
    beginning in 2009 and the majority were closed or transferred by 2010,
    it took Credit Suisse until mid-2013 to completely exit the cross-border
    business as the firm continued to collect broker-dealer and investment
    adviser fees on some accounts."



    The above meshes with what I wrote in my first post that you disputed. Accounts were wholesale being closed in 2009 (majority closes or transferred by 2010)... even the SEC admits this.

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  16. Jack, you write that, "The U.S. has no interest in making life harder to expats, so long as mechanisms are in place to assure U.S. tax compliance."

    That may be true, but the U.S. has not been paying much attention to our issues. The fact is that FATCA was passed without any consideration at all about what effect it might have on US citizens living abroad.
    The general assumption among homelanders in the US (including Congress and the IRS) is that the only reason a US citizen might want to have a bank account outside the US is to evade taxes. That one might want and need a bank where one is living just doesn't figure in. It's as if expats don't exist.

    Look at the initial paperwork for the OVDI, which was put out when FATCA was in the works. The IRS was asking about "offshore" accounts. They asked, "Explain the purpose for establishing the offshore account or assets. For example: Holocaust Compensation or Restitution; inherited account; account established prior to World War II, etc." No idea that one might need an account for salary deposits or grocery bills.



    FATCA is an obvious disincentive for any non-US bank to have or keep clients who are US persons. It's pretty obvious, you don't need to be a financial whizz to figure that out. It would have been easy to craft FATCA in such a way that it did not impact people with bank accounts in their country of residence. But that either was not important or simply did not occur to the lawmakers.


    Whether it's "The US does not want me to be able to have a bank account", "The US doesn't care if I can find a bank willing to give me an account", "The US wants me to spend a long time searching and pay way too much for banking services" or "The US forgot about me completely" doesn't matter much in the end. None of those are good ways to treat citizens. A country that treats me that way, whether out of malice or stupidity, does not deserve my loyalty.

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  17. ACA has asked its members about about banking troubles, mainly to gather arguments for discussions in Washington, but they probably can't publish (all) the data. That's because some of the respondents may have opted for anonymity.


    I did not have banking problems. But that's only because I read FATCA shortly after it passed, realized that the lawmakers were either stupid or indifferent to expats and took the only reasonable action. As soon as I got my CLN, I marched right down to my bank and showed it to them, making sure the bank documented it. I know only one other "US person" resident in my country. That person was refused an account at the local bank that they had banked with since apprenticeship, decades ago. The only solution was a CLN.

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  18. I used to have IRA accounts with a firm called TradeKing. I did not live in the USA. Around 2009, they wrote to me and instructed that I must close my accounts and transfer them elsewhere as they would no longer do business with anyone with a non-US address.

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