Saturday, June 14, 2014

11th Circuit Holds Clear and Convincing Evidence Required for Section 6701 Penalty; Can Reasoning be Extended to FBAR Willful Penalty? (6/14/14)

In United States v. Carlson, ___ F.3d  ___, 2014 U.S. App. LEXIS 11001 (11th Cir. 6/13/14), here, the issue was the plaintiff's liability for " aiding and abetting understatement of tax liability in violation of I.R.C. § 6701."  Section 6701 is here.  In relevant part, Section 6701 imposes the penalty upon a person:
(1) who aids or assists in, procures, or advises with respect to, the preparation or presentation of any portion of a return, affidavit, claim, or other document,
(2) who knows (or has reason to believe) that such portion will be used in connection with any material matter arising under the internal revenue laws, and
(3) who knows that such portion (if so used) would result in an understatement of the liability for tax of another person.
Section 6701 may be viewed as the civil penalty analog to the tax crime of aiding and assisting, Section 7206(2), here.

One issue on the appeal was the appropriate burden of  proof the Government must bear.  Carlson argued that it was by clear and convincing evidence; the Government argued that it was by a preponderance.  The Court held that the standard of proof is by clear and  convincing evidence.  Here is the Court's discussion:
I. The Government must prove violations of I.R.C. § 6701 by clear and convincing evidence. 
At trial, the parties disputed the correct standard of proof. Carlson contends the correct standard should be clear and convincing evidence while the Government contends the correct standard is a preponderance of the evidence. The district court agreed with the Government and instructed the jury that the Government must prove its case by a preponderance of the evidence. We conclude that this instruction misstated the law. 
Under the Eleventh Circuit's longstanding precedent, the Government must prove fraud in civil tax cases by clear and convincing evidence. See, e.g., Ballard v. Comm'r of Internal Revenue, 522 F.3d 1229, 1234 (11th Cir. 2008) ("The Commissioner has the burden of proving allegations of fraud by clear and convincing evidence."); Korecky v. Comm'r of Internal Revenue, 781 F.3d 1566, 1568 (11th Cir. 1986) ("The IRS bears the burden of proving fraud, which must be established by clear and convincing evidence."); Marsellus v. Comm'r of Internal Revenue, 544 F.2d 883, 885 (5th Cir. 1977) (holding fraud must be proved by clear and convincing evidence); Webb v. Comm'r of Internal Revenue, 394 F.2d 366, 378 (5th Cir. 1968) (same); Goldberg v. Comm'r of Internal Revenue, 239 F.3d 316, 320 (5th Cir. 1956) ("The Commissioner has the burden of proving fraud by clear and convincing evidence."); Jemison v. Comm'r of Internal Revenue, 45 F.2d 4, 5-6 (5th Cir. 1930) ("Fraud is not to be presumed, but must be determined from clear and convincing evidence, considering all the facts and circumstances of the case."). Our sister courts of appeals follow the same rule. See, e.g., Grossman v. Comm'r of Internal Revenue, 182 F.3d 275, 277 (4th Cir. 1999) (holding that a finding of fraud must be supported by clear and convincing evidence); Lessmann v. Comm'r of Internal Revenue, 327 F.2d 990, 993 (8th Cir. 1964) (same); Davis v. Comm'r of Internal Revenue, 184 F.2d 86, 86 (10th Cir. 1950) (same);Rogers v. Comm'r of Internal Revenue, 111 F.2d 987, 989 (6th Cir. 1940) ("Fraud cannot be lightly inferred, but must be established by clear and convincing proof."); Duffin v. Lucas, 55 F.2d 786, 798 (6th Cir. 1932) (same); Griffiths v. Comm'r of Internal Revenue, 50 F.2d 782, 786 (7th Cir. 1931) ("Fraud is never presumed but must be determined from clear and convincing evidence, considering all the facts and circumstances of the case.").
Thus, the inquiry is whether I.R.C. § 6701 requires the Government to prove fraud. If I.R.C. § 6701 requires the Government to prove fraud, then under our precedent the Government must prove its case by clear and convincing evidence. I.R.C. § 6701 penalizes an individual
(1) who aids or assists in, procures, or advises with respect to, the preparation or presentation of any portion of a return, affidavit, claim, or other document, (2) who knows (or has reason to believe) that such portion will be used in connection with any material matter arising under the internal revenue laws, and (3) who knows that such portion (if so used) would result in an understatement of the liability for tax of another person . . . . 
The third element embodies a scienter requirement. As other courts have recognized, the third element of I.R.C. § 6701 requires the Government to prove that the preparer acted with actual knowledge that the document would deprive the Government of tax it is owed. See Mattingly v. United States, 924 F.2d 785, 791 (8th Cir. 1991); Sansom v. United States, 703 F. Supp. 1505, 1511 (N.D. Fla. 1988); Warner v. United States, 698 F. Supp. 877, 882 (S.D. Fla. 1988). 
Were the level of scienter required by I.R.C. § 6701 not so high, we might face a difficult task in deciding whether I.R.C. § 6701 requires proof of fraud.  However, under this standard the IRS must prove that the preparer actually knew the return understated tax. In other words, the IRS must prove that the preparer deceitfully prepared a return knowing it misrepresented or concealed something that understates the correct tax. This is a classic case of fraudulent conduct. The standard could be accurately paraphrased as requiring the IRS to prove that the preparer actually knew that the return defrauded the Government of tax it is owed. As one of our district courts noted, "[i]f the preparer knows that use of the tax document as prepared will result in an understatement of tax liability, must not the document necessarily be false or fraudulent?" Warner, 698 F. Supp. at 882. 
The Government contends that I.R.C. § 6701 cannot be a fraud statute because the statute never uses the word "fraud." However, the lack of the word "fraud" is immaterial if the conduct the government must prove meets the definition of fraud. And based on the foregoing analysis, it does. As a master of the English language noted, "What's in a name? That which we call a rose by any other name would smell as sweet . . ." n3 And, in other cases considering whether I.R.C. § 6701 requires proof of  [*11] fraud for determining the statute of limitations, the Government contends-and courts agree-that I.R.C. § 6701 does require proof of fraud. See, e.g., Mullikin v. United States, 952 F.2d 920, 929 (6th Cir. 1991) (holding no limitation applied "since Section 6701 is an anti-fraud provision of the Code."); Lamb v. United States, 977 F.3d 1296, 1297 (8th Cir. 1992) (holding Section 6701 is an anti-fraud provision).
   n3 William Shakespeare, Romeo and Juliet, Act II, Scene 2. 
We recognize that our decision places us at odds with two other courts of appeals that have considered the correct standard of proof under I.R.C. § 6701. Both the Second and the Eighth Circuits have held that the correct standard of proof is by a preponderance of the evidence. See Barr v. United States, 67 F.3d 469, 469 (2d Cir. 1995); Mattingly v. United States, 924 F.2d 785 (8th Cir. 1991). The Second Circuit followed the Eighth Circuit, and gave little rationale for its decision. The Eighth Circuit acknowledged that the Government must prove civil tax fraud by clear and convincing evidence, but held that this rule did not apply to I.R.C. § 6701 for three reasons. 
First, the Eighth Circuit concluded that I.R.C. § 6701 does not require proof of fraud because it "does not refer to the evasion of tax." Mattingly, 924 F.2d at 788. At the outset, it is unclear why reference to the evasion of tax is relevant. The Eighth Circuit's prior precedent that fraud must be proven by clear and convincing evidence does not include this limitation. Neither does the Eleventh Circuit's precedent require reference to the evasion of tax. But, even if we were to assume that it is correct to require a statute to reference tax evasion, I.R.C. § 6701 does reference tax evasion. IRC § 6701 requires actual knowledge that a return "would result in an understatement of the liability for tax of another person." (emphasis added). Contrary to Mattingly's conclusion, this penalty exists to penalize tax preparers who design returns to evade tax. 
Second, the Eighth Circuit concluded that "the integrated enactment of §§ 6700-03 suggests application of a uniform standard of proof." Id. But, we know of no reason why statutes enacted at the same time must all use the same standard of proof. If anything, such a rule would likely lead to perverse results based on happenstance instead of reason and precedent. We decline to allow such an assumption to overrule our clear precedent that the Government must prove civil tax fraud by clear and convincing evidence. n4
   n4 Even assuming laws enacted simultaneously must share the same standard of proof, the Eighth Circuit provides no reason why the correct standard is by a preponderance of the evidence and not by clear and convincing evidence. The act does not specify a standard of proof for I.R.C. § 6700-03. Thus, the Eighth Circuit's analysis does not help us determine which standard of proof is correct; it merely states that all three penalties must use the same standard. 
Finally, the Eighth Circuit concluded that the "the overall civil penalty structure applicable to taxpayers and tax preparers suggests that § 6701 is just another piece in the expansive non-fraud penalty scheme." Id. at 789. While we agree with the Eighth Circuit's recognition that the penalty structure is relevant, we think it suggests the opposite conclusion: that I.R.C. § 6701 does require proof of fraud. The first district court in our circuit to analyze the scienter requirement in I.R.C. § 6701 artfully identified three penalties in the Internal Revenue Code that pertain to tax preparers: I.R.C. §§ 6694(a); 6694(b); and 6701. Sansom, 703 F. Supp. at 1510. First, I.R.C. § 6694(a) penalizes tax preparers who take unreasonable positions. Second, I.R.C. § 6694(b) penalizes tax preparers who understate the correct tax willfully or recklessly, even if the preparer does not actually know the return understates the correct tax. Third, and in contrast, I.R.C. § 6701 requires  [*14] actual knowledge that the document understates tax. "[A]ctual knowledge is a higher standard than the 'willfulness' standard utilized in other statutes. Simply put, 'know' requires knowledge-awareness of the facts and the ultimate result of the conduct." Id. Whereas both § 6694(a) and § 6694(b) penalties can apply when a tax preparer is negligent or reckless, § 6701 requires proof that the tax preparer knew his or her conduct would defraud the Government. This penalty structure indicates that I.R.C. § 6701 is designed to require the highest level of culpability among the civil penalties for tax preparers. 
For these reasons, we are not persuaded by the Eighth Circuit's reasoning.  We hold that the Government must prove fraud in I.R.C. § 6701 penalties by clear and convincing evidence. In this case, many of the penalties were supported only by weak evidence. Under these circumstances, we cannot assume that the district court's error was harmless because the jury instruction reduced the level of proof required.
This is, of course, an  important decision in its  own right.  Every tax litigator knows -- as the Court held -- that the difference between the two standards is significant.

RELATIONSHIP TO FBAR WILLFUL PENALTY

Readers of this blog will recall that I have discussed this burden of proof issue in the context of the FBAR willful penalty.  We now have three court cases that have addressed the issue:  United States v. Williams, 2010 U.S. Dist. LEXIS 90794 (E.D. Va. 2010) (arguably dicta in the case), reversed on other grounds without reaching the standard of proof issue, 2012 U.S. App. LEXIS 15017 (4th Cir. 2012); United States v. McBride, 908 F. Supp. 2d 1186 (D. UT 2012); and United States v. Zwerner (SD Fl. - No. 13-22082) (no opinion, but submitted to the jury on a preponderance standard; would likely have been raised on appeal, but case settled after jury verdict).  I have urged that the burden of proof for FBAR willfulness should be clear and convincing for the same reasons as for civil fraud.  This new Carlson case, I think, holds some possibility that at least the Eleventh Circuit might be open to this analysis.  I note in this regard that Zwerner would have been appealable to the 11th Circuit, the Court deciding Carlson.  The Zwerner case settled last week, but I wonder whether, had the Carlson decision been rendered earlier, the case might not have been settled or, possibly, the Government might have accepted a better settlement.  (I suspect that the Government does not perceive much risk in its position on preponderance, but Carlson may call that assessment into question.)

The argument on the FBAR willful penalty would be like this:  (i) willfulness is required for the FBAR willful penalty; all authorities on the issue (including the IRM) interpret willfulness in the FBAR statute to be the same as the Cheek standard - intentional violation of a known legal duty (see e.g., Ratzlaf); this is the mens rea element for tax crimes (e.g., Cheek), the civil analogs of which (Section 6663) require proof by clear and convincing evidence; therefore, by the type of extension in Carlson, the FBAR willful civil penalty requires proof by clear and convincing evidence.  (There are some fine connections in this sparse argument, but most readers can supply them.)

I suppose that the Government might make the argument that the FBAR civil penalty does not involve fraud.  Historically, fraud has involved the taking of something of value.  The failure to file the FBAR does not involve the taking of something of value.  However, since the penalty regime for the form plays out in the context of other potential crimes, including tax crimes, involving the taking of something of value (e.g., tax evasion in a tax setting), then I would argue that fraud is inextricably linked to the penalty.  Stated otherwise, it is hard for me to imagine the Government asserting the willful penalty if there is not some other misconduct going on.  (To illustrate, where the only potential related crime is a tax crime (either 26 or 18 USC), if there is not tax involved, the IRS does not assert the penalty, at least so I understand).  Moreover, as we all know, the definition of defraud in terms of the defraud / Klein conspiracy does not even require the taking of money but can involve simply the interference of the lawful functioning of a government agency / IRS.  Certainly, the failure to file the FBAR fits easily within that expanded notion of fraud.

32 comments:

  1. Bank Leumi is not a Jewish bank, but an Israeli bank which serves all citizens of Israel, whether Jewish or Arab. In 1971, Bank Leumi acquired Arab Israel Bank, which serves mainly the Arab citizens of Israel.

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  2. Mark, thanks for pointing my error out. Someone else notified me earlier today, and I corrected it.


    Jack

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  3. Michael J. MillerJune 15, 2014 at 4:30 PM

    Jack,


    Thanks for your thoughts. I'm not at all sure it's an apt analogy, but I think it's more deserving of discussion than anything else that the lawyers for the banks (or others) have put on the table as a reason for why present and former account holders ought not be able to seek something of value from the bank for providing evidence of having completed (or as having recently started, as the case may be) a voluntary disclosure.


    I actually think the business side of this is more interesting. I wonder what a rational bank will be willing to pay, and whether they will expect DOJ -- somehow, someway -- to find a way to allow them to avoid penalties on accounts that were covered by a voluntary disclosure. If they pay cash to get my 906, for example, that's out the door forever. If the pay me nothing, they still have hope of avoiding the penalty (or alternative cash outlay) altogether.

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  4. Michael,


    My understanding is that, indeed, some banks who either are refused the documents outright or cannot reach some "agreement" with the U.S. depositor, will try to establish that the client became U.S. tax compliant through emails and other correspondences which, while not rising to the level of proof of the preclearance letter, form 906, etc., might still give DOJ sufficient comfort to permit the penalty mitigation. In this regard, I suppose, DOJ could allow a partial mitigation on less that solid proof.


    Jack Townsend

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  5. Why send assets to Dubai or the Bahamas when foreigners can fill out IRS form W-8 when they open a US account and have an unreported account here?

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  6. Desi b,


    I can't answer that question. That is the single biggest issue in this area and only if that a conclusion can be reached that risk of criminal prosecution is low should one not go into OVDP. But reaching that conclusion requires a lot of digging into the facts and a lot of judgment once all relevant facts are known.


    Hence, I am unable to state whether your facts suggest any risk of criminal prosecution, material or otherwise.


    I would encourage you to seek counsel on that issue.


    Then, if you get satisfied that you have no material risk of criminal prosecution so that you will not achieve the principal benefit of OVDP, you can seek counsel as to whether you have material risk of civil penalties in excess of the penalties in OVDP. If that question is answered yes, then get into OVDP and do not opt out. If that question is answered no, then you have potential options -- all involving audit results -- whether those audit results come from OVDP opt out, QD audit, or GF audit.


    But no lawyer can answer those questions for you without a significant amount of work -- questions and answers and review of all the relevant facts.


    Jack Townsend

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  7. Thx again Jack. I have reached out to Merry.

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  8. So the fact that one (negligently/unknowingly) answered 'No' to the "Do you have interest in foreign accounts...." question for multiple years - can that by itself constitute material criminal risk in the eyes of IRS?

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  9. My understanding is that the IRS frowns upon quiet disclosures, because the taxpayer is "trying to slip in under the radar". If one files an explanation for the delay in filing FBARS on the FBAR itself, is that still considered a quiet disclosure? In my case, during two brief visits (less than 2 weeks each) over a 5 year period after my mother passed away in 2007, I was given to understand by overseas relatives (not intentionally) that my wife and I didn't have more than $10K as our share of accounts owned jointly owned with them (overseas relatives).

    On my third visit earlier this year, I finally was able to get time to unravel the accounts owned, and turns out the value of the assets (including shares traded on a stock exchange) which me and my wife own and should be declared on the FBAR is around $90K. I must admit though that part of the delay in getting this information until this year, was because I didn't have time to get this information during previous two visits, combined with my mistaken understanding that only overseas assets in cash which can be fully repatriated to the US in $ should be reported on the FBAR.

    Could the above facts be considered a reasonable excuse for a
    non-willful FBAR penalty if I do end up with a quiet disclosure for previous year FBARS and amended 1040s? In any case, I will be filing the 2013 FBAR before June 30. We owe about $3k in taxes total for the last 6 years combined. I did get an extension for filing my 1040, and am deferring a decision on my quiet disclosure until the IRS announces their modifications to OVDP, per your blog entry of 6/4/14. Because Mr. Koskinen states "very near future", I am assuming that the IRS will announce something soon after July 1. Mr. Townsend, what are your thoughts about the timing for this announcement? Thanks for this blog, the most informative and useful that I have found that doesn't try to scare everyone into OVDP.

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  10. Desi B i am in the same situation and i in a haste joined ovdi i think i should have avoided but what can i do now.
    I just have a new born kid and i should get the worst father of the year award by the IRS, i have been a total zombie, the joy of having a new baby has dissipated from my life.
    Yesterday was the worst day when my wife cried and told me that i was being a bad husband/father and you know i am sad to say she's right.


    All i can say is that life is short just pick one attorney and follow the process, get it done rather then ignoring is what i would say.
    You and I are not the kind of people who can ignore things like this. We are the one who follow the rule otherwise it would haunt us for the rest of our lives.


    Sadly a horrible father :(

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  11. Jack i have a question i was wondering if i should opt out or not, my lawyer states since i have been filing a schedule C for the past 8 years i should avoid opting out. He states that the IRS is asking for all schedule C expenses, bank statements, credit card statement to prove expenses in an opt out and if the irs decides to omit those expense i can get more penalties in an opt out then just paying the 27.5% fine.
    I am wondering if you have seen the same with your clients and if your advice would be similar to that of my lawyer.

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  12. I have not had clients with material "onshore" problems such as you describe. I take it that you have an unreported onshore schedule C business that will have to be reported on the amended return. I just have not encountered that situation, but have in some few cases had the IRS question other items elsewhere on the return other than the foreign account reporting. In most cases, because of the quality of diligence and presentation on the returns by the preparers my clients use, the IRS does not seem to be terribly interested in questioning the reporting. In this regard, I do tell clients that the amended return is an actual return and everything for which there is a not a reportable position needs to be corrected on the amended returns. Everything. So, at least by the time the preparers we use is through, we have really in some ways already done the audit work for the IRS. So the IRS's spending much time routinely on all submissions would be a huge waste of resources.


    Bluntly stated, if there are clearly good adjustments the IRS would correct on the Schedule C, then the Schedule C submitted in the OVDP process was improperly prepared and that could create a whole separate range of problems. For example, if the taxpayers claims improper expenses on Schedule on the amended return in the OVDP, he could conceivably have just committed a crime for which he could be kicked out of OVDP and punished criminally and civilly for the original crimes and the crimes in the process. Submitting a bad return in the process is just incredibly stupid. So, if you are going to submit any schedule C in the process (whether amended or original Schedule C), you would be well advised to take positions you can reasonably claim.


    So to answer your question, I have not seen a whole lot of income tax exposure with respect to the returns we submit.


    Because of our quality process in filing the OVDP amended returns, the opt out "audit" has focused exclusively on the facts related to the application of the FBAR penalty. There has been no income tax audit.


    Finally, I do understand that part of the process in moving the case administratively to opt out is to have an analysis of the audit potential of the returns and the FBARs so that a decision is made as to the scope of the opt out audit. Like I say above, apparently because of the quality of the returns we submit, the scope has been limited to the FBAR penalty issues.


    Jack Townsend

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  13. i think the worst father of the year still's for me.. i have had thoughts of ending it all for me and my family which includes my 2 kids.. the thought of financially being ruined still haunts me..

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  14. Jack if you would allow me to say the following.....

    I found a wonderful lawyer from Jacks list, Abkins firm, i spoke with them they were courteous, to the point and extremely fair, very knowledgeable. Of course stupid me spoke with her for an hour and then just picked another schmuck from the internet. If i have to do it all over again i would go with her. I am still kicking myself for not listening to her.
    Talk to her and see what she has to say.

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  15. It's only in recent years, perhaps following the lead of the US Treasury, that the European Commission has moved on (begun to address with Regulation (i.e. primary law) and Directive (which may or may not have "direct effect" and be self-implementing) personal income taxation and especially on tax evasion. Of course for the immediate future automatic exchange of information between EU Member States the USA is one-way and the USA remains something of a tax haven with its hybrid entities, secret directorships and so on.

    Within the EU reciprocal enforcement and extradition for tax crimes are now possible. European Arrest Warrants are a regular feature of cross-border law enforcement.

    But (as a law student) having read Zagaris ("U.S. Efforts to Extradite Persons for Tax Offenses"), Michael S. Kirsch ("Revisiting the Tax Treatment of Citizens Abroad"), and Hale Sheppard's articles, I'm puzzled about how claims by the USA against EU citizens and residents will be resolved.

    And how the IRS proposes to enforce its mandate as against those whose American citizenship is doubtful. There is a presumption of alienage in the case of birth abroad, where someone has never "availed himself of an attribute of U.S. citizenship". I think the IRS does not have status to rule on citizenship questions or to bring the issue before the State Department or an Immigration Court. And as far as I know a (foreign) country of which a US citizen is also a national may under international law treat that person as if it held only that other country's citizenship. (The ECJ's judgment in the famous Micheletti case goes further and may extend that to any EU Member State citizenship.)

    So we are left with, as Zagaris points out, non-tax crimes (money laundering, common-law fraud, wire fraud, and so on) which would be hard to assert until and unless a person's liability to tax and citienship status have been shown.

    Especially tenuous are claims by the IRS based on "quasi-nationality": noncitizen or former citizen US Person status maintained because, say, a post-1985 loss of status was not followed by filing Form 8854 (or any equivalent prior version) and payment of exit tax. I wonder if any other scholars are working on this.

    (Within the EU the closest approximation is with the UK's assertion of domicile or continued tax residence but as you must know for most countries (other than France and Switzerland and others with wealth taxes) it is only income and not foreign assets that need to be reported, except perhaps to the extent that those foreign assets represent income never declared for tax in the first place.)

    I'm trying to deal with this on a comparative-law basis but there really isn't anything to compare with the exorbitance (from a European standpoint) of US claims of jurisdiction. Not just for tax but for information. But you knew that already.

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  16. An interesting colloquy. But not every American depositor with a Swiss bank is in such a position of conflict.

    I represent investors in Swiss property, all of whom have been reporting their assets and income to the relevant Swiss canton tax authorities and to HMRC (if British) or the IRS (if American), some of them for several decades. None has been asked for proof of filing foreign tax returns. Here's a link to what Credit Suisse sent out last October: http://uniset.ca/misc/crsuisse_irs_hmrc_ltrs.pdf No client of mine has heard from the IRS as of yet but HMRC sent out that same month a scattershot mailing to persons reported to them by Swiss banks: http://uniset.ca/misc/hmrc_swiss_ltr_oct2013.pdf Unlike the IRS, HMRC does not ask about the value of foreign deposits, only the interest, dividends or other revenue earned.

    My clients, some of whom are Swiss nationals or married to Swiss nationals, express some anguish over the apparent assumption abroad that anybody with a Swiss account is a tax cheat. For one thing, over 700,000 Swiss citizens live abroad, more than 77,000 of them in the USA, and many or most have such accounts, along with pension assets from prior employment: http://www.eda.admin.ch/eda/en/home/doc/publi/ptrali/statis.html

    Since about 2010 Americans not resident in Switzerland (and for all I know maybe anybody resident in the USA) has been unable to get a new mortgage on Swiss property. This caused some grief to at least one client who had his mortgage offer withdrawn and who had to scramble for funds from within the USA to complete his purchase.

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  17. Jack: Do you know if Swiss banks are entitled under Swiss law to freeze accounts of clients until they provide evidence of tax compliance or entry into OVDP?


    I like this talk of compensation, but I might be satisfied if my bank would just let me close my account and transfer the funds to the U.S. Then maybe we can talk about providing personal documents. They want the documents before allowing me access to my account.


    But the bank also says in a letter than under the U.S.-Swiss agreement, it is required to close accounts of U.S. clients who don't provide proof that their account was declared.


    So let me get this straight: The bank won't close accounts of clients until they provide personal documents, but the bank is required to close accounts of clients who don't provide such documents.


    So do I just wait them out?

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  18. I have heard of banks freezing part of the account until proof of tax compliance or being in OVDI is provided. I have also read that such action is NOT legal under Swiss law. As far as I know a bank can freeze an account on its own initiative in certain cases (such as money laundering) but only for a couple of days while it notifies the Swiss government and gives the government time to take action.

    A Swiss lawyer may or may not be able to give you a more definite answer since this is a relatively new area of the law.

    But I understand your point.

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  19. First, I am not a Swiss lawyer and hence do not know whether the Swiss could withhold your account funds for failure to produce documents showing that you are in past U.S. tax compliance. I would be surprised, however, ;if the banks had that authority under Swiss law. The banks may be exercising the power -- not the same as the authority -- and you may have to get a Swiss lawyer to rattle their cage if they are misbehaving under Swiss law.

    Second, under FATCA, the bank is required to get your identifying information and report the income annually going forward in the future. It can and should close down your accounts if it does not get that information. That information, however, has only to do with FATCA compliance going forward. It has nothing to do with providing proof of past U.S. tax compliance.

    So, I would think that if you provide them your U.S. identifying information; and whatever consent local law requires to do the FATCA reporting going forward, the bank should not close down your account.

    However, unless there is a strong non-economic non-tax reason to keep a Swiss account, why would one do that. Similar kind and quality services can usually be obtained elsewhere cheaper, with equal or more convenience and equal safety.

    Jack Townsend

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  20. In the case of accounts which are currently open, the Swiss bank is offering to keep the account open, in exchange for proof of compliance and signing a release. It seems to me that keeping the account open is as much "consideration" (in the legal sense of the word) as paying money for the information. Given the difficulty that US persons face in opening a Swiss account, the consideration of keeping the account open is quite valuable. It seems inconsistent to allege that asking for payment constitutes noetigung/contrainte and threatening to close the account if the information is not provided, is somehow okay.

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  21. In the example of a $1M account one could argue that a reasonable payment would be half the penalty, or $100K. It seems to me that the party looking to obtain the information should be the one to make the first offer (just as if I owned a piece of real estate worth $100K which was not currently for sale.) What the banks are doing is tantamount to sending a letter that says "Hey, I noticed you own a vacant lot, which I like, will you let me have it for free?"

    I suspect that many former bank customers are put off by such an approach and will not bother replying unless the bank makes a serious offer. This is similar to many Swiss banks which simply ignore emails from Americans asking whether it is possible to open an account instead of having the courtesy to at least say, "Sorry, no."

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  22. GlobalCapitalismJune 20, 2014 at 9:12 AM

    ...However, unless there is a strong non-economic non-tax reason to keep a
    Swiss account, why would one do that. Similar kind and quality services
    can usually be obtained elsewhere cheaper, with equal or more
    convenience and equal safety...... Such a naive statement can only come from a person who hasn`t been out much in the real expat world we are living in !!

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  23. Thank you for your thoughts. I want to close the account; the bank says I can't until I provide personal documents of past tax compliance or entry into OVDP.

    I understand that, should I wish to keep the account open, I am required to provide identifying information. I do not want to keep the account open, but the bank is refusing to close it unless I provide the personal documents that will mitigate its penalty. So not only is this particular bank not paying compensation, it is attempting to coerce me into providing what it needs by denying me access to my own money until I do.

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  24. Thank you. I'll report back if I have any success resolving this.

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  25. I am on VISA in US for past 12+ years .. have exposure of around $250K (mainly due to purchase of property and I was stupid enough to show the rent when i was filed for 2013 without realizing what i am doing ).. except for the early years when i wasn't taxed in native country, for rest of these years, I have been paying hefty tax in my native country for this account.

    I had no knowledge of my obligation to report my native (Indian accounts) as Foreign accounts nor have I heard of FBAR till this year



    I always used tax software and always checked No on do you have a foreign account


    Can someone please advise me if I qualify for the Streamline procedure?

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  26. exposure of around $250K (mainly due to purchase of property and I was stupid enough to show the rent when i was filed for 2013 without realizing what i am doing )



    That's a very .. unusual .. statement. You are saying that it was 'stupid' to report your tax liabilities correctly ?



    I always used tax software and always checked No on do you have a foreign account



    There have been court cases where the DoJ has won willful penalties against people who checked 'No'. Check this blog for Williams. And that was for only 1 week.

    I am sure there are several factors at work, but I doubt anyone can advise you without talking to you in detail. So find a good laywer and talk to him/her. And be careful in your statements about whether its 'stupid' to report foreign income on your tax return.

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  27. Thank you for the response.. much appreciated.. however this has been very frustrating for me and my whole family..



    my tax liability for last 8 years hardly comes to max of 4K - 5K.. i am not a criminal.. it was just an oversight and lack of understanding of the law.


    and the rent i reported isn't anywhere in my bank account however i just wanted to come clean


    i have a big family to take care of and close to my retirement age .. and really can't afford to lose much.. i don't mind paying a hefty penalty for my mistake however to lose half of my savings for a minor mistake.. is that justice?

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  28. Just_Me - Can you please share your thoughts on my case? Would truly appreciate it..


    Best,
    Desi

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  29. Jack - Would the total tax liability one owes to IRS for past 3 / 8 years come into play in deciding whether one acted willfully or nonwillfully?


    Regards

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  30. In my case -- Swiss bank freezing all funds until I provide personal documents -- you can take that even farther: "Hey, I noticed you own a vacant lot, which I like. Give it to me for free or I will block you from any further access to it."

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  31. Somewhat to my surprise, since this hasn't happened to anyone I know, the freezing of accounts by some (unnamed) Swiss banks has been complained of several times. Put the following query into a search engine: site:englishforum.ch freeze bank account
    It was only 5 years ago that at least two Swiss bank directors "confided" in me that they could freely accept deposits from Americans because they had no branches or offices there and the USG lacked jurisdiction over them. I wasn't so sure, but it didn't concern my clients. I recall one meeting with a cantonal bank to discuss a mortgage and bank account and the account manager beginning to write furiously when I made clear that the client was reporting the account to his foreign tax authorities as required.
    For what it is worth (I know because I have done it successfully) the procedure for litigating a claim against a Swiss defendant is to file the claim (in a local language) with the Office des Poursuites et Faillites / Betreibungs- und Konkursämtern. There may follow mediation and if that fails a court hearing. A lawyer is not needed but fluency in the language is. And the venue for filing suit is the commune where the head office of the defendant is located, this may be far away and in a different language. It's not a procedure to be undertaken lightly even if one is resident in Switzerland.

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  32. It seems inconsistent for a bank to claim that it cannot pay for the documentation/release while at the same time if an account is still open it offers to keep it open if the information is supplied. In my view, a bank that allows an American to keep his account open is very valuable consideration.

    Also, I think the Category 2 banks overestimated the response they would get to their requests. Typically a survey gets a small response. The response would be even lower when substantial work is involved (getting a copy of proof of compliance, reading and understanding the legal verbiage of the release.) Some of the account holders also have moved or died.

    ReplyDelete

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