Obama's Tax Proposals Relating to Tax Crimes

I have briefly reviewed the so-called "Greenbook," which is the common name for a tome titled "General Explanations of the Administration’s Fiscal Year 2010 Revenue Proposals" dated May 2009. Based on my limited review, here are the items that are most relevant to the general topic of federal tax crimes (including civil penalties that often accompany tax crimes). I present here the proposals themselves without discussion of the current law or reasons for the change. Most practitioners reading this blog will already know the current law and can easily imagine reasons for the change. Perhaps in subsequent blogs where I address the proposals in more detail. In this blog, however, I just alert practitioners to the proposals.

1. FBAR and Related Foreign Account Provisions

This blog's readers certainly know by now what the FBAR is, but as a reminder it is the form due by June 30 of each year with respect to foreign financial accounts over which a U.S. taxpayer had certain powers during the preceding year (the year for which the report is made). (For the FBAR form, click here and for IRS FAQs on the FBAR, click here.) Suffice it to say significant numbers of U.S. taxpayers do not comply with the FBAR requirement or answer properly the related questions on Form 1040 Schedule B about foreign bank accounts. Taxpayers failing to file the FBAR also often -- indeed generally -- do not pay U.S. tax (income or estate and gift tax with respect to such accounts). The IRS has a major enforcement initiative with respect to foreign accounts and these obligations for FBARs and income tax return reporting. The Obama proposal is to require U.S. individual taxpayers to disclose on their 1040s information paralleling the disclosures on the FBAR.

As a backup to the foregoing obligations, the Obama proposal will require U.S. financial intermediary firms to report (i) transfers with a value of more than $10,000 to a foreign bank, brokerage, or other financial account on behalf of a U.S. person and (ii) receipts with a value of more than $10,000 from a from a foreign bank, brokerage, or other financial account on behalf of a U.S. person. A U.S. financial intermediary that opens a foreign account for a U.S. person will be required to report regarding the account and transfers to the account. Treasury would be given regulatory authority to promulgate rules and exemptions.

A negative presumption will apply in civil cases that a person having a foreign account had the amount required to have an FBAR obligation. A related negative presumption would treat the taxpayer's failure to report foreign accounts with over $200,000 as willful, thus attracting the more draconian FBAR penalties unless the taxpayer rebuts the negative presumption. A related provision extends the statute of limitations for failure to report until 6 years after the taxpayer reports the information required to be reported.

The accuracy related penalty for failure to report income for accounts required to be reported would be doubled from 20% to 40%.

2. Tax Restitution

Restitution is not permitted (absent the defendant's agreement or in exchange for a benefit given by the sentencing court) for Title 26 (Internal Revenue Code) offenses. Restitution is permitted for tax flavored crimes charged under Title 18 (e.g., defraud conspiracy). But, the IRS has no authority to assess the amounts in the restitution obligation and thus cannot use its substantial collection powers with respect to such amounts because restitution amounts have not been assessed as a tax. The proposal is (i) to give the IRS authority to assess immediately the amount of the restitution (without a notice of deficiency) and (ii) to deny the defendant taxpayer the right to collaterally attack liability for the restitution as tax in a civil tax proceeding.

3. Make repeated Failure to File a Tax Felony.

A U.S. taxpayer failing to file for 3 out of 5 years involving an aggregate tax liability of $50,000 or more could be charged as a felony rather than the normal misdemeanor attaching to failure to file. This enhanced felony status would be called an aggravated failure to file. The maximum incarceration period would be five years and the maximum fine would be $250,000 ($500,000 in the case of a corporation).

4. Investigative disclosures

The proposal will give IRS agents authority to identify themselves, their organizational affiliation, and the nature and subject of an investigation, when contacting third parties in connection with a civil or criminal tax investigation.