Saturday, June 28, 2014

U.S. International Tax Enforcement -- Exchange of Information and Collection (6/28/14)

I often get the question of whether the U.S. can request treaty partner assistance to collect taxes from taxpayers resident in foreign country or against property in a foreign country.  The U.S. can do that by treaty, but that is not a standard provision in the bi-lateral double tax treaties that the U.S. has.  There is a multilateral treaty, called the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, sponsored by the OECD to which the U.S. is a party.  The OECD's resources on this Convention, including the Convention, are here.  The U.S. has made reservations the effect of which is to deny its obligation to collect other countries' taxes and, because reciprocal duties are required, relieve other countries from the obligation collect U.S. taxes.

Now, to the broader subject of U.S. international tax enforcement, I offer the following (footnotes omitted) from a JCT report, titled Joint Committee on Taxation, Explanation of Proposed Protocol to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, (JCX-9-14), February 21, 2014, which may be downloaded here:

The report has a great discussion of the state of the law on international enforcement.  Here are key excepts related to international enforcement mechanisms under Current Law (footnotes omitted; I do not indent because of the length of the material copies; in some cases I have bold-face to draw readers' attention)


* * * *

Ratification of the protocol is not intended to alter the reservation of rights or declarations of understanding that the United States made when it ratified the existing convention in 1991. In its instrument of ratification, the United States reserved the right not to provide (1) assistance for taxes imposed by possessions, political subdivisions, or local authorities of other parties to the convention; (2) tax collection assistance; or (3) assistance in serving documents (except the service of documents by mail). The reservations are reciprocal; to the same extent that the United States will not provide assistance, other parties need not assist the United States. Thus, only the provisions relating to information exchanges and service of documents by mail are in effect for the United States. Those reservations would continue to govern the effect of the treaty with respect to the United States upon ratification of the proposed protocol.

* * * *

A. General Background of OECD 
B. Emerging Consensus on OECD Transparency Standards 
C. Extent of Mutual Assistance Under Present Law

The difficulties one jurisdiction has in piercing the “bank secrecy” of another jurisdiction can be traced to the centuries-long tradition against expecting one jurisdiction to assist another jurisdiction with collection of its taxes. This doctrine, known as the “Revenue Rule,” is rooted in common law and sovereign immunity. It is often referred to as the Lord Mansfield Rule, in recognition of the jurist's statement, “For no country ever takes notice of the revenue laws of another.” Although its vitality and scope have been questioned, most recently in Pasquatino v. United States [544 U.S. 349 (2005), here], the doctrine remains a cornerstone of all common law jurisdictions, as well as many others. To the extent that countries have provided administrative assistance of any sort, including exchange of information, it has been a result of State-to-State negotiations, resulting in a multilateral or bilateral international agreements or treaties, ensuring that any waiver of the principle will be reciprocated.

The degree of governmental access to financial information has varied historically from country to country, ranging from the relative transparency in the United States to the traditional opacity of jurisdictions such as Switzerland or Liechtenstein. The term “bank secrecy” generally refers to a legal standard, whether judicial or statutory in origin, which prevents governmental access to the financial information necessary to ascertain beneficial ownership and enforce tax, securities and financial regulations. The limitations may apply only to certain entities operating within the jurisdiction or may apply only to the sharing of information with a foreign jurisdiction, and are often reinforced by civil or criminal penalties.

Presently, the United States is a party to more than 60 income tax conventions, more than 20 tax information exchange agreements (“TIEAs”), and more than 50 Mutual Legal Assistance Treaties (“MLATs”). In a report in 2011 to the Permanent Subcommittee on Investigations, U.S. Senate Committee on Homeland Security and Governmental Affairs, the Government Accountability Office outlined the varied bilateral agreements under which the United States exchanges tax information. In this network of agreements, exchange of information is not the sole type of assistance that has been agreed upon, but it is the principal form of assistance that the United States has been willing to provide. In its treaties with France, Canada, Sweden, Denmark, and the Netherlands, the United States has specifically agreed to provide mutual assistance in collection, and does so under its Mutual Assistance Collection Program. It also provides assistance in criminal tax matters via the MLATs. Unlike the tax treaties, MLATs designate the Department of Justice as the “Central Authority” having the role of administering the treaty on behalf of the United States. Exchange of information provisions first appeared in the late 1930s. They are included in almost all current double tax conventions to which the United States is a party. Beginning in the 1980s, the United States began entering into specific TIEAs under the authority of the Code. In contrast to the bilateral double tax conventions, TIEAs are executive agreements entered into by Treasury without the advice and consent of the Senate and are limited in scope to the mutual exchange of information. These agreements often are entered into with countries that impose little or no income tax.

The information exchange procedures followed by the United States under its network of international agreements are described below. The goals of the U.S. tax information exchange program are (a) assuring the accurate assessment and collection of taxes, (b) preventing fiscal fraud and tax evasion, and (c) developing improved information sources for tax matters in general. With respect to the United States, taxes covered generally are limited to national taxes, such that state and local taxes are not covered. The objective of a TIEA is to promote international cooperation in tax matters (civil and criminal) through exchange of information. A party to the TIEA must have adequate process for obtaining information; if the party is required to enact measures providing such process, then the entry into force of the TIEA may be delayed until such requirements have been met. The requirements of the TIEA often require a jurisdiction to override its domestic laws and practices pertaining to disclosure of information regarding taxes.

To administer its obligations under the network of bilateral treaties, the Secretary of the Treasury has delegated the role of U.S. Competent Authority for the treaties to the Deputy Commissioner, Large Business & International, IRS. The Competent Authority is responsible for resolving disputes with the other contracting State about the scope or interpretation of the treaty. With respect to exchange of information articles, the Competent Authority determines whether the agency should present a request for information to a treaty partner as well as how to respond to any requests that it receives from the treaty partner.

All information exchanged flows through the offices of the Competent Authorities, and is safeguarded by the domestic laws of each State as well as the secrecy clause in the exchange of information article. In the United States, the information received from a treaty partner is within the scope of “tax convention information” and, if it is taxpayer-specific, is also treated as “return information” for purposes of protecting it from disclosure. Non taxpayer-specific information received from a partner is considered tax convention information as is also protected from disclosure if such disclosure would harm tax administration, as determined by the Competent Authority in consultation with his counterpart.32 Since the entry into force of the first treaty to include an exchange of information article, the United States has exchanged information with its partners in a variety of ways.

The principal types of information exchanges are generally referred to as routine or automatic, spontaneous, or specific exchanges. In addition, there are industry-wide exchanges with certain treaty partners, and simultaneous examinations or criminal investigations with other partners. The IRS reports the number of total disclosures under the exchange of information program in an annual report, but does not provide a breakdown of the type of exchange involved.

A “routine exchange of information” is one in which the contracting States have agreed that a category of information will be shared with one another on an ongoing basis, without the need for a specific request because it is of a type that is consistently relevant to the tax administration of the receiving jurisdiction. Information that is automatically shared under this jurisdiction to override its domestic laws and practices pertaining to disclosure of information regarding taxes.

The treaty partners may also work together to gain expertise about specific industries and to facilitate sharing of information when there is a common interest in the information. In those instances, they may arrange a meeting of agents or officials familiar with a particular industry or economic sector to share experiences, know-how, investigative techniques, and observations about trends in that industry. These discussions do not generally address the cases of specific taxpayers. Both the industry-wide meetings and the simultaneous examinations occur under the auspices of the exchange of information program; they are not in lieu of formal exchanges. They establish a process by which extensive exchanges of information can occur, with the assistance of an Exchange of Information analyst or Tax Attache.

As part of its obligations under its treaties, the United States has successfully defended its efforts to honor its treaty obligations against a variety of challenges. These challenges have included suits seeking to obtain publication of information received under treaty exchanges, objections to enforcement of administrative summonses and finally, an attempt to claim that the disclosure to another tax administrator was negligent. The United States successfully protected the secrecy of certain information in internal memoranda, including the identity of the treaty partner that had communicated with the IRS.38 The need to safeguard the secrecy of the information to protect the working relationship of the treaty partners was sufficient reason to sustain the government position that documents from meetings of Competent Authorities are entitled to treaty protection.

D. Cross-Border Enforcement Actions

Because the United States taxes its citizens and residents on their worldwide income, U.S. tax administrators frequently need foreign-based financial information to verify the accuracy of reporting by U.S. taxpayers. The United States generally has three options for accessing information located in other jurisdictions: information reported by the taxpayer in compliance with U.S. domestic requirements; third-party information reporting to the IRS; and information obtained from other jurisdictions through an exchange of information under a bilateral agreement, as described in the preceding section.

1. U.S. information gathering ability in tax administration

The administration and enforcement of the Internal Revenue Code is generally governed by the provisions of Subtitle F of the Code. The broad powers granted to the IRS include the ability to compel production of information in the form of filing returns or response to summonses, the implementation of a system of third-party information reports on various specific subjects and the ability to impose and collect penalties for failure to comply with the measures.

Information gathering ability

Summons authority of the IRS

The IRS has broad statutory authority to require production of information in the course of an examination. A request for information in the form of an administrative summons is enforceable if the IRS establishes its good faith, as evidenced by the four factors enunciated by the Supreme Court in United States v. Powell [379 U.S. 48 (1964), here].  The Powell factors require that the information (1) is sought for a legitimate law enforcement purpose, (2) is of a type that will shed light on the subject of the examination, (3) is not already in the possession of the IRS, and (4) that the IRS has complied with all applicable statutory requirements, such as service of process. Subsequent to United States v. Powell, the legitimacy of using an administrative summons in furtherance of an investigation into criminal violations was validated in United States v. LaSalle National Bank [437 U.S. 298 (1978), here], in which the Supreme Court determined that the dual civil and criminal purpose was legitimate, so long as there had not yet been a commitment to refer the case for prosecution.

The use of this summons authority to obtain information from third parties is subject to greater procedural safeguards, but otherwise the same good faith elements are analyzed to determine whether the summons should be enforced. When the existence of a possibly noncompliant taxpayer is known but not his identity, as in the case of holders of offshore bank accounts or investors in particular abusive transactions, the IRS is able to issue a summons to learn the identity of the taxpayer, but must first meet greater statutory requirements, to guard against fishing expeditions.

An effort to learn the identity of unnamed “John Does” requires that the United States seek judicial review in an ex parte proceeding prior to issuance of the summons. In its application and supporting documents, the United States must establish that the information sought pertains to an ascertainable group of persons, that there is a reasonable basis to believe that taxes have been avoided, and that the information is not otherwise available. The reviewing court does not determine whether the summons will ultimately be enforceable. Once a court has determined that the predicate for issuance of a summons is met, the summons is served, and the summoned party served may challenge enforcement of the summons, based on the Powell factors. It is not entitled to judicial review of the ex parte ruling that permitted issuance of the summons.

If a taxpayer whose liability is the subject of the summons either initiates or intervenes in a proceeding to challenge the  enforcement of the summons, the limitations period for the tax year under investigation is suspended during the pendency of the proceeding. The taxpayer whose identity is at issue in a John Doe summons would not initiate or intervene in a proceeding, and may not know of the proceeding. Nevertheless, enforcement of a John Doe summons is likely to be subject to time-consuming challenges, possibly warranting an extension of the limitations period. Thus, under current law, the limitations period for the tax year under investigation is suspended beginning six months after the service of a John Doe summons and ends with the final resolution of the response to the summons.

Information reporting requirements

A variety of information reporting requirements apply under present law. The primary provision governing information reporting by payors requires an information return by every person engaged in a trade or business who makes payments to any one payee aggregating $600 or more in any taxable year in the course of that payor’s trade or business. Reportable payments include compensation for both goods and services, and may include gross proceeds. Certain enumerated types of payments that are subject to other specific reporting requirements are carved out of reporting under this general rule by regulation. Another carveout excepts payments to corporations from reporting requirements. Additionally, the requirement that businesses report certain payments is generally not applicable to payments by persons engaged in a passive investment activity.

Detailed rules are provided for the reporting of various types of investment income, including interest, dividends, and gross proceeds from brokered transactions (such as a sale of stock). In general, the requirement to file Form 1099 applies with respect to amounts paid to U.S. persons and is linked to the backup withholding rules of section 3406. Thus, a payor of interest, dividends or gross proceeds generally must request that a U.S. payee (other than certain exempt recipients) furnish a Form W-9 providing that person’s name and taxpayer identification number.54 That information is then used to complete the Form 1099.

Failure to comply with the information reporting requirements results in penalties, which may include a penalty for failure to file the information return, a penalty for failure to furnish payee statements, or failure to comply with other various reporting requirements.

2. Access to cross-border information

Judicial process

Foreign-based information may be obtained using judicial process. It requires a balancing of the U.S. interest in tax enforcement with the interests of the other state in maintaining confidentiality. In Société Internationale v. Rogers, 357 U.S. 197 (1958) [here], the Supreme Court articulated a basic rule of comity, holding unanimously that a U.S. district court could not ignore the interests of the foreign state in determining whether it would compel production of foreign based documents. Since then, courts balancing these conflicting U.S. and foreign interests have tended to give greater weight to the U.S. interests in cases involving money laundering or drug dealing than in cases involving tax compliance. In United States v. Bank of Nova Scotia, 487 U.S. 250 (1988) [here], the court enforced a grand jury subpoena served in the United States for records maintained in the Cayman Islands, despite claims that the bank secrecy laws of that jurisdiction would not permit production. In that case, the records were sought in connection with prosecution of money laundering and possible drug dealing.

Foreign Account Tax Compliance Act (“FATCA”)

In response to the difficulties in compelling production of information across-borders, the United States has enacted a variety of statutory measures to require greater enhanced information reporting and encourage voluntary disclosure, at the risk of incurring penalties. One of the most significant is the separate reporting and withholding regime for outbound payments in order to police tax compliance of U.S. persons. Although other measures provide narrowly targeted tools that assist in securing cooperation in later stages of controversies, such measures do not assist during the examination portion of a controversy.

Commonly referred to as the Foreign Account Tax Compliance Act, the new regime imposes a withholding tax of 30 percent of the gross amount of certain payments to foreign financial institutions (“FFIs”) unless the FFI establishes that it is compliant with FATCA. The information reporting requires identification by third parties of certain U.S. accounts held in an FFI. An FFI must report with respect to a U.S. account (1) the name, address, and taxpayer identification number of each U.S. person holding an account or a foreign entity with one or more substantial U.S. owners holding an account, (2) the account number, (3) the account
balance or value, and (4) except as provided by the Secretary, the gross receipts and gross withdrawals or payments from the account.

Final regulations published in 2013 provide guidance on how FFIs may comply with FATCA. An FFI may become a participating FFI by completing the IRS FATCA registration process, obtaining a Global Intermediary Identification Number (GIIN), and agreeing to the terms of an FFI Agreement. A list of FATCA compliant institutions is to be published electronically by the IRS. The list can be relied upon by withholding agents in determining the status of a payee. To be included on the list, an FFI applies to the IRS for issuance of a GIIN through the IRS FATCA registration process. If approved, the applicant and GIIN will be included in the published list. The registration process and access to the list may be done electronically.

The process for complying with FATCA is expected to be further streamlined for FFIs resident in jurisdictions that are parties to an intergovernmental agreement (“IGA”) with the United States. In 2012, the United States began negotiations for a series of bilateral IGAs, on the authority of its various tax treaties and agreements to exchange information, with the intention of forming a partnership with another jurisdiction (FATCA partner) to facilitate the implementation of FATCA and obviate any legal impediments that FFIs that are resident in a FATCA partner may otherwise have faced in complying with the terms of FATCA. Since then, the United States has signed intergovernmental agreements with 22 countries. In addition, it has completed negotiations with several others.

All bilateral IGAs conform to models published in 2012. The Model 1 bilateral agreement provides a framework in which an FFI provides information to the tax authorities of the FATCA partner rather than to the IRS. The FATCA partner then provides information to the United States under an automatic exchange of information. In a variation on Model 1 referred to as the reciprocal version, the agreements include a reciprocal commitment for automatic exchange of information, under which the United States agrees to provide automatic exchange of certain information identified in the IGA and collected under U.S. information reporting requirements with respect to residents of the FATCA partner. Model 2 creates a framework under which the FATCA partner agrees to waive domestic restrictions, if any, which would prevent FFIs from reporting directly to the IRS and to require these FFIs to comply with the terms of an FFI Agreement. The FATCA partner also agrees to honor U.S. requests for requests for exchange of information as needed. The FFIs provide the requisite information directly to the IRS.

Third-party reporting is not the only means by which compliance of U.S. persons with foreign financial holdings is encouraged. Reporting by taxpayers about their foreign holdings was also enacted contemporaneously with FATCA. Effective for tax years beginning after the date of enactment (March 18, 2010), individuals are required to disclose with their annual Federal income tax return any interest in foreign accounts and certain foreign securities if the aggregate value of such assets is in excess of the greater of $50,000 or an amount determined by the Secretary in regulations. Failure to do so is punishable by a penalty of $10,000, which may increase for each 30 day period during which the failure continues after notification by the IRS, up to a maximum penalty of $50,000.68 In addition, U.S. persons with foreign holdings may be required to file an annual form TD F 90-22.1, Foreign Bank Account Report (“FBAR”). The FBAR includes information about foreign financial accounts held or controlled, as provided under regulations implementing the Bank Secrecy Act.


  1. Agreed. But I think the streamlined program was released because of the outcry of those in the OVDP. I have a number of people who probably should not have been in the OVDP and would have fared better with the streamlined. But sadly, they have received their 906 almost a year or two ago, and do not qualify for streamlined anymore.

  2. Jack has commented on willfulness & nonwillfulness in earlier blog entries. It's very difficult to prove and there is a host of factors.

  3. I ift in FAQ52 Cat. 3: 1) am foreign resident since 1996, 2) tax compliant in my home countrx 3) no US income >10K. the reason I am considering OVDP is the "willfulness" part. What I think is non-willful not necessary fits IRS's definition. My only problem is 2012 where I have a large balance in my bank account due to sale of a rental property which has unreported income for prior years as well and I didn't report my foreign pension funds (didn't know I need to). My lawyer wants me in the OVDP for fall back plan and try to switch to SDOP (can't do SFOP due to long annual visit to U.S), so filing intake and attachement on Monday.

  4. agreed. I didn't know the CRA had a VDP. 17 FAQs are not necessarily better than 55, but I know that Canada's tax system is not exactly citizenship based. Correct me if I am wrong, but Canadian citizens and permanent residents having moved out of Canada are "deemed" nonresidents and might not have filing responsibilities, let alone any FBAR-like form.

  5. I agree. Under OVDP, I have corrected domestic issues as well as foreign issues. Since the statute was reopened for those years, I figured I would take a shot. The OVDI examiners did not have a problem with me taking the foreign tax credit and correcting domestic stock discrepancies on Schedule D going all the way back to 2003.

  6. Do you remember the name of that case?

  7. One more question, if I may, do you think there is any risk to writing such a letter (i.e., that the Service deems you to have opted out and therefore subject to examination as opposed to streamlined)? Thanks.

  8. I'm in the 2011 OVDI- I have Amended returns 2003 to 2010 and paid all taxes including interest and accuracy related penalties etc. Pending are the 25% penalty and the 906
    Q1. Can I now file for the Streamlined Domestic Offshore Program and why would I need to withdraw (Opt out) before July 1 ?( The new program was only announced 6/18- that does not leave taxpayers much time
    Q2. If I pick option #1 above:
    a) Re: the Certification of US Residents for SDOP - would mine be Not Applicable since I am current on FBARs and Taxes for 2010, 2011, 2012 ( Got an extension for 2013). So would my Streamlined Penalty be $0?
    b) Am I eligible to have all additional taxes interest etc paid on foreign accounts 2003 to 2009 REFUNDED to me ?

  9. A.1. I think you can still get the streamlined offshore penalty only by asking for it within OVDI since you have not entered a binding Form 906 yet. But that will leave you paying 8 years of incom taxes, 20% penalty on the income taxes and interest on both of those. This is the transition result as I read it in the transition FAQ.

    The straight streamlined result is better because only 3 years of income tax returns are required and there is no 20% income tax penalty.

    So the question is whether a taxpayer can withdraw from OVDP by 7/1/14, which is the key date for the transition rule to kick in per transition FAQ 2. It seems to say that, if the taxpayer is not in OVDI/P as of 7/1/14, the transition rule does not apply. That would, logically, seem to permit the taxpayer to withdraw and proceed only under streamlined.

    The question I asked the IRS representative was whether a taxpayer could withdraw by 6/30/14 after submitting the OVDL intake letter but before submitting the final package submission. The answer I got was yes, because the taxpayer would then not be in OVDP as of 7/1/14.

    I don't know if that same result would apply to someone who has made the final package submission, but analytically I don't see why it would not. If that taxpayer has withdrawn from OVDP, I don't know why it would make a difference which particular stage he was at.

    Please understand that this is not legal advise, but simply my trying to infer an unknown answer from a different circumstance. So, it might be worth a phone call to the Hotline early tomorrow.

    By the way, you might listen to that phone call. I am not sure that a formal letter of withdrawal is necessary, but I would not attempt this strategy without a formal letter of withdrawal. If you do that, be sure and send it via one of the 7502 timely mailing, timely filing services (Postal or authorized carrier service such as UPS or Fedex).

    a. I think so.
    b. If the foregoing works so that you are not in OVDI/P and can proceed under streamlined, logically you could get a refund (I think) for years prior to the earliest streamlined covered year but watch out for the refund statute of limitations. However, I suppose the IRS could argue that it has no authority to make a refunds if you are not entitled to one, but in order for the IRS to make that argument it would have to find an open statute of limitations, such as fraud or a 6 year that has been preserved by the consents to extend required by OVDI/P).

    Jack Townsend

  10. I don't understand your question. I think you are referred to a withdrawal letter. Upon withdrawal you could be examined, but you should proceed promptly to do the streamlined. The IRS can exam the streamlined submission to make sure you have done them right.

    Jack Townsend

  11. There might be that advantage of getting the OVDL intake letter in by 6/30. That would be a big undertaking.

    If you are going in and planning to opt out, why would you not do the streamlined. The new streamlined program was designed to cover the non-willful actor who would opt out. In other words, if you can make a credible certification of non-willfulness and are avoiding streamlined for that reason, why would you opt out?

    Jack Townsend

  12. Am I missing something then, Jack? It seems to me that OVDP+Optout is cheaper for a clearly non-willful taxpayer with larger accounts (2.5M+) with minimal unreported income over the past 3-8 years, and NO unreported income during the 3-year audit period for opt-out. SDOP requires a 5% penalty. 5% of 2.5M is more than s/he would expect to pay in an audit of her previous 3 years tax returns EVEN IF if s/he fails with reasonable cause arguments on the FBARs. Of course - a decision has to be made TODAY so I appreciate any feedback asap :)

  13. The new SDOP does nothing to help non-willful taxpayers holding large balances (2M+) with little to no unreported income or unpaid tax during the past 8 years. Those taxpayer would still do better to enter OVDP & opt-out. Even if IRS throws the FBAR book at them - they still do better than paying a 5% penalty on their entire balance. Thoughts? Am I missing something?

    If so, these taxpayers intending to opt-out must pay the 27.5% OVDP penalty up front as part of the new FAQ25?!

  14. Milan . Let me ask you regarding foreign mutual funds. I read some where there is revised rules for PFIC in Dec 2013. Do we still need to file Form 8621 for previous years if we have foreign mutual fund as part amendment ?. Are there any exemption for minnows?.

  15. I think in cases of large accounts balances and low income tax, if one is sure that the client will be treated as non-willful (with or without reasonable cause), the exposure can be less on Opt Out than in OVDP and even in Streamlined. It is just a matter of crunching the numbers and considering the exposure.

    Keep in mind that, for someone who has filed returns in all years, on opt out if the additional unreported income is low and thus tax law, the statute of limitations on opt out will be three years (same as Streamlined) and, say in a $2.5MM case there is a single account, the FBAR penalty cannot exceed $60,000 ($10,000 per year for the single account). The Streamlined cost for that will be $125,000 (5% of $2.5MM). But, there will be the hassle of submitting the final package (including 8 years amended returns) and then proceeding through the opt out audit (probably just an interview).

    Jack Townsend

  16. Under OVDP 2014, these taxpayers will be required to fully pay the offshore penalty even though the offshore penalty will be less if they opt out. That is the reason that, in most of these cases, the Streamlined may be the way to to.

    Jack Townsend

  17. Yes, they will get it back or have it applied to whatever the cost required by the opt out. But, again, for persons who are nonwillful, why get in and opt out. Just do streamlined. That way they do not have to be out the 22.5% (domestic) or 27.5% (foreign) while waiting on the opt out resolution.

    Jack Townsend

  18. I am a minnow and about to do streamlined procedure. Please guide me on the following. Would really appreciate it.

    1) When we submit the 3 years tax returns which I am assuming for now is 2012, 2011 and 2010; do we have to submit just the Federal or include the State returns as well? In the Certification document, do we just the Total Federal for 3 years or also include the State liability also?

    2) Do I need to add the rent yielding property in the 5%? I hadn't reported the rent in the prior years.

    3) Do minnows like me need to go thru lawyers? They charge 7K - 10K

  19. "...EVEN IF if s/he fails with reasonable cause arguments on the FBARs......
    That would be incorrect. If you have no RC for not filing FBARs your potential exposure is larger than $125K in an audit.

  20. 1) Just federal.

    2) No.

    3) No, but there are risks to not going through a lawyer to help with the certification as to nonwillfulness. No one can assess the risk without knowing all the facts and nuance. Having said that, for most minnows, probably getting the legal advice would be like buying limited insurance. If you don't die, you didn't need the insurance. Similarly, if the IRS does not audit the certification or agrees that the certification was correct, you did not need to engage the lawyer, but you don't know that in advance.

    Jack Townsend

  21. If it helps, the certification statement for SDOP & SFOP has the following statement about negligence being an element of nonwillfulness. But I defer to Jack.

    "My failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-willful conduct. I understand that non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law."

  22. Jack - Thank you very much..

  23. If you have a foreign mutual fund, you have to apply the asset or income test from the 8621 instructions. Most foreign mutual funds I know of are in fact PFICs. Minnow is not a technical term and there are no special provisions for exemptions of 8621 fiing, as far as I know, for anyone in OVDP, SDOP, SFOP, or making a reasonable clause disclosure outside of those programs. If you are in OVDP, you can use MTM, if it's suitable, but keep in mind, the tax in the FIRST year alone for OVDP is 27% on the unrealized gains of the PFIC, and thereafter, is 20% FLAT going forward unti the end of your OVDP period.

    Your first year of OVDP will be the 8 years previous, for the year which the extended due date for filing the return has passed. So right now, anyone contemplating OVDP would be entering for 2005-2012, EVEN if 2012's return was filed with a refund. So WATCH out. Another "snowbird", or "minnow" trap. ;)

  24. Asher,

    This is exactly my case. My client inherited an amount well over FBAR reporting standards some 9 years ago, and from those monies, opened up two accounts at a bank (now a known bank with a John Doe summons from DOJ). They used the smaller account (whose balance never anywhere near $10), but the larger 6 digit account stayed passive (no withdrawals and deposits from anywhere, whatsoever. The smaller account was used for expenses whilst abroad.

    Original returns did NOT have any foreign interest income, nor had he checked the box at bottom of Schedule B in those original covered OVDP years.

    OVDP Examiner had said he was willful would he to Opt Out. That was a bunch of Mallarkey (Joe Biden's term), because we now know willful, per IRM, and court cases has VERY difficult to prove with only one factor alone.

    Taxpayer got SDOP approval (transition FAQ 9), for just the 5% penalty.

    It depends on the full set of facts. Hope this helps.

    I had presented a 48 page letter, using JustMe & Moby's template.

    It depends on the

  25. No. I disagree. Fixing mistakes on domestic matters is okay, but signing the certificaiton statement, in SDOP or SFOP, can muddy the waters. Jack has commented on this. See below.

  26. My question is: do you think there is a chance that the IRS would deem the letter to withdraw to be equivalent to an opt out, which would then disqualify you from the Streamlined and automatically put you into the opt out/possible examination

  27. Jack - If TP submits 8 yrs of returns and then opts-out, does IRS process and assess tax on the out of statute returns or not?

  28. Only a US person has concerns of having a financial interest. I think the word nominee is key here. India for e.g., has a very different defintion of what the word nominee means, compared to IRS definitions. If the money is essentially the nominee's after the US person passes on (assuming the US person did not leave a will or beneficiary for some accidental reason) , then does the nominee being able to keep the monies after US account owner's death mean the US person did NOT have financial interest while US person was alive? I don't think so. The key for you, might be, that how the nominee (IRS definition), who, being on legal title, acts on behalf of the US person while US person is alive, and that indeed, in my opinion, can create a financial interest for that US person because a nominee (IRS definition) is still acting on behalf (according to some instructions by US person). It all depends what the foreign country's definition of "nominee" means, and what, if any, instrucitons (either on a pre-written document, or verbally) which the nominee (IRS definition) is taking from US persons not legally on title of those accounts . See here, from Internal Revenue Manual: (07-01-2008)

    "A United States person also has a financial interest in each bank, securities, or other financial account in a foreign country for which the owner of record or holder of legal title is: a person acting as an agent, nominee, attorney, or in some other capacity on behalf of the U.S. person;"

  29. Yes, I believe that they process the returns when they come in, but in any event they will cash the check for the payments.

    You have to be careful about how the IRS posts the payments. If they are posted to the years to which they \apply, then the 2 year period to claim the refund will apply. If, as they IRS started doing, the payments are posted to the earliest clearly open year (say the first year in the 3 year statute of limitations, even though the payments relate to earlier years), then the statute will be open because of the consents that are signed in the OVDP process and the payments can be refunded.

    Jack Townsend

  30. I can't speak to what the IRS would consider it, but I do think the word withdraw connotes something different than opt out. Opting out keeps the taxpayer in the OVDI/P structure, but just adopts a different civil penalty regime (the audit regime rather than the offshore penalty regime). Withdrawing throws the taxpayer back in the original milieu, which he solves by streamlining.

    Jack Townsend

  31. I read this hurriedly, but are you saying the IRS signaled a willful conclusion if the client opted out but was willing to give the client the 5% streamlined penalty?

    That seems pretty early in the process for that kind of determination to have been made and, if it was made, that is a fantastic and counter-intuitive result.

    Jack Toiwnsend

  32. Milan ,

    Than you for your reply. I have sitauation where I have purchased $1000 a dollor worth of Mutual funds in year 2010. It never made any profit during last 3 years and Still own them. Never knew about reporting foreign mutual funds. I am not sure how to report this to IRS during the process of amending tax return. Any information on this will be appreciated.

  33. I had a situation where my client gave the 906 to the OVDP Examiner, dually signed by him and his wife. However, he had second thoughts, and before the Examiner executed the 906, he requested that the 906 not be executed until he had time to review his case with the Taxpayer Advocate Service. The Examiner complied and said she would give him time to decide on the Opt Out. Then the streamlined programs came out on June 18th, and my guy requested the 5% treatment per Transition FAQ 9. Examiner agreed and has recommended he receive the SDOP 5% mitigation. How has your case turned out?

  34. You have a lot "ifs" in your situation, but it seems you might have a lot of reasonable cause arguments also. Your general picture seems to cry "nonwillful", but no one can really be sure until you do a nice story line, chronologically, and what exactly happened, etc. etc.. You need good counsel. Regarding the certification, yes , it's true that the IRS could come back to you if they find something they feel is truly deceiful or representative of fraud by you, but assuming you are thorough with your filings, as much as possible, I would not worry about an account you missed here or there because the IRS has to establish a pattern of bad behaviour by you which truly cries out that you are willfully not disclosing. The cerification for SDOP/SFOP itself says that nonfwillfulness is "due to negligence, inadvertence,...."

    Just my take.

  35. Milan - For e.g. on a $100K foreign property, how do we calculate the yearly depreciation expense or depletion? Most of the CPA's don't know on this.

    Would it be challenged by IRS?

    Thank you

  36. A-B-S-O-L-U-T-E-L-Y. Welcome to OVDP Bizarro world.

  37. In the streamline certification statement (multipage document) it asks for the EOY balance (unlike the highest balance in OVDI.) This simplifies the calculations and would benefit some whose highest balance did not occur on Dec 31 but sometime during the year. Also, by reporting Dec. 31 balances, there is no need to do the sometimes complicated calculations of netting out interbank transfers, since this is a snapshot taken on Dec. 31 of each year. HOWEVER ... note that under streamlined the penalty base is accounts which EITHER had no FBAR filed OR income was not reported on the tax return, in other words tax-compliant accounts which were not reported on the FBAR are not excluded from the penalty base (see Streamline FAQs.)

  38. My understanding is that an ultimatum given by phone to sign the 906 or optout is meaningless. The IRS must follow procedures and send you a letter saying as much and giving you time to respond (I think 30 days.) In any case you must act before the IRS signs the 906. Suggest you ask the agent for the name and phone of his/her manager and talk to the manager.

  39. 40 years - straightline. See Pub 946, & Reg 1.168(i)-1(f). Foreign real estate is a GAA (gneral asset account) and subject to ADS (usually).

  40. If you're in OVDP, then you can use the MTM method (which is the proscribed alternative resolution, Code 1296). This is spelled out in FAQ 10, in both the old & new OVDP (2012 & 2014). You'll need to find a CPA or a practioner who knows MTM (1296) & 1291 rules.

    But in lay defintion, MTM means, everytime the mutual fund goes up in value, even though you did NOT sell it, it's TAXABLE as ordinary income (surprise!), and every time it goes down, it's deductible as an ordinary loss ONLY up to the prior gain you've taxed yourself on (these are called unreversed inclusions and are cumulative).

    But find a good CPA who knows PFICS inside and out. (not me).

  41. Yes. It's basically for people who have ownership in both a CFC & PFIC entity, and when you should file a 5471 versus a 8621. It does not mean that you should not be filing a 8621 for your PFIC, but rather a 5471, since that may take precendence. It's a highly complex reg, and I don't know if it's final yet, but even if it's not, you can still use the temp regulations. Again, you need a good CPA or Practioner to walk you through.

  42. I meant in a SFOP setting. Since the program is SO new, you might have the advantage of explaining or making a case to the Examiner and his/her manager that you (the taxpayer) can qualify under SFOP, and explain that the 330 day can overlap two calendar years, assuming you are on the border of qualifying for SFOP. I had the advantage of getting transitionary SDOP treatment in light of the Examiner saying my client would be construed willful in an Opt Out situation. I think my examiner was extremely tired of the back & forth, and the situation that my client was going to possibly Opt Out. I don't think the examiner wanted to spend more time on the same case, after 2.5 years in OVDP, in an Opt Out situation with the Opt Out Committee.

  43. Jack, Thanks for your help on this. If it doesn't raise issues around client privilege, would you be able to post (in general terms) whether or not the IRS accepts the withdrawal prior to July 1?

  44. This says a lot
    about Banks --- the consensus of opinion is that they are highly paid
    “crooks” ---- no wonder they voted Ivan Pictet banker of the

    It appears that
    crimes in the “establishment.” are honoured by their peers.



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