1
How to Find Your Spouse’s Secret
Offshore Bank Account:
Using U.S. Tax Reporting Requirements as a
Discovery Tool for Lo...
Matthew D. Lee
Matthew D. Lee is a former U.S. Department of Justice trial attorney who concentrates his
practice on all a...
G. Daniel Jones, CPA, CFF
Dan Jones is a Managing Director for CBIZ MHM, LLC, a division of CBIZ, Inc. (NYSE:
CBZ) in the ...
Introduction
•Internal Revenue Service now requires more
disclosure than ever of the offshore assets and
offshore activiti...
The Case of Dr. Michael Brandner:
A Cautionary Tale
5
United States v. Michael Brandner, M.D.
•Dr. Brandner is a plastic surgeon in Anchorage, Alaska
•In 2007, Dr. Brandner’s w...
Dr. Brandner’s 6,891 mile journey
from Alaska to Panama
7
Dr. Brandner’s banking activity
• Opens account at Capital Bank in Panama, and deposits
five cashier’s checks worth over $...
Dr. Brandner’s banking activity
(continued)
• Alaska court enters a divorce decree on April 19, 2011, and
awards wife the ...
Dr. Brandner’s banking activity
(continued)
•In August 2011, Dr. Brandner opens account in name
of Evergreen Capital at Ba...
Federal Charges Filed
1. February 9, 2012: U.S. Department of Justice files
federal forfeiture lawsuit in California alleg...
Why is tax reporting regarding
offshore activities more important
today than in the past?
12
Offshore Assets
• The world is more globally integrated
• Easier to invest assets offshore
• Easier to access jurisdiction...
IRS Offshore Focus
IRS Commissioner Douglas H. Shulman:
• “Combating international tax evasion is a top priority for the I...
Justice Department
Offshore Compliance Initiative
“The Tax Division’s top litigation priority is the concerted civil and
c...
Key Enforcement Milestones
•End to historic Swiss bank secrecy laws
– Believed to be 52,000 U.S. accounts at UBS alone
– U...
Key Enforcement Milestones
(continued)
•IRS Offshore Voluntary Disclosure Programs (2009 to
the present)
– Over 40,000 ind...
Foreign Bank Account (FBAR)
Reporting Requirements
18
Foreign Bank Accounting Reporting
• Form TD F 90-22.1, Report of Foreign Bank and Financial
Accounts (“FBAR”), now known a...
Who is required to file an FBAR?
• An FBAR must be filed if all of the following requirements are
satisfied:
– Filer is a ...
What is reported on the FBAR?
• A U.S. Person must report all their financial interests in, or
signature or other authorit...
FinCEN 114 (new form)
22
FinCEN 114
23
FinCEN 114
24
FinCEN 114
25
Form TD F 90-22.1 (old form)
26
Form TD F 90-22.1
27
FBAR Penalties for Non-Compliance
• Criminal penalties for willful violations:
– Up to 5 years imprisonment and $250,000 f...
Example of exposure to FBAR sanctions
1. assume balance in BDA a/c since 2008 is $5M
2. Sale of a foreign based hedge fund...
Foreign Bank Account Reporting
on Income Tax Returns
•Must report income from foreign account on Schedule
B (interest/divi...
Form 1040, Schedule B
31
Foreign Tax Credit (FTC)
32
Form 1040, Line 47
33
If there is a foreign tax credit claimed, it "could" lead to discovery of significant marital assets or
income.
1. Request...
Foreign Account Tax Compliance Act
(FATCA)
Foreign Asset Reporting
35
What is FATCA?
• “The Foreign Account Tax Compliance Act (FATCA) is an important
development in U.S. efforts to improve ta...
Two Primary FATCA Requirements
• In general terms, foreign financial institutions are
annually required to report to the U...
FATCA Policy in Context of U.S. Tax Laws
• U.S. taxpayers’ investments have become increasingly global in
scope.
• Recogni...
What Does FATCA Require of Foreign Banks?
• FATCA requires foreign banks and financial institutions (FFIs) to report to th...
FATCA Implementation Through
Intergovernmental Agreements
•As of May 1, 2014:
– Treasury has signed 30 agreements with for...
FATCA Asset Reporting Regime
• New Internal Revenue Code provision enacted as part of 2010
HIRE Act
• Requires reporting o...
Form 8938
42
What is a
“Specified Foreign Financial Asset”?
A specified foreign financial asset (SFFA) is:
• Any financial account main...
Form 8938 – Part I
44
What is a SFFA?
(continued)
• Other foreign financial assets held for investment that are not
in an account maintained by ...
Form 8938 – Part II
46
Form 8938 – Part II (continued)
47
Other U.S. Tax Information Returns
Addressing Offshore Activities
48
U.S. Tax Information Returns Requiring
Disclosure of Foreign Assets and Activities
49
• Form 3520 – Annual Return To Repor...
Form 3520 – Foreign Trusts & Foreign Gifts
50
• Purpose of the form
• Information reporting
Distributions from foreign tr...
Form 3520-A – Foreign Trust with U.S. Owner
51
• Purpose of the form
• Separate filing by the foreign trust – not part of ...
Form 5471 – Controlled Foreign Corporations
52
• Purpose of the form
• Controlled foreign corporation (“CFC”) – More than ...
Form 5471 – Controlled Foreign Corporations
53
• Form 5471 can be filed on behalf of other taxpayers but such
taxpayers mu...
Form 5471 – Controlled Foreign Corporations
54
Schedule Details Categories
2 3 4 5
General Identification information √ √ ...
Form 5471 – Controlled Foreign Corporations
55
Form 8621 – Passive Foreign Investment
Companies
56
• Purpose of the form
• Passive foreign investment company – foreign c...
Form 8865: Foreign Partnerships
•Purpose of form
•Requires disclosure of
– Identity of partners
– Affiliates of partnershi...
Obtaining Information Directly From
the Internal Revenue Service
58
Other Options for Obtaining Tax Information
• Internal Revenue Code 6103(e)(1)(B) authorizes either
individual to request ...
60
61
Discovery Checklist
• Form 1040 (tax return) and all schedules/attachments
• FBAR forms
– TD F 90-22.1 (prior to 2014)
– F...
What if you discover that your client has a
secret offshore bank account?
63
IRS Offshore Voluntary Disclosure Program
• To date, over 40,000 individuals have come forward and
enrolled, and the U.S. ...
OVDP
(continued)
•More stringent eligibility requirements:
– U.S. government receipt of taxpayer information from
“John Do...
Questions?
Matthew D. Lee
Blank Rome LLP
One Logan Square
Philadelphia, PA 19103
(215) 569-5352
(215) 832-5352 (facsimile)...
Circular 230 Notice
To ensure compliance with IRS Circular 230, you are hereby
notified that any discussion of federal tax...
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How to Find Your Spouse’s Secret Offshore Bank Account - Using U.S. Tax Reporting Requirements as a Discovery Tool for Locating Foreign Assets.

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How to Find Your Spouse’s Secret Offshore Bank Account

  1. 1. 1 How to Find Your Spouse’s Secret Offshore Bank Account: Using U.S. Tax Reporting Requirements as a Discovery Tool for Locating Foreign Assets Presented by: Matthew D. Lee, Blank Rome LLP G. Daniel Jones, CBIZ
  2. 2. Matthew D. Lee Matthew D. Lee is a former U.S. Department of Justice trial attorney who concentrates his practice on all aspects of white collar criminal defense and federal tax controversies. He has extensive experience in advising clients on issues regarding foreign bank account reporting (FBAR) obligations, the Foreign Account Tax Compliance Act (FATCA), and the Internal Revenue Service’s 2009 Offshore Voluntary Disclosure Program, 2011 Offshore Voluntary Disclosure Initiative, and 2012 Offshore Voluntary Disclosure Program. He has represented hundreds of U.S. taxpayers with undisclosed foreign bank accounts. Mr. Lee has published numerous articles regarding the IRS voluntary disclosure programs and FBAR and FATCA reporting obligations and speaks frequently on these topics. He has also represented clients in all stages of proceedings before the Internal Revenue Service, including audits, appeals, and collections, and Tax Court and district court litigation. Mr. Lee also has experience in conducting corporate internal investigations and advising clients as to corporate compliance issues involving the Bank Secrecy Act, the USA Patriot Act, FATCA, and anti- money laundering laws and regulations. Mr. Lee has represented both corporations and individuals in criminal investigations involving tax, money laundering, health care, securities, public corruption, and fraud offenses, and has significant experience in handling all stages of federal litigation including trials and appeals. Mr. Lee publishes a blog devoted to addressing the latest developments in the tax controversy field at www.taxcontroversywatch.com.
  3. 3. G. Daniel Jones, CPA, CFF Dan Jones is a Managing Director for CBIZ MHM, LLC, a division of CBIZ, Inc. (NYSE: CBZ) in the FFS Group, which includes forensic accounting, litigation support and valuation services. After graduation from Temple University, Dan began his professional career as an Internal Revenue Agent for the U.S. Treasury Department from 1973-1977, where he also served as an expert witness for the Department of Justice. In 1982 he helped establish the firm of Jones, Hayward & Lenzi, CPA’s. Since 1976, Dan has been qualified as an expert witness in the Federal, Pennsylvania, New Jersey, Tennessee, state courts and the counties of Philadelphia, Bucks, Montgomery, Delaware, Chester, Lancaster and Monroe in Pennsylvania. Active in professional, community and charitable affairs, Dan has served, or currently serves, on the boards of Continental Bank; Marine Corps – Law Enforcement Foundation; Torresdale-Frankford Country Club; Accountants Professional Liability Group (Orion Capital, NYSE); and Progress Bank (PFNC-OTC). He has also served as an adjunct professor at Philadelphia University and is a member of the American and Pennsylvania Institutes of CPAs. Dan has presented at over 30 conferences during the last dozen years on forensic accounting, tax and family law related issues. He has also authored articles in national and local publications. 3
  4. 4. Introduction •Internal Revenue Service now requires more disclosure than ever of the offshore assets and offshore activities of U.S. taxpayers •Harsh financial penalties, and even criminal prosecution, can result from the failure to make such disclosures •Significant amount of information regarding offshore activities can be gleaned from U.S. tax reporting forms •Discovery requests should be specifically tailored to request this type of information 4
  5. 5. The Case of Dr. Michael Brandner: A Cautionary Tale 5
  6. 6. United States v. Michael Brandner, M.D. •Dr. Brandner is a plastic surgeon in Anchorage, Alaska •In 2007, Dr. Brandner’s wife of 28 years files for divorce in Alaska Superior Court •Dr. Brandner devises scheme to defraud his wife and hide millions of dollars of assets from his wife and the Court •Shortly after his wife files for divorce, Dr. Brandner converts $3 million into five cashier’s checks and drives south to Central America 6
  7. 7. Dr. Brandner’s 6,891 mile journey from Alaska to Panama 7
  8. 8. Dr. Brandner’s banking activity • Opens account at Capital Bank in Panama, and deposits five cashier’s checks worth over $3 million. Government alleges that this account was opened to conceal assets from wife. • It turns out that the banker in Panama assisting Dr. Brandner was cooperating with the U.S. government in a separate fraud investigation. Banker advises Dr. Brandner of the requirement to file the FBAR form with the Internal Revenue Service. • Dr. Brandner later transfers another $1.5 million (primarily from an IRA account at Pensco Trust Company) to the Panama account, again to conceal assets from his wife. 8
  9. 9. Dr. Brandner’s banking activity (continued) • Alaska court enters a divorce decree on April 19, 2011, and awards wife the funds in the Pensco IRA account. • On May 10, 2011, the banker records a phone call to Dr. Brandner, who states that respect to the funds awarded to his wife, “my intention is to not hand it over to the court.” Banker advises Dr. Brandner of a new U.S.-Panama tax treaty that could be problematic, and Dr. Brandner asks banker to assist in further concealing assets from wife. • Dr. Brandner creates Evergreen Capital LLC, which is structured to disguise Brandner’s identity as beneficial owner. 9
  10. 10. Dr. Brandner’s banking activity (continued) •In August 2011, Dr. Brandner opens account in name of Evergreen Capital at Bank of America in Seattle. •$4.65 million wire transferred from Panama to Bank of America account. •U.S. Department of Homeland Security seizes all funds from the Bank of America account on September 12, 2011. 10
  11. 11. Federal Charges Filed 1. February 9, 2012: U.S. Department of Justice files federal forfeiture lawsuit in California alleging that Dr. Brandner engaged in wire fraud and money laundering to conceal assets from his wife. 2. September 18, 2013: federal grand jury in Alaska returns indictment charging Dr. Brandner with seven counts of wire fraud and seeking forfeiture of $4.6 million in funds concealed from wife and divorce court. 11
  12. 12. Why is tax reporting regarding offshore activities more important today than in the past? 12
  13. 13. Offshore Assets • The world is more globally integrated • Easier to invest assets offshore • Easier to access jurisdictions with strict privacy/secrecy rules; very strong asset protection rules. • Easier to hide assets from the IRS (and from a spouse) • The IRS and the DOJ have responded in kind . . . 13
  14. 14. IRS Offshore Focus IRS Commissioner Douglas H. Shulman: • “Combating international tax evasion is a top priority for the IRS. We have additional cases and banks under review. The situation will just get worse in the months ahead for those hiding assets and income offshore.” (February 8, 2011) • “Tax secrecy continues to erode. . . . We are not letting up on international tax issues, and more is in the works. For those hiding cash or assets offshore, the time to come in is now. The risk of being caught will only increase.” (February 8, 2011) • “Our focus on offshore tax evasion continues to produce strong, substantial results for the nation’s taxpayers . . . . As we’ve said all along, people need to come in and get right with us before we find you. . . . We are following more leads and the risk for people who do not come in continues to increase.” (January 9, 2012) 14
  15. 15. Justice Department Offshore Compliance Initiative “The Tax Division’s top litigation priority is the concerted civil and criminal effort to combat the serious problem of non-compliance with our tax laws by U.S. taxpayers using secret offshore bank accounts – a problem that a 2008 Senate report concluded costs the U.S. Treasury at least $100 billion annually.” – U.S. Department of Justice website 15
  16. 16. Key Enforcement Milestones •End to historic Swiss bank secrecy laws – Believed to be 52,000 U.S. accounts at UBS alone – UBS agreement with U.S. government and turnover of names •Numerous criminal cases filed against accountholders, advisors, and bankers •Global crackdown on use of secret bank accounts (Israel, India, and many other countries) •Over 100 Swiss banks seeking amnesty as of February 2014 16
  17. 17. Key Enforcement Milestones (continued) •IRS Offshore Voluntary Disclosure Programs (2009 to the present) – Over 40,000 individuals have enrolled – Over $5.5 billion in additional revenue to U.S. Treasury •Passage and implementation of Foreign Account Tax Compliance Act in 2013 will end bank secrecy worldwide and impose global transparency and information sharing •Indictment of Credit Suisse expected imminently 17
  18. 18. Foreign Bank Account (FBAR) Reporting Requirements 18
  19. 19. Foreign Bank Accounting Reporting • Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (“FBAR”), now known as FinCEN Form 114 • Primary weapon in the IRS’ arsenal for enforcing information reporting • Severe penalties for noncompliance: criminal and civil • Required as part of Bank Secrecy Act, not Internal Revenue Code; hence, penalties more stringent than Internal Revenue Code penalties • Obligation to file introduced in 1970s but enforcement was lax prior to 2009 19
  20. 20. Who is required to file an FBAR? • An FBAR must be filed if all of the following requirements are satisfied: – Filer is a U.S. Person; – U.S. Person has a financial account; – U.S. Person has a direct or indirect financial interest in, or signature or other authority over, the financial account; – Financial account is in a foreign country, including the foreign branch of a U.S. bank; and – Aggregate account balances exceed $10,000 (USD) at any point during calendar year 20
  21. 21. What is reported on the FBAR? • A U.S. Person must report all their financial interests in, or signature or other authorities over, foreign financial accounts. • Financial accounts include: – Bank accounts with offshore banks; – Securities and brokerage accounts with offshore financial institutions; – Commodity futures and options account; – Insurance policy with a cash value and an annuity policy; and – Shares in a mutual fund 21
  22. 22. FinCEN 114 (new form) 22
  23. 23. FinCEN 114 23
  24. 24. FinCEN 114 24
  25. 25. FinCEN 114 25
  26. 26. Form TD F 90-22.1 (old form) 26
  27. 27. Form TD F 90-22.1 27
  28. 28. FBAR Penalties for Non-Compliance • Criminal penalties for willful violations: – Up to 5 years imprisonment and $250,000 fine • Civil penalties – Non-willful violation: Up to $10,000 for each violation – Willful violation: Greater of $100,000 or 50 percent of the balance in the account at the time of the violation • Both civil and criminal penalties may be imposed together. • Assisting a U.S. person in evading reporting may also result in tax and money laundering charges, and seizure and forfeiture of the assets in the account. 28
  29. 29. Example of exposure to FBAR sanctions 1. assume balance in BDA a/c since 2008 is $5M 2. Sale of a foreign based hedge fund a/c created balance just before meltdown. 3. No form 90-22.1 or Sch B, 1040 answered or filed 4. Husband never told CPA and never discussed with wife. 5. But H's AA knew about it and was sympathetic to wife. She drops a dime. 6. Penalty exposure to H (and the marital estate) YearBalance Penalty Cum Pen All amounts in millions 2008 $5.0 $ 2.5 $ 2.5 2009 4.2 2.1 4.6 2010 4.6 2.3 6.9 2011 5.4 2.7 9.6 2012 6.0 3.0 12.6 2013 7.0 3.5 $ 16.1 Conclusion; you may have located a $7M asset for division with your client. How do you handle the potential liabilty of $16M if you - Represent wife? - Represent husband?
  30. 30. Foreign Bank Account Reporting on Income Tax Returns •Must report income from foreign account on Schedule B (interest/dividends) and Schedule D (capital gain/loss) •Must also check the box on Form 1040, Schedule B, Part III – Also, Forms 1120, 1120-S, 1065, 706, and 990 30
  31. 31. Form 1040, Schedule B 31
  32. 32. Foreign Tax Credit (FTC) 32
  33. 33. Form 1040, Line 47 33
  34. 34. If there is a foreign tax credit claimed, it "could" lead to discovery of significant marital assets or income. 1. Request certificates of tax withheld at source. That reflects dividends paid and foreign taxes withheld If there are dividends, think about it and work backwards to imply asset values. 2. Assume a Foreign Tax Credit of say $150,000 on form 1116 is disclosed. A. if at 15% = $150,000 B. Dividend earned or received = $1,000,000 C. If dividend is 40% of net income = $2,500,000 is Hs share D. If value compared to div is 5x, the asset is $12,500,000. E. if the PE ratio is 15X, the implied value is $37,500,000
  35. 35. Foreign Account Tax Compliance Act (FATCA) Foreign Asset Reporting 35
  36. 36. What is FATCA? • “The Foreign Account Tax Compliance Act (FATCA) is an important development in U.S. efforts to improve tax compliance involving foreign financial assets and offshore accounts.” (www.IRS.gov) • FATCA was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act • Under FATCA, U.S. taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS. This reporting will be made on Form 8938, which taxpayers attach to their federal income tax return, starting with the 2011 tax filing season. • In addition, FATCA will require foreign financial institutions to report directly to the IRS information about financial accounts held by U.S. taxpayers, or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest. 36
  37. 37. Two Primary FATCA Requirements • In general terms, foreign financial institutions are annually required to report to the U.S. government information about financial accounts held by U.S. taxpayers, or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest. •U.S. taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS annually on the Form 8938 information return. 37
  38. 38. FATCA Policy in Context of U.S. Tax Laws • U.S. taxpayers’ investments have become increasingly global in scope. • Recognition that foreign financial institutions (“FFIs”) are in best position to identify and report with respect to their U.S. account holders. • Absent reporting by FFIs, some U.S. taxpayers may attempt to continue to evade U.S. tax by hiding money in offshore accounts. • “To prevent this abuse of the U.S. voluntary tax compliance system and address the use of offshore accounts to facilitate tax evasion, it is essential in today’s global investment climate that reporting be available with respect to both the onshore and offshore accounts of U.S. taxpayers.” (Preamble to Final Regulations). 38
  39. 39. What Does FATCA Require of Foreign Banks? • FATCA requires foreign banks and financial institutions (FFIs) to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. In order to avoid withholding under FATCA, a participating FFI will have to enter into an agreement with the IRS to: – Identify U.S. accounts; – Report certain information to the IRS regarding U.S. accounts; and – Withhold a 30 percent tax on certain U.S.-connected payments to non- participating FFIs and account holders who are unwilling to provide the required information. • Registration take places through an online system which opened January 1, 2014. • FFIs that do not register and enter into an agreement with the IRS will be subject to withholding on certain types of payments relating to U.S. investments. 39
  40. 40. FATCA Implementation Through Intergovernmental Agreements •As of May 1, 2014: – Treasury has signed 30 agreements with foreign jurisdictions to implement FATCA – Treasury has reach agreements in substance with 29 other foreign jurisdictions to implement FATCA 40
  41. 41. FATCA Asset Reporting Regime • New Internal Revenue Code provision enacted as part of 2010 HIRE Act • Requires reporting of specified foreign financial assets if aggregate value exceeds certain thresholds • Applies to tax years beginning with 2011 • Requires that new information return be attached to a taxpayer’s U.S. income tax return entitled Form 8938, “Statement of Foreign Financial Assets” 41
  42. 42. Form 8938 42
  43. 43. What is a “Specified Foreign Financial Asset”? A specified foreign financial asset (SFFA) is: • Any financial account maintained by a foreign financial institution – Foreign bank accounts – Foreign mutual funds – Foreign hedge funds – Foreign private equity funds – Certain foreign insurance products 43
  44. 44. Form 8938 – Part I 44
  45. 45. What is a SFFA? (continued) • Other foreign financial assets held for investment that are not in an account maintained by a U.S. or foreign financial institution, namely: – Stock or securities issued by someone other than a U.S. person – Any interest in a foreign entity – Any financial instrument or contract that has as an issuer or counterparty that is other than a U.S. person – Foreign pensions and deferred compensation plans – Foreign trusts and estates (if “specified individual” is aware of its existence) 45
  46. 46. Form 8938 – Part II 46
  47. 47. Form 8938 – Part II (continued) 47
  48. 48. Other U.S. Tax Information Returns Addressing Offshore Activities 48
  49. 49. U.S. Tax Information Returns Requiring Disclosure of Foreign Assets and Activities 49 • Form 3520 – Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts • Form 3520-A – Annual Information Return of Foreign Trust With a U.S. Owner • Form 5471 – Information Return of U.S. Persons With Respect to Certain Foreign Corporations • Form 8621 – Information Return by a Shareholder of a PFIC or Qualified Electing Fund • Form 8865 – Return of U.S. Persons With Respect to Certain Foreign Partnerships
  50. 50. Form 3520 – Foreign Trusts & Foreign Gifts 50 • Purpose of the form • Information reporting Distributions from foreign trusts US owner of a foreign trust Gifts and bequests from foreign persons • Filed with the US taxpayer’s income tax return • Mandatory filing obligation with penalties of $10,000 or up to 35% of the fair value of property transferred to or received from the trust or 5% of the gross value of the trust
  51. 51. Form 3520-A – Foreign Trust with U.S. Owner 51 • Purpose of the form • Separate filing by the foreign trust – not part of the U.S. owner’s tax return • Provides details about: Foreign trust and its P&L and balance sheet Fair market value of the distributions (if any) US Owner(s), income attributable to each US owner and the value of US owner’s interest in trust • Mandatory – US owner subject to penalty of $10,000 or 5% of gross value of assets
  52. 52. Form 5471 – Controlled Foreign Corporations 52 • Purpose of the form • Controlled foreign corporation (“CFC”) – More than 50% of vote or value held by US Shareholders (each with a 10% or greater voting interest) • Different filing obligations Category 2 – US director or officer Category 3 – Investment into a foreign corporation Category 4 – Controlling US shareholder Category 5 – Non-controlling US shareholder
  53. 53. Form 5471 – Controlled Foreign Corporations 53 • Form 5471 can be filed on behalf of other taxpayers but such taxpayers must attached a statement to their tax returns indicating such. • Penalties for non-compliance - $10,000 per Form 5471 and return remains open for audit
  54. 54. Form 5471 – Controlled Foreign Corporations 54 Schedule Details Categories 2 3 4 5 General Identification information √ √ √ √ Sch. A Shares on issue by class √ √ Sch. B U.S. Shareholders in foreign corp. √ √ Sch. C,E,F Profit & loss, balance sheet & foreign taxes paid √ √ Sch. G Other investment information √ √ √ √ Sch. H Earnings & Profits √ √ Sch. I Shareholder’s income from foreign corporation √ √ Sch. J Accumulated Earnings & Profits √ √ Sch. M Transactions between controlled entities √ Sch. O, Pt I Investing/selling shareholder information √ Sch. O, Pt II Transaction details of buying/selling stock √
  55. 55. Form 5471 – Controlled Foreign Corporations 55
  56. 56. Form 8621 – Passive Foreign Investment Companies 56 • Purpose of the form • Passive foreign investment company – foreign corporation with 75% or more passive income or 50% or more passive income generating assets. Excludes CFCs. • No dollar threshold or 10% threshold • Elections for recognizing income • Draconian regime for taxing income and gains from PFICs unless elections made to recognize income over term of investment • Report income and gains on sales
  57. 57. Form 8865: Foreign Partnerships •Purpose of form •Requires disclosure of – Identity of partners – Affiliates of partnership – Income statement of partnership – Balance sheet of partnership – Transactions between partnership and partners •Financial penalties and possibility of criminal prosecution for failure to file form 57
  58. 58. Obtaining Information Directly From the Internal Revenue Service 58
  59. 59. Other Options for Obtaining Tax Information • Internal Revenue Code 6103(e)(1)(B) authorizes either individual to request “return information” from IRS regarding a jointly filed return – “return information” includes the tax return and supporting schedules/information returns • Divorced/separated spouses may also request, in writing, that the IRS disclose details regarding collection activities undertaken with respect to jointly filed returns (IRC 6103(e)(8)) • Use IRS Forms 4506 or 4506-T, or Freedom of Information Act, to request this information 59
  60. 60. 60
  61. 61. 61
  62. 62. Discovery Checklist • Form 1040 (tax return) and all schedules/attachments • FBAR forms – TD F 90-22.1 (prior to 2014) – FinCEN Form 114 (starting in 2014) • Form 8938 (FATCA asset disclosure form) • Form 3520 • Form 3520-A • Form 5471 • Form 8621 • Form 8865 62
  63. 63. What if you discover that your client has a secret offshore bank account? 63
  64. 64. IRS Offshore Voluntary Disclosure Program • To date, over 40,000 individuals have come forward and enrolled, and the U.S. government has collected $5.5 billion. • IRS reopened program on January 9, 2012. • Similar to the 2011 program, but with a few significant differences: – Open for an indefinite period of time until otherwise announced – terms of Offshore Voluntary Disclosure Program (“OVDP”) could change at any time; – Requires individuals to pay an FBAR penalty of 27.5% (compared to 25% in the 2011 program), may be reduced to 12.5% or 5% in certain circumstances; and – 8 year “rolling” look-back period with exclusion of compliant years. 64
  65. 65. OVDP (continued) •More stringent eligibility requirements: – U.S. government receipt of taxpayer information from “John Doe” summons, treaty request, or similar action is disqualifying event; – Taxpayers who appeal foreign tax administrator’s decision to release account information must notify U.S. Attorney General or be disqualified; – IRS may in its discretion designate certain classes of taxpayers ineligible. 65
  66. 66. Questions? Matthew D. Lee Blank Rome LLP One Logan Square Philadelphia, PA 19103 (215) 569-5352 (215) 832-5352 (facsimile) Lee-M@BlankRome.com 66 G. Daniel Jones CBIZ MHM, LLC 401 Plymouth Road, Suite 200 Plymouth Meeting, PA 19462 (610) 862-2210 (215) 432-6309 (cell) Gdjones@cbiz.com
  67. 67. Circular 230 Notice To ensure compliance with IRS Circular 230, you are hereby notified that any discussion of federal tax issues in this presentation is not intended or written to be used, and it cannot be used by any person for the purpose of: (A) avoiding penalties that may be imposed on them under the Code; and (B) promoting, marketing or recommending to another party any transaction or matter addressed herein. This disclosure is made in accordance with the rules of Treasury Department Circular 230 governing standards of practice before the Service. 67
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