What’s new in offshore tax compliance?

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<p> Two financial institutions have been added to the 50% penalty list, and the IRS has made clear that streamlined compliance will require some effort from taxpayers.

Do you still have clients who have not come forward to report their unreported offshore accounts? The reasons to come forward have gotten ever more compelling and will continue to do so. Of note are two recent developments.

50% penalty list

First, the IRS announced the addition of two entities to the list of Foreign Financial Institutions or Facilitators that will cause taxpayers disclosing accounts held by those entities to pay the highest penalties under the Offshore Voluntary Disclosure Program (OVDP). The list now contains 12 entities with the addition of Sovereign Management & Legal Ltd. (Sovereign) and Bank Leumi. Under the OVDP, participants pay a miscellaneous offshore penalty of 27.5% of the highest account value. If, however, the bank or entity where the taxpayer had an account is on this list, the penalty rises to 50%.

The addition of Sovereign and Bank Leumi is sure to have wide-reaching consequences. Sovereign is not actually a bank; it is what the IRS would refer to as a facilitator, assisting in the creation and administration of Panamanian corporations and foundations, among other things. These were fairly common structures recommended by offshore banks and facilitators. One concern is that some individuals with ownership in a Panamanian corporation or foundation may not even be aware that Sovereign was involved.

Bank Leumi is one of Israel’s largest banks, with subsidiaries and branches throughout the world. The bank agreed to pay a $270 million fine and disclose the details of over 1,500 account holders who are U.S. citizens or residents, according to a press release from the U.S. Department of Justice (DOJ).

Anyone who was assisted by Sovereign or who had an undisclosed account at Bank Leumi will now find himself or herself paying a miscellaneous offshore penalty of 50% of the highest account value if he or she seeks to enter the OVDP to resolve foreign account matters. The list of banks and facilitators is not static. It will continue to expand as more institutions enter into deferred prosecution agreements with the DOJ.

Taxpayers who have or had a foreign account that is still undisclosed should see a tax professional about coming forward now, before more banks or entities are added to the list. Accountants should urge their clients to come forward now, even if they have thus far been reluctant to do so.

Streamlined procedures

The second recent development is in the Streamlined Filing Compliance Procedures (Streamlined Program). Under the Streamlined Program, nonwillful taxpayers residing in the United States who can certify to their nonwillfulness will pay a 5% miscellaneous offshore penalty, rather than the 27.5% penalty associated with the voluntary program. (Nonresidents who qualify for relief will not pay any penalty at all.) Form 14654, Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures, contains the required certification of nonwillfulness by U.S. persons. According to the IRS, nonwillful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the law’s requirements.

The following was recently added to the form:

Note: You must provide specific facts on this form or on a signed attachment explaining your failure to report all income, pay all tax, and submit all required information returns, including FBARs. Any submission that does not contain a narrative statement of facts will be considered incomplete and will not qualify for the streamlined penalty relief.

The IRS now requires a detailed narrative that explains the circumstances that surround taxpayers’ failure to report and pay tax on their foreign accounts. Lack of a sufficient explanation could bar a taxpayer from the Streamlined Program.

This area of law continues to be complicated and nuanced. It is important for individuals with unreported foreign accounts to retain competent representation. If you are a CPA, consider partnering with a tax attorney if you are not comfortable handling an unreported foreign account matter. <p/>

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