IRS and DOJ Losing Patience with Taxpayers with Undisclosed Foreign Accounts

Posted by Jennifer Benda on February 04, 2013

The assistant US attorney general for the Tax Division, Kathryn Keneally, recently indicated that the window for avoiding criminal prosecution related to undeclared foreign accounts may be closing soon.  At a roundtable discussion at the University of Southern California’s annual tax institute, Ms. Keneally indicated that waiting to disclose offshore accounts is extremely dangerous. 

If you have undeclared offshore accounts, you should consult with a tax attorney who regularly handles such disclosures.  Taxpayers who would like more information regarding the 2012 IRS Voluntary Disclosure Program should call Jim Mastracchio at (202) 861-1650 or Jennifer Benda at (303) 764-4025.

GAO recommends IRS Step Up Enforcement Measures for Dentists, Doctors and Other Medical Services Providers Who Receive Medicaid Funds

Posted by Jennifer Benda on August 08, 2012

In a report issued July 27, 2012, the GAO recommended that the IRS “explore opportunities to enhance collection of unpaid taxes from Medicaid providers, including the use of continuous levies.”  The GAO reviewed Medicaid reimbursement information from the three states which received the most Medicaid funding under the American Recovery and Reinvestment  Act of 2009.  The GAO found that in 2009, doctors, dentists, and other medical services providers who received $6.6 billion in Medicaid reimbursement owed the U.S. government $791 million in unpaid taxes from 2009 and earlier years.  The GAO believes this estimate is low because it relies only on taxes which are self-reported and does not include amounts for which returns were not filed, underreported amounts, or amounts reported under a different tax identification number.  Over 40% of the unpaid taxes were identified as payroll taxes and over 30% of the unpaid taxes were identified as income taxes.  The study points out that Medicaid reimbursements made to delinquent taxpayer are subject to one-time, rather than continuous, levies during the collection process.  GAO concludes that if it was possible to continuously levy Medicaid reimbursements, collections would increase dramatically.  Congress has proposed changing the law so that Medicaid reimbursements are subject to continuous levy.  However, this measure has not become law.

 

The GAO report is available here: GAO Report 593095.pdf

IRS Issues Updated Guidance for 2012 Offshore Voluntary Disclosure Program

Posted by Jennifer Benda on June 26, 2012

On June 26, 2012, the Internal Revenue Service (“IRS”) released new FAQ’s on the current Offshore Voluntary Disclosure Program (“OVDP”) . The IRS opened the current OVDP on January 9, 2012, but, other than announcing the new FBAR penalty of 27.5%, had not issued updated guidance, leaving practitioners and taxpayers to rely on the 2011 program FAQ’s and a January 2012 news release for details on the program.

Unlike the 2009 and 2011 programs, the current program does not specify a range of years for the disclosure period.  Instead, the disclosure period is “the most recent eight tax years for which the due date has already passed” and does not include “current years for which there has not yet been non-compliance.” 

Another new feature of the current OVDP is that it has no set end date.  The IRS has reserved the option to change the terms of the program, undoubtedly to make them less favorable, or to end it entirely at any time.

The new FAQs are available here: new%20FAQs.pdf

The IRS also announced that it will provide special procedures for US citizens living abroad who failed to file US income tax returns and FBARs but have little to no U.S. tax liability.  This special procedure will be available September 1.  Details have not been provided. 

The IRS also increased its estimate of the amount of money it has recovered through the three iterations of the program to $5 billion.

Please contact Jay Nanavati at 202-861-1747, jnanavati@bakerlaw.com, or Jim Mastracchio at 202-861-1650, jmastracchio@bakerlaw.com, if you have any questions regarding this post.

 

 

 

U.S. Treasury Releases Joint Statements with Switzerland and Japan Announcing Intent to Cooperate on FATCA Enforcement

Posted by Jay R. Nanavati on June 21, 2012

The U.S. Treasury released joint statements with Switzerland and Japan announcing their “mutual intent to pursue a framework for intergovernmental cooperation to facilitate the implementation of the Foreign Account Tax Compliance Act (FATCA).”  The Treasury has already released similar joint statements with France, Germany, Italy, Spain and the United Kingdom.

The Treasury pointed out that the framework for cooperation with Switzerland and Japan differs from that with France, Germany, Italy, Spain and the United Kingdom.  It called the latter “Model II.”  Model II involves the direct reporting by foreign financial institutions (“FFIs”) to the Internal Revenue Service (“IRS”), where Model I involves reporting by FFIs first to their respective governments, followed by automatic transmission of the information to the U.S. government.

The idea behind the two separate models is to allow FFIs to provide information on U.S. accounts to the U.S. government without violating the privacy laws of their respective governments.  The Treasury’s announcement said that a model intergovernmental agreement pursuant to Model I would be released “soon.”  In the last few days, Michael Danilack, IRS Deputy Commissioner (International) of the Large Business and International Division (“LB&I”), has been more precise, saying that he expects a model agreement to be released “much sooner than the end of the summer . . . .  There's a great urgency to that. We have to get it done.”  The Treasury has given no indication of when a model agreement pursuant to Model II might be released.

Treasury’s announcement comes in the wake of other recent developments.  In December 2011, the IRS released a revised Form 8938, Statement of Foreign Financial Assets.  In June 2012, the IRS released drafts of Forms W-8BEN and W-8BENE (for entities), Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding.

Please contact Jay Nanavati at 202-861-1650, jnanavati@bakerlaw.com, if you have any questions regarding this post.

IRS Clarifies Form 8938 Reporting

Posted by Jennifer Benda on June 11, 2012

The IRS has added nine new questions and answers addressing the filing requirements for Form 8938, Statement of Foreign Financial Assets.  These new Q&A address a variety of issues including whether tangible assets such as art, antiques, jewelry, cars and other collectibles held in a foreign country must be reported on Form 8938 (Q&A 19) and whether precious metals (Q&A 20) or safe deposit boxes (Q&A 21)  in foreign countries must be reported on Form 8938. 

The IRS also clarified issues about valuation of foreign financial assets.  Q&A 15 states that assets with a de minimis maximum value must be included on Form 8938 if a taxpayer meets the applicable reporting threshold.  Q&A 23 clarifies that taxpayers holding an interest in a  foreign defined benefit plan are not required to obtain an appraisal by a third party to estimate the asset’s maximum value during the tax year.  Rather, taxpayers are permitted to rely on periodic account statements which reflect a reasonable estimate of the maximum value of the account during the tax year or, if statements are not issued, taxpayers may rely on information publicly available from reliable financial information sources. 

The IRS Q&A’s for Form 8938 are available here:  http://www.irs.gov/businesses/corporations/article/0,,id=255061,00.html.

Colorado Court of Appeals Releases Significant Decision Affecting Colorado Conservation Easement Litigation

Posted by Jennifer Benda on March 21, 2012

On March 15, the Colorado Court of Appeals issued its much anticipated decision in Kowalchik v. Brohl.  The Court determined that transferees who purchased conservation easement credits from donors of conservation easements were not required to be joined in the conservation easement litigation that has been brought pursuant to House Bill 1300.  This issue was raised by the Department of Revenue (“Department”) in most cases filed pursuant to H.B. 1300,  the statute authorizing  trial procedures for taxpayers arguing with the Department over the validity and value of countless conservation easements credits. 

By way of background, since 2001, the Department has disallowed a vast majority of conservation easement credits claimed by taxpayers.  Taxpayers filed administrative appeals which were sitting in a queue with little prospect for timely resolution.  Last year, the legislature passed H.B. 1300 permitting taxpayers to bypass the administrative appeals process and get their case in front of a judge who had the authority to expedite the case.  These cases were required to be filed by October 1, 2011 and hundreds of cases were filed.  In cases where a donor of a conservation easement sold the gross conservation easement tax credit to a transferee, the Department moved to dismiss the case or, in the alternative, to compel joinder of the transferees of the credit.  The Department’s position was that unless the transferees were named as parties in the district court, the litigation would not be binding on the transferees.  

The District Court rulings on this issue were divided, some in favor of the Department’s Motion to Dismiss and some denying the Department’s Motion to Dismiss.  In Kowalchik, the Huerfano County District Court held that joinder was not required and denied the Department’s motion to dismiss.   The Department appealed this finding to the Court of Appeals which expedited the matter.  The Court of Appeals ruled last week that joinder of the transferees was not required because the transferee’s interest were represented by the donor, or Tax Matters Representative (“TMR”), who was authorized under the statute to enter into agreements with the Department regarding the validity and value of the easement and that those agreements would bind transferees.  The Court of Appeals found that the legislature’s clear intent was not to require joinder of the transferees.  Furthermore, the Court of Appeals determined that  failure to join the transferees did not violate the transferees’ due process rights because the transferee voluntarily entered into a contractual arrangement agreeing to be represented and bound by the Tax Matter Representative with respect to the amount of the credit.  Because the TMR’s and transferee’s interests are aligned and the statute clearly gives transferees the right to intervene if the transferee is not satisfied with the representation of the TMR, the procedures do not violate the transferee’s due process rights.  In a final matter, the Court ruled that the transferees were taxpayers who are subject to deficiencies, interest, and penalties.

The Court of Appeals opinion is available here: CCA_2011ca2634_031512_Opinion.pdf

If you have questions about how this case may impact you, please contact Jennifer Benda at 303-764-4025 or Paul Enockson at 303-764-4017.

 

New Foreign Asset Reporting Requirements for 2011 Returns

Posted by Jennifer Benda on March 03, 2012

The HIRE Act of 2010 enacted Section 6038D which requires single taxpayers to report ownership of specified foreign financial assets which in aggregate exceed $50,000 on new Form 8938, which is filed with an individual’s Form 1040.  Various dollar thresholds apply to individuals who do not file single taxpayer returns.  Individuals required to file Form 8938 are still required to comply separately with Treasury rules for filing FBARs, or Form T.D. 90-22.1, to report foreign bank and financial accounts. 

Specified foreign financial assets generally include financial accounts maintained at foreign financial institutions; stock, securities, and other financial instruments issued by a foreign person or other foreign issuer; and interests in foreign entities held for investment.  Assets held at U.S. branches of foreign financial institutions are not specified foreign financial assets.  The IRS recently posted responses to Frequently Asked Questions about Form 8938.  The IRS FAQ’s are available here:  http://www.irs.gov/businesses/corporations/article/0,,id=255061,00.html

The FAQs elaborate on many common situations.  For example, FAQ’s 7 and 8 provide that foreign investments maintained by a U.S. financial institution or its holdings, such assets held through U.S. mutual fund accounts, IRAs (traditional or Roth), 401(k) retirement plans, qualified U.S. retirement plans, and brokerage accounts maintained by U.S. financial institutions, are not reported on Form 8938.  FAQ 3 discusses the rules governing foreign real estate.  Foreign real estate held directly by an individual is not reportable on Form 8938.  However, if foreign real estate is held through a foreign entity, such as a corporation, partnership, trust or estate, the investment in the entity is a specified foreign financial asset that is reported on Form 8938 if you meet the reporting threshold. 

There is a $10,000 penalty for failure to file Form 8938 and failures to report tax on income generated by assets not disclosed on Form 8938 are subject to a 40% accuracy-related penalty.  In addition, when a taxpayer fails to file Form 8938, the statute of limitations for the tax year remains open until three years after Form 8938 is filed. 

If you would like to discuss your obligations to report foreign assets or are looking for assistance with any IRS reporting requirements, please contact Jim Mastracchio at (202) 861-1650 or Jennifer Benda at (303) 764-4025.

IRS Includes Hiding Offshore Income on List of Dirty Dozen Tax Scams for 2012

Posted by Jennifer Benda on February 16, 2012

See IRS Video posted here:  http://youtu.be/10D1XqVmIW0

IRS News Release is posted here: http://www.irs.gov/newsroom/article/0,,id=254383,00.html

Careful Attention to Offshore Voluntary Disclosure Cases

Posted by Allen Littman on January 19, 2012

Baker Hostetler’s lawyers have handled hundreds of voluntary disclosures through the 2009 and 2011 Offshore Voluntary Disclosure Programs (OVDI).  Recently, the IRS has announced a third OVDI, this time with no defined termination date.

The OVDI programs provide important protections for those who might face criminal prosecution for unreported income or unfiled informational returns.  The OVDI programs also provide certainty regarding the level of civil monetary penalties that will be imposed.  In the current OVDI Program, penalties are relatively high (although they are somewhat lower than a civil “fraud” penalty), and there is no leeway for appeal or negotiation in the Program.  It is a relatively rigid process in which the taxpayer is required to provide certain information at certain times.  In addition to taxes and interest, accuracy penalties are imposed at a rate of 20% of the tax liability, plus 27.5% of the fair market value of the offshore assets giving rise to the unreported income. 

It has been our experience that certain taxpayers may be able to lower their civil monetary penalties through a non-OVDI audit process.  For such taxpayers, the taxpayer can withdraw or “opt out” from the program at the appropriate time after making the required disclosure to the criminal tax authorities.  This approach may be beneficial if there are substantial legal issues or doubt may be raised as to a taxpayer’s liability for particular amounts.  What is best depends on the taxpayer’s situation and his or her specific facts.

In particular, we learned in the previous OVDI Programs that some taxpayers, including certain immigrants, should carefully consider entering into the OVDI Program and then opting out.  One potential benefit of opting out may be the possibility of obtaining certain retroactive restructuring relief, an outcome that may not be available to taxpayers in the formal OVDI Program.  While not everyone can obtain a dramatically better result or retroactively restructure their holdings, paying close attention to a taxpayer’s particular facts and circumstances has the potential to create a less negative outcome.

An article discussing the IRS position on retroactive relief for OVDI taxpayers can be found here: http://www.bakerlaw.com/files/Uploads/Documents/News/Articles/TAX/2011/TaxNotesToday_Littman_Nydegger_3-2011.pdf

A brief description of the article appears here:  http://www.bakerlaw.com/articles/littman-and-nydegger-publish-article-tax-analysts-tax-notes-today-3-9-2011/

IRS Grants Additional Time To File FBARs

Posted by James Mastracchio on June 16, 2011

Today, the IRS announced an extension until November 1, 2011 for taxpayers who did not file TD F 90-22.1 (FBARs) forms in prior years.  For those taxpayers who only had signatory authority over a foreign account and did not own the account in 2009 or prior years, additional time has been granted to gather the necessary information to file the old FBARs.

This is a helpful development for many taxpayers who are attempting to gather information from financial institutions where the there was no ownership. 

The IRS on two prior occasions extended the deadline while it considered its position.  See Notice 2011-54 for the current reporting obligations.

Colorado Enacts Tax Amnesty Program

Posted by Jennifer Benda on June 13, 2011
Colorado's recently enacted Taxpayer Amnesty program is provides a one-time opportunity for non-compliant taxpayers to file overdue returns and become compliant.  The program covers many types of tax and provides for a waiver of penalties and one-half of the interest due.  Non-compliant taxpayers can quickly and easily fix any lingering issues involving Colorado tax liabilities.

We are working with the Colorado Department of Revenue on behalf of several taxpayers to resolve our clients' outstanding tax issues. 

IRS May Pursue Gift Tax from Donors to Some Politically Active Organizations

Posted by Edward Beckwith on June 13, 2011

Organizations formed to support particular political candidates often achieve favorable tax status as political action committees (“PACs”) and those formed to focus on particular causes can be formed as charitable organizations.  Both are exempt from most income taxes and contributions to each are specifically exempt or deductible with respect to the federal gift tax.

Recently, so-called social welfare organizations or civic associations, also known as Section 501(c)(4) organizations, have been formed to support political causes.  While such 501(c)(4) organizations generally are exempt from income taxes as well, contributions made to them by donors are not specifically exempted from the gift tax.  Historically, donors have not been concerned about this discrepancy.  It now appears, however, the Internal Revenue Service now may be attempting to impose gift tax liability on such contributions.

Media reports indicated that contributions to Code Section 501(c)(4) organizations may have been made to avoid campaign finance regulations and public disclosure of contributions.  While the tax form filed by such organizations each year includes the names of contributors who gave more than $5,000 and the aggregate amount of such contributions, this information is not publicly available.  However, the IRS is free to use the information for related enforcement purposes.  In a recent front page article The New York Times reported the IRS sent letters to five unidentified donors informing them that their contributions to Section 501(c)(4) organizations may be subject to gift tax.

This development is consistent with the 2011 Work Plan of the Exempt Organizations Division of the IRS, which indicated that the Division planned to increase its focus on Section 501(c)(4) organizations.  The donor letters suggest IRS personnel who enforce the estate and gift tax will also pay attention to such groups in the context of the gift tax.  

There are ways to structure contributions to such organizations to reduce or eliminate gift tax liability.  Donors and those managing Section 501(c)(4) organizations would be well advised to seek knowledgeable counsel.  Members of the Tax-Exempt and Government Relations Teams at Baker & Hostetler will continue to monitor developments in this area and are available to confer with clients and potential clients about these important issues.

U.S. Taxpayers Living Abroad - Reduced Penalties To Come Clean

Posted by James Mastracchio on June 06, 2011

In a bid to encourage U.S. taxpayers living abroad to file U.S. tax returns and FBARs, the IRS has significantly reduced the civil penalties associated with the 2011 Offshore Voluntary Disclosure Initiative.  On June 2, 2011, the IRS announced new rules applicable to U.S taxpayers who live outside the United States.  If qualified, taxpayers can file delinquent FBARs (Report of Foreign Bank Accounts) and other US tax returns, and pay a 5% penalty on financial assets (such as bank accounts, savings accounts and investment accounts) and pay a zero penalty on non-financial assets such as business interests, real property and artwork.  Under the initial settlement guidelines a penalty of 25% would be imposed.

To qualify, the U.S. taxpayer must have resided in a foreign country, complied with the tax laws of the country of residence, and had less than $10,000 per year in U.S. sourced income. 

For U.S. taxpayers living abroad, these new rules provide a significant reduction in the level penalties that would otherwise apply. 

For taxpayers who already settled with the IRS under the 2009 or 2011 OVDI programs, the IRS will reconsider their cases to determine if the lower penalties should apply, provided the taxpayers make a submission to the IRS for reconsideration.

Charitable Contributions--Do you know where your 170(f)(8) letter is ?

Posted by Jeffry Erney on April 18, 2011

In order to be entitled to a deduction, for a charitable contribution of $250 or more, section 170(f)(8) of the Internal Revenue Code requires a taxpayer to have a Contemporaneous Written Acknowledgement ("170(f)(8) letter") from the donee organization which includes the following:

  • The amount of cash and a description of the property contributed;
  • Whether the donee organization provided goods or services in consideration of the donation; and
  • A description and good faith estimate of the value of the goods services provided by the donee organization.

The 170(f)(8) letter  was enacted as law in 1993, but to date there have only been a few cases in which the Internal Revenue Service ("Service") has pursued this position as a basis for denial of the deduction.   See Bruzewicz v. United States, 604 F.Supp.2d 1197, 1200 (N.D. Ill 2009), and Gomez v. Comissioner, T.C. Summ. Op. 2008-93: No. 13167-07S (July 30, 2008)   It is the author’s belief that many donors fail to receive a  170(f)(8) letter contemporaneous with  the donation of property.  However, the author also believes that the Service, during an audit, will generally allow non-contemporaneous documentation (e.g. a letter or affidavit) from the donee organization to establish that nothing was received from the donee organization in exchange for the contribution (a prohibited quid pro quo).   It is only when it does not like the overall transaction that the Service will pull out the 170(f)(8) letter trump card to try and kill the deduction.

Guidance:  Regardless of your level of comfort regarding the deduction, always make sure you receive a 170(f)(8) letter and that you store it in a secure place for when the Service comes knocking on your door.

For more detailed information See Baker & Hostetler Executive Alert--Charitable Contribution-Compliance Issues (PDF)