Foreign Account Tax Compliance Act - Traps for the Unwary

For anyone who has clients or family members that live and work abroad, the new Foreign Account Tax Compliance Act (FATCA) is a real doozy. Although this Act is supposed to punish Americans who hide assets abroad to avoid their tax liabilities, the Act doesn't differentiate between those deliberately hide assets and those who don't realize that they are required to report their assets to the IRS.

Under the FATCA, there’s an up-to-$50,000 penalty for failing to file with your return the new 6038D statement disclosing specified foreign financial assets with an aggregate value >$50k ($10,000 for not filing, plus up to an additional $40,000 if you don’t file within 90 days after the Secretary notifies you that you’ve failed to disclose). Then, if you don’t include the income from such foreign assets, you get hit with a new 40-percent penalty on an understatement attributable to an undisclosed foreign financial asset. And to top it all off, the IRS gets 6 years to assess you for the underreporting and penalty.

But wait, there’s more. There’s a new open-ended unlimited extension of the assessment statute for failing to provide timely information returns required with respect to PFICs and the new 6038D self-reporting of foreign financial assets. Until you file the 6038D disclosure form there’s no SOL on assessment (making it akin to the current situation for fraud). That’s true even if the IRS knows you’ve got the asset(s) because they notified you about failing to file the 6038D and then socked you with $40,000 in penalties for not filing the attachment. And the killer is that the unlimited extension is “not limited to adjustments to income related to the information required to be reported.” I read that to mean the entire return has no SOL on assessment until you file a 6038D for "every" foreign financial asset once the aggregate of your foreign financial assets is >$50k.

For U.S. citizens living abroad the FATCA would require reporting the purchase of a residence with a fair market value of >$50k, even though such an asset is not currently taxable and any gain on the sale of the asset may not be taxable. I assume the same would be true of tax-exempt assets.

Did the IRS Really Win Case Against UBS?

The IRS settled its summons case against UBS this week and will get account information for fewer than 5,000 Americans with accounts at the Swiss bank. Since the IRS was originally asking for information on 52,000 accounts, is this really the victory the IRS claims it is?

Although the settlement agreement apparently lets the IRS pick which accounts are disclosed (so the IRS won't get information it already has perhaps?) it seems a stretch to think that 45,000 or more secret account holders have come forward under the IRS's "amnesty" program or that the IRS has been able to get that much information from the individuals who have already pleaded guilty ot tax evasion. While the banker has given up a number of names, it is doubtful that he had access to over 45,000 accounts - so what about the other 47,000 tax evaders?

Also, the settlement allows UBS to notify account holders and lets them appeal their account's disclosure to the Swiss government. Are the Swiss using this as a way out?

Meanwhile the attack on offshore accounts continues with more indictments this week.

IRS Settles UBS Summons Case

It looks like the Swiss backed down and have agreed to let UBS reveal the names of U.S. tax cheats with accounts in the Swiss bank. While the IRS was originally after information about 52,000 accounts, they likely settled for a lot less. Most media outlets are reporting that information about 5,000 to 10,000 accounts will be disclosed.

Also unknown is whether those disclosures will include information about individuals who have already taken advantage of the IRS's amnesty program, or if the IRS will get new names.

In the meantime, this week another individual pled guilty to keeping an offshore account at UBS.

Will prosecutions pick up once the amnesty program ends?

Congressional Ethics and DOMA

Many of the Congressmen and Senators who voted to pass the Defense of Marriage Act (DOMA) are licensed attorneys. Those individuals were required to take an oath to uphold the Constitution of the United States and the State where they were licensed.

In addition, the ethics rules in many states require attorneys to avoid doing anything that would undercut the rule of law.

DOMA explicitly amends the "full faith and credit" clause of the constitution. Unfortunately, the U.S. Constitution may not be amended by Congressional fiat. Shouldn't the lawyers in Congress know that?

Since DOMA is clearly unconstitutional, should those attorneys who voted for it be subject to an ethics investigation and possible sanctions under attorney discipline rules?

Another One Bites the Dust -

Another UBS client has pled guilty to filing a false tax return, putting more pressure on the hold outs. The IRS's amnesty program ends in September and it looks like UBS is going to turn over a lot, if not all, of the information the IRS has summoned.

Why? Because there is now evidence that UBS committed fraud, not only in the U.S. but also in Switzerland. The latest plea agreement indicates that the defendant went to Switzerland having decided to "come clean" While there he consulted an attorney who told him not to worry about it, his name wouldn't be disclosed. After making this assurance, the defendant's Swiss attorney bribed a UBS official to keep the defendant's name off the list of UBS customer's already disclosed to the IRS. The defendant allegedly paid $40,000 to keep his name a secret.

This incident would seem to undercut UBS and Switzerland's argument that no Swiss laws have been broken and, therefore, UBS doesn't have to respond to the IRS's summons.

UBS Yacht Broker Client Pleads Guilty -

One of UBS's american clients, a Florida yacht broker, pleaded guilty to filing a false tax return today. According to government sources, the false tax return was filed on October 18, 2008, and failed to report his interest in a UBS account in Switzerland. He also failed to report the income he earned on his UBS bank accounts. The account was owned through a panamanian corporation. 

 

That means it took the government less than six-months to investigate and prosecute the case -

It also appears that this case may be related to the criminal complaint filed a couple of weeks ago against the Florida accounant (see prior posts) many of whose clients were in the yacht brokerage business. 

Federal Prosecution of UBS Client - Update

The Florida accountant who last week was charged with filing a false federal income tax return because he failed to disclosed his multimillion dollar account at UBS has been released from jail on a $12 million bond.