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Foreign Account Reporting and Exchanges of Information

Houston Tax Attorney

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Foreign Account Reporting and Exchanges of Information

A question those who are seriously non-compliant with reporting of foreign accounts and assets sometimes ask is, “how will the IRS discover my account?” Hopefully this article will shed some light.

Foreign Account Tax Compliance Act (FATCA)

Automatic exchanges of foreign account information with the IRS are received by foreign financial institutions (FFIs) pursuant to the Foreign Account Tax Compliance Act (FATCA) which was passed into law in March 2010. FATCA requires financial institutions (FIs) to report certain information about certain financial accounts held by United States taxpayers, or by foreign entities in which United States taxpayers hold a substantial ownership interest.

Intergovernmental Agreements (IGAs)

Foreign banks that are located in jurisdictions with which the U.S. has intergovernmental agreements (IGAs) are required to provide information as required under I.R.C. § 1471(c). A list of IGAs can be found on the Treasury website. Foreign financial institutions (FFIs) that are not located in jurisdictions with IGAs must comply with FATCA or be subject to harsh withholding rules under I.R.C. § 1471. And since most foreign financial institutions do business with the U.S. or with other financial institutions that conduct business with the U.S., a large number of FFIs not located in jurisdictions with IGAs choose to comply with FATCA. A list of FFIs can be found on the IRS website.

Information Provided by Foreign Financial Accounts under FATCA

I.R.C. § 1471(c) requires a foreign financial institution to report the following with respect to each United States account maintained by such institution:

(A) The name, address, and TIN of each account holder which is a specified United States person and, in the case of any account holder which is a United States owned foreign entity, the name, address, and TIN of each substantial United States owner of such entity.
(B) The account number.
(C) The account balance or value (determined at such time and in such manner as the Secretary may provide).
(D) Except to the extent provided by the Secretary, the gross receipts and gross withdrawals or payments from the account (determined for such period and in such manner as the Secretary may provide)

Exchange of Information Pursuant to Income Tax Treaties and Tax Information Exchange Agreements

In addition to automatic exchange of information under FATCA, specific and spontaneous exchanges of information may occur pursuant to tax treaties and tax information exchange agreements (TIEAs). In matters involving criminal tax evasion, the DOJ may request cooperation through mutual legal assistance treaties (MLATs).

Specific requests may arise from collection matters, criminal investigations, or other tax administrative or court procedures. Information must be first sought domestically, such as by issuance of an Information Document Request or a summons on a 3rd party possessing relevant records.

Spontaneous exchange of information, which operates through the exchange of information provisions of tax treaties and TIEAs, involves the transmission of information that has not been specifically requested by a Competent Authority, but which in the judgment of the providing authority may be of interest to a foreign partner for tax purposes. The exchange typically involves information discovered during a tax examination, investigation, or other administrative procedure that suggests or establishes noncompliance with the tax laws of a foreign partner, or that is otherwise determined to be potentially useful to a foreign partner for tax purposes. The information may pertain to nonresident aliens, United States citizens, domestic or foreign corporations, or other taxpayers.

Simultaneous examinations involve the United States and one or more of its foreign partners conducting separate independent examinations of selected taxpayer(s) within their respective jurisdictions in which the partners have a common or related interest

Tax treaty EOI – Article 26 of the U.S. Model Income Tax Convention

This following is an excerpt from the Exchange of Information Article (Article 26) of the U.S. Model Income Tax Convention (2006).

EXCHANGE OF INFORMATION AND ADMINISTRATIVE ASSISTANCE

  1. The competent authorities of the Contracting States shall exchange such information as may be relevant for carrying out the provisions of this Convention or of the domestic laws of the Contracting States concerning taxes of every kind imposed by a Contracting State to the extent that the taxation thereunder is not contrary to the Convention, including information relating to the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, such taxes. The exchange of information is not restricted by paragraph 1 of Article 1 (General Scope) or Article 2 (Taxes Covered).
  2. Any information received under this Article by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) involved in the assessment, collection, or administration of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, the taxes referred to above, or the oversight of such functions. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions.

Deferred Prosecution Agreements

In addition to the above sources of information, certain FFIs, namely Swiss, are required to provide information pursuant to deferred prosecution agreements with the USDOJ. For example. The Swiss Bank Program, which was announced on August 29, 2013, provides a path for Swiss banks to resolve potential criminal liabilities in the United States.  Swiss banks eligible to enter the program were required to advise the department by Dec. 31, 2013, that they had reason to believe that they had committed tax-related criminal offenses in connection with undeclared U.S.-related accounts. Banks already under criminal investigation related to their Swiss-banking activities and all individuals were expressly excluded from the program.

Under the program, banks were required to:

  • Make a complete disclosure of their cross-border activities;
  • Provide detailed information on an account-by-account basis for accounts in which U.S. taxpayers have a direct or indirect interest;
  • Cooperate in treaty requests for account information;
  • Provide detailed information as to other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed;
  • Agree to close accounts of accountholders who fail to come into compliance with U.S. reporting obligations; and
  • Pay appropriate penalties.

Once the IRS is in possession of the information relating to undisclosed accounts, whether by an automatic exchange, specific request, or through a deferred prosecution agreement, any non-compliance by a U.S. account holder will subject that person to civil and criminal penalties, and in rare situations a risk of prosecution. While anyone with undisclosed foreign accounts should seek counsel, any accountant holders with unreported accounts at the below institutions should immediately contact counsel, especially in light of recently announced LB&I compliance campaigns.

Vadian Bank AG
Finter Bank Zurich
Société Générale Private Banking (Lugano-Svizzera)
MediBank AG
LBBW (Schweiz) AG
Scobag Privatbank AG
Rothschild Bank AG
Banca Credinvest SA
Société Générale Private Banking (Suisse) SA
Berner Kantonalbank AG
Bank Linth LLB AG
Bank Sparhafen Zurich AG
Ersparniskasse Schaffhausen AG
Privatbank Von Graffenried AG
Banque Pasche SA
ARVEST Privatbank AG
Mercantil Bank (Schweiz) AG
Banque Cantonale Neuchâteloise
Nidwaldner Kantonalbank
SB Saanen Bank AG
Privatbank Bellerive AG
PKB Privatbank AG
Falcon Private Bank AG
Credito Privato Commerciale in liquidazione SA
Bank EKI Genossenschaft
Privatbank Reichmuth & Co.
Banque Cantonale du Jura SA
Banca Intermobiliare di Investimenti e Gestioni (Suisse) SA
Bank Zweiplus Ag
Banca dello Stato del Cantone Ticino
Hypothekarbank Lenzburg AG
Schroder & Co. Bank AG
Valiant Bank AG
Bank La Roche & Co AG
St. Galler Kantonalbank AG
E. Gutzwiller & Cie, Banquiers
Migros Bank AG
Graubündner Kantonalbank
BHF-Bank (Schweiz) AG
Schaffhauser Kantonalbank
BBVA Suiza S.A.
Piguet Galland & Cie SA
Luzerner Kantonalbank AG
Habib Bank AG Zurich (HBZ)
Banque Heritage S.A.
Hyposwiss Private Bank Genève S.A.
Banque Bonhôte & Cie SA
Banque Internationale à Luxembourg (Suisse) SA
Zuger Kantonalbank
Standard Chartered Bank (Switzerland) SA
Maerki Baumann & Co. AG
BNP Paribas (Suisse) SA
KBL (Switzerland) Ltd.
Bank CIC
Privatbank IHAG Zürich AG
Deutsche Bank (Suisse) SA
EFG Bank European Financial Group SA, Geneva, and EFG Bank AG
Aargauische Kantonalbank
Cornèr Banca SA
Bank Coop AG
Crédit Agricole (Suisse) SA
Dreyfus Sons & Co Ltd, Banquiers
Baumann & Cie, Banquiers
Bordier & Cie Switzerland
PBZ Verwaltungs AG
PostFinance AG
Edmond de Rothschild (Suisse) SA and Edmond de Rothschild (Lugano) SA
Bank J. Safra Sarasin AG
Coutts & Co Ltd
Gonet & Cie
Banque Cantonal du Valais
Banque Cantonale Vaudoise
Bank Lombard Odier & Co Ltd
DZ Privatbank (Schweiz) AG
Union Bancaire Privée, UBP SA
Leodan Privatbank AG
HSZH Verwaltungs AG


References:

I.R.C. § 1471, https://www.law.cornell.edu/uscode/text/26/1471

Internal Revenue Manual, 4.60.1

FIRPTA Withholding on Dispositions of U.S. Real Property Interests

Houston Tax Attorney

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FIRPTA witholding rules may apply to a disposition of a U.S. real property interest by a foreign person.  Such transactions are subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding. FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests.

Here’s what buyer and sellers need to know in situations where the buyer might be considered a foreign person.

What is a Foreign Person for FIRPTA Withholding Purposes?

A foreign person is someone who is not a resident for U.S. tax purposes. More specifically, a foreign person does not meet either one of the following tests:

  • Lawful permanent resident test: An individual who holds a green card is considered a resident for tax purposes for the period of time that he was a lawful permanent resident.
  • Substantial presence test: An individual that spends at least 31 days during the current calendar year; and the sum of the total number of US presence days in the current year, plus 1/3 of the total US presence days in the preceding year, plus 1/6 of the US days during the second preceding year equals or exceeds 183 days.

What is the Buyer’s Responsibility if Purchasing a Property from a Foreign Seller?

Persons purchasing U.S. real property interests from foreign persons, certain purchasers’ agents, and settlement officers are required to withhold 15% (10% for dispositions before February 17, 2016) of the amount realized on the disposition.

If you are the transferee/buyer you must find out if the transferor/seller is a foreign person. If the transferor (seller) is a foreign person and you fail to withhold, you may be held liable for the tax.

If the transferor is a foreign person, then the buyer must use Forms 8288 and 8288-A to report and pay to the IRS any tax withheld on the acquisition of U.S. real property interests.

FIRPTA Withholding Rates

The transferee (buyer) must deduct and withhold a tax on the total purchase price by the foreign person on the disposition. The rate of withholding generally is 15% (10% for dispositions before February 17, 2016).

If the property transferred was owned jointly by U.S. and foreign persons, the amount realized is allocated between the transferors based on the capital contribution of each transferor.

Exceptions from FIRPTA Withholding

The following are exceptions to the FIRPTA withholding rule:

  • The transferee (buyer) may be exempt from withholding if transferee acquires the property for use as a residence and the amount realized (sales price) is not more than $300,000.
  • The transferor (seller) gives you a certification stating, under penalties of perjury, that the transferor is not a foreign person and containing the transferor’s name, U.S. taxpayer identification number, and home address (or office address, in the case of an entity).
  • You receive a withholding certificate from the Internal Revenue Service that excuses withholding.
  • The transferor (seller) gives you written notice that no recognition of any gain or loss on the transfer is required because of a nonrecognition provision in the Internal Revenue Code or a provision in a U.S. tax treaty. You must file a copy of the notice by the 20th day after the date of transfer with the Ogden Service Center, P.O. Box 409101, Ogden, UT 84409.
  • The amount the transferor (Seller) realizes on the transfer of a U.S. real property interest is zero. This is not common obviously, unless the property is gifted.
  • The grantor realizes an amount on the grant or lapse of an option to acquire a U.S. real property interest. However, you must withhold on the sale, exchange, or exercise of that option.

Reducing the Rate of Withholding

The default withholding rate of 15% on the entire amount of the sales price of the property is quite harsh. Capital gains on the sale of real estate are determined by netting of the sales price and the adjusted basis (property cost plus improvements plus costs of sale and other expenses). In some cases there may be capital losses. So a 15% withholding rate would be excessive in many cases. A seller can later file a U.S. tax return as a non-resident and obtain a refund for the extra withholding, or the seller may apply for a reduced rate of withholding.

Withholding Certificates

A reduced rate of withholding may be allowed upon the submission and acceptance of Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests. Form 8288-B can be used to apply for a withholding certificate to reduce or eliminate withholding on dispositions of U.S. real property interests by foreign persons, but only if the application is based on:

  1. A claim that the transferor is entitled to nonrecognition treatment or is exempt from tax,
  2. A claim solely on a calculation that shows the transferor’s maximum tax liability is less than the tax otherwise required to be withheld, or
  3. A claim that the special installment sales rules described in section 7 of Rev. Proc. 2000-35 allowed reduced withholding.

Blanket Withholding Certificates

A blanket withholding certificate may be issued if the transferor holding the U.S. real property interests provides an irrevocable letter of credit or a guarantee and enters into a tax payment and security agreement with the IRS. A blanket withholding certificate excuses withholding concerning multiple dispositions of those property interests by the transferor or the transferor’s legal representative during a period of no more than 12 months.

How to Get Help

We’ve consulted both buyers and sellers in FIRPTA matters. Contact us at (281) 746-6066 or (800) 580-0622 if we can be of assistance in your transaction.

United States v. Paul Manafort and Robert Gates: An Offshore Tax Evasion Case

Houston Tax Attorney

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United States v. Paul Manafort and Robert Gates: An Offshore Tax Evasion Case

On October 27, 2017, the Government filed criminal charges against former Trump aides, Paul J. Manafort and Richard W. Gates, III. While these are only allegations and all defendants should be considered innocent until otherwise proven, the case provides some important lessons in offshore compliance cases. I expect that many with undisclosed offshore assets will be unnerved by this case, but hopefully by understanding the particular facts in this case, such individuals won’t jump to conclusions about the best way to proceed in their situation.

There are a number of federal charges in the case, so I will try to discuss only the facts as they relate to offshore tax non-compliance.

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IRS Audits of Streamlined Applications

Houston Tax Attorney

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IRS Audits of Streamlined Applications

A question that’s asked by every client in a streamlined compliance filing is: “will I get audited?” This article will hopefully shed some light.

Here’s what the IRS says:

Returns submitted under either the Streamlined Foreign Offshore Procedures or the Streamlined Domestic Offshore Procedures will not be subject to IRS audit automatically, but they may be selected for audit under the existing audit selection processes applicable to any U. S. tax return and may also be subject to verification procedures in that the accuracy and completeness of submissions may be checked against information received from banks, financial advisors, and other sources.

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Foreign Life Insurance Taxation

Houston Tax Attorney

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Foreign Life Insurance Taxation

Life insurance can be good way to ensure that loved ones are taken care of in the event of an unfortunate situation. However, owning a foreign life insurance policy with cash value can prove to be more of a headache than it’s worth. We’ve come across such types of investments regularly in our offshore compliance cases; the reporting and tax obligations can be burdensome. Hopefully, this article will help foreign insurance policy owners understand their U.S. tax obligations.

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Willfulness vs. Non-willfulness

Houston Tax Attorney

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Willfulness vs. Non-willfulness: Offshore Compliance Cases Involving Immigrants

Nearly on a daily basis I get a call or email from a potential client with this almost exact same scenario:

Client from Country A moves to the U.S. and leaves behind some accounts and assets in Country A. Client finds out about FBAR filing requirements and learns that foreign income must be reported on the U.S. return. 

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IRS Tax Amnesty & Voluntary Disclosure Practice

Houston Tax Attorney

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IRS Tax Amnesty & Voluntary Disclosure Practice

What do you do if you have committed a serious tax crime but the IRS has not yet discovered it? Tax amnesty has been a longstanding practice of the IRS Criminal Investigation division whereby taxpayers are allowed to make timely, accurate, and complete voluntary disclosures to avoid criminal prosecution.

Taxpayers are given tax amnesty for “coming clean” regarding their tax crimes. There are two such programs depending on whether the tax evasion involves domestic or foreign income:

  1. Domestic Voluntary Disclosure Program (not to be confused with streamlined domestic offshore procedures which is a completely unrelated program)
  2. Offshore Voluntary Disclosure Program (OVDP)

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Gifts from Foreign Persons

Houston Tax Attorney

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IRS Form 3520 – What are the Reporting Requirements and Tax Consequences of Receiving a Gift from a Foreign Person?

It is a common scenario where a U.S. person receives a gift from a parent or relative who lives abroad. Such transactions usually trigger a Form 3520 filing requirement. There are two steps to determining the tax and reporting consequences of such transactions.

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IRS Form 8938 Filing Requirements

Houston Tax Attorney

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IRS Form 8938 (FATCA) Filing Requirements

The “FATCA” (Foreign Account Tax Compliance Act) provisions require specified individuals to report ownership of specified foreign financial assets if the total value exceeds the applicable reporting threshold. The IRS created Form 8938, Statement of Specified Foreign Financial Assets, for this purpose. Form 8938 must be included with the individual’s tax return. Failure to include the Form 8938, if required, could lead to significant penalties. Note that the Form 8938 is also referred to as “FATCA” which can cause confusion since that term also refers to the regulations themselves. Read more

How the IRS Investigates FBAR Violations

Houston Tax Attorney

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How the IRS Investigates FBAR Violations

In this article are the IRS’ internal procedures for investigations of FBAR violations. After the foreign bank reports the non-compliant taxpayer’s account information to the foreign taxing authority, the information is then provided to the IRS. For those countries without intergovernmental agreements (IGAs), the account holder’s information will be sent directly to the IRS. Or the IRS has discovered the non-compliance based on stated or implied sources of foreign income on filed tax returns or information forms. Regardless of how the IRS obtains the information, what follows next is an investigation by an IRS examiner of the potential FBAR violation(s). Read more