IRC 6038 Penalties in Dewees v. United States
Dewees v. United States, 16-cv-01579 (D.C. 2017) is a difficult case. The IRS appears to have been unusually tough on this taxpayer.
Dewees is a U.S. citizen living in Canada, where he operates a consulting business. Because the business is incorporated abroad, Dewees was required to furnish certain annual information about the company to the IRS. Unfortunately for Dewees, he neglected to do so for over a decade.
U.S. citizens who hold controlling interests in foreign corporations must annually file IRS Form 5471, which discloses certain ownership and financial information about the corporation. In addition, U.S. citizens living abroad must disclose holdings in foreign bank accounts over certain thresholds by filing a Report of Foreign Bank and Financial Accounts (“FBAR”).
Form 8938 & Statute of Limitations
IRC § 6038D, enacted on Mar. 18, 2010, and effective for taxable years beginning after the date of enactment, imposes reporting requirements with respect to certain “specified foreign financial assets”. The requirements are satisfied by an accurately filed Form 8938.
Form 8938, Statement of Foreign Financial Assets, is required to be filed by specified individuals who are beneficial owners of specified foreign assets in excess of the filing threshold.
IRS statute of limitations are time periods established by law to review, analyze, and resolve taxpayer and/or IRS tax-related issues. The Internal Revenue Code requires the IRS to assess, refund, credit, and collect taxes within specified limits. Once the applicable statute of limitations has expired, the IRS cannot assess additional tax, allow a claim for refund, or take collections action.
The general statute of limitations on assessment of taxes on a tax return is three years under IRC § 6501(a). There are at least two exceptions unique to offshore compliance cases:
- IRC § 6501(e)(1)(A)(ii) Where income attributed to a specified foreign financial asset is omitted and in excess of $5,000, the statute may be extended to 6 years with respect to the omitted income from the specified asset.
- IRC§ 6501(c)(8)(A) Where Form 8938 or any other international information return is required to be filed with a tax return, the statute is extended for any tax imposed under Title 26 with respect to any tax return, event, or period to which such information relates for three years after the information is provided (e.g., filing an accurate and complete form). Read more
CFCs, Tax Deferral, and Subpart F Income
While a U.S. corporation is subject to tax on its earnings and then its shareholders on their dividends, the U.S. has no taxing jurisdiction on a foreign corporation that neither receives U.S.-source income nor has income effectively connected with the conduct of a U.S. trade or business. However, any dividends earned by U.S. shareholders from foreign corporations are taxable. Without anti-deferral rules in place, U.S. individuals could make investments through foreign entities and indefinitely defer taxation in the U.S. by not issuing dividends. In addition to PFIC rules, Subpart F provisions are powerful anti-deferral mechanisms to prevent this deferral of foreign earned income. Subpart F rules, discussed below, apply to CFCs.
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.
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.
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.
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.
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.
How much does a Streamlined Case Cost?
OVDPs are a rarity compared to streamlined cases. It is quite rare for a case to have the willfulness elements that require such a drastic solution. We’ve had clients call us after speaking to other tax practitioners who recommended they file under OVDP where the recommendation made no sense. It was overkill. We’d like to believe the attorney was doing what they thought was right, and not that they were recommending unnecessary procedures to pad their fees. Unfortunately, we often hear the same stories about the same few practitioners. In one case, the client was recommended to file OVDP where the client’s non-compliance was only in one year and it was relatively minor. Read Stephen Dunn’s book on offshore accounts compliance to hear about some of his similar experiences.
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:
- Domestic Voluntary Disclosure Program (not to be confused with streamlined domestic offshore procedures which is a completely unrelated program)
- Offshore Voluntary Disclosure Program (OVDP)