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Buchanan Law Group July 29, 2009


Hello all, The e-mail subject line for this Law Note may seem a bit dramatic, but not as dramatic as the criminal and civil penalties with which taxpayers may be hit if they do not report holdings in certain offshore accounts. I am sending this law note to remind you of a fast-approaching deadline (September 23rd) by which taxpayers must act, to avoid certain penalties or prosecution for past noncompliance in this area.
United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in (or authority over) a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign accounts exceeded $10,000 at any time during the year. Such interests are generally reported by June 30 of each year on a Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts, commonly known as an "FBAR"). In memoranda issued May 23, 2009 by the IRS, the IRS is offering an opportunity for taxpayers in noncompliance to come back into the fold, in a way that can avoid criminal prosecution and civil penalties. The catch to receiving amnesty? Taxpayers must make the IRS aware of their noncompliance prior to the IRS contacting them, in accordance with the procedures set forth in the IRS's Internal Revenue Manual (at I.R.M. 9.5.11.9). If you are out of compliance and missed the June 30 deadline, don't worry - the May 23, 2009 memoranda extend the deadline to September 23, 2009. If taxpayers take advantage of the voluntary disclosure program, they may limit their exposure to the following: · Payment of the past due taxes, plus interest. · Payment of an accuracy-related penalty or delinquency penalty on all years, equal to 20% of the aggregate total of all taxes and interest. · In lieu of other penalties that may apply, including FBAR and information return penalties, payment of a penalty equal to 20% of the amount in the foreign bank accounts/entities in the year with the highest balance/value. If taxpayers DO NOT take advantage of the amnesty/voluntary disclosure program and the IRS discovers the noncompliance, what can happen? A taxpayer in this situation can be subject to the following criminal and civil prosecution and/or penalties: Criminal · Prosecution for tax evasion (26 U.S.C. §7201). If convicted, a person is subject to a prison term of up to five years and a fine of up to $250,000. · Prosecution for filing a false return (26 U.S.C. §7206(1). If convicted, a person is subject to a prison term of up to three years and a fine of up to $250,000. · Prosecution for failure to file an income tax return (26 U.S.C. § 7203). A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. · The failure to file an FBAR (see discussion below) and the filing of a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322, carrying a prison term of up to ten years and criminal penalties of up to $500,000. Civil In addition to the potential for criminal prosecution, the following civil penalties also potentially apply (this list is not exhaustive): · A penalty for failing to file the FBAR. Generally, the civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50% of the total balance of the foreign account. See 31 U.S.C. §5321(a)(5). Nonwillful violations are subject to a civil penalty of not more than $10,000. · A penalty for failing to file Form 3520 (transactions with foreign trusts or receipt of foreign gifts) - up to 25% to 35% of gross reportable amount. · A penalty for failing to file Form 3520-A (U.S. owned foreign trust) - 5% of trust assets. · A penalty for failing to file Form 5471 (U.S. person involved with a foreign corporation) - $10,000 for failing to file each one of several applicable information returns, for each month the failure continues (up to a maximum of $50,000 per return). · A penalty for failing to file Form 5472 (certain U.S. owned foreign corporations) - $10,000 for failing to file each of several applicable information returns, with an additional $10,000 added for each month the failure continues (up to a maximum of $50,000 per return). · A penalty for failing to file Form 926 (U.S. transfer of property to a foreign corporation) - 10% of the value of the property transferred (up to a possible maximum of $100,000 per return). · A penalty for failing to file Form 8865 (U.S. interest in certain foreign partnerships) - $10,000 for failure to file each of several applicable returns relating to certain activities, with an additional $10,000 added for each month the failure continues (up to a maximum of $50,000 per return), and 10% of the value of any transferred property (subject to a $100,000 limit). · Fraud penalties of up to 75% of the unpaid tax. · A penalty for failing to file a tax return - up to 25% of the balance due. · An accuracy-related penalty - up to 20% to 40% of the underpayment. Excluding criminal prosecution, the difference between using the voluntary disclosure program and remaining silent can be significant for taxpayers who are caught. In an IRS example of a taxpayer with an unreported $1,000,000 balance offshore in year 1, with unreported interest in each of six years of $50,000 per year. The taxpayer who comes forward would pay $386,000 plus interest. The taxpayer who is discovered without coming forward could face up to $2,306,000 in tax, accuracy-related penalty, and FBAR penalty. The taxpayer would also be liable for interest and possibly additional penalties, and an examination could lead to criminal prosecution. What to Do? If you or a client has unreported income in an offshore account, it would be wise to consider participating in the program. You can do so by sending a letter to the nearest Special Agent in Charge, IRS Criminal Investigation, stating that you wish to make a voluntary disclosure. For more information, you may call IRS Criminal Investigation in San Francisco at (415) 522-6001 or in Oakland at (510) 637-1031.
Thank you for taking the time to read this Law Note. We hope you find the information helpful. More information can be found on the IRS 's website, at http://www.irs.gov/newsroom/article/0,,id=206012,00.html. If you have any questions, please do not hesitate to contact us. Sincerely,
Robert Buchanan Buchanan Law Group
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