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IRS expands use of Subpeonas

The U.S. Internal Revenue Service is planning to broaden the use of subpoenas of documents in cases where the name of a taxpayer under investigation is not known.

The so-called John Doe summonses were a breakthrough for the IRS in tackling offshore tax evasion when they were first addressed to banks to divulge the identity of U.S. customers suspected of maintaining undeclared offshore bank accounts. The use of the legal tool served on UBS in 2008 launched an ongoing U.S. offshore tax evasion crackdown.

The IRS is now going to target service providers that help facilitate offshore tax evasion both in the U.S. and abroad, said Brian Stiernagle, program manager of the IRS Offshore Compliance Initiative, speaking at the Offshore conference in Miami last week.

“In the next 12 to 24 months, you will see additional John Doe summonses related to parts of the world other than Switzerland, and we are going to go beyond the banks. Intermediaries, service providers and facilitators will be potential targets of John Doe summonses,” Mr. Stiernagle said.

The Offshore Compliance Initiative started 10 years ago as an investigation into offshore credit card abuses with a team of one investigator and two legal counsels. Following the UBS case, the IRS issued seven additional John Doe summonses related to private banking, which turned the initiative into a full-fledged nationwide IRS program with 16 specialists who conduct investigations.

“From those summonses we have obtained a significant amount of information, and when you couple that with what we have received from the offshore compliance initiative and the streamlined filing program, we have actually been able to secure quite a lot of intelligence related to what’s going on currently in the offshore transaction world,” Mr. Stiernagle said.

Most of the summonses related to U.S. banks that served as a gateway into the U.S. banking system for offshore banks by maintaining correspondent bank accounts for them. By granting the summonses for correspondent banking accounts, federal courts effectively extended the reach of U.S. authorities to offshore banks.

In 2013, the IRS issued John Doe summonses against Bank of New York (Mellon), Citibank, JPMorgan Chase, HSBC and Bank of America to produce information about U.S. taxpayers with undisclosed accounts at Bermuda’s Bank of Butterfield and its affiliates in the Bahamas, Barbados, the Cayman Islands, Guernsey, Hong Kong, Malta, Switzerland and the United Kingdom.

In the same year, similar orders were issued against Bank of New York (Mellon) and Citibank for the correspondent accounts of Swiss bank Zurcher Kantonalbank, against UBS for the correspondent accounts of Wegelin Bank and against Wells Fargo for the correspondent accounts of CIBC FirstCaribbean.

For a John Doe summons to be granted by a court, the IRS has to provide evidence that tax evasion by a class or group of unknown individuals may have occurred at a bank. In recent years, the information that forms a “reasonable basis” for suspecting tax evasion has come from two main sources: various offshore voluntary disclosure programs and whistleblowers.

The summonses against Butterfield and CIBC FirstCaribbean were prompted by a number of the banks’ clients who came clean and disclosed their previously undeclared offshore accounts.

With new data expected from the FATCA initiative, which forces financial institutions worldwide to report U.S. taxpayer accounts and assets to the SEC, U.S. tax authorities will get an even clearer picture of the offshore world.

Another Taxpayer Found Guilty of Failure to File FBARs and Report Foreign Income

Raju Mukhi of St. Louis MO was indicted last year for his alleged failure to file a report to the IRS on his foreign financial accounts and for filing false tax returns.

United States citizens are required to report income from foreign countries, such as bank account, securities and any other financial accounts on their tax returns.  If the value is more than $10,000, they are required to file a Report of Foreign Bank and Financial Accounts, Form TD F90-22.1 (FBAR).

According to the indictment, Mukhi failed to disclose the existence of Clariden Bank and Goldman, Sachs & Company Bank-Singapore accounts and the income earned in these accounts to his tax preparers for the years 2006 and 2008.  The indictment also states that Mukhi failed to file an FBAR disclosing that he had financial accounts in Singapore and Switzerland for years 2007-2010. Mukhi was indicted by a federal grand jury on two felony counts of filing false tax returns and four felony counts of failure to file reports of foreign bank and financial accounts.

According to the indictment, Mukhi opened an account at Swiss bank Clariden Leu. The account was originally opened in the name Sukhmani Partners II. Later he changed the name on the account to Safekeep. The government said notwithstanding the names on the accounts, Mukhi was the beneficial owner. They also say that he simultaneously opened another offshore account in nominee name at Goldman Sachs Bank – Singapore.

When completing his returns, he checked the “No” box to the question “Do you have interest or signature authority over an account in a foreign country?” Making a false statement on a tax return can be a felony as is the willful failure to file an FBAR form. Mukhi is lucky that he wasn’t also charged with tax evasion as the government often considers nominee accounts – accounts opened in another name – to be an affirmative act of tax evasion.

Each count of filing false tax returns carries a maximum penalty of three years in prison and/or fines up to $100,000. Each of the other counts carry a maximum penalty of five years in prison and/or fines up to $250,000.  In determining the actual sentences, a Judge is required to consider the U.S. Sentencing Guidelines, which provide recommended sentencing ranges.

Earlier this year, Mukhi eventually pled guilty to one count of failing to file an FBAR and one count of filing a false tax return. According to court documents, Mukhi did not disclose to his tax preparers accounts with Clariden Bank and Goldman, Sachs & Company Bank-Singapore, nor income earned in these accounts, in 2006 and 2008. Mukhi also failed to disclose accounts in Singapore and Switzerland from 2007 to 2010, according to the U.S. Attorney’s Office.

He was sentenced to three years of supervised release. Essentially, this means that he is technically in custody but he can avoid incarceration in a prison. Mukhi was likely cooperating and working with the federal government with information on both the banks that housed his accounts. The case records were sealed, which is another indication that there may be some cooperation occurring.

In announcing the convictions, the IRS issued a statement saying, ”Hiding income and assets offshore is not tax planning, it’s tax fraud. We are continuing our work to crack down on offshore tax evasion.”

A timely filed OVDP submission (or maybe SDOP filing) may have saved Mr. Mukhi.

Stay tuned, we regretfully expect more similar indictments and plea deals from other non-compliant taxpayers.

Helpful Non-willful FBAR penalty case decided by court

For the first time, in the case of James Moore, Plaintiff v. United States of America, Defendant (James Moore v. U.S. Case 2:13-cv-02063-RAJ filed 4/1/15), we finally get a look at some non-willful FBAR penalty litigation.

The US district court has essentially dismissed a taxpayer’s challenges to his penalty for failing to file FBARs (Report of Foreign Bank and Financial Account) with respect to his foreign account, finding that he failed to make the required filings, he had no reasonable cause for that violation, and his constitutional objections were without merit. However, the court reserved ruling on the taxpayer’s Administrative Procedures Act (APA) claims and ordered the parties to supplement the record. In arriving at its conclusions, the court had to tackle a number of FBAR-related issues, such as the appropriate standard of judicial review, for which there is little to no case law.


For nearly 20 years, Mr. Moore maintained a foreign account subject to FBAR requirements. The account was opened in the Bahamas, was ultimately migrated to Switzerland, and at all relevant times contained a balance between $300,000 and $550,000.

Mr. Moore filed no FBARs until at least 2009. Around that time, he became aware of IRS’s voluntary offshore disclosure program (OVDP) to encourage people who had not been reporting foreign accounts to come forward. He ultimately amended six years of tax returns (from 2003 through 2008) to report income for each of those years from his foreign account. In addition, Mr. Moore in 2010 filed late FBARs for 2003 through 2008, as well as his first timely-filed FBAR for 2009.

In October of 2011, an IRS agent interviewed Mr. Moore and then prepared an FBAR Penalty Summary Memo (memo) recommending that IRS impose a $10,000 penalty for each year from 2005 to 2008. The memo, which provided the agent’s reasoning in detail for recommending the penalty, wasn’t disclosed to Mr. Moore until he filed this lawsuit.

Mr. Moore probably opted-out of the OVDP program and was hence subject to a standard examination. In December of 2011, IRS sent Mr. Moore a letter proposing a $40,000 penalty that provided virtually no information about the basis for the penalty, demanded that he accept the penalty or request a conference with Appeals by Jan. 28, 2012, and explained that if nothing was done by that date, the penalty would be assessed and collection procedures would be instigated. However, on Jan. 23, 2012, IRS assessed a $10,000 penalty against Mr. Moore for 2005 only. Mr. Moore requested an appeal, and his counsel provided detailed arguments in a letter as to why Mr. Moore acted with reasonable cause In December of 2012, IRS responded in a brief letter upholding the penalties and assessed the $10,000 penalties for each of the remaining three years on Jan. 24, 2013.

Mr. Moore filed suit late in 2013. He argued that IRS violated the Fifth Amendment’s Due Process Clause, the Eighth Amendment’s Excessive Fines Clause, and the Administrative Procedures Act (APA) (other arguments were deemed abandoned). He sought a refund of $10,500 he paid toward the 2005 penalty and asked the court to set aside the remaining penalties. IRS sought summary judgment on his claims, as well as on its counterclaims to reduce to judgment the penalties for 2006 to 2008.



In setting out the undisputed facts of the case, it was established that, as a matter of law, Mr. Moore committed non-willful violations of the BSA and was thus subject to civil penalties. The remaining issue was whether Mr. Moore could escape liability based on having acted with reasonable cause. The court noted as an initial matter that there was no binding case law providing standards for judicial review of FBAR civil penalty assessments, then determined that it would apply de novo review in reviewing Mr. Moore’s liability for the FBAR penalty.

  • “Reasonable cause” defined for BSA purposes. The court found that, although the term “reasonable cause” wasn’t defined in the BSA or applicable regs, it made the most sense to attribute to it the meaning of the phrase in other statutes involving IRS’s tax assessment role (e.g., Code Sec. 6664(c)(1) and Code Sec. 6677(d)) and found that a person would have “reasonable cause” for an FBAR violation when he committed that violation despite an exercise of ordinary business care and prudence.
  • Reasonable cause lacking in this case. The court then examined Mr. Moore’s explanation in support of reasonable cause and found that he had no objective basis for his purported belief that he didn’t have to report his account. The court determined that he knew of the requirement to report the account vis-a-vis Schedule B, Foreign Accounts and Trusts, which he didn’t self-prepare during the years at issue but had done so in the past. Also, in two tax questionnaires used by his return preparer that were part of the record, he indicated to his preparer that he had no interest in a foreign account, and there was no evidence that he otherwise disclosed the account to the preparer.

Challenge to assessment & amount. The court then determined that, in evaluating IRS’s assessment of the FBAR penalties, including the amount thereof, the appropriate standard of review was whether IRS’s actions were “arbitrary, capricious, an abuse of discretion, or otherwise not accordance with the law” under the APA. The court observed that, unlike tax deficiencies, there are “no codified procedures” for IRS to use in assessing FBAR penalties. Thus, IRS can essentially fashion its own procedures for doing so, subject to constitutional limitations and the APA.

  • Assessment fails to meet APA. The APA provision at issue in this case is §555. That section provides minimal procedural guarantees for “information adjudication,” including that the agency give “[p]rompt notice” when denying any request made in connection with any agency proceeding, and that the notice include a “brief statement of the grounds for denial.”

The court then examined the letter sent to Mr. Moore and found that it could not, on the record before it, determine whether IRS acted arbitrarily, capriciously, or abused its discretion in assessing the penalties. Specifically, the letter didn’t actually indicate whether IRS considered relevant factors or whether it made a clear error of judgment. And the fact that the summary memo provided some explanation as to why the agent recommended imposing the maximum amount didn’t make a difference in this case because that memo wasn’t an explanation of the ultimate decision to impose a penalty.

The court noted, however, that the foregoing failure wasn’t adequate grounds to overturn IRS’s decision. Instead, the court decided that it would allow IRS to introduce additional material in support of its determination to show that its decision wasn’t arbitrary. Specific instructions were provided to this effect. The court also stated that IRS “may also choose” to provide a better explanation for why it assessed the 2005 penalty in advance of the time indicated to Mr. Moore and that, absent an adequate explanation, the court would rule that assessing the 2005 penalty in January 2012 was arbitrary and capricious.

The court determined that IRS’s penalty assessment procedures “served all of the purposes of due process.” Namely, with respect to the 2006, 2007, and 2008 penalties, Mr. Moore was interviewed, received a notice proposing to assess the penalties, afforded an appeal process, and was issued notice of assessment. For 2005, although there was no meaningful pre-assessment review, IRS nonetheless allowed him to contest it, and Mr. Moore had the opportunity to seek judicial review of all of IRS’s decisions.  Finally, the court found that IRS’s imposition of the maximum penalty of $40,000 didn’t violate the excessive fines clause.

It is possible the IRS may settle the case with the taxpayer. This case is a good case in that it provides helpful direction to the IRS and taxpayers to consider the Administrative Procedure Act and the process in a determination of the amount of the FBAR penalty. We expect more cases to resolved on this contentious issue.





A solution in a tough tax season: the IRS Streamlined Offshore Procedures

In the midst of tough tax season, many U.S taxpayers are unfortunately surprised to discover that they have a U.S. tax reporting obligation on financial accounts or assets held overseas. Once they discover their tax and reporting obligation, there are a number of programs through which they can become compliant.

One option, if the taxpayers meet the requirements, is to file under the Streamlined Domestic Offshore Procedures (SDOP) or the Streamlined Foreign Offshore Procedures (SFOP). Our firm has recently received many inquiries regarding these new IRS Streamlined Offshore Procedures. These programs require U.S. taxpayers to certify that their prior non-compliant conduct was non-willful.


To be eligible for the streamlined offshore procedures for U.S. residents, taxpayers (1) must fail to meet the nonresidency requirement described below (if the taxpayer filed a joint return, one or both of the spouses must fail to meet the requirement); (2) have previously filed a U.S. tax return (if required to file) for each of the most recent three years; (3) have failed to report gross income from a foreign financial asset and pay tax, and may have also failed to file a FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) (previously Form TD F 90-22.1) and/or one or more international information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621) for the foreign financial asset; and (4) these failures resulted from non-willful conduct.

To be eligible for the streamlined offshore program for taxpayers residing outside the United States, taxpayers must (1) meet one of the nonresidency requirements described below (for joint return filers, both spouses must meet this), and (2) have failed to report the income from a foreign financial asset and pay tax, and may also have failed to file an FBAR, and those failures resulted from non-willful conduct.

Individual U.S. citizens or lawful permanent residents, or estates of U.S. citizens or lawful permanent residents, are nonresidents if, in any one or more of the most recent three years for which the U.S. tax return due date (or properly extended due date) has passed, the individual did not have a U.S. abode and the individual was physically outside the United States for at least 330 full days. Individuals who are not U.S. citizens or lawful permanent residents, or estates of individuals who were not U.S. citizens or lawful permanent residents, meet the nonresidency requirement if, in any one or more of the last three years for which the U.S. tax return due date (or properly extended due date) has passed, the individuals did not meet the Sec. 7701(b)(3) substantial-presence test.

Non-Willful Conduct Certification

In order for taxpayers to qualify for such preferable penalty treatment, they must meet several criteria. One critical criterion is that taxpayers must establish – to the satisfaction of the IRS – that their non-compliant behavior was non-willful. Non-willful conduct is defined as “negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.”

Depending on where the U.S. taxpayer resides, certification of non-willful behavior may be made on one of the following forms initially released by the IRS in August 2014:

For U.S. taxpayers residing in the U.S. – IRS Form 14654: Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures.

For U.S. taxpayers residing Abroad – IRS Form 14653: Certification by U.S. Person Residing Outside of the United States for Streamlined Foreign Offshore Procedures.

Taxpayers must make this certification under penalty of perjury.  In our experience, the non-willful certification is carefully scrutinized by the IRS.

The IRS wants to know the “why” behind the non-willful conduct. Importantly, the IRS has added new language to both forms stating “Any submission that does not contain a narrative statement of the facts will be considered incomplete and will not qualify for streamlined penalty relief.”  Importantly, taxpayers should always bear in mind that they sign their non-willful conduct certification narrative under penalties of perjury.

Evidence of non-willful behavior could include having a small account, especially in comparison to the taxpayer’s other assets; an account on which no U.S. tax is due; a foreign government-sponsored savings or pension account; minimal or no withdrawals; amount of time in the U.S.; and no prior U.S. tax filings.

There is no perfect fact pattern or objective test for non-willful conduct. Furthermore, the taxpayer must “provide specific reasons for your failure to report all income, pay all tax, and submit all required information returns, including FBARs. If you relied on a professional advisor, provide the name, address, and telephone number of the advisor and a summary of the advice. If married taxpayers submitting a joint certification have different reasons, provide the individual reasons for each spouse separately in the statement of facts.”

Persuasive legal advocacy is required to affirmatively and persuasively demonstrate credible legal grounds for non-willfulness. Beware of badges (evidence) of willfulness, blind willfulness, concealment, etc. The IRS will carefully monitor taxpayer filings with large accounts making fraudulent claims in the streamlined program and likely seek to punish them to send a warning.

While the streamlined program offers a welcome option for many taxpayers with undeclared accounts, other ways to address past noncompliance remain viable, including the OVDP program and Delinquent FBAR Submission Procedures and Delinquent International Information Return Submission Procedures. The analysis to enter the one program versus other alternative options is complex and requires full legal analysis by a competent experienced tax attorney.

The IRS streamlined program makes it easier for some taxpayers and more difficult for others. Detailed analysis is required to ascertain the risk/reward for each taxpayer.  Regardless, as FATCA continues to go fully online (and the cooperating bank list grows), the cost and risk of doing nothing has gone up exponentially. In summary, taxpayers with undisclosed offshore accounts should fully explore some form of voluntary disclosure before it is too late and much more costly.

Our firm presented an informational webinar on the Streamlined Filing Compliance Procedures. Materials from the webinar can be downloaded here: Game Changer Streamline.

Patel Law Offices has consulted with hundreds of clients regarding their offshore asset and income compliance issues. Patel Law Offices is a law firm dedicated to helping clients resolve complicated tax, criminal tax, and international tax problems. Our firm assists (and defends) clients and their advisors to legally disclose (and legitimize) foreign assets.

Beware: India to sign FATCA agreement with US for sharing of information

Earlier this week, the Indian Cabinet, chaired by Prime Minister Narendra Modi, approved signing of an Inter-Governmental Agreement (IGA) between India and the U.S. for implementation of the U.S. Foreign Account Tax Compliance Act (FATCA).

Indian Finance Minister Arun Jaitley this week said India was not a tax haven and that taxes that were payable by foreign investors should be paid. The era of Indian information sharing and cooperation has begun. This is a major development for Indian financial institutions and U.S. persons with assets in India.

FATCA is a U.S. law which seeks to facilitate flow of financial information. FATCA requires Indian banks to reveal account information of persons connected to the U.S.  Non-compliant financial institutions could be frozen out of U.S. markets and subjected to punitive withholding taxes.

Foreign financial institutions (FFIs) in India, i.e. an insurance company, bank, or mutual fund, would be required to report all FATCA-related information to Indian governmental agencies, which would then report these information to Internal Revenue Service (IRS).  Foreign Financial Institutions must report account numbers, balances, names, addresses, and U.S. identification numbers. There is punitive 30% withholding tax on any financial institution that fails to report.

India agreed to sign a Model 1 FATCA Model Intergovernmental Agreement (IGA) with the U.S.  The IGA would likely require Indian financial institutions to report information on U.S. account holders to India’s Central Board of Direct Taxes, which would then share the information with the U.S. Internal Revenue Service (IRS).  The agreement would provide the Internal Revenue Service (IRS), access to details of all offshore accounts and assets beyond a threshold limit held by Americans here, while a reciprocal arrangement would be offered for Indian authorities as well.

Many Indian financial institutions have already registered on the IRS’s FATCA Registration Portal. The IRS has published a searchable list of financial institutions. The FFI List Search and Download Tool is located on the IRS’s FATCA website. The tool can be used to search for the name of a specific foreign financial institution and find out if it has registered under FATCA. As of today, 739 financial institutions in India have registered with the IRS.  Users can also download an entire list of financial institutions with the tool. See the FFI List Search and Download Tool and User Guide. Countries complying with FATCA can be found at FATCA – Archive.

Who is Reported?

Financial institutions in India will carry out a detailed due diligence on all their clients and report details of their U.S. clients to the Internal Revenue Service.  U.S. persons for tax purposes are generally considered as:

  • A citizen of the U.S. (including an individual born in the U.S. but resident in another country, who has not renounced U.S. citizenship);
  • A lawful resident of the U.S. (including any U.S. green card holder);
  • Most U.S. visa holders (including H-1 and L-1 visa holders);
  • A person residing in the U.S.
  • Somebody who has spent considerable period of time in the U.S.
  • American corporations, estates and trusts may also be considered U.S. persons

Which Accounts?

Indian financial institutions need to report certain accounts to the IRS under FATCA. The need for identifying U.S. person(s) arises from the fact that money invested in India needs to be reported to IRS in the U.S.  While the threshold limit for reporting will be specified by the regulators in India based on FATCA regulations, institutions will have reporting requirements under FATCA, in terms of threshold limits.

As per FATCA, U.S. persons need to report to IRS in the following scenarios:

  • If the total value is at or below $50,000 at the end of the tax year, there is no reporting requirement for the year, unless the total value was more than $75,000 at any time during the tax year.
  • The threshold is higher for individuals who live outside the U.S. .
  • Thresholds are different for married and single taxpayers.

There is a provision for third party reporting under FATCA for FFIs which states, “Foreign financial institutions may provide to the IRS, third-party information reporting about financial accounts, including the identity and certain financial information associated with the account, which they maintain offshore on behalf of U.S. individual account holders”.

While the IRS has recently targeted Swiss, Israeli and Indian banks, India continues to be a focal point for the U.S.  government. While new criminal prosecutions start and continue, our law firm expects unabated aggressive enforcement of the U.S. tax laws, including increased criminal prosecutions and civil investigations. We have been advising our clients to expect the unexpected (and the worst) in their tax treatment and disclosure of offshore assets, particularly for Indian assets.

The fact that 77,000 banks have registered and over 100 countries will be providing government help to the IRS means that no foreign account is secret. U.S. persons must report worldwide income and most must file IRS Form 8938 and Foreign Bank Account Reports (FBAR) to report foreign accounts and assets. With such comprehensive databases, noncompliant taxpayers should beware; the government has better and more complete information than ever.

Patel Law Offices has consulted with hundreds of clients regarding their offshore asset compliance issues. Patel Law Offices is a law firm dedicated to helping clients resolve complicated tax, criminal tax, and international tax problems. Our firm assists (and defends) clients and their advisors to legally disclose (and legitimize) foreign accounts.

FATCA Repeal Fails

Last month US Senator Roger Wicker (R-Miss.) introduced a budget amendment SA 621 to repeal the Foreign Account Tax Compliance Act (FATCAFATCA requires foreign financial institutions to disclose to the IRS about their U.S. customers’ accounts.

The U.S. loses an estimated $150 billion in tax revenue each year to tax haven abuse – a revenue shortfall that honest taxpayers have to make up. About $40-70 billion of that revenue loss is from individual tax evasion. In light of those numbers, the virtues of FATCA become exceedingly clear.

FATCA is an enforcement tool.  It exists to give the U.S. government the information it needs to determine ownership of assets in foreign accounts and make it harder for taxpayers to hide assets and evade tax. While FATCA is heavily criticized by foreign governments and financial institutions when it was first enacted, now it is being hailed as the catalyst for change and an example for inter-governmental agreements around the world.

Countries and financial institutions that sign FATCA compliance agreements with the US government agree to automatically share certain tax information. To date, over 77,000 banks and 80 countries have signed such agreements. In 2013, G8 leaders pledged to crack down on tax avoidance and improve transparency by working toward a global version of FATCA. The G20 that year agreed to automatically exchange information by the end of 2015 and called such exchange “the new standard.” In 2014, 47 countries agreed to a global standard of information exchange developed by the Organization for Economic Cooperation and Development.

Last week, budget amendment SA 621, to repeal the Foreign Account Tax Compliance Act (FATCA), failed to reach the US Senate floor for a vote on Friday.

“It’s an unpopular idea to overturn existing tax transparency laws in the Senate,” said Eric LeCompte, executive director of the financial reform organization Jubilee USA Network, which generated thousands of phone calls into the Senate in support of FATCA. “The lack of support for repealing FATCA shows how important anti-corruption legislation is to Congress.”

So for the time being, expect FATCA to remain as a fixed law and powerful enforcement tool.



Another Swiss Bank Discloses Customer Names to the US

The Department of Justice announced today that BSI SA, one of the 10 largest private banks in Switzerland, is the first bank to reach a resolution under the Department of Justice’s Swiss Bank Program.  Swiss private bank BSI SA avoided prosecution for suspected tax-related offenses by paying a $211 million penalty, becoming the first bank to reach a deal in the U.S. Department of Justice’s voluntary disclosure program, the department said on Monday.

The U.S. government program allows Swiss banks to avoid prosecution by coming clean about their cross-border business in undeclared U.S.-related accounts before they are investigated.

For decades up to 2013, BSI assisted thousands of U.S. clients in opening accounts in Switzerland and hiding the assets and income held in the accounts from tax authorities, according to a non-prosecution agreement signed on Monday. As part of the deal, BSI agreed to cooperate in any related criminal or civil proceedings and put better controls in place.

The agreement is expected to be the first of a flood of settlements by Switzerland’s banks, which have come under intense pressure to give up the banking secrecy so embedded in Swiss culture and the world’s largest offshore financial center.

BSI acknowledged that it issued pre-paid debit cards to U.S. clients without their names visible on the card to help them keep their identities secret, U.S. authorities said.

It also said the bank helped U.S. clients create “sham corporations” and trusts that masked their identities.

In some instances, U.S. clients would tell their bankers that their “gas tank is running empty” as coded language to indicate that they needed more cash on their cards, according to a statement of facts..

Swiss financial regulator FINMA said in a statement on Monday that BSI had breached its obligations to identify, limit and monitor the risks involved in its dealings with U.S. clients, having served a large volume of customers with undeclared assets.

FINMA said it hopes that, case by case, each bank in the U.S. program “will reach an agreement with the DoJ to settle their legacies related to U.S. clients subject to U.S. taxation.”

BSI, one of Switzerland’s largest private banks, apparently had more U.S. account holders than many other banks in the program, a reason for the sizeable penalty. Sixty or 70 other Swiss banks are expected to strike similar agreements with the Justice Department in the coming months.

The BSI agreement also has substantial implications for account holders. If a U.S. taxpayer has an unreported account at a Swiss bank and enters the offshore disclosure program, the account holder has to pay a penalty equal to 27.5 percent of the high balance in the account.

With the announcement of BSI’s non-prosecution agreement, its noncompliant U.S. account holders must now pay that 50 percent penalty to the IRS if they wish to enter the IRS’ program.  Once a bank becomes the publicly announced subject of an investigation or enforcement action, including the execution of a non-prosecution agreement, the 27.5 percent penalty facing a taxpayer who holds an undisclosed account rises to 50 percent.

BSI and other banks in the Swiss Bank Program are also providing detailed information to the department about transfers of money from Switzerland to other countries. The Tax Division and the IRS intend to follow that money to uncover additional tax evasion schemes.

The US Department of Justice has emphasized the importance of identifying U.S. account holders who have undeclared foreign bank accounts, and BSI has provided assistance in that task.  Because of the information provided to the department under the program, the Tax Division has already begun the process of identifying noncompliant U.S. accountholders who have maintained accounts at many Swiss banks participating in the Swiss Bank Program.

According to the US Department of Justice press release “Today’s action sends a clear message to anyone thinking about keeping money offshore in order to evade tax laws,” said Chief Richard Weber of IRS-Criminal Investigation (CI).  “Fighting offshore tax evasion continues to be a top priority for IRS-CI and we will trace unreported funds anywhere in the world.  IRS-CI special agents are our nation’s best financial investigators, trained to follow the money and enforce our country’s tax laws to ensure fairness for all.”

Seminar: Navigating Foreign Waters: The Complex Requirements of Foreign Accounts Compliance on US tax laws

With the IRS aggressively targeting taxpayers with unreported offshore accounts, tax professionals must know benefits and pitfalls of offshore accounts.

Our firm presented technical seminars titled Navigating Foreign Waters: The Complex Requirements of Foreign Accounts Compliance on US tax laws to tax professionals on foreign account disclosure, FBARs, and compliance programs to The Institute of Chartered Accountants of India (ICAI) and the Bombay Chartered Accountants’ Society. Materials from the seminars can be downloaded here: Navigating Foreign Waters- Discussion on the U.S. Laws for Foreign Accounts Compliance

New Warnings in the IRS’ Streamlined Filing Compliance Procedures

The Internal Revenue Service has recently updated the certification forms required to be filed by taxpayers seeking to avail themselves of the Streamlined Filing Compliance Procedures.  The streamlined program was significantly expanded by the IRS in June 2014 in order to provide a meaningful way for non-willful taxpayers to remedy past non-compliance with respect to non-U.S. bank accounts and income associated with those accounts.  Any taxpayer seeking to utilize the streamlined program must submit a form entitled Form 14654–Certification by U.S. Persons Residing in the United States for Streamlined Domestic Offshore Procedures (SDOP) (for U.S. residents) or Form 14653–Certification by U.S. Persons Residing Outside of the United States for Streamlined Foreign Offshore Procedures (SFOP) (for non-U.S. residents).

The streamlined filing compliance procedures are designed for only individual taxpayers, including estates of individual taxpayers. The streamlined procedures are available to both U.S. individual taxpayers residing outside the United States and U.S. individual taxpayers residing in the United States. In order to enter the streamlined offshore procedures, the taxpayer must officially certify that their failure to report all income, pay all tax, and file all required information was due to non-willful conduct.

In either version of the form, the taxpayer is certifying, under penalties of perjury, that:

“My failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-willful conduct.  I understand that non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.”

This is a very important element of the streamlined process.  Any taxpayer who cannot make such a certification is ineligible for the relief afforded by the Streamlined Filing Compliance Procedures.  As part of the certification, the taxpayer is required to provide a factual statement explaining the reasons for non-compliance, including if such non-compliance was attributable to advice received from a professional advisor:

“Provide specific reasons for your failure to report all income, pay all tax, and submit all required information returns, including FBARs. If you relied on a professional advisor, provide the name, address, and telephone number of the advisor and a summary of the advice. If married taxpayers submitting a joint certification have different reasons, provide the individual reasons for each spouse separately in the statement of facts. The field below will automatically expand to accommodate your statement of facts.”

Some taxpayers apparently have been submitting the certification form without the narrative statement.  As a result, the IRS has updated the forms to now include, in bright red font, the following warning:

“Note:  You must provide specific facts on this form or on a signed attachment explaining your failure to report all income, pay all tax, and submit all required information returns, including FBARs.  Any submission that does not contain a narrative statement of facts will be considered incomplete and will not qualify for the streamlined penalty relief.”

In spite of the standardization of the forms, very careful drafting and persuasive legal advocacy of a taxpayer’s particular circumstances are still recommended for a clear demonstration of non-willfulness. Beware: the statement can be used against the taxpayer.  The narrative portion of the certification form has always been the most important part of the streamlined submission, because that is what the IRS will review in order to determine whether the taxpayer’s failure to file FBARs and report income from offshore accounts was non-willful.  All certifications are reviewed carefully by the IRS.  The updated form with its new conspicuous warning language further confirms the important nature of the narrative.  Taxpayers who choose to submit certification forms without a narrative, or who cannot complete the narrative for whatever reason, are now warned that their streamlined applications will be rejected.

Whether a taxpayer’s conduct is non-willful is a critical question of fact and law, based largely on the taxpayer’s particular facts and circumstances. Taxpayers with foreign accounts would be wise to retain tax legal counsel, to better analyze the taxpayers’ position.  In our experience, good facts applied to the law will result in a result.  Legal research, careful drafting and legal advocacy of a taxpayer’s particular circumstances are still strongly recommended for a favorable result.