Estate planning affects women more profoundly, so they should take charge of this process, or at least be equal participants. Among Americans 65 and older, 42% of women, but just 14% of men, are widowed. Women’s longer life expectancy, combined with their tendency to marry older mates and their lower lifetime earnings means they are far more likely to see their living standards compromised in retirement if proper estate planning is not done. And since it is women who are most often widowed, they usually have the last word about which of a couple’s assets ultimately go to family, charity or the taxman.
Starting in 2011, a surviving spouse can add any unused estate tax exclusion of the just deceased spouse to her own $5 million exclusion–this is called portability. So a widow can pass on as much as $10 million, untaxed, through either lifetime gifts or her will. But portability is not automatic. To get it, the executor of the estate of the first spouse to die must file an estate tax return, even if no tax is due. Surviving spouses should see to it that the form is filed even if they have nowhere near $5 million of their own, because who knows what the future holds?
Nine months is also the deadline if you plan to disclaim (turn down) any portion of what you inherited from a spouse so that it can go directly to your children or other family members or into a trust for their benefit. The new tax law makes it more likely that spouses will leave everything to each other outright. Other couples may want to give the survivor the right to disclaim at least some money and have it go into a family trust or bypass trust, as it is also called. This allows the survivor to make an informed decision based on her own financial resources and federal and state estate laws at that time. If you want to use this postmortem tax planning strategy, you need to keep an eye on the calendar.
Starting in 2011, the tax-free amounts you can give to no-spousal heirs during life and at death are combined into a single $5 million exclusion. So, for example, if you have used $1 million of the exclusion to make lifetime gifts, the unused exclusion when you die will be $4 million, rather than $5 million.
Married couples get a new, special break: They can share each partner’s $5 million exclusion during life (this process is called gift-splitting) and give more to the kids now, tax-free. But of course this also reduces how much of the tax-free amount will be available when they die, either for their own use or to be carried over by the survivor.
Should you give away assets now to save taxes?
Now that the estate tax exclusion has gone to $5 million per person ($10 million/couple), this issue concerns very few people. Still, a popular new refrain from estate tax experts is that you should rush to give to family members before the tax-free amount is scheduled to drop to a measly $1 million in 2012–even though that change isn’t likely to take effect. Of course many of the transactions they recommend for making gifts now generate high legal fees for them.
Keep in mind, too, that most methods of saving estate taxes require you to totally give up ownership and control over assets, whether you are giving them to people directly or putting them in a trust. A threshold question for anyone contemplating this strategy: Can I afford it? Be sure you are leaving yourself enough, and to be on the safe side, you should assume you will live to an advanced age.
You can give anyone $13,000 a year (a couple can give $26,000) without eating into your $5 million exclusion. If you want to give away more than that, you can either count your gift against the $5 million exclusion amount or, if you have used up the tax-free amount, pay gift tax of 35%. Remember that each dollar of the exclusion used during life shaves a dollar off what is available for your estate to use after your death.
A Wisconsin neurosurgeon was re- indicted by a U.S. grand jury on new charges that he failed to declare an HSBC Holdings Plc (HSBA) account in India valued in 2009 at $8.7 million. Arvind Ahuja was indicted again by a federal grand jury in Milwaukee, where he was initially charged June 28 with concealing accounts from the Internal Revenue Service. Federal prosecutors in Milwaukee filed a superseding nine-count indictment to defraud the IRS from 2006 to 2009 against Dr. Ahuja, a neurosurgeon in Greendale, Wisconsin, that fleshed out details of HSBC’s work with Americans born in India and highlighted the role of two unnamed HSBC bankers in New York.
The charges against Ahuja come amid a widening U.S. crackdown on offshore tax evasion that includes grand jury investigations of eight foreign banks. Prosecutors have filed criminal tax charges against more than three dozen former U.S. clients of UBS AG and Credit Suisse Group AG, Switzerland’s two biggest banks, and London-based HSBC, Europe’s biggest bank. The superseding indictment signals a ramping up of pressure on HSBC and could lead to charges against two unnamed bankers listed in the new filing, based on past procedures.
Dr. Ahuja was indicted in June for tax fraud involving more than $8.7 million hidden in an Indian branch of HSBC. Court papers say that over 2006 through 2009, Ahuja failed to report to the Internal Revenue Service more than $1.2 million in interest income he earned from the account, as well as to disclose the account’s existence to the IRS, as required by U.S. law.
Dr. Ahuja took steps to hide his offshore accounts, according to the indictment made public today. In 2007, an HSBC India banker told a colleague that Ahuja “has requested that he does not want any kind of mail at his US or India address,” according to the indictment. “He wants a HOLD on all his accounts.” If convicted, Ahuja, faces as long as 10 years in prison on the FBAR charges, five years on conspiracy and three years on charges of filing false tax returns.
On April 7, 2011, the U.S. District Court for the Northern District of California issued an order authorizing the Internal Revenue Service to serve a “John Doe” summons requesting information from HSBC regarding U.S. residents who may be using accounts at HSBC in India to evade federal income taxes. If HSBC produces these records, which is likely, it may be too late for U.S. taxpayers with undisclosed HSBC accounts to take advantage of the IRS Voluntary Disclosure Program for offshore accounts. The IRS says there are 9,000 high net worth Indian US residents who maintain at least $100,000 in their bank accounts in HSBC India but few of them have disclosed details of their accounts.
In light of prosecution and summons, it is imperative that HSBC India accountholders seriously consider entering the IRS Voluntary Disclosure Practice (VDP) program, which remains in effect after OVDI’s expiration, for protection against civil (and criminal) penalties.
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.
When the IRS says “voluntary” it can sound scary. The IRS is unlikely to use this word unless the potential liability is serious. The IRS would much rather have you come forward. If you do, you’re likely to get a much better deal than if you wait for them to find you.
Recent examples include the just ended the 2011 OVDI for foreign accounts and assets. Through these “voluntary” programs, the IRS has collected billions and is getting many taxpayers back into the IRS system in a major way. The latest example is a newly minted voluntary relief program for worker status.
Many companies classify as “independent contractors” workers who the IRS would view as employees. The IRS uses 20 factors to say who qualifies. The overall issue is whether the employer the right to control the worker not only as to end result of their work but also as to their method and means.
The tax dollars for failure to withhold income and Social Security taxes can run in the millions. Holding your breath and hoping you’re not audited can be stressful. And the mix of factors is so fact-intensive that outcomes are hard to predict.
Now there’s a potential way out if you’re willing to treat workers as employees prospectively. IRS Announcement 2011-64 unveils the IRS’s Voluntary Classification Settlement Program—VCSP—allowing you to voluntarily reclassify independent contractors as employees for the future. If you qualify, your tax exposure for the past is significantly limited.
To be eligible, you must:
- Have consistently treated the workers as independent contractors;
- Have filed all required Forms 1099 for the workers for the previous three years;
- Not currently be under audit by the IRS;
- Not currently be under audit by the Department of Labor or a state government agency concerning worker classification; and
- If you were previously audited by the IRS or the Department of Labor concerning the classification of the workers, you will only be eligible if you complied with the results of that audit.
The IRS has discretion whether to accept you, but once you’re in, you will pay just over 1% of the wages paid to the reclassified workers for the past year. Stated differently, your payment is 10% of the employment tax liability that would have been due on what you paid your workers for the most recent year, but determined under the reduced rates of tax code Section 3509(a). To see how this payment is computed, see VCSP FAQ 16. See also Instructions to Form 8952. There are no interest charges or penalties, and the IRS won’t audit you on payroll taxes related to these workers for prior years. You must prospectively switch them to employee status and agree to a special six-year statute of limitations rather than the three years that usually applies to payroll taxes.
Apply by filing Form 8952 at least 60 days before you want to begin treating the workers as employees. Full details, including FAQs, are available here. Also provide contact details for yourrepresentative with an IRS Power of Attorney (Form 2848). The IRS will contact you or your representative to complete the process.
IRS Commissioner Shulman has invited persons with unreported foreign accounts to
come forward and avail themselves of the IRS’s Voluntary Disclosure Practice. That
practice is described in the Internal Revenue Manual 9.5.11.9. The Practice has a bearing upon whether the IRS will conduct a criminal investigation and recommend that the Department of Justice should commence a criminal prosecution. The Practice is not designed to address the IRS’s discretion whether to impose civil tax or FBAR penalties.
The Internal Revenue Manual states that a voluntary disclosure made by a taxpayer will be considered by the IRS along with all other factors in the investigation in determining whether a criminal prosecution will be recommended to the Department of Justice. The Internal Revenue Manual is quick to add that the Practice creates no substantive or procedural rights as it is simply a matter of internal IRS practice, provided solely for the guidance of IRS personnel. Voluntary Disclosure does not apply to taxpayers with illegal source income. A Voluntary Disclosure occurs when the taxpayer’s disclosure of the unreported liability is truthful, timely, complete, and when (a) the taxpayer has shown a willingness to cooperate (and does cooperate) with the IRS in determining her correct tax liability and (b) the taxpayer makes good faith arrangements to pay in full to the IRS the tax, interest, and any penalties determined to be applicable.
Importantly, a disclosure is considered to be timely if it is received at a time when the IRS has not yet received information from a third party alerting the IRS to the specific taxpayer’s noncompliance or has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer.
Navigating the Voluntary Disclosure Practice:
Given the aggressiveness of the IRS’s enforcement efforts and the severity of the potential criminal and civil penalties involved, participation in the IRS’s Voluntary Disclosure Practice should be carefully considered by any non-compliant taxpayer. Before advising such a client regarding this program, any practitioner would be well-served to take the following steps:
• Conduct Thorough Due Diligence: The potential stakes and the fact-sensitive nature of the inquiry dictate that the practitioner obtain a complete and accurate understanding of the facts. First, it is important to determine the scope of the problem – the number of years involved, the size of assets, the number of taxable events and whether acts of concealment, falsification of documents, or other potential badges of fraud are involved. All of these issues are critical to assessing potential criminal and civil exposure. Second, it is critical to pressure-test the client’s story. Participation in the Voluntary Disclosure Practice will most likely require responding to IDRs, producing documents, and submitting to interviews. Not only can such subsequent fact-finding interfere with your goals when making the Voluntary Disclosure, but misstatements during this phase can, and often are, the grounds for subsequent criminal prosecution. You cannot take your client’s word; you need to obtain records from the bank, examine passports, and talk to the tax preparer. If, for example, your client has made frequent and regular trips to Switzerland, the IRS may be less likely to accept his or her story of careless neglect. Third, you need to keep abreast of the quickly evolving legal landscape involving the interplay between the privacy laws of other jurisdictions and U.S. laws. A significant IRS victory on any of these issues will make the IRS less likely to agree that your client satisfied the “timely” element of the voluntary disclosure program. No one has a crystal ball, but if your client is inclined to participate, delay could have serious costs.
• Carefully Analyze Potential Criminal and Civil Liability: In many scenarios, particularly those involving inherited accounts, the potential tax liability and civil penalties is a far more realistic and onerous threat than criminal prosecution. As noted above, however, a taxpayer has to agree to pay all tax, interest, and penalties to take advantage of the Voluntary Disclosure Practice. The potential civil penalties could be draconian and could, in fact, far exceed the total value of the assets held in the undisclosed account. That is particularly true if your client failed to file the required FBAR for a number of years, or is potentially subject to civil fraud penalties, which are not bound by any statutes of limitation. There is no point in rushing in to negotiate a tax liability and penalty package that your client cannot or will not pay, particularly when the risk of criminal prosecution is low. The IRS believes there are hundreds of thousands of taxpayers who have failed to disclose foreign accounts, many thousands of whom did so willfully. The IRS does not have the resources to prosecute every willful evader, and the risks of prosecution, even in cases of willfulness, will vary depending on such factors as the scope and duration of criminal conduct, the amount of the delinquent taxes, the deterrent value, and the prosecuting district.
• Evaluate Disclosure Options: There are two ways to disclose the existence of foreign
accounts and income: “quiet disclosure” or “noisy disclosure.” Quiet disclosure involves simply filing amended returns with the appropriate IRS service center and filing in Detroit the necessary FBAR forms that disclose the account and state the reason for the prior nondisclosure. An amended return will typically be examined by CID for potential prosecution and/or participation in the Voluntary Disclosure Practice. If CID is not interested in pursuing a criminal investigation, the matter will be referred to IRS Exam for a civil audit. On the other hand, a “noisy disclosure” involves contacting someone responsible for making a decision on prosecution – i.e., a senior representative of CID or a responsible person in the local U.S. Attorney’s office — to explore, on an anonymous basis, the potential applicability of the Voluntary Disclosure Practice. This noisy approach should be through an attorney who will gauge the chances that the client will be allowed to participate in the disclosure program before any identifying information is provided. If accepted for Voluntary Disclosure, the taxpayer will cooperate with Exam representatives to determine all liabilities for taxes, interest, and civil penalties, which liability will then be memorialized in an issue-specific IRS closing agreement.
• Balance Delayed Closure Against Intangibles Such as Peace of Mind: Perhaps the most prominent advantage of noisy disclosure is that it has the potential to bring closure. Although neither the DOJ or IRS will grant amnesty or immunity as part of this program, taxpayers can be assured that issues covered in the closing agreement with the IRS will not be subject to criminal prosecution. The quiet disclosure route, however, provides less immediate feedback and less certainty. It is possible a case will get hung up in CID, and the taxpayer will hear nothing. Or the return could have fallen through the cracks, or on a back burner. However, the risks of any disclosure are not insignificant, and are accelerated and magnified with noisy disclosure. You are putting your client squarely in the IRS’s sights, and any inconsistencies or false statements can be fatal to an effort to avoid prosecution. What is worse, they can provide an independent ground for criminal prosecution. In addition, disclosure provides no protection of on-going or unrelated tax issues that could arise during the subsequent examination. On the other hand, doing a correct current filing (which a non-filer is obliged to do if the non-filer’s accounts had an aggregate maximum balance of more than 10,000 dollars in 2011) may raise a red flag if corrective back filings are not also done — perhaps prompting the IRS to view all past nonfilings as willful for FBAR penalty purposes.
• Minimize Risk: To the extent possible, an attorney needs to carefully control the disclosure process and his or her client to minimize these risks. Disclosure statements should be kept as brief as possible, and the attorney needs to be diligent to ensure that every statement is accurate and supported by documents, if possible. The attorney-client privilege should also be carefully protected. If an accountant is to be involved in the process, that process needs to be cloaked with protections designed to comply with the Kovel case, which allows for the protection of accountant work product designed to assist an attorney.
As expected, the United States Internal Revenue Service (IRS) has disclosed that the recently-completed offshore voluntary offshore initiative (OVDI) has pushed the total number of voluntary disclosures up to 30,000 since 2009. The IRS customarily publicizes (and celebrates) such accomplishments.
The 2011 OVDI, which was announced in February this year, followed a previous disclosure initiative in 2009. In the 2011 initiative, there was a penalty framework that generally required individuals to pay a penalty of 25% of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period.
In all, the IRS confirmed that 12,000 new applications came in from the 2011 OVDI that closed on September 9. It has collected USD2.2bn so far from people who participated in the 2009 OVDI, reflecting closures of about 80% of the cases from the initial initiative. On top of that, the IRS has already collected an additional USD500m in taxes and interest as down payments for the 2011 initiative – a figure, it said, that will increase because it does not yet include penalties.
“By any measure, we are in the middle of an unprecedented period for our global international tax enforcement efforts,” said IRS Commissioner Doug Shulman. “We have pierced international bank secrecy laws, and we are making a serious dent in offshore tax evasion.”
“My goal all along was to get people back into the US tax system,” Shulman continued. “Not only are we bringing people back into the US tax system, we are bringing revenue into the US Treasury.”
It was also added that the two OVDIs “have provided the IRS with a wealth of information on various banks and advisors assisting people with offshore tax evasion, and the IRS will use this information to continue its international enforcement efforts.”
Patel Law Offices has assisted over 100 taxpayers with offshore asset plannning and filed dozens of OVDI applications. Our firm is now assisting clients with existing traditional Voluntary Disclosure Practice filings outside of OVDI. The IRS has detailed the terms of its existing traditional Voluntary Disclosure Practice in its Internal Revenue Manual (IRM) 9.5.11.9 (titled “TAX CRIMES – GENERAL”).
Patel Law Offices is a law firm dedicated to helping clients resolve complicated tax, criminal tax, and international tax problems. Our firm assists (and aggresively defends) clients and their advisors to legally disclose (and legitimize) foreign accounts.
Even though the deadline for the Internal Revenue Service’s 2011 Offshore Voluntary Disclosure Initiative has concluded last week, U.S. taxpayers with undisclosed offshore accounts still have the opportunity to come forward through the IRS’s traditional Voluntary Disclosure program. Like the OVDI, the traditional Voluntary Disclosure program provides taxpayers an opportunity to come forward and potentially avoid criminal prosecution. The IRS has detailed the terms of its existing traditional Voluntary Disclosure Practice in its Internal Revenue Manual (IRM) 9.5.11.9 (titled “TAX CRIMES – GENERAL”).
For individuals who fail to disclose foreign assets and income, both the IRS and Department of Justice have repeatedly stated that taxpayers with undisclosed offshore bank accounts will be pursued by the government, potentially becoming subjects of criminal investigations.
Parag Patel of Patel Law Offices believes that recent developments with investigations into prominent private offshore wealth management banks, regional – or cantonal – Swiss banks, as well as such large banks as Credit Suisse and HSBC, have heighten the risks of not disclosing a foreign account. Taxpayers who have not disclosed their offshore bank accounts should do so before the Department of Justice begins to open investigations against them; information provided by Credit Suisse, HSBC or other banks during these investigations may be used by the IRS and the Department of Justice to support new investigations into U.S. taxpayers suspected of evading taxes.
Parag Patel of Patel Law Offices, a law firm that represents many taxpayers throughout the U.S. and around the world with undisclosed offshore accounts states, “For taxpayers with undisclosed accounts who were unable to take advantage of the recent 2011 (and 2009) IRS Amnesty Program, now is the time for you to come forward and learn about other options the IRS provides in regards to voluntary disclosure in order to limit potential civil penalties and criminal exposure”.
Mr. Patel encourages all taxpayers with undisclosed offshore bank accounts to “contact a tax attorney immediately in order to learn of other disclosure options and to assess their exposure.”
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.
Last week, late on Friday afternoon, August 26, 2011, the IRS issued a statement indicating that the due date for filing 2011 Offshore Voluntary Disclosure Initiative (OVDI) requests has been extended until September 9, 2011, due to the potential impact of Hurricane Irene. Prior to this statement, the deadline was set to occur on August 31st. The statement includes the necessary actions that must occur by September 9th, including information to be submitted to the Criminal Investigation office, as well as submitting a request for a 90-day extension to provide the full voluntary disclosure package of information. As part of this late news, the IRS issues a new FAQ #24.1, as well as revised FAQ #25.1. The IRS statement and updated FAQs regarding the OVDI are reflected on the IRS website.
At the time of the writing of this article, it was uncertain if further guidance from the government would be issued to modify the due date of those information filings that are not directly within the 2011 OVDI program, but rather are permitted to be filed due to the OVDI’s FAQs #17 and #18. These include situations where the person properly reported all taxable income but had not filed Form TD F 90-22.1, Report of Foreign Bank and Financial Account (FBAR), in prior years to report a foreign bank account or signature authority over a foreign bank account owned by an employer. Similar is permitted for delinquent Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations, and Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, where all income was reported and all tax paid on the taxable income. The relevant FAQs as originally issued indicate that these delinquent forms could be filed by August 31, 2011 with an explanation for the late filing, and that the IRS would not impose a penalty for the failure to file the information returns. The due date in FAQs #17 and #18 does not appear to have been changed as a result of the IRS’s August 26th statement. As such, it is expected that filing under those specific areas would still be due by August 31, 2011.
Given the quick nature of the developments, please watch our blog closely for any further guidance from the IRS in this area.
While our law firm is expeditiously filing OVDI applications and extensions for new OVDI applications, the IRS has extended the OVDI deadline to September 9, 2011 because of the potential impact of Hurricane Irene on taxpayers. The IRS’ announcement was published only three hours ago. The IRS had previously given taxpayers until August 31 to present their requests to the IRS.
We continue to open new cases and aggresively defend taxpayers in filing OVDI applications. Since we have over three dozen OVDI filings, our experience with the OVDI and VCP (the 2009 amnesty program) programs is comprehensive and unparalleled.
More information on the OVDI is available in IRS News Release 2011-84, on the 2011 Offshore Voluntary Disclosure Program webpage and in detailed FAQs. The 2011 OVDI was announced on Feb. 8, 2011, and follows the 2009 Offshore Disclosure Program (OVDP). According to the IRS, the 2011 initiative offers clear benefits to encourage taxpayers to come forward rather than risk detection by the IRS. Taxpayers hiding assets offshore who do not come forward will face far higher penalties along with potential criminal charges.
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.
A recent article in the Wall Street Journal discussed the new IRS’ Global High Wealth Industry Group. Over 1 year ago we warned readers of the new group when Commissioner Shulman announced its formation in an address to the American Institute of CPA’s during October of 2009. In his remarks, Shulman noted the need for a highly specialized audit unit to closely examine high-income taxpayers.
One year later, the group has started to make a name for itself and it isn’t a good one in some circles.
If you are a high wage earner and operate a hedge fund, make extensive use of trusts, have a privately held company, utilize flow-through entities or have offshore real estate holdings, be prepared for an audit. Those that are targeted can expect a particularly rigorous audit.
The new unit combines seasoned revenue agents (auditors) with offshore examiners and specialists capable of auditing every aspect of a person’s holdings.
Other developed nations are forming similar units. The IRS has suggested more cooperation in audits involving people that face taxes in more than one jurisdiction. In years past, individuals with assets in multiple countries could argue that their income was being taxed elsewhere. Those claims were often accepted as there was little cooperation between countries. That is starting to change
Given the IRS’ zeal for unreported offshore accounts and income, high wealth taxpayers playing the “audit lottery” may have more to worry about than audits. The IRS has also targeted people with unreported foreign source income and assets for criminal prosecution.
What should you do if targeted for an aggressive audit? First, have a heart to heart discussion with your accountant. If there is any risk of exposure, contact a tax attorney. Your tax attorney can then rehire your accountant under the attorney client privilege.
CPA’s do not enjoy the same confidentiality privileges that lawyers do. By having your lawyer hire the accountant, he or she is then protected by the same broad privilege as the lawyer. Nothing is worse than finding out your accountants were subpoenaed by the government and subsequently provided evidence against you. It’s not their fault; accountants simply do not enjoy a broad privilege.
Your accountant may be able to engage the IRS and defend the audit. If not, the lawyer can. Some CPA’s have experience in defending audits – it’s a special skill set – and others do not. If there is possible criminal exposure, leave it to the lawyers. Never be afraid to ask your lawyer or accountant for their experience in defending an aggressive audit. When it’s your liberty at stake, you want the best.
If the matter cannot be resolved at the audit level, you ultimately can take your case to U.S. Tax Court. You need a tax attorney for that. In one recent case we were able to reduce a $4 million dollar case to slightly more than $100,000, a forty-fold reduction.