The most time-consuming aspect of estate planning is educating clients and dispelling common misconceptions that most people have regarding Wills, Trusts, Estate Taxes and Probate. Over the years, we have identified six recurring misconceptions which many of our clients carry with them into our first conference:
MYTH #1 – “I DON’T HAVE A WILL”
New Jersey law provides a Will for people who die without one. “New Jersey’s Will” provides for the following:
The manner in which your property will be distributed among your surviving relatives.
The designation of an administrator who will be responsible for settling the estate.
Guardians for minor children.
MYTH #2 – “I DON’T NEED A WILL”
See Myth #1; do you want the state to dictate:
The manner in which your property is distributed?
Who will be responsible for administering your estate?
Who will be guardians for your minor children?
A Will may also be necessary to minimize Death Taxes. (See Myth #3.)
MYTH #3 – “I HAVE NO FEDERAL ESTATE & GIFT EXPOSURE”
Federal Estate & Gift Tax is generally a concern only where assets (including the face value of life insurance) exceed the “Applicable Exclusion Amount”. The Applicable Exclusion Amount is $5,000,000 in 2012 and $1,000,000 for 2013.
For married couples, there is no Federal Estate Tax exposure at the first death, regardless of the amount of their assets, as long as everything passes to the surrvivor. However, Estate Tax will be due at the second death to the extent assets exceed the survivor’s Applicable Exclusion Amount (discussed above).
Married couples may need Wills to implement a “Bypass Trust” for the benefit of the survivor in order to preserve the decedent’s (i.e., the first person to die) Applicable Exclusion Amount. A Bypass Trust is a trust established under the decedent’s Will for the benefit of the survivor. Notwithstanding the survivor’s enjoyment of the Bypass Trust assets, none of those assets are exposed to Estate Tax in the survivor’s estate.
The State of New Jersey imposes an Estate Tax on assets which exceed the New Jersey “Applicable Exclusion Amount”. New Jersey Estate Tax can be due even where no Federal Estate Tax is due.
MYTH #4 – “I HAVE NO NEW JERSEY INHERITANCE TAX EXPOSURE”
Even if there is no Federal Estate & Gift Tax exposure or New Jersey Estate Tax exposure, there may be New Jersey Inheritance Tax exposure. This tax applies to property transferred at death to the following individuals: brothers, sisters, nephews, nieces, cousins and friends. It does not apply to property transferred to children, grandchildren, step-children and parents.
Example: Ricky dies with assets valued at $1,000,000. His Will provides that all of his property will pass to his friend, Ethel. Federal Estate Tax – $0; New Jersey Inheritance Tax – $153,000.
The New Jersey Estate Tax would be $33,200, but Ricky’s estate would only be liable for the higher of the Inheritance Tax or Estate Tax. The two taxes are not combined.
MYTH #5 – “I MUST AVOID PROBATE”
In New Jersey, Probate is neither an expensive, nor a time consuming process.
“Probate” is simply the legal process by which an individual’s Will is proven as a valid legal document to dispose of that individual’s property. This “process” usually consists of a thirty minute meeting at the County Surrogate’s office.
Once the Will is “probated”, or proven as valid, the decedent’s (the person that has died) property can be distributed in accordance with the directions set forth in the Will.
MYTH #6 – “TRUSTS ARE JUST FOR THE WEALTHY”
A Trust is simply a vehicle for separating the legal title and beneficial ownership of property.
A “Trustee” is designated as the person or entity who has legal title to the property placed in that person or entity’s “trust”.
The “Trustee” must manage the trust property in accordance with the directions set forth in the trust document, for the benefit of the trust’s “beneficiary”.
Even the simplest Will should contain provisions for a trust to be established to hold property for the benefit of minors.
1. Where There Is A “Will” Is There Is A Way? The biggest mistake is the failure to plan, having the wrong plan or even having an outdated plan. Everyone can benefit from a will or some other form of estate planning. Avoiding or reducing estate taxes, saving estate administrative costs, specifying who will receive your estate and protecting your family are just a few of the benefits a will can achieve.
2. Understanding the Death Tax System. If you are married, with proper planning you and your spouse can shield double the state and federal exemption amount ($5.0 million federal and $675,000 for New Jersey) from estate tax. The mistake occurs when the first spouse dies and leaves their entire estate to the surviving spouse thereby in effect losing the deceased spouses individual exemption amount. Instead, it is often beneficial for the spouse to leave all or a portion of their estate to a simple trust called an exemption trust (also know as a credit shelter trust).
3. Should Assets be Jointly Titled? Joint assets often have a right of survivorship which transfers ownership at death to the joint owner by operation of law. This bypasses the will. Since probate in New Jersey is relatively straightforward, instead of being an advantage, joint ownership can interfere with an estate plan.
4. What Are The Benefits Of Beneficiary Designations? IRA And Retirement Plan Distributions. A well thought out estate plan can be undermined by an incorrect beneficiary designation. The most common error is naming minor or irresponsible beneficiaries. A trust may be a better designation. Also consider a “Stretch IRA”.
5. Can Life Insurance Be Improperly-Owned? Life insurance death benefits are not subject to income tax. However, they are subject to estate taxes if the policies are owned by the insured at death. A way to avoid this is to have life insurance owned by an irrevocable life insurance trust.
6. Gifting When You Shouldn’t And Not Gifting When You Should. When properly applied, gifting can be an extremely effective way to reduce estate taxes. However, many individuals incorrectly assume that gifting is simple and fail to obtain competent advice.
7. Hiring A Generalist. When hiring a doctor, attorney, mechanic or any type of service profession, I strongly recommend hiring a specialist. Almost without exception, the specialist will have more experience and skill in their area of specialty than will a generalist. This usually translates into higher quality services provided in the most cost effective manner possible.
The announcement by the IRS of the opening of the new Offshore Voluntary Disclosure Program (OVDP) on January 9, 2012 came as a surprise to most tax practitioners, especially since the 2011 OVDI just ended on September 9, 2011. However, if one analyzes the number of new developments in international tax compliance over the past several years, then the surprise of the announcement of a new offshore voluntary disclosure program is greatly reduced. One of these latest developments is the new Form 8938. This article analyzes some of the key aspects of the interaction between Form 8938 and 2012 OVDP.
2012 OVDP and Form 8938
In announcing the 2012 OVDP, IRS cited several reasons for announcing the new voluntary disclosure program for U.S. taxpayers with offshore assets, particularly the success of the previous programs and the wealth of information gathered by the IRS which would allow it to investigate (and ultimately penalize and/or prosecute) additional non-compliant U.S. taxpayers.
However, Form 8938 is likely to play a very important role in driving additional U.S. taxpayers toward 2012 OVDP.
Form 8938′s Impact on Foreign Asset Disclosure
The main reason for Form 8938′s potentially large impact on 2012 OVDP participation lies in the nature of Form 8938.
Form 8938 is and will be a significant tool for the IRS to identify the scope of international tax non-compliance of a given U.S. taxpayer. The reason why Form 8938 is so useful for the IRS is that Form 8938 now requires a taxpayer to disclose more information, which connects various parts of a taxpayer’s international tax compliance including the information that escaped disclosure on other forms earlier. This summary, in turn, allows the IRS to effectively identify the overall scope of a taxpayer’s noncompliance. Form 8938 may lay the foundation (and road map) for an IRS investigation of whether the taxpayer has been in compliance previously.
Form 8938 May Force Taxpayers to Enter a Voluntary Disclosure Program
This ability by the IRS to discern whether the areas of actual or potential non-compliance in current as well as prior years puts previously non-compliant taxpayers in a very uncomfortable position.
A previously non-compliant taxpayer who failed to reporting foreign bank accounts will have great difficulty with Form 8938. Since Form 8938 required to be annually filed together with the tax return, the failure to file (or being untruthful) Form 8938 at this point is likely to turn previous non-willful non-compliance into a willful one.
For example, Question 3a of Form 8938 indirectly asks a problematic question: the date of the account opening (the question specifically asks whether the account was opened in the tax year). For older accounts, this is a dangerous question. Answering that the account was not opened in the tax year, implicitly (and affirmatively by omission) states that account was opened in a prior year. As a result, prior years FBARs should have been filed. The answer to question 3a could provide incriminating evidence to the IRS.
Question 3a (similar to Question 7a of Form 1040 Schedule B) also does something far worse: it requires a response from the taxpayer. Answering (or not answering) the question could demonstrate “willfullness” in failing to file FBARs. The IRS has previously used taxpayers’ answer (or non-answer) of Question 7a of Form 1040 Schedule B to successfully demonstrate “willfullness” and “intent” in criminal prosecutions. A person who willfully fails to report an FBAR may be subject to a civil monetary penalty equal to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation. Willful violations would also be subject to criminal penalties.
Form 8938 is likely to have a major impact on the number and depth of voluntary disclosures as taxpayers are forced to re-evaluate their tax compliance strategies.
The impact of Form 8938 on your particular situation should be analyzed separately by a competent tax attorney. This article can only provide a very general background, because the exact strategies, including the enrollment into 2012 OVDP, will differ from situation to situation.
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.
Yesterday the Internal Revenue Service opened its Offshore Voluntary Disclosure Program (OVDP) to encourage more taxpayers with assets in undeclared foreign bank accounts to come forward. While the OVDP was not expected by most tax lawyers and professionals, it may be welcomed by many of our clients who missed the recently closed 2011 OVDI program.
The IRS has introduced a series of voluntary disclosure programs in recent years. The OVDP follows on the success of the 2009 Offshore Voluntary Disclosure Program (the 2009 OVDP) and the 2011 Offshore Voluntary Disclosure Initiative (the 2011 OVDI), which were announced many years after the 2003 Offshore Voluntary Compliance Initiative (OVCI) and the 2003 Offshore Credit Card Program (OCCP) (there was low participation in the 2003 programs).
The many voluntary disclosure initiatives typically offer reduced penalties in exchange for taxpayers voluntarily coming into compliance before the IRS is aware of their prior tax indiscretions. In part, the success of such initiatives often depends on the perception that they will be followed by strong government tax enforcement efforts.
One reason for new OVDP program is the IRS’s ongoing well-publicized efforts with the Justice Department to pursue criminal prosecution of international tax evasion. Last year they charged a half dozen Americans with HSBC accounts with tax evasion. They also recently charged a trio of Swiss bankers with conspiring with U.S. taxpayers to hide more than $1.2 billion in assets from the IRS. There is ongoing summons activity (including the subpoena issued to HSBC India) seeking to force foreign financial institutions to deliver account-holder information to the U.S. government as well as possible indictments of foreign financial institutions. Recently, several foreign institutions have advised their account holders to consult U.S. tax advisors regarding the IRS voluntary disclosure program and their U.S. tax reporting relating to their foreign financial accounts. The institutions will likely take whatever action is necessary to avoid being indicted, beginning with the delivery of information regarding account holders to the U.S. government. In summary, the IRS is vigorously shaking the tax evasion tree, and fruits (i.e., tax evaders) are falling out.
The new 2012 OVCP program is similar to the 2011 program in many ways, but with a few key differences. Unlike last year, there is no set deadline for people to apply. However, the terms of the program could change at any time going forward, the IRS cautioned. For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers—or decide to end the program entirely at any point.
The overall penalty structure for the new program is the same for 2011, except for taxpayers in the highest penalty category. The 2012 OVDI is patterned after the 2011 OVDI but increases the maximum “FBAR-related” penalty from 25% to 27.5% of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25% in the 2011 program (the IRS has to give some incentive to previous taxpayers who earlier came forward; the 2009 program penalty was 20%). Some taxpayers will be eligible for 5 or 12.5% penalties; these remain the same in the new program as in 2011.
It is uncertain how the 2012 OVDP affects pending 2011 OVDI applications. It is possible that some 2012 OVCP filings could have resulted in a lesser (or greater) penalty, depending on account balances during the relevant disclosure period.
Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.
Participants face a 27.5 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty. Smaller offshore accounts will face a 12.5 percent penalty. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the new OVDP will qualify for this lower rate. As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.
Under the 2011 OVDI, the IRS agreed not to impose a penalty for the failure to file the delinquent FBARs if there were no underreported tax liabilities and the FBARs were filed by August 31, 2010 (FAQ 17). Presumedly, the IRS will follow the same course under the 2012 OVDI since those with no underreported tax liabilities are not truly within the range of taxpayers the IRS is trying to identify.
The ability of a U.S. taxpayer to maintain an undisclosed, “secret” foreign financial account is fast becoming impossible. Foreign account information is flowing into the IRS under tax treaties, through submissions by whistleblowers, from others who participated in the 2009 OVDP and the 2011 OVDI who have been required to identify their bankers and advisors. Additional information will become available as the Foreign Account Tax Compliance Act (FATCA) and Foreign Financial Asset Reporting (Form 8938 and new IRC § 6038D) become effective.
It is likely that the U.S. government will require foreign financial institutions doing any business in the United States (that may include any wire transfer activity, which is almost all institutions) to disclose account holders having relatively small accounts and earnings. There have been tax rumors of disclosure discussions regarding accounts having a high balance of the equivalent of $50,000 at any time between 2002 and 2010. U.S. persons having interests in foreign financial accounts should not be comfortable that their foreign financial institution will somehow refrain from disclosing very small accounts in the current enforcement environment. We do know how the unpredictable IRS will react to discovered undisclosed small account balances.
Taxpayers with undisclosed foreign accounts should consult a competent tax lawyer before deciding to participate in the 2012 OVDI. Although the 2012 OVDI penalty regime may seem overly harsh for many, the decision to participate should include an economic analysis of the taxpayer’s projected future earnings that could be generated from the foreign funds. If a taxpayer is discovered before any voluntary disclosure submission, there could be harsh criminal (in addition to civil) penalties. The risks may outweigh the benefits.
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.
The Internal Revenue Service today reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes.
The IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.
The overall penalty structure for the new program is the same for 2011 OVDI program, except for taxpayers in the highest penalty category. Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.
Under the new program, there’s a 27.5% penalty, up from 25% in the 2011 program, on the highest aggregate balance in a taxpayer’s overseas accounts in the eight years before disclosure. But those whose overseas account balances did not top $75,000 in any year face a lower penalty of 12.5%. Like the previous program, some taxpayers are eligible for an even lower penalty rate of 5%. Taxpayers also owe back taxes and interest. As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.
The IRS said the new program’s terms and penalties could change at any time, and the IRS may opt to end the program at any time.
“As we’ve said all along, people need to come in and get right with us before we find you,” said IRS Commissioner Doug Shulman, in the release. “We are following more leads and the risk for people who do not come in continues to increase.”
The IRS said its two previous disclosure programs — one ended in 2011 and one in 2009 — netted the agency about $4.4 billion so far in tax revenue, and the agency is still processing disclosures to the 2011 program.
The IRS received some 33,000 disclosures under the previous programs, and “hundreds of taxpayers” have come forward since the 2011 program closed in September, the IRS said in its release Monday. Those people will be treated under the terms of the new, third program, the IRS said.
“Our focus on offshore tax evasion continues to produce strong, substantial results for the nation’s taxpayers,” Shulman said. “We have billions of dollars in hand from our previous efforts, and we have more people wanting to come in and get right with the government. This new program makes good sense for taxpayers still hiding assets overseas and for the nation’s tax system.”
Also, the IRS made note of American citizens living in other countries who did not realize they had run afoul of U.S. law by failing to report certain assets. “The IRS recognizes that its success in offshore enforcement and in the disclosure programs has raised awareness related to tax filing obligations,” the release said. “This includes awareness by dual citizens and others who may be delinquent in filing, but owe no U.S. tax. The IRS is currently developing procedures by which these taxpayers may come into compliance with U.S. tax law.”
In light of the numerous probes and summonses against several foreign banks, including HSBC, it is imperative that U.S. accountholders seriously consider entering the new IRS OVDP program for protection against civil (and criminal) penalties.
Patel Law Offices has assisted numerous taxpayers with offshore asset planning and filed dozens of OVDI applications last year. 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.
Form 8938, Statement of Specified Foreign Financial Assets, is a new reporting form. Form 8938 will be used to report certain foreign financial assets as required as part of the Hiring Incentives to Restore Employment Act (HIRE Act), which was signed into law in 2010 by President Obama.
Form 8938 is effective for 2011 and future tax years. The form will typically be attached to your annual federal income tax return if you have a filing requirement. Please keep in mind Form 8938 is a separate and distinct reporting form from Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, commonly referred to as the FBAR. Individuals may be required to file both reports, depending on the specific facts of a particular year.
It is possible that the provisions of the HIRE Act will affect you and any disregarded entities. While the HIRE Act technically requires reporting by domestic entities in addition to individual reporting requirement, the IRS has currently suspended the reporting requirement for domestic entities until it issues final regulations covering domestic entities.
Last month the IRS finally released the final version of Form 8938, Statement of Specified Foreign Financial Assets, and released its Form 8938 instructions. Affected taxpayers must use the form to report certain financial assets to the IRS.
Under the Foreign Account Tax Compliance Act’s addition of Sec. 6038D to the Code, individuals are required to report interests in specified foreign financial assets (SFFAs) when filing their federal income tax returns. The act was effective for tax years beginning after March 18, 2010; however, in Notice 2011-55, the IRS suspended the requirement until the final version of Form 8938 was released. Therefore, the taxpayers subject to the requirement must file the form in 2012 for 2011 tax years. In addition, taxpayers who would have been required (except for the suspension of the requirement in Notice 2011-55) to file Form 8938 in 2011 for a tax year that began after March 18, 2010, must file it for the prior year with their return for the current tax year.
The Sec. 6038D reporting requirement also applies to any domestic entity that is formed or availed of to hold specified foreign assets, but until the IRS issues regulations governing such domestic entities, only individuals are required to file Form 8939.
The final form is unchanged from the draft form released in June. The instructions, issued in draft form in September, have been updated to reflect changes made by last week’s regulations—most notably, a reduction in the reporting threshold amounts for the value of specified foreign financial assets held at any time during the tax year. The new thresholds for taxpayers living in the United States are:
- Single taxpayers/married filing separately: $50,000 on the last day of the year or $75,000 anytime during the year.
- Married filing jointly: $100,000 on the last day of the year or $150,000 anytime during the year.
The reporting thresholds for taxpayers living abroad are:
- Single taxpayers/married filing separately: $200,000 on the last day of the year or $300,000 anytime during the year.
- Married filing jointly living abroad: $400,000 on the last day of the year or $600,000 anytime during the year.
There are significant civil and criminal penalties for failure to file Form 8938 or for an incorrectly filed Form 8938. The civil penalty starts at $10,000 and goes up from there. In addition to penalties, failure to file Form 8938 when required could result in the statute of limitations on tax liability for the entire income tax return to remain open until three years after the failure is remedied as well as possible criminal prosecution in certain circumstances.
It is very important for anyone with funds in offshore accounts to have a tax professional who is familiar with all of the applicable reporting requirements to assist them. Taxpayers with undisclosed foreign accounts should also consider participating in the 2012 OVDP. Although the 2012 OVDP penalty regime may seem harsh for many, the decision to participate should include an economic analysis of the taxpayer’s projected future earnings that could be generated from the foreign funds. If a taxpayer is discovered before any voluntary disclosure submission, there could be harsh criminal (in addition to civil) penalties. The risks may outweigh the benefits.
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.
In a fact sheet (IRS FS-2011-13) released last week, the IRS reminded U.S. citizens and dual citizens of the United States and foreign countries who live abroad about U.S. filing requirements, including Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). No new developments are provided, only reminders of existing laws and regulations.
Some dual-citizen taxpayers may have only recently learned about their obligation to file U.S. income tax returns or FBARs, the IRS said in the fact sheet.
Generally, FBAR must be filed by U.S. persons having a financial interest in or signature authority or other authority over any financial account in a foreign country if the aggregate value of the accounts exceeds $10,000 at any time during the calendar year. The normal annual filing date for FBAR is June 30. While the Association of Americans Resident Overseas estimates that some 6.32 million Americans live abroad, the Treasury Inspector General for Tax Administration reports that only a little more than 534,000 FBARs were filed in 2009.
FBAR discloses the foreign interest or account to the IRS and does not impose a tax, although failure to file it can incur penalties. Non-willful failure to file may be penalized by up to $10,000 per violation, unless the failure was due to reasonable cause. A willful failure to file can be subject to a higher civil penalty (up to $100,000 or 50% of the balance of the foreign account, whichever is greater) and criminal penalties.
In the fact sheet, the IRS gave examples of factors that, considered along with all the facts and circumstances, could point to reasonable cause for non-willful failure to file an FBAR and therefore a lesser or no penalty:
Reliance upon the advice of a professional tax adviser who was informed of the existence of a foreign financial account;
A lack of any intentional effort to conceal income or assets related to an unreported foreign account that was established for a legitimate purpose; and a lack of any material tax deficiency related to an unreported foreign account.
Factors identified as potentially weighing against a finding of reasonable cause, on the other hand, were:
Failure by the taxpayer to disclose a foreign financial account to his or her tax return preparer; Background and education of the taxpayer indicating that he or she should have known of the FBAR reporting requirements; and A tax deficiency related to the unreported foreign account.
The fact sheet advised taxpayers who learn belatedly of their FBAR filing requirement for earlier years (within the six-year statute of limitation) to file the delinquent FBARs and attach a statement explaining why they are late.
The fact sheet also advised of basic federal income tax filing and payment requirements and related penalties and described reasonable-cause factors for those lapses. It reminds U.S. citizens and dual citizens that they are required to report their worldwide income on their federal tax return.
In addition, the fact sheet reminds taxpayers that Foreign Account Tax Compliance Act reporting of specified foreign financial assets on income tax returns will be required starting in 2012. Notice 2011-55, issued last summer, suspended the requirement until a final version of Form 8938 is released. The IRS has said it intends to release the form, along with new guidance, before the end of this month.
Although, the IRS provided no new developments and only reminders of existing laws and regulations, the announcement re-affirms the IRS’ aggressive stance on tax enforcement of offshore activities.
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.
Earlier this month Credit Suisse Group AG, Switzerland’s second-biggest bank, told U.S. clients it is giving confidential client account data to the Swiss tax authorities, who will decide whether to disclose it to the Internal Revenue Service. The U.S. is probing whether Credit Suisse helped Americans evade taxes, and the IRS used a 1996 tax treaty to request data for certain accounts held between 2002 and 2010, according to a November 2nd letter sent to a client by the bank. The IRS sought data for accounts owned through domiciliary companies in which clients are the beneficial owners, according to the letter.
The Swiss Federal Tax Administration issued an “immediately executable” order to the Zurich-based bank, which has no right to appeal, according to the letter. Taxpayers can consent to the SFTA handing over their account data to the IRS, or they can use the Swiss legal system to appeal a ruling by the SFTA that their account must be given to the IRS, according to the letter.
“Please be advised that Credit Suisse is not able to provide any information on whether or not information with respect to a specific account will be provided to the IRS,” according to the letter, signed by managing directors Michel Ruffieux and Stephan Gussmann. “In connection with the IRS treaty request, the SFTA has issued an order directing Credit Suisse AG to submit responsive account information to the SFTA,” the bank said in a statement.
Credit Suisse stated on July 15th that it is a target of a criminal probe by the Department of Justice over former cross-border private-banking services to U.S. customers. On July 21, seven Credit Suisse bankers were indicted on a charge of conspiring to help U.S. clients evade taxes through secret accounts.
The U.S. is conducting criminal probes of 11 financial institutions. U.S. and bank officials are concluding talks on a civil settlement that will probably require banks to pay billions of dollars and hand over the names of thousands of Americans who have secret accounts. Those people who have had their accounts disclosed will be subject to civil tax penalties by the IRS and potential prosecution by the Justice Department.
U.S. taxpayers can avoid prosecution by voluntarily disclosing their account to the IRS. Though the OVDI program window has closed, taxpayers with undisclosed foreign assets may still be able to file a traditional voluntary disclosure via the IRS VDP program that would allow them to avoid potential criminal prosecution.
In February 2009, UBS AG, the biggest Swiss bank, avoided criminal prosecution by paying $780 million, admitting it fostered tax evasion and giving the IRS data on more than 250 accounts to avoid criminal prosecution. It later turned over data on another 4,450 accounts and in October 2010, the U.S. dropped its criminal case against UBS. The Justice Department is pursuing new criminal cases against Swiss banks after American customers provided information on them through a U.S. voluntary-disclosure program. The U.S. crackdown against offshore tax evasion has led to charges against UBS AG, at least 21 foreign bankers, advisers and attorneys and at least 36 U.S. taxpayers.
It is predicted that other Swiss and many other banks (including HSBC) under investigation will eventually settle with the U.S. For U.S. citizens or residents who have not paid taxes on offshore assets, the hope of hiding from tax authorities seems increasingly unlikely.
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 federal grand jury in San Jose, California, last week indicted Ashvin Desai of San Jose on three counts of tax evasion, two counts of willfully aiding the preparation of materially false tax returns and three counts of failing to file Reports of Foreign Bank and Financial Accounts (FBARs), the Justice Department and Internal Revenue Service (IRS) announced.
According to the indictment, Desai, the owner of a medical device company, his wife and his two adult children maintained millions of dollars in undeclared bank accounts in India at The Hongkong and Shanghai Banking Corporation Ltd. (HSBC). During 2009, Desai maintained approximately $8.8 million in his undeclared accounts at HSBC in India. Desai attempted to evade his income taxes for tax years 2007-2009 by filing false tax returns that failed to report $1,306,810 of interest income, and that falsely reported that he did not have an interest in, or signature authority over, bank accounts located in a foreign country. Desai also prepared false tax returns for his children for tax year 2009 that failed to report approximately $189,000 of interest income paid by HSBC in India, and that falsely reported that the children did not have an interest in bank accounts located in a foreign country.
The indictment further alleges that during 2009 Desai closed an account he maintained at HSBC in England and directed that the funds from that account be transferred to a bank account maintained at HSBC in Dubai in the name of one of his children, and that, for tax years 2007-2009, Desai failed to file FBARs to report his foreign bank accounts to the Department of Treasury.
As alleged in the indictment, United States citizens have an obligation to report to the IRS on Schedule B of their United States Individual Income Tax Return, Form 1040, whether they had a financial interest in, or signature authority over, a financial account in a foreign county in a particular year by checking “Yes” or “No” in the appropriate box and identifying the country where the account was maintained. They further have an obligation to report all income earned from foreign financial accounts on the tax return and to pay the taxes due on that income. Separately, United States citizens with a financial interest in, or signatory authority over, a foreign financial account worth more than $10,000 in a particular year, must also file an FBAR form with the Treasury disclosing such an account by June 30 of the following year.
Each tax evasion charge carries a maximum penalty of five years in prison and a $250,000 fine. The false tax return charges each carry a maximum penalty of three years in prison and a $250,000 fine. The failure to file an FBAR charges each carry a maximum penalty of 10 years in prison and a $500,000 fine.
While an indictment is merely an allegation and Mr. Desai is presumed innocent, several other HSBC India clients this year have been indicted and subsequently pled guilty to tax evasion.
This case is being prosecuted by Senior Litigation Counsel John E. Sullivan and Trial Attorney Melissa S. Siskind of the Justice Department’s Tax Division. Mr. Sullivan, who has also previously prosecuted several other Swiss bank customers, is leading prosecutions in numerous HSBC India tax evasion cases. The Justice Department’s Tax Division seems to be replicating its 2009 prosecutorial successes against UBS Swiss bank customers again with HSBC India account holders.
Earlier this year, 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.
The Desai indictment and HSBC summons should persuade offshore accountholders who cannot decide whether to disclose past foreign account noncompliance to the IRS via the IRS Voluntary Disclosure Practice (VDP) program, which remains in effect after OVDI’s expiration, for protection against civil (and criminal) penalties. In light of recent indictments, quiet or no disclosures are not viable options for such individuals. Our law office, which represents many taxpayers throughout the U.S. and around the world with undisclosed offshore accounts, believes that the recent indictments and large penalties should encourage more U.S. taxpayers with undisclosed offshore accounts, especially held at HSBC, to come forward before the government contacts them.
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.