Taxpayers with offshore activities must be careful

April 27, 2009
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Earlier this month, many of us filed our tax returns and put another year behind us. Something that may have gone unnoticed in the rush to meet the deadline is that the U.S. government has stepped up its enforcement and administration of certain international reporting requirements of individuals and businesses with an offshore or international connection. This trend is evidenced by the April 15 press releases reiterating a focused effort to enforce the law and regulations with regard to offshore accounts owned or used by taxpayers.

On April 15, the Department of Justice asked a federal court to approve a John Doe summons to be issued to First Data Corp., a credit card processor, to assist the IRS in identifying merchants who use offshore accounts to evade U.S. tax liabilities. The ex parte petition for leave to serve the summons was filed in the U.S. District Court for the District of Colorado, and it alleges that merchants have opened bank accounts in offshore jurisdictions and directed credit card processors, including First Data, to deposit or transfer proceeds from debit or credit card transactions directly into offshore accounts. Other such summonses have been issued in the past to assist the Internal Revenue Service and DOJ in identifying offshore account holders that may have evaded or attempted to evade U.S. tax.

The other announcement was posted on the IRS Web site and provides guidance to taxpayers to voluntarily disclose offshore assets. The site provides telephone numbers for each state for U.S. taxpayers to contact if they desire to participate in a voluntary disclosure program and avoid possible criminal prosecution and other civil penalties.

The recent guidance follows an IRS announcement March 26 of a new penalty structure designed to encourage voluntary disclosures while reducing potential penalties. Under the March 26 guidelines, the IRS will look back six years, and taxpayers will pay taxes, interest and possible accuracy and delinquency penalties for the six-year period. In lieu of any other penalties, taxpayers will be assessed a penalty equal to 20 percent of the amount in foreign bank accounts and entities in the year with the highest aggregate account/asset value.

All of this follows the release of a revised reporting form last fall for offshore accounts. In October 2008, the Treasury Department revised Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts). This form is required to be filed by June 30 each year for accounts controlled by a U.S. person or a person doing business in the United States, or where signature authority by a U.S. person existed during the prior calendar year. The revised form includes more extensive instructions and likely requires more taxpayers to file the form than in prior years. Indeed, as a reminder that TD F 90-22.1 may be required, U.S.  individual and business tax returns have a specific question in the tax return that requests the taxpayer to acknowledge the existence of an offshore account as a reminder that TD F 90-22.1 may be required.

TD F 90-22.1 is generally required to be filed by any U.S. person with a financial interest in, signatory authority over, or other authority over, a foreign financial account (other than an account with a U.S. branch), including a foreign bank account or brokerage account with a value in excess of $10,000 at any time during the year.

The form instructions indicate the control definition can include accounts held or maintained by foreign subsidiaries of U.S. owners. That is, if your company has a Canadian subsidiary, and the subsidiary has Canadian bank accounts, the existence of the accounts must be disclosed on TD F 90-22.1. If a U.S. person has signature authority on the account, the U.S. signatory may also have a filing requirement.

Perhaps the most dramatic change in the revised instructions for many potential filers is the change in definition. Moreover, the IRS Web site’s frequently asked questions regarding what is a U.S. person for purposes of the reporting obligation continue to evolve. The definition is quite expansive and generally includes “a citizen or a resident of the United States, or a person in and doing business in the United States.” The term “person” includes individuals and all forms of business entities, trusts and estates. Certain exemptions exist for foreign athletes or entertainers who may occasionally visit the U.S.

Recent IRS guidance on its Web site indicates the requirements may also apply to employees and self-employed non-resident aliens doing business in U.S. and foreign corporations with a U.S. presence. The form instructions indicate “a branch of a foreign entity that is doing business in the U.S. is required to file this report even if not separately incorporated under U.S. law.”

The consequences for non-compliance are severe, since non-compliance can be subject to civil and criminal penalties. The penalties can include fines of up to $500,000 and five years in prison for willful failures to file or report or supply the required information or for filing a false or fraudulent report.

The change in the instructions and the increased diligence of the IRS and DOJ in this area has been in part due to the results of a 2003 voluntary disclosure program and the recent discoveries in 2008 and 2009 of several situations where certain intermediaries may have assisted U.S. persons in concealing the existence and identity of certain offshore assets and accounts.

Additionally, the IRS has increased its assessment of penalties for non-compliance or late compliance of certain information reporting related to the foreign operations of U.S. businesses and offshore trusts. The IRS has authority to waive penalties where there is reasonable cause, though with the increased focus and publicity regarding the initiatives, the ability to obtain abatements or waivers may be more limited as time moves forward.

The recent announcements clearly indicate that the DOJ and the IRS are taking a more active role in the enforcement of many of the rules on the books that affect taxpayers with offshore activities. There are opportunities for taxpayers to come forward and clean up what they may not have reported in the past. Not participating in such programs may subject taxpayers to the full cadre of penalties and other remedies the IRS and DOJ have at their disposal.

William F. Roth III is a tax partner with BDO Siedman LLP. The views expressed are those of the author and not necessarily those of BDO Seidman LLP or its employees.

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