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Blake Christian
Blake Christian
Tax Haven Banking Melt-Down, Tax Audits and FBAR Reporting

Post-9/11 worldwide banking disclosure reform, the European banking developments over the past two years and the Obama Administrationís 2010-2011 tax reform proposals will keep a white-hot spotlight focused on this area.

February 25, 2010
by Blake Christian, CPA, MBT

As a result of the 2009 stalemate between the IRS and the Swiss banking authorities, UBS was ultimately forced to disclose banking details on 4,450 United States (U.S.) taxpayers. For additional background, view Switzerland at War With U.S. Tax Officials.

The other U.S. fallout from this tax and banking privacy battle was the Administration’s and the Internal Revenue Service’s (IRS) all-out tax conformity blitz last year. This was to ensure that all taxpayers having signature rights and/or direct or indirect interests in any foreign financial institution with a $10,000 or greater balance during the reporting period disclosed all account details timely, as well as earnings from such accounts.

These efforts late last year paid off as evidenced by the more than 14,700 U.S. individual and business taxpayers who disclosed billions of dollars of offshore bank accounts in over 70 countries. Most of these filings were attributable to the IRS Foreign Bank Account Reports (FBAR) amnesty program which expired on October 15, 2009. See IRS Notice 2009 – 62). Those taxpayers who did not comply under the amnesty program will undoubtedly be hearing from the IRS (quite possibly the criminal division) in the near future.

At this point it is not clear how many of the amnesty filers had under-reported their U.S. taxable income associated with these foreign accounts vs. simply not disclosing their signature rights and other interests in various bank accounts. For example, a percentage of the amnesty filers simply had signature rights in foreign accounts through their role as a corporate officer, but may have had no economic interest in the underlying accounts. Other filers may have previously reported their foreign taxable income on Schedule B or Schedule D of their personal returns or on their business returns, but simply failed to file the required Form TD F 90 – 22.1.

Even though the U.S. received worldwide attention (generally negative) as a result of the IRS’s aggressive actions in 2009, Germany and the United Kingdom (U.K.) had been equally aggressive in prior years. In fact, Germany made a bold move two years ago and paid €4.6 million to obtain customer information from LGT Bank located in Liechtenstein (another popular tax haven). The controversy surrounding the Germany’s strategy was that they secured this LGT information from a party who had stolen the data from the bank or another party.

While German Chancellor, Angela Merkel, has fully endorsed the purchase of the stolen data, other German politicians and, not surprisingly the Swiss, have voiced strong opposition to Germany’s techniques.

The Germans do not appear to be too concerned with public perception and are laughing all the way to the bank. According to the Financial Times (UK), so far their €4.6 million investment has yielded over €200 million in incremental tax collections.

The Germans also have a line forming from other countries — including the U.K., Netherlands, Belgium and Austria — willing to pay for the banking data secured by them. The current worldwide economic slump is a likely reason that these governments are resorting to such aggressive audit and collection strategies. Plus, there is little sympathy from the masses when the wealthy taxpayers use offshore accounts to hide assets from tax authorities and creditors.

Needless to say, deposits in tax-haven jurisdictions have seen a massive exodus over the last two years as taxpayers move away from these radioactive banks.

The FBAR reporting has been required for years and will continue for U.S. taxpayers having either signature rights or material financial interests in foreign accounts. Therefore a review of the current filing requirements is worth reviewing.

FBAR Deadline for Calendar 2009

In addition to disclosing banking relationships on the bottom of Form 1040, Schedule B and reporting the foreign interest, dividends, capital gains and other taxable items on their appropriate personal and/or business U.S. income tax returns, U.S. taxpayers having signature authority or economic interests in financial accounts that exceed $10,000 during the prior year must separately report and file Form TD F 90-22.1 with the U.S. Treasury Department.

This Form is due by June 30th of the year following each calendar year. Otherwise, significant civil (up to $500,000) and criminal (up to five years in prison) penalties can be imposed. Unlike tax returns, these forms must be physically received (rather simply postmarked) by the Treasury Department on or before June 30th; therefore, adequate planning is required to ensure timely filing.

FBAR Deadline Extended for Certain Taxpayers (Pre-2009
Forms 90-22.1)

IRS Notice 2009-62 provided an additional FBAR extension beyond the basic September 23, 2009 amnesty deadline. This extended deadline is June 30, 2010, but is limited to select taxpayers for FBAR reporting of 2008 and prior years foreign account activities as follows:

  1. Persons with signature or other authority over, but no financial interest in, a foreign financial account and
  2. Persons with a financial interest in or signature or other authority over, a foreign financial account in which assets are held in certain commingled funds (a “foreign commingled fund”).

While the original June 2009 amnesty guidelines were only available to taxpayers who had originally reported and paid all taxes associated with their foreign accounts, the extension under Notice 2009-62 is generally interpreted to apply to those taxpayers with a signature or other financial interest in a “foreign comingled fund,” without regard to whether the taxpayer had actually reported and paid tax on all of the taxpayer’s taxable income for 2008 and previous years.

According to Quarles & Brady LLP, a Milwaukee-based law firm, “An equity interest in a foreign hedge fund or foreign private equity fund is a typical example of a financial interest in a foreign commingled fund. Thus, the extension under Notice 2009-62 generally will apply to taxpayers owning a 50-percent-or-less equity interest in a foreign hedge fund or foreign private equity fund. Accordingly, the FBAR filing deadline for 2008 and previous years for U.S. persons owning such interests is June 30, 2010.

Since the extension under Notice 2009-62 also applies to all U.S. persons having signature or other authority over, but no financial interest in a designated foreign financial account, the FBAR filing deadline for 2008 and previous years is also June 30, 2010.”

Pending FBAR Updates

The Department of Treasury is expected to issue regulations clarifying filing requirements prior to June 30, 2010. As reported by Commerce Clearing House, on February 18, Nikole Flax, technical advisor to the Commissioner, IRS — Tax-Exempt and Government Entities, reconfirmed that the IRS is working on such guidance and reminded recent conference attendees that the IRS has posted frequently asked questions on their Web site. Open issues include whether financial interests in pensions and employee benefit trusts holding foreign investments are subject to FBAR reporting.
 
The IRS is soliciting taxpayer input regarding when a person with signature authority, but no economic interest in a foreign financial account may be exempt from filing an FBAR. The IRS is also asking for comments as to when an economic interest in a foreign legal entity triggers FBAR reporting.

Closing Thoughts

The Obama Administration is focusing on foreign tax provisions in narrowing the 2010 – 2011 federal budget deficit. A wide-variety of proposals to increase foreign income reporting and compliance are incorporated in the president’s budget proposal, including: additional third-party disclosures regarding fund transfers, increased penalties and extended statute of limitations with respect to under-reporting of foreign income or assets. Most of these proposals would not become effective until calendar 2013.

The combination of the post-9/11 worldwide banking disclosure reform, the European banking developments over the past two years and the Obama Administration’s 2010 – 2011 tax reform proposals will keep a white-hot spotlight focused on this area for years to come.

The IRS released Announcement 2010-16 on February 26th which provides a temporary suspension of FBAR reporting for certain taxpayers who are non-U.S. citizens, non-U.S. residents, and non-domestic entities.  IRS Notice 2010-23 was also released on the 26th and outlines Form TD 90-22.1 filing extensions for certain taxpayers with account signature rights but no financial interest in the related account, and exemptions for certain taxpayers who have investments in “foreign comingled funds.

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Blake Christian, CPA/MBT is a tax partner in the Long Beach office of Holthouse Carlin & Van Trigt LLP, CPAs and is co-founder of National Tax Credit Group, LLC.

For more information, contact Christian at (562) 216-1800 or see www.blakechristian.com.