Foreign Asset Reporting Update: IRS Releases Form 8938, FinCEN Grants FBAR Extension for Some Investment Advisors

In its crusade to rein in foreign asset reporting, the IRS moved closer to implementing a new reporting measure called for by the Foreign Account Tax Compliance Act of 2010. Meanwhile, FinCEN granted an FBAR reporting extension to certain employees of investment advisors.

Draft Form 8938 Released: Statement of Specified Foreign Financial Assets

On May 27, 2011, the IRS released a draft version of the Form 8938, Statement of Specified Foreign Financial Assets. The new form is the progeny of the Foreign Account Tax Compliance Act (“FATCA”), passed by Congress in 2010 to prevent foreign income tax evasion by U.S. taxpayers.

A copy the draft version of Form 8938 is available here.

Effective for tax year 2011 reporting, taxpayers with foreign financial assets valued over $50,000 will be required to file Form 8938 annually. To comply, taxpayers will trace foreign asset income, deductions, and credits from the Form 8938 to where the same are reported on the return. While many individuals will file both FBAR and the Form 8938, some may only need to file one or the other. The IRS has not yet released instructions for Form 8938.

FinCEN Grants FBAR Extension for Employees of Investment Advisors

Shortly after FinCEN Notice 2011-1 extended the FBAR filing deadline for certain signatories, the Treasury Department announced an extension for another subset of signatory filers. FinCEN Notice 2011-2 extends the FBAR filing deadline to June 30, 2012 for the following individuals:

  • Officers and employees of investment advisors registered with the Securities and Exchange Commission with signature or other authority over (but no financial interest in) the foreign financial accounts of persons that are not registered investment companies.

    • A full copy of Notice 2011-2 is available here.

    Individuals and entities that do not fall within the exceptions must file the FBAR for calendar year 2010 by June 30, 2011. The form must be received by June 30th and a USPS postmark will not suffice.

    The attorneys at Fuerst Ittleman, PL have extensive experience with the complex regulatory provisions governing the reporting of foreign assets and bank accounts. You can contact an attorney by emailing us at contact@fidjlaw.com.

    IRS Releases Final Circular 230 Revisions Regulating Registered Tax Return Preparers

    After considering more than 50 written comments on the proposed Circular 230 revisions, the Treasury and the IRS released final regulations on May 31, 2011. Notably, the regulations establish a new “registered tax return preparer” designation. Sections 10.3-10.6 of Circular 230 describe the process for becoming a registered tax return preparer (“Registered Preparer”) and the limited practice rights associated with the designation.

    Application Process

    Generally, the process to become a Registered Preparer requires an applicant to: (1) be at least 18 years of age, (2) pass a one-time competency exam, (3) pass a suitability check, and (4) obtain a Preparer Tax Identification Number (“PTIN”). The competency exam will be administered under IRS oversight and will be similar to the special enrollment examination for enrolled agents. The suitability check, also conducted by the IRS, inquires whether the applicant has engaged in any conduct that would justify suspension or disbarment.

    During the transitional period, an individual who obtains a provisional PTIN before the competency examination is offered may prepare any tax return or claim for refund until December 31, 2013, as long as the individual complies with all other requirements. After the examination is offered, only attorneys, CPAs, enrolled agents, and registered tax return preparers, or individuals defined in section 1.02(a) or (b) of Notice 2011-6 may obtain a PTIN.

    Scope of Registered Preparer Designation

    A Registered Preparer can represent taxpayers before revenue agents, customer service representatives, and other employees during an examination if the preparer signed the tax return for the period under investigation. Under no circumstances does the representation extend to proceedings before appeals officers, revenue officers, IRS counsel, or similar agents of the IRS or the Treasury. Moreover, a Registered Preparers practice dos not include the authority to advise clients beyond what is necessary to prepare a tax return, claim for refund, or other document intended to be submitted to the IRS. Thus, communications between a Registered Preparer and taxpayer are not privileged under IRC § 7525 because the advice is intended to be reflected on a tax return, not privileged or confidential.

    Tax Return Preparation Standards

    The revised Circular 230 Section 10.34 also provides the broad tax return preparation standards applicable to all practitioners, including CPAs and enrolled agents. According to the regulations,

    A practitioner may not willfully, recklessly, or through gross incompetence, sign a tax return or claim for refund that the practitioner knows or reasonably should know contains a position that: (A) lacks a reasonable basis; (B) is an unreasonable position as described in section 6694(a)(2); or (C) is a willful attempt by the practitioner to understate the liability for tax or a reckless or intentional disregard of rules or regulations by the practitioner as described in section 6694(b)(2).

    The revised Circular 230 final regulations are posted by the Office of the Federal Register here.

    The attorneys at Fuerst Ittleman have extensive experience in tax refund claims and all forms of tax controversy. Contact an attorney by emailing us at contact@fidjlaw.com.

    Panelists Address New Approaches to Increasing Efficiency of U.S. APAs

    At the first annual Transfer Pricing Conference in Washington on June 8, current and former IRS officials explained recent initiatives in the Advance Pricing Agreement Program (APA). The panelists concluded that despite significant processing delays, obtaining an APA can prevent future complications with double taxation, tax evasion, and uncertainty over transfer pricing methods. Practitioners questioned whether the program can remain effective when limited resources and increased applications have lengthened the processing time.

    Advance Pricing Agreement Program

    The Advance Pricing Agreement Program, implemented in 1991, is designed to resolve actual or potential transfer pricing disputes under IRC § 482 in a cooperative manner. An APA is a binding contract between the IRS and a taxpayer whereby the IRS agrees not to seek a transfer pricing adjustment for a covered transaction if the taxpayer files its tax return for a covered year consistent with the agreed transfer pricing method.

    From 2000-2007, the APA Program averaged 91 applications per year. Applications sharply increased in 2008 and maintained momentum through 2010 with 144 applications, representing a new one-year high for the Program. The APA Program expects APA applications to continue in 2011.

    Processing Delays

    The APA process is a lengthy one. The process can be broken into five phases: (1) application; (2) due diligence; (3) analysis; (4) discussion and agreement; and (5)

    drafting, review, and execution. Determinations are made on a case-by-case basis rather than by category. The APA team must satisfy itself of highly complex factual issues before reaching an advance agreement with a taxpayer; as a result, the due diligence and analysis stages can span a staggering number of months.

    The average time to complete a new APA for a small business is 40.7 months, 33.1 months for a renewal. Although the IRS expedites APA processing for small businesses, these cases require nearly the same amount of time and resources to analyze the highly factual, novel transfer pricing issues. Consequently, many taxpayers are opting to forgo the process.

    Recent Initiatives

    At the June 8 conference, former APA director John Hinding discussed IRS initiatives to reduce processing times amid restricted resources. Some of these initiatives include pooling resources with other competent authority and reducing the number of participants required at meetings.

    In 2005, the IRS Chief Counsel increased specialization within the office by creating five teams of select individuals to handle all cases of a particular type. The purpose was to increase efficiency, quality, and consistency. At the end of 2010, cases within these five categories accounted for 86 of the 243 cases pending in the office.

    Read more about the APA Program and its initiatives here.

    The attorneys at Fuerst Ittleman have extensive experience in transfer pricing and litigating foreign and domestic tax controversy. If you have a troublesome tax matter on your hands, email us at contact@fidjlaw.com.

    Third Circuit to consider Constitutionality of IRS Summons Issued in U.S. Virgin Islands Economic Development Credit Case

    On June 13, 2011, Joseph A. DiRuzzo, III, a Senior Tax Associate at Fuerst Ittleman, PL filed his Initial Brief in the Third Circuit Court of Appeals in Gangi v. United States of America, 3d. Cir. case # 11-1612. The appeal stems from a decision of the United States District Court for the District of New Jersey in which the District Court granted in part and denied in part Mr. Gangis petition to quash two separate IRS summons, one issued to CitiBank and the other to Sovereign Bank.

    Mr. Gangi petitioned the District Court contending that the IRS summons used to audit USVI taxpayer that claimed EDC credits violated United States v. Powell, was unconstitutional, and that there was institutional bad faith on part of the IRS. The District Court ruled, in part, against Mr. Gangi finding that the IRS summonses in question were properly issued.

    The 3rd Circuit opening brief argued that the District Court erred in concluding that the enforcement of the IRS summonses would not result in an abuse of its process; that the “Virgin Islands project” (the IRS audit project regarding USVI residency) was predicated on an unconstitutional construction of the Internal Revenue Code and violated the Equal Protection Clause; and that the IRS Taxpayer Advocates 2009 report to Congress demonstrated institutional bad faith on the part of the IRS.

    A full copy of the opening brief is available here.

    The Answer Brief of the United States is expected in mid July. The pace of the Virgin Islands tax litigation is quickening as this case will require the Third Circuit to again examine the USVI residency/EDC cases, and in July the Tax Court will be hearing oral argument regarding the applicability of TERFA to USVI partnerships.

    The attorneys at Fuerst Ittleman have extensive experience in litigating against the IRS and the Tax Division of the U.S. Department of Justice before the Tax Court, District Courts, and Courts of Appeal in civil and criminal matters. Additionally, the attorneys at Fuerst Ittleman have extensive experience in Virgin Islands tax cases, and Mr. DiRuzzo is admitted to practice law in the USVI. For more information, contact us at: contact@fidjlaw.com.

    Third Circuit Court of Appeals overturns U.S. Tax Court regarding Virgin Islands Economic Development Program case

    On June 10, 2011, the Third Circuit Court of Appeals in Appleton v. Commissioner, overturned the U.S. Tax Court which had denied the Government of the U.S. Virgin Islands motion to Intervene. The Tax Court ruled that the USVI did not meet the requirements of Rule 24 of the Federal Rules of Civil Procedure which addresses intervention as of right and permissive intervention. The Tax Court ruled that the USVIs participation would cause a delay in the case, that there would be redundancy in the issued, that the USVI did not have a recognizable stake in the litigation, and that an amicus brief would be sufficient. The USVI appealed to the Third Circuit which had jurisdiction over the case because the taxpayer, Mr. Appleton, resides in the USVI.

    Judge Rendell in writing for the majority opinion held that the USVI met the permissive intervention standard and did not have to address intervention as of right. The Third Circuit stated:

    There is no support for the notion that any delay here would be “undue,” or that the [USVIs] arguments would prejudice either Appleton or the IRS. While the issue that concerns both the [USVI] and Appleton is the same, namely, the statute of limitations, the [USVIs] interest in the proceedings is certainly different from Appletons interest in dealing with this one-time tax adjustment. The fact that the [USVIs] interest is somewhat different detracts from the argument that the proceedings will be “redundant.”

    Judge Rendell held as follows:

    Accordingly, it is clear to us that the Tax Court abused its discretion by not considering whether the [USVIs] intervention would cause “undue delay” or “prejudice.” Additionally, as Congress thought it important enough to afford the [USVI] this mechanism to improve its economy, and the Rule permits it to protect its interest through intervention, we will direct the Tax Court to allow the [USVI] to intervene in Appletons proceedings pursuant to Rule 24(b)(2). Therefore, we will remand this matter to the Tax Court, and require that the [USVI] be permitted to intervene pursuant to Fed. R. Civ. P. 24(b)(2).

    In his dissent, Judge Ambro noted that because the USVI and Appletons interest were aligned and that the USVI could file an amicus brief the Tax Court did not abuse its discretion. A copy of the decision is available here.

    The take away from this decision is that the USVI most likely will be able to intervene in all the pending Tax Court cases involving USVI residency and the EDP tax credit. Joseph A. DiRuzzo, III, a attorney at Fuerst Ittleman, PL is currently litigating four cases where the USVI has moved to intervene. Those cases are currently pending before the 11th and 4th Circuit Courts of Appeal.

    The attorneys at Fuerst Ittleman have extensive experience litigating against the IRS and the Tax Division of the U.S. Dept. of Justice, including issues involving the Virgin Islands Economic Development Program. For more information, contact us at contact@fidjlaw.com.

    IRS Prepares Enforcement Against at Least One Foreign Bank

    On June 7, 2011, Steven Miller, deputy commissioner for services and enforcement, announced the next IRS strike in its battle against offshore tax evasion. Miller stated that the agency is planning an enforcement action against one or more non-U.S. banks in the next month.

    Over the last few years, the IRS and the Department of Justice have ramped up their efforts to combat offshore tax evasion. The agencies have been particularly vigorous about pursuing accounts held by Switzerlands UBS AG, London-based HSBC Holdings Pc, and Europes Credit Suisse Group AG. Since 2007, the U.S. has charged tax crimes against over two dozen UBS clients, four UBS bankers, three HSBC clients, and four other alleged offshore enablers.

    In February 2009, the U.S. charged the UBS with helping U.S. citizens avoid taxes. To escape prosecution, the Swiss bank had to pay $780 million, admit that it fostered tax evasion, and hand over selected data to the IRS for 250 accounts. Soon after, the bank handed over data on another 4,400 accounts to settle an IRS lawsuit.

    This February, four Europe-based bankers with Credit Suisse Group AG were also indicted for conspiring to help U.S. clients evade taxes. According to the indictment, the bank had thousands of undeclared accounts with $3 billion in assets. The bankers have not yet appeared in court.

    In April, the U.S. filed a civil suit against HSBC seeking information about U.S. citizens who may have banked in India to keep their accounts hidden from the IRS. In a June 8 statement, HSBC maintained that it “does not condone tax evasion and fully supports the U.S. efforts to promote appropriate payment of taxes by U.S. taxpayers.” The bank pledged to cooperate with requests from U.S. authorities while complying with applicable law in its own jurisdictions.

    You can read more about U.S. enforcement actions against undisclosed foreign bank accounts here and here.

    The IRS held an initial voluntary disclosure program in 2009 whereby taxpayers could avoid prosecution by disclosing their offshore accounts. The taxpayers also had to reveal their bankers and advisers as well as how they moved their money. 15,000 taxpayers came forward between March and October 2009, followed by another 4,000 after October. The IRS is now running a second voluntary disclosure program to encourage more taxpayers to come forward and declare their accounts. Learn more about the Offshore Voluntary Disclosure Initiative here.

    The attorneys at Fuerst Ittleman, PL have extensive experience in handling undeclared foreign bank accounts, undeclared income and voluntary disclosures. You can contact an attorney by emailing us at contact@fidjlaw.com.

    AICPA Submits FBAR Comment Letter

    The AICPA submitted a comment letter last week calling for the Financial Crimes Enforcement Network (“FinCEN”) to reduce or eliminate select filings of Report of Foreign Bank and Financial Account (“FBAR”) for 2009 and prior years. The AICPAs comments come as the deadline approaches for filers who previously deferred from the June 30, 2010 and June 30, 2009 deadlines under Notices 2010-23 and 2009-62. Now, those filers are under the gun to analyze their data and determine appropriate filing or non-filing positions before June 30, 2011. The AICPA proposes waiving the filing requirement for those with signatory authority over, but no financial interest in, a foreign bank or financial account.

    Alternatively, if FinCEN chooses not to make such a waiver, the AICPA makes the following recommendations:

    1. Given the limited use of, and difficulty to collect, the necessary data to file, FinCEN should limit the filings of prior year signatory FBARs to 2008 and 2009. Thus, it would require three years of FBAR filings (2008, 2009, 2010).
    2. Prior year FBAR filings under Notice 2010-23 are now due on June 30, 2011. FinCEN should adopt the 2011 Offshore Voluntary Disclosure Initiative (OVDI) due date, August 31, 2011, to conform to IRS guidance.
    3. Situations may arise where a signatory is no longer has access to account data, such as when the account is maintained by a former employer. In such situations, FinCEN should strongly consider extending a hardship waiver or exception for persons with signatory authority over, but no financial interest in, a foreign financial account.

    The comment letter also demands immediate, definitive guidance on prior year signatory FBAR filings. You can read the complete letter here.

    The attorneys at Fuerst Ittleman, PL have extensive experience navigating the complex regulatory requirements for the Bank Secrecy Act, foreign bank accounts, and the Internal Revenue Code. You can contact an attorney by emailing us at contact@fidjlaw.com.

    IRS Relaxes Deadline for 2011 Offshore Voluntary Disclosure Initiative, Provides Opt Out and Removal Procedures

    As the August 31, 2011 deadline nears, the IRS has announced that taxpayers may request a 90-day extension to participate in the 2011 Offshore Voluntary Compliance Initiative (“OVDI”). The IRS also laid out guidance for taxpayers to opt out of the disclosure program as well as circumstances when the Service will remove taxpayers from the program.

    OVDI

    The 2011 OVDI is a follow-up to a similar 2009 disclosure program targeted at taxpayers with unreported foreign accounts. The initiative offers taxpayers a reduced penalty framework in exchange for full disclosure of unreported foreign accounts. The penalties range from 5 to 25 percent of the balances held in such accounts. You can read more about the initial 2011 OVDI Program announcement and its penalty framework here.

    Extension

    Although the IRS initially stated that the August 31, 2011 was a firm deadline, it is now permitting taxpayers to file for a 90-day extension. The taxpayer must have made a good-faith attempt to comply with the terms of the OVDI. One such term requires the taxpayer to consent to an extended period during which the IRS can assess additional tax or penalties. If taxpayers wish to request an extension, they must submit a written statement before August 31, 2011. The statement must explain the taxpayers reasons for seeking an extension.

    Opt-Out and Removal

    According to IRS guidance, the OVDI opt out is an irrevocable election by a taxpayer to have his or her case handled under the standard audit process. The election is made at the sole discretion of the taxpayer. In contrast, removal occurs when the IRS decides to remove a taxpayer from the disclosure program. Nevertheless, the IRS initiates an examination after either opt-out or removal. In its FAQ guidance, the IRS proposed different scenarios where opt out would be an appropriate election for taxpayers. Although the IRS predicts opt-out to be suitable for only for a discrete minority, it reminds examiners that an election should not be cast in a negative light. Alternatively, documented refusal to cooperate with the program is grounds for removal. You can read the full opt out and removal guidance here.

    The attorneys at Fuerst Ittleman, PL are well-versed in matters of voluntary disclosure, PFIC taxation, Controlled Foreign Corporation (CFC) taxation, and tax litigation. You can contact an attorney by emailing us at contact@fidjlaw.com.

    FinCEN Expected to Announce Final Rule On Pre-Paid Access Cards In July 2011

    Prepaid access cards, also known as stored value cards, such as pre-paid gift and credit cards, are currently not subject to any of the rigorous cross-border reporting requirements of the Bank Secrecy Act and FinCEN regulations that other monetary instruments such as cash and checks are subject to. The practical result of such a loophole is that while individuals crossing the border into the United States from a foreign country must declare if they are transporting over $10,000 in cash, no such requirement exists for pre-paid access cards. Additionally, prepaid access cards are relatively easy to obtain and provide for anonymous use. As a result, of the numerous schemes drug traffickers use to funnel illegal proceeds out of the United States, one of the more popular is the use of stored value cards to launder and transport money across international borders.

    However, that may soon change as FinCEN anticipates promulgating its final rules on prepaid access cards in July 2011. With the passage of the Credit Card Accountability, Responsibility, and Disclosure Act of 2009, FinCEN was mandated “not later than 270 days after the date of enactment” to “issue regulations in final form implementing the Bank Secrecy Act, regarding the sale, issuance, redemption, or international transport of stored value, including stored value cards.”

    The anticipated final rules come at a time when FinCEN has been under increasing pressure from Congress to implement its mandate to address prepaid access cards. On March 14, 2011, the Senate Caucus on International Narcotics Control sent Secretary of the Treasury Timothy Geithner a letter voicing its displeasure with the Treasury Departments delay in promulgating final rules. Though FinCEN issued a notice of proposed rulemaking in June of 2010, no concrete timetable was established for the promulgation of the final rules. As a result, the Senate Caucus warned that “[a]bsent a renewed effort from the [Treasury] Department to propose and finalize a cross-border reporting requirement for prepaid access programs, including stored value, Congress will have to take action via the legislative process.” A copy of the Senate Caucuss letter can be read here.

    Though the regulations will come later than mandated, when promulgated, such rules will provide a comprehensive regulatory framework currently lacking for non-bank issued prepaid access cards. The proposed rules place registration requirements on non-bank prepaid access card providers. Additionally, the proposed rules place suspicious activity reporting, customer information recordkeeping, and transactional recordkeeping requirements on both providers and sellers of prepaid access cards. The rules will also provide exemptions from the reporting requirements for categories of prepaid access products that pose a low risk of money laundering and terrorist financing. A copy of the proposed rules can be read here.

    Fuerst Ittleman will continue to closely monitor this issue for the latest developments from FinCEN. If you have questions pertaining to the proposed prepaid access rules, the BSA, anti-money laundering compliance, or how to ensure that your business maintains regulatory compliance at both the state and federal levels please contact us at contact@fidjlaw.com.

    IRS Devising Additional Guidance on UTP Reporting, Focusing on Reserves and NOLs

    In our continuing coverage of the new IRS regulations for Schedule UTP for Uncertain Tax Positions, we just learned that the IRS is working on additional guidance to aid taxpayers in properly reporting their positions. After the IRS finalized its initial UTP regulations on December 15, 2010, companies grappled with reporting amid uncertain definitions and a lack of guidance. The IRS responded by releasing “Frequently Asked Questions on Schedule UTP” on its website. Now, BNA reports that the IRS is working to clarify what it means to record a reserve and how to treat net operating losses (“NOLs”). This much-needed update comes as the nations largest taxpayers are preparing their first round of Schedules UTP for tax year 2010.

    The previous “Frequently Asked Questions on Schedule UTP” addressed concerns about reporting requirements and the expanded policy of restraint. With respect to UTP reporting requirements, the FAQ guidance provided that:

      · For a corporation subject to FIN 48, a tax position is considered “sufficiently certain so that no reserve was required” and therefore need not be reported on Schedule UTP if the position is “highly certain” within the meaning of FIN 48.

      · A corporation must report its tax position on Schedule UTP if it records a reserve in an audited financial statement for a tax position it expects to take in its 2010 tax return, but later eliminates the reserve in a subsequent unaudited interim financial statement issued before filing its 2010 return. However, if the corporation reconsiders whether a reserve is required for a tax position and eliminates the reserve in an interim audited financial statement issued before the tax position is taken in a return, the corporation need not report the tax position to which the reserve relates on the Schedule UTP.

      · A corporation should not report the use of an NOL or credit carryover in a post-2009 filing if the portion used includes a tax position taken pre-2010 for which the corporation already recorded a reserve.

      · The size of a tax position is the amount of the reserve recorded for that position. If a corporation does not separately identify an amount of interest or penalties in its books and records as relating to a particular tax position, then the corporation should not include those interest or penalties in the size of that position.

      The guidance also clarified the IRSs policy of restraint. The FAQs provided that:

      · The Announcement 2010-76 changes to the policy of restraint apply to documents requested by Counsel after the filing of a Tax Court position. While Appeals does not expect to conduct frequent substantive fact-finding during its case consideration, the changes do apply to any request for documents during the administrative process of determining the correct tax liability.

      · Generally, Counsel attorneys will not issue discovery requests for documents or information that the IRS would not seek under its policy of restraint.

      · The Announcement 2010-76 changes apply to any request for documents outstanding or made after September 24, 2010, in any open examination.

    If your corporation is struggling with proper UTP reporting or any other tax issues, let us ease your concerns. The attorneys at Fuerst Ittleman have extensive experience in corporate tax reporting and regulatory compliance. You can reach an attorney by emailing us atcontact@fidjlaw.com