Foreign Bank Account Report (“FBAR”) Extended Filing Date Announced for Signatory Authority Only Filers

The U.S. Department of the Treasury, Financial Crime Enforcement Network (James H. Freis, Jr., Director) announced via FinCEN Notice 2011-1, that individuals in the following categories now have until June 30, 2012 to file FBARs (for calendar year 2010 reporting obligations):

(1) An employee or officer of an entity under § 1010.350(f)(2)(i)-(v) who has signature or other authority over and no financial interest in a foreign financial account of a controlled person of the entity, OR

(2) an employee or officer of a controlled person of an entity under § 1010.350(f)(2)(i)-(v) who has signature or other authority over and no financial interest in a foreign financial account of the entity or another controlled person of the entity.

A full copy of the notice is available here.

However, individuals and entities that do not fall within the exception 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 navigating the complex regulator and statutory provisions regarding the reporting of foreign bank accounts. You can contact an attorney by emailing us at: contact@fidjlaw.com

U.S District Court Judge Rebuffs IRS’ Attempt to Use “John Doe” Summons

In what many consider to be a surprise, United States District Judge Morrison C. England, Jr. denied the United States ex parte petition for leave to serve “John Doe” summons on Californias Board of Equalization.

Any person making “gifts” in excess of the annual exclusion amount must file an IRS Form 709 United States Gift (and Generation-Skipping Transfer) Tax Return. 26 U.S.C. §§ 2503(b), 6019(a). Taxpayers have a lifetime credit against gift taxes, and Form 709 is used to track

the amount of credit both: 1) utilized by the taxpayer; and 2) remaining for future use. In addition, estate taxes may be due based on the value of an estate when transferred. The estate tax owed includes certain taxable gifts reported on Form 709 during the decedents lifetime.

The IRS has recently realized “a pattern of taxpayers failing to file Forms 709” for real property transfers between non-spouse related parties. The IRS has thus launched a “Compliance Initiative” to investigate those taxpayers who have failed to file Forms 709. As a part of this Compliance Initiative, the government has sought to capture data from states and counties regarding real property transfers taking place between non-spouse family members for little or no consideration during the period of January 1, 2005, through December 31, 2010.

The IRS attempted to obtain informal cooperation from the State of California, and then attempted to obtain permission to use a “John Doe” summons to formally obtain the requested information. The Court held that “because the United States has failed to show that the information sought cannot be obtained from another readily available source, the instant Petition is denied without prejudice.”

Interestingly, the Court noted that it may not have the power to issue a “John Doe” summons to a State. The Court outlined the following questions that would have to be answered before it would issue a “John Doe” summons to a State:

1) Whether a state is a “person” as that word is used in 26 U.S.C. §§ 7602(a) and 7609(f); 2) Whether a states sovereign immunity precludes

issuance of a John Doe Summons; 3) Whether, assuming a state is subject to the Courts power to issue a John Doe Summons, the United States must exhaust all administrative remedies prior to proceeding in federal court; and 4) Whether the United States should be required to

attempt to pursue any and all state court remedies prior to seeking relief in federal court.

A full copy of the opinion is available here.

The attorneys at Fuerst Ittleman, PL have extensive experience litigating against the IRS, including but not limited to IRS summons enforcement. You can reach an attorney at Fuerst Ittleman by emailing us at: contact@fidjlaw.com

U.S. Tax Court Rules in Favor of Good Faith Taxpayers

On March 1, 2011, the Tax Court held that a husband and wife were not liable for accuracy-related penalties related to their 2005 income tax return where they acted in good faith and made reasonable efforts to accurately report their income. The entire Bengtson v. Commissioner opinion is available here.

The married taxpayers made an express agreement with the wifes sister to invest in the shares of two companies. In 1999, 2000, and 2001, the sister purchased stock through her brokerage account with funds provided by the taxpayers. The investments completely devalued when one companys shares were delisted in 2001 and the other company ceased operations in 2002. The taxpayers requested information about the stock from the wifes sister, who did not comply with their requests. The taxpayers thereafter claimed a long-term capital loss from the investment in each company on their 2005 tax return. The Internal Revenue Service subsequently denied the capital losses on the basis that the stocks became worthless prior to 2005. Further, the IRS asserted that there was insufficient evidence to prove that the taxpayers were even the actual stock owners, since the wifes sister never provided such information. The IRS then went on to correct the taxpayers characterization of income from the sale of options, which was reported as a capital gain but should have been reported as ordinary income.

Ultimately, the husband and wife conceded that the sale of options should have been reported as ordinary income and that their stock investments became worthless prior to 2005, but argued that the IRS penalties were inapplicable due to reasonable cause and good faith. Responding to the taxpayers defense, the Tax Court noted that the taxpayers read IRS publications, took reasonable measures to properly report the sale of options, and sought to obtain the necessary stock information from the wifes sister. The court held that the sisters lack of responsiveness was irrelevant to its decision that the taxpayers actions were sufficient to clear them of accuracy-related penalties.

The attorneys at Fuerst Ittleman, PL have extensive experience litigating against the IRS in both the Tax Court and District Courts. You can contact an attorney by emailing us at contact@fidjlaw.com

IRS’s Second Guidance on the Foreign Account Tax Compliance Act (FATCA) Leaves Many Questions Unanswered

As we previously discussed here, the Foreign Account Tax Compliance Act (FATCA) enacted in March 2010 imposes a 30 percent withholding tax on foreign banks who do not properly disclose accounts held by U.S. taxpayers. In its implementation of FATCA, the Internal Revenue Service (IRS) has issued two Notices providing guidance to those that are affected. As previously discussed in our blog, the IRS issued its first guidance regarding its implementation of FATCA in late 2010. In this original guidance, the IRS required foreign institutions to document every account regardless of whether it had documentation on file.
In response to numerous complaints to the first notice, the IRS provided additional guidance in Notice 2011-34 on April 8, 2011. According to this notice, financial institutions will have to review paper and electronic account files to identify U.S. accounts. Although this has reduced the requirements imposed by the first notice, it is still extremely burdensome.
According to Danielle Nishida, attorney advisor in the Office of Associate Chief Counsel, the IRS has narrowly tailored its guidance regarding the FATCA, hoping to provide more broad advice in the future. Notably, however, the IRS is looking to the community for comments in assessing the effect of FATCA on retirement plans, employee benefit plans, trusts, and numerous other areas. Ultimately, these comments will guide the IRS in its implementation of FATCA.
According to Nishida, the IRSs goal is to “get U.S. reporting” and “not to tax anyone besides U.S. taxpayers.” Notably, however, the foreign institutions involved are either subject to the task assigned to them by the IRS or pay a 30 percent withholding tax. While discussing the withholding tax, Michael Plowgian, attorney advisor in the Treasurys Office of Tax Policy, explained the 30 percent withholding tax “gives foreign financial institutions a way to incentivize recalcitrant account holds to provide information about their accounts” and “prevents a ring of Ëœblockers from forming around the United States to act on behalf of noncompliant entities.”
The IRS is also struggling with how to best address partnerships and other pass-through entities under the disclosure regime established by FATCA. During a forum sponsored by the D.C. Bar Taxation Sections Passthroughs and Real Estate Committee on May 25, 2011, Plowgian expressed that “because of the way partnerships are structured, these entities represent a significant challenge as the government works to implement the statute.”
According to Plowgian, the IRS is working to create exceptions for those entities that do not represent a risk of tax evasion. Specifically mentioned were pension and retirement plans and tax exempt charities. The Department of Treasury is also working to narrow the scope of entities subject to the FATCA by working on determining “when a foreign entity is primarily engaged in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest in such instruments,” which would put that institution within the requirements of the FATCA.
The two guidance documents issued by the IRS are clearly only a starting point in the implementation of FATCA. Before the provisions become effective in 2013, the IRS must undertake the responsibility of explaining the mechanics of FATCA to the endless list of potential taxpayers.
The attorneys at Fuerst Ittleman have extensive experience in the areas of tax law and tax law litigation and will continue to monitor the changes made or considered by the Internal Revenue Service. If you have any questions regarding the FATCA or any other Internal Revenue Code section, do not hesitate to contact us as contact@fidjlaw.com

The Internal Revenue Service Considers Taking a Closer Look at Political Donations

According to a recent Wall Street Journal article, the Internal Revenue Service is looking to “retroactively tax top donors to political advocacy groups” following the Supreme Courts Citizens United ruling reversing certain campaign finance laws. Specifically, donations made during the 2010 elections to IRC § 501(c)(4) nonprofit groups are being considered. Groups classified as IRC § 501(c)(4) can support candidates and legislation, but cannot be primarily political in nature. According to the IRS, large donations to these groups should have been subject to the gift tax, although enforcement has been lax in the past. Currently, individual donors can contribute $13,000 annually ($26,000 for couples), subject to a lifetime maximum of $5 million, before a 35% tax rate takes effect. In 2013 the lifetime exempted amount drops to $1 million.

Reports in the press indicate that at least five donors have been contacted by the agency for not filing gift tax returns, a requirement for large political donations. In a statement, IRS spokeswoman Michelle Eldrige wrote, “[t]hese examinations were started by employees of the Estate and Gift Tax Unit at the IRS as part of their increased efforts in the area of non-filing of gift and estate tax returns” and is not political in nature. The statement continues, “[a]ll of the decisions involving these cases were made by career civil servants without any influence from anyone outside the IRS.”

The Los Angeles Times reports that “[i]n 2010, nonprofit groups, many of them [IRC §] 501(c)(4)s, disclosed nearly $300 million in spending on midterm election campaigns, much of it to elect Republicans.” A similar article in the New York Times states, “Democrats have embraced the model, too. Bill Burton, Mr. Obamas former deputy press secretary, was skewered by critics of these groups for creating Priorities USA Action to help Democrats.” Experts predict that “broad IRS action against donors could slow the groups funding streams as the 2012 presidential election nears.”

The attorneys at Fuerst Ittleman have extensive experience in the areas of tax law and tax law litigation and will continue to monitor the changes made or considered by the Internal Revenue Service. If you have any questions regarding IRC § 501 or any other Internal Revenue Code section, do not hesitate to contact us as contact@fidjlaw.com.

Department of Justice Prosecutes US Taxpayer For Failing to Report HSBC Bank Account in Bermuda

On May 19, 2011, a criminal information was filed in the U.S. District Court for the District of Massachusetts charging Michael F. Schiavo with one count of willfully violating the Foreign Bank Account Reporting Requirements of 31 U.S.C. sections 5314 and 5322(a).

Of particular interest is the following paragraphs of the information:

11. A “silent disclosure” occurs when a U.S. taxpayer with an undeclared account files FBARs and amended returns and pays any related tax and interest for previously unreported offshore income without notifying the IRS of the undeclared account through the Voluntary Disclosure Program. A silent disclosure does not constitute a voluntary disclosure. On its website, the IRS strongly encourages taxpayers to come forward under the Voluntary Disclosure Program and warns them that taxpayers who instead make silent disclosures risk being criminally prosecuted for all applicable years.

18. On or about October 6, 2009, following widespread media coverage of UBS’s disclosure to the IRS of account records for undeclared accounts held by U.S. taxpayers and the IRS’s Voluntary Disclosure Program, Schiavo made a “silent disclosure” by preparing and filing FBARs and amended Forms 1040 for tax years 2003 to 2008, in which he reported the existence of his previously undeclared account at HSBC Bank Bermuda. He made such filings notwithstanding the availability of the Voluntary Disclosure Program. Schaivo reported on the amended individual income tax returns the interest income that he earned from the previously undeclared account he held at HSBC Bank Bermuda but did not report on the 2006 return the income earned that he earned from Headway Partners.

19. On or about October 27, 2009, a Special Agent from the IRS attempted to interview Schiavo at his home.

20. On or about October 29,2009, Schiavo prepared and executed a second amended individual income tax return for tax year 2006 on which he reported the income earned that he earned from Headway Partners and that had been deposited into his previously undeclared account at HSBC Bank Bermuda.

A full copy of the information is available here.

What is interesting is that the criminal charges do not contain any violations of the Internal Revenue Code (Title 26), but instead only contain violations of the Bank Secrecy Act. The Bank Secrecy Act requires individuals to file Form TD 90.22-1. A copy of the form is available here.

Further, the U.S. Department of Justice has issued a press release on the matter available here.

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

DOJ Will No Longer Seek Chevron Deference for Revenue Rulings and Revenue Procedures

On May 7, 2011, the Department of Justice announced it will no longer argue for Chevron deference to apply to revenue rulings and revenue procedures. The announcement comes in the wake of the Supreme Courts recent decision in Mayo Found. for Med. Educ. & Research v. U.S., 131 S. Ct. 704 (2011) in which the Court held all regulations should be analyzed using Chevron deference regardless of the agency which promulgated them.

A basic principle of administrative law is that, generally, courts will tend to defer to an agencys interpretation of the statute that it administers. The Supreme Court expanded upon this idea in Chevron U.S.A. Inc. v. Natural Resource Defense Counsel, 467 U.S. 837 (1984). In Chevron, the Court established a two part test to determine whether to grant deference to an administrative agencys interpretation of a statute. First, the Court will look to see if Congress has directly spoken to the matter at issue. If so, the Courts analysis is complete and the administrative agencys interpretation is not entitled to deference. However, if the Court determines that issue is ambiguous, the Court will proceed to step two of the Chevron analysis. Under step two, the question for the court is whether the agency’s interpretation is based on a permissible construction of the statute. So long as the agencys interpretation is a permissible construction, the Court will not substitute its own judgment for that of the administrative agency and will uphold the agencys interpretation.

Not all agency actions are entitled to the highly deferential standard of Chevron deference. While Chevron deference applies to agency interpretations contained within properly promulgated regulations, interpretations such as those in opinion letters and interpretations contained in policy statements, agency manuals, and enforcement guidelines — all of which lack the force of law — do not warrant Chevron deference. Instead, they are “entitled to respect,” but only to the extent that they are persuasive. See Skidmore v. Swift & Co., 323 U.S. 134 (1944). Revenue rulings, which are official pronouncements of the IRS addressing the application of the Internal Revenue Code (“I.R.C.”) and regulations to particular factual situations, and revenue procedures, which are official statements of a procedure that affect the rights or duties of taxpayers under the law, would fall into this latter category.

Prior to the Mayo decision, debate raged as to whether Treasury regulations were to be analyzed under the highly deferential Chevron standard or whether the older, less deferential. multi-factored analysis of National Muffler Dealers. Assn., Inc. v. United States, 440 U.S. 472 (1979), used by the Court previously to analyze tax regulations, still governed. Under National Muffler, when evaluating a regulations validity, the Court looked to numerous factors to determine whether the Commissioners interpretation of the statute in question should receive deference including: 1) whether the regulation was promulgated contemporaneously with the statute in question; 2) the length of time the regulation had been in effect; 3) the reliance placed on the regulation by the Commissioner; 4) the consistency of the Commissioners interpretation over time; and 5) the degree of scrutiny Congress has devoted to the regulation during subsequent reenactments of the statute. National Muffler Dealers Assn., Inc., 440 U.S. at 477. As a result, while a regulation could pass muster as being a permissible construction under the Chevron test, “[u]nder National Muffler, . . ., a court might view an agencys interpretation of a statute with heightened skepticism when it has not been consistent over time, when it was promulgated years after the relevant statute was enacted, or because of the way the regulation evolved.” Mayo Found. for Med. Educ. & Research, 131 S. Ct. 104.

Moreover, prior to Chevron, the Court emphasized that rules passed pursuant to the Treasury Departments “general authority” under 26 U.S.C. § 7805(a), such as the rule in Mayo, were entitled to less deference than those rules under a specific grant of authority to define a statutory term or prescribe a method of executing a statutory provision. See Rowan Cos. v. United States, 452 U.S. 247 (1981); United States v. Vogel Fertilizer Co., 455 U.S. 16 (1982). As a result of these Pre-Chevron decisions, the deference afforded to the Commissioners interpretation of ambiguous IRC provisions varied depending on not only the multiple National Muffler considerations but also the authority under which the regulation was promulgated.

In Mayo, the Court found that as a result of Chevron and its progeny, the administrative law landscape had changed substantially since National Muffler, Rowan, and Vogel. The Court found that the underlying principles of Chevron applied to the tax context and that the Court in previous decisions had recognized the importance of maintaining a uniform approach to the judicial review of administrative agency actions. Therefore, the National Muffler analysis was no longer appropriate and the more deferential Chevron deference applied. Additionally, as a result of Mayo, all regulations promulgated by the Commissioner, regardless of whether promulgated under a specific grant of authority, will be analyzed under Chevron and entitled to the same deference.

The attorneys at Fuerst Ittleman, PL have extensive experience dealing with tax matters, administrative law, and regulatory compliance. You can reach at attorney by emailing us at contact@fidjlaw.com.

Companies Still Grappling with UTP Reporting Issues

Several months ago, we reported on the Internal Revenue Service (IRS) promulgating its final guidance for corporations required to file uncertain tax position (UTP) statements. The initial deadline for corporations with total assets equal to or exceeding $100 million to file its 2010 taxes with Schedule UTP, “Uncertain Tax Position Statement,” is fast approaching. Yet despite this formal guidance, IRS answers to FAQs, and a blogosphere full of information from tax practitioners, PricewaterhouseCoopers LLP (PwC) reports that companies are still facing major uncertainties with respect to their UTP reporting issues.

In a Practitioner webcast on March 21, 2011, PwC Tax Partner Ken Kuykendall stated that there is “a lot of uncertainty in these rules,” and reported that companies are hoping for more guidance from the IRS on reporting guidelines before the first Schedules must be filed.

The primary questions identified by would-be Schedule UTP filers include the uncertainty surrounding the definitions of what it means to have “recorded a reserve for an uncertain position” and “position taken on a return.” Kuykendall added that issues such as how to handle net operating losses (NOLs) “ and other attributes that embed and carry forward uncertain tax positions into future years “ are also a source of substantial confusion for companies.

Finally, Kuykendall referred to additional UTP issues that are “lurking in the background.” These issues include uncertainty over the reporting of multi-year positions, foreign positions, purchase accounting, and affirmative claims and amended reserves. He added that the IRS must also provide additional guidance to companies regarding the determination of reserve amounts for the purposes of ranking UTPs, a requirement of the Schedule.

Luke Cherveny, PwC Tax Director also spoke at the Practitioner webcast and added that PwC foresees UTP compliance as a “multi-phase process” beginning with fostering internal communications to develop UTP-required information. Cherveny warned that companies will face “gaps” between the information that is currently available and that which needs to be reported. Without a plan as to how to bridge those gaps, he opined, companies are going to falter in their reporting obligations.

If your company is facing uncertainty over UTP reporting, let us assist you in meeting your needs and putting that uncertainty to rest. Our tax law practitioners can help identify your UTP reporting requirements and process the information you need to achieve compliance. Contact us for a consultation today at contact@fidjlaw.com.

United States Government Requests US District Court to Release Property Tax Records from California Board of Equalization

The United States Justice Department, on behalf of IRS, has asked a federal judge to issue a “John Doe” summons on the California Board of Equalization requiring the board to turn over records of property transfers for little or no consideration (In Re the tax liabilities of John Does, E.D. Cal., No. 2:10-mc-00130-MCE-EFB, filed 12/27/11).

In the gift tax area, this is the first reported time that the IRS has attempted to use John Doe summons to obtain information. The investigation relates to taxpayers who transferred real property between 2005 and 2010. “Based on information received from examinations across the country and information voluntarily disclosed by other states, the IRS has determined that taxpayers who transfer real property to a related party for little or no consideration frequently fail to file Form 709 and report this transfer, despite the fact that they are required to do so by the internal revenue laws,” wrote Josephine M. Bonaffini, Federal/State Coordinator of IRS Estate and Gift Tax Program in a declaration filed with the District Court. “Thus, the IRS has a reasonable basis to believe that a significant portion of the California taxpayers who have transferred property to their children or grandchildren (as reported to the BOE on forms for exclusion of reassessment) for little or no consideration have failed to report these transfers to the IRS.”

Because no statute of limitations applies to gift tax returns, the recipient of the gift will be liable to pay gift tax if the donor fails to do it. The IRS reportedly has teams in Florida, Nebraska, New York, North Carolina, Ohio, Washington, and Wisconsin working on gift tax compliance. Unsurprisingly, many states and counties have voluntarily disclosed their property transfer data. Public data reveals that 323 taxpayers have been examined for failing to File Form 709 and another 217 are currently under examination.

The attorneys at Fuerst Ittleman, PL have experience representing taxpayer in IRS audits and litigation before the U.S. Tax Court, U.S. District Courts, and U.S. Courts of Appeal. You can contact us by emailing:contact@fidjlaw.com.

Federal Prosecution of Tax Crimes up 25%

Federal prosecutors brought criminal charges in 1,250 tax cases in 2010, a 25.3% jump from 2001. Criminal tax prosecution recommendations by the Criminal Investigation Division of the IRS reached a high of 1,507, up 50.4% from 2001. The data is from Transactional Records Access Clearinghouse, a data research and distribution organization.

Part of the increase resulted from criminal charges in cases involving Swiss banking UBS. UBS agreed to assist the IRS by providing account data for 4,450 American clients. The U.S. Department of Justice recently disclosed in court documents that the IRS is investigating HSBC for assisting U.S. taxpayers hide accounts and income in India. Recently a New York woman plead guilty to filing a false 2008 income tax return that did not disclose that she owned multiple HSBC accounts in India that held $8.3 million. Additionally, the IRS recently opened field offices around the world including Australia, China, and Panama.

The attorneys at Fuerst Ittleman, PL have extensive experience in criminal and civil tax litigation, IRS audits, and federal tax compliance. You can reach an attorney by emailing us at: contact@fidjlaw.com.