Source: https://taxcontroversywatch.com/tag/fatca/
Timestamp: 2019-01-19 12:01:37
Document Index: 708448004

Matched Legal Cases: ['§ 267', '§ 988', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§ 1', '§ 1', '§1', '§1', '§1', '§1', '§1', '§ 501', '§ 954', '§ 1221', '§1', '§1', '§1', '§1']

FATCA | Tax Controversy Watch
Tag Archives: FATCA
FATCA Update: Treasury Issues Long-Awaited Rules For Foreign Asset Reporting by Domestic Entities
Posted on February 24, 2016 by Matthew D. Lee
The Treasury Department has finally issued regulations implementing the rules requiring domestic entities to annually disclose their foreign financial assets to the Internal Revenue Service. In 2010, as part of the enactment of the Foreign Account Tax Compliance Act (FATCA), Congress added section 6038D to the Internal Revenue Code requiring certain taxpayers to annually report information about their “specified foreign financial assets,” if the aggregate value of such assets is greater than $50,000 on the last day or the year, or $75,000 at any time during the year. Such reporting is to be made on Form 8938, entitled “Statement of Specified Foreign Financial Assets.” Section 6038D applies to individual taxpayers, as well as any domestic entity “formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets as if such entity were an individual.”
In 2011, the Treasury Department published a proposed regulation setting forth the conditions under which a domestic entity would be required to report specified foreign financial assets. Reporting by domestic entities was deferred, however, due to issuance of Notice 2013-10, which provided that such obligation would not be effective until issuance of final regulations. After receiving comments, the Treasury Department published the final regulation for domestic entity reporting on February 23, 2016. The new rules are effective for tax years beginning after December 31, 2015.
“Specified Domestic Entity”
Section 6038D provides that a “specified domestic entity” that has any interest in a “specified foreign financial asset” during the taxable year must attach Form 8938 to its tax return. The Final Regulations define “specified domestic entity” as any domestic corporation, a domestic partnership, or a domestic trust “formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets.” The determination as to whether a domestic corporation, a domestic partnership, or a domestic trust is a “specified domestic entity” is to be made on an annual basis.
In the case of corporations and partnerships, such entities are considered to have been “formed or availed of” for purposes of holding specified foreign financial assets if (1) the entity is “closely held” by a specified individual and (2) at least 50 percent of the entity’s gross income for the taxable year is passive income or at least 50 percent of the assets held by the entity for the taxable year are assets that produce or are held for the production of passive income. The Final Regulations provide that the percentage of passive assets held by a corporation or partnership for a taxable year is the weighted average percentage of passive assets (weighted by total assets and measured quarterly), and the value of assets of a corporation or partnership is the fair market value of the assets or the book value of the assets that is reflected on the corporation’s or partnership’s balance sheet (as determined under either a U.S. or an international financial accounting standard).
In the preamble to the Final Regulations, Treasury stated that the “weighted average test” for determining whether at least 50 percent of an entity’s income or assets are passive “provides an administrable way to determine the passive asset percentage.” Corporation or partnerships may be required to substantiate their determination of the passive asset percentage upon request by the IRS.
“Closely Held”
The Final Regulations provide that a domestic corporation is deemed to be “closely held” by a specified individual if at least 80 percent of the total combined voting power of all classes of stock of the corporation entitled to vote, or at least 80 percent of the total value of the stock of the corporation, is owned, directly, indirectly, or constructively, by a specified individual on the last day of the corporation’s taxable year.
A domestic partnership is deemed to be “closely held” by a specified individual if at least 80 percent of the capital or profits interest in the partnership is held, directly, indirectly, or constructively, by a specified individual on the last day of the partnership’s taxable year. The preamble to the Final Regulations specifies that this 80-percent threshold should exempt most publicly-traded partnerships from being considered “specified domestic entities.”
The Final Regulations provide that the constructive ownership rules of IRC § 267(c) apply in making the determination of whether a corporation or partnership is “closely held” by a specified individual. The Final Regulations further specify that the constructive ownership rules apply as if the family of an individual includes the spouses of the individual’s family members.
“Passive Income and Assets”
The Final Regulations provide that passive income means the portion of gross income that consists of the following items:
Dividends, including substitute dividends;
Income equivalent to interest, including substitute interest;
Rents and royalties, other than rents and royalties derived in the active conduct of a trade or business conducted, at least in part, by employees of the corporation or partnership;
Capital gains from the sale or exchange of property giving rise to passive income in the form of dividends, interest, income equivalent to interest, and rents and royalties.
Capital gains from commodities transactions (including futures, forwards, and similar transactions) subject to certain exceptions;[1]
The excess of foreign currency gains over foreign currency losses attributable to any IRC § 988 transaction; and
Net income from notional principal contracts.
The preamble to the Final Regulations explain that the definition of “passive income” is based upon a similar definition contained with the final FATCA regulations. The definition employed in the Final Regulations is used to “identify entities that have a high risk of being used for tax evasion and to reduce compliance burdens for active entities.”
The Final Regulations eliminate the so-called “principal purpose test” included in the proposed regulations. That test which would have treated any corporation or partnership as “formed or availed of” for purposes of holding specific foreign financial assets if at least 10 percent of the entity’s gross income or assets is passive and the entity was formed or availed of with a principal purpose of avoiding section 6038D. In the preamble to the Final Regulations, Treasury stated that it believed the 50-percent passive assets or income threshold “appropriately captures situations in which specified individuals may use a domestic corporation or partnership to circumvent the reporting requirements of section 6038D” and that “taxpayers should be able to determine their reporting requirements under section 6038D based on objective requirements rather than a subjective principal purpose test.” In the preamble, Treasury warns that it “will continue to monitor whether domestic corporations and partnerships not required to report under these final regulations are being used inappropriately by specified individuals to avoid reporting under section 6038D” and that Treasury “may expand the definition of a specified domestic entity in future guidance.”
The Final Regulations provide an exception applicable to a corporation or partnership that regularly acts as a dealer in property that gives rise to passive income, forward contracts, option contracts, or similar financial instruments (including notional principal contracts and all instruments referenced to commodities). In the case of such an entity, the term “passive income” does not include (1) any item of income or gain (other than any dividends or interest) from any transaction (including hedging transactions and transactions involving physical settlement) entered into in the ordinary course of such dealer’s trade or business as such a dealer; and (2) if such dealer is a dealer in securities (within the meaning of section 475(c)(2)), any income from any transaction entered into in the ordinary course of such trade or business as a dealer in securities.
The Final Regulations provide a special rule for related entities. All domestic corporations and domestic partnerships that are closely held by the same specified individual and that are connected through stock or partnership interest ownership with a common parent corporation or partnership are treated as owning the combined assets and receiving the combined income of all members of that group. For purposes of this rule, assets relating to any contract, equity, or debt existing between members of such a group, as well as any items of gross income arising under or from such contract, equity, or debt, are eliminated. A domestic corporation or a domestic partnership is considered connected through stock or partnership interest ownership with a common parent corporation or partnership if stock representing at least 80 percent of the total combined voting power of all classes of stock of the corporation entitled to vote or of the value of such corporation, or partnership interests representing at least 80 percent of the profits interests or capital interests of such partnership, in each case other than stock of or partnership interests in the common parent, is owned by one or more of the other connected corporations, connected partnerships, or the common parent.
The Final Regulations provide a series of examples to illustrate these rules.
Example 1. Closely held and constructive ownership.
(i) Facts. DC1 is a domestic corporation the total value of the stock of which is owned 60% by A, a specified individual, 30% by B, a member of A’s family for purposes of section 267(c)(2) who is not a specified individual, and 10% by FC1, a foreign corporation. DC1 owns 90% of the total value of the stock of DC2, a domestic corporation. FC2, a foreign corporation, owns 10% of DC2. Neither A nor B owns, directly, indirectly, or constructively, any stock in FC1 or FC2.
(ii) Closely held ownership determination. A is considered to own 90% and 81% of the total value of DC1 and DC2, respectively, by application of the rules of section 267(c) and this section. DC1 and DC2 are closely held by A within the meaning of paragraph (b)(2) of this section because A, a specified individual, is considered to own more than 80% of their total value.
Example 2. Application of aggregation rule and reporting threshold.
(i) Facts. L is a specified individual. In Year X, L wholly owns DC1, a domestic corporation, and also owns a 90% capital interest in DP, a domestic partnership. DC1 owns 80% of the sole class of stock of DC2, a domestic corporation. DC1 has no assets other than its interest in DC2. DC2’s only assets are assets that produce passive income, with a maximum value in Year X of $40,000 on October 12. DC2’s assets are comprised in relevant part of specified foreign financial assets with a maximum value in Year X of $15,000 on October 12. DP’s only assets are assets that produce passive income and that are specified foreign financial assets with a maximum value of $90,000 in Year X on October 12.
(ii) Specified domestic entity status.
(A) DC1 and DC2. DC1 and DC2 are closely held by a specified individual for purposes of paragraph (b)(2) of this section. DC1 and DC2 are considered related entities that are connected through stock ownership with a common parent corporation under paragraph (b)(3)(iii) of this section, because DC1 and DC2 are closely held by L, and DC2 is connected with DC1 through DC1’s ownership of stock of DC2 representing at least 80% of the voting power or value of DC2. As a result, for purposes of applying paragraph (b)(1)(ii) of this section, each of DC1 and DC2 is considered as owning the combined assets, and receiving the combined income, of both DC1 and DC2; however, DC1’s equity interest in DC2 is disregarded for this purpose under paragraph (b)(3)(iii) of this section. Therefore, DC1 and DC2 each satisfies the passive asset threshold of paragraph (b)(1)(ii) of this section, because 100 percent of each company’s assets is passive. DC1 and DC2 are specified domestic entities for Year X.
(B) DP. DP is closely held by a specified individual for purposes of paragraph (b)(2) of this section. DP is not considered a related entity with DC1 and DC2 under paragraph (b)(3)(iii) of this section, because DC1 and DP are not owned by a common parent corporation or partnership. As a result, whether the passive income or passive asset threshold of paragraph (b)(1)(ii) of this section is met with respect to DP is determined solely by reference to DP’s separately earned passive income and separately held passive assets. DP holds only passive assets during Year X and therefore satisfies paragraph (b)(1)(ii) of this section. DP is a specified domestic entity for Year X.
(iii) Reporting requirements.
(A) DC1. Under §1.6038D-2(a)(6)(ii), DC1 is not treated as owning the specified foreign financial assets held by DC2 and DP for purposes of applying the reporting threshold of §1.6038D-2(a)(1), because DC1 does not have an interest in any specified foreign financial assets. DC1 is not required to file Form 8938 because DC1 does not satisfy the reporting threshold of §1.6038D-2(a)(1).
(B) DC2 and DP. Under §1.6038D-3, DC2 and DP each has an interest in specified foreign financial assets. For purposes of applying the reporting threshold of §1.6038D-2(a)(1), §1.6038D-2(a)(6)(ii) provides that DC2 is treated as owning in addition to its own assets the assets of DP, and DP is treated as owning in addition to its own assets the assets of DC2. As a result, DC2 and DP each satisfies the reporting threshold of §1.6038D-2(a)(1), because the value of the specified foreign financial assets each is considered as owning for purposes of § 1.6038D-2(a)(1) is $105,000 on October 12, Year X, which exceeds DC2’s and DP’s $75,000 reporting threshold. DC2 and DP must each file Form 8938 for Year X to report their respective specified foreign financial assets in which they have an interest and disclose their maximum values as provided in § 1.6038D-4 ($15,000 in the case of DC2 and $90,000 in the case of DP).
Example 3. Application of aggregation rule and entity with an active trade or business.
(i) Facts. The facts are the same as in Example 2, except that DC2 also owns an active business. The assets attributable to the business are not passive assets and constitute at least 60% of the value of DC2’s assets at all times during Year X. The income from the business is not passive income and constitutes at least 60% of the gross income generated by DC2 in Year X.
(A) DC1 and DC2. DC1 and DC2 are considered related entities that are connected through stock ownership with a common parent corporation under paragraph (b)(3)(iii) of this section because DC1 and DC2 are closely held by L, and DC2 is connected with DC1 though DC1’s ownership of stock of DC2 representing at least 80% of the voting power or value of DC2. As a result, for purposes of applying paragraph (b)(1)(ii) of this section, each of DC1 and DC2 is treated as owning the combined assets, and receiving the combined income, of both DC1 and DC2; however, DC1’s equity interest in DC2 is disregarded for this purpose under paragraph (b)(3)(iii) of this section. As a result, no more than 40 percent of the value of DC1’s and DC2’s assets at all times during Year X are passive and no more than 40 percent of DC1’s and DC2’s gross income for Year X is passive. DC1 and DC2 do not satisfy the passive income or passive asset threshold in paragraph (b)(1)(ii) of this section for Year X. DC1 and DC2 are not specified domestic entities for Year X.
(B) DP. For the reasons described in paragraph (ii)(B) of Example 2, DP is a specified domestic entity for Year X.
(A) DC1 and DC2. DC1 and DC2 are not specified domestic entities for Year X, and are not required to file Form 8938.
(B) DP. Under §1.6038D-3, DP has an interest in specified foreign financial assets. Under §1.6038D-2(a)(6)(ii), DP is treated as owning in addition to its own assets the assets of DC2. As a result, DP satisfies the reporting threshold of §1.6038D-2(a)(1) because the value of the specified foreign financial assets it is considered to own for purposes of §1.6038D-2(a)(1) is $105,000 on October 12, Year X, which exceeds DP’s $75,000 reporting threshold. DP must file Form 8938 for Year X to report the specified foreign financial assets in which it has an interest and disclose their maximum values as provided in §1.6038D-4, which is $90,000.
A domestic trust is considered to “formed or availed of” for purposes of holding specified foreign financial assets only if it has one or more specified persons as a current beneficiary. The term “current beneficiary” means, with respect to the taxable year, any person who at any time during such taxable year is entitled to, or at the discretion of any person may receive, a distribution from the principal or income of the trust (determined without regard to any power of appointment to the extent that such power remains unexercised at the end of the taxable year). A “current beneficiary” also includes any holder of a general power of appointment, whether or not exercised, that was exercisable at any time during the taxable year, but does not include any holder of a general power of appointment that is exercisable only on the death of the holder.
Excepted Domestic Entities
The Final Regulations provide that certain domestic entities are excluded from the definition of “specified domestic entity,” including all of the following:
any corporation which is a member of the same “expanded affiliated group” as a corporation the stock of which is regularly traded on an established securities market,
any organization exempt from taxation under IRC § 501(a) or an individual retirement plan,
the United States government or any wholly owned agency or instrumentality thereof,
any common trust fund (as defined in section 584(a)), and
any trust which is exempt from tax under section 664(c), or is described in section 4947(a)(1).
In addition, the Final Regulations also exempt a domestic trust provided that the trustee:
has supervisory authority over or fiduciary obligations with regard to the specified foreign financial assets held by the trust;
timely files (including any applicable extensions) annual returns and information returns on behalf of the trust; and
is (1) a bank that is examined by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, or the National Credit Union Administration; (2) a financial institution that is registered with and regulated or examined by the Securities and Exchange Commission; or (3) a domestic corporation whose stock is regularly traded on an established securities market or is a member of the same expanded affiliated group as a corporation whose stock is regularly traded on an established securities market.
Finally, the Final Regulations exempt domestic grantor trusts owned by one or more specified persons.
The Final Regulations provide a special rule for purposes of determining the aggregate value of specified foreign financial assets held by a specific domestic entity. Under the existing regulations, a taxpayer is not required to report a particular asset on Form 8938 if such asset is reported on any of the following international information returns: Forms 3520, 5471, 8621, 8865, and 8891. The Final Regulations provide that the value of any specified foreign financial asset which is reported on one of the enumerated information returns is excluded for purposes of determining the domestic entity’s aggregate value of specified foreign financial assets.
The Final Regulations further provide that purposes of determining the aggregate value of specified foreign financial assets, a specified domestic entity that is a corporation or partnership and that has an interest in any specified foreign financial asset is treated as owning all the specified foreign financial assets held by all domestic corporations and domestic partnerships that are closely held by the same specified individual.
The Final Regulations apply to taxable years beginning after December 31, 2015.
[1] The Final Regulations exclude (1) any commodity hedging transaction described in IRC § 954(c)(5)(A), determined by treating the corporation or partnership as a controlled foreign corporation; or (2) active business gains or losses from the sale of commodities, but only if substantially all the corporation or partnership’s commodities are property described in IRC § 1221(a)(1), (2), or (8).
Matthew D. Lee is the author of The Foreign Account Tax Compliance Act Answer Book 2015 (published by the Practising Law Institute), a definitive treatment of the due diligence, withholding, reporting, and compliance obligations imposed by FATCA on foreign financial institutions, non-financial foreign entities, and withholding agents. For more information on this publication, please click here.
Posted in FATCA	| Tagged FATCA, Foreign Account Tax Compliance Act	| 1 Reply
INTERNAL REVENUE SERVICE ISSUES STERN WARNING TO NON-COMPLIANT TAXPAYERS WITH OFFSHORE HOLDINGS
Posted on October 16, 2015 by Matthew D. Lee
Just one day after the October 15 deadline for filing personal income tax returns on extension, the Internal Revenue Service issued a strongly-worded warning to non-compliant taxpayers: take action now to fix your problem, or face serious consequences. At the same time, the IRS revealed, for the first time, that nearly 85,000 taxpayers have taken advantage of voluntary disclosure programs for unreported offshore assets over the course of the last seven years. The IRS also disclosed that it has conducted “thousands” of offshore-related civil audits of taxpayers, resulting in the payment of “tens of millions of dollars” to the U.S. Treasury.
In a press release dated October 16, 2015, and entitled “Offshore Compliance Programs Generate $8 Billion; IRS Urges People to Take Advantage of Voluntary Disclosure Programs,” IRS Commissioner John Koskinen touted global cooperation among nations to automatically exchange tax information as providing tax authorities around the world, including the Internal Revenue Service, with substantial greater leverage to combat tax evasion:
“The groundbreaking effort around automatic reporting of foreign accounts has given us a much stronger hand in fighting tax evasion. People with undisclosed foreign accounts should carefully consider their options and use available avenues, including the offshore program and streamlined procedures, to come back into full compliance with their tax obligations.”
The IRS announced updated statistics regarding participation in its offshore voluntary disclosure programs, which have existed since 2009. More than 54,000 taxpayers have utilized the formal IRS amnesty program, called the Offshore Voluntary Disclosure Program (OVDP), paying more than $8 billion in taxes, penalties, and interest to the U.S. Treasury. In addition, the newer Streamlined Filing Compliance Procedures (initiated in 2012 but not fully clarified and expanded until June 2014) have been exceedingly popular with non-compliant taxpayers. The streamlined program, which is designed for “non-willful” taxpayers, has seen more than 30,000 applicants, with two-thirds of those submissions made since June 2014 when the streamlined eligibility criteria were expanded.
These statistics demonstrate overwhelming interest in the streamlined procedures, while applications for the formal OVDP appear to be waning. Prior to announcement of the streamlined procedures, the IRS received withering criticism for the OVDP’s “one-size-fits-all” penalty structure that contained no mechanism to distinguish between individuals who had engaged in outright tax evasion and those taxpayers whose non-compliance was due to “non-willful” conduct, such as a good faith misunderstanding of the law. The streamlined program was designed to provide an alternative to the perceived harsh treatment accorded OVDP participants, and judging by the statistics announced today, it appears that the vast majority of taxpayers who have taken action in the past year have rejected the OVDP option and instead elected for streamlined treatment. Curiously absent from today’s IRS announcement is any discussion of the number of taxpayers whose streamlined applications were rejected. The streamlined program application ominously warns that taxpayers whose conduct is not genuinely “non-willful” risk being rejected from the streamlined program and subject to audit or criminal investigation. The IRS is undoubtedly scrutinizing streamlined applications in an effort to ensure that “willful” taxpayers are not able to “sneak” through the less rigorous program alternative. The IRS also has not provided any statistics regarding the number of taxpayers who have utilized the disfavored (in the eyes of the IRS) “quiet disclosure” path, although tracking such taxpayers is admittedly difficult given the nature of such disclosures.
Today’s announcement by the IRS makes clear the risk to non-compliant taxpayer because of global developments regarding the automatic exchange of tax exchange now in effect. Both the Foreign Account Tax Compliance Act (FATCA), which is now fully effective, and the OECD’s Common Reporting Standard, which starts to become effective in 2016, are mechanisms to provide tax authorities throughout the world (including the U.S.) with information about taxpayers with offshore assets:
Under the Foreign Account Tax Compliance Act (FATCA) and the network of intergovernmental agreements (IGAs) between the U.S. and partner jurisdictions, automatic third-party account reporting began this year, making it less likely that offshore financial accounts will go unnoticed by the IRS.
Also, the Department of Justice’s Swiss Bank Program is another way in which the U.S. will obtain a significant amount of information regarding U.S. taxpayers with Swiss bank accounts:
In addition to FATCA and reporting through IGAs, the Department of Justice’s Swiss Bank Program continues to reach non-prosecution agreements with Swiss financial institutions that facilitated past non-compliance. As part of these agreements, banks provide information on potential non-compliance by U.S. taxpayers. Potential civil penalties increase substantially if U.S. taxpayers associated with participating banks wait to apply to OVDP to resolve their tax obligations.
The overwhelming success of the IRS voluntary disclosure initiatives (both OVDP and the streamlined program) is unquestionably attributable to the U.S. government’s use of a traditional “carrot and stick” approach. With OVDP and the streamlined program representing the “carrot” used to entice non-compliant taxpayers to take action and return to tax compliance, a robust enforcement agenda carried out by the IRS, working hand-in-hand with the Justice Department, represents the “stick.” Enforcement actions in this area consist of both criminal and civil proceedings. The DOJ’s Offshore Compliance Initiative proclaims that “[o]ne of the Tax Division’s top litigation priorities is combatting the serious problem of non-compliance with our tax laws by U.S. taxpayers using secret offshore bank accounts” and maintains an updated list of offshore criminal prosecutions on its website. Today’s IRS announcement reveals that the IRS has conducted thousands of civil audits in this area:
Separately, based on information obtained from investigations and under the terms of settlements with foreign financial institutions, the IRS has conducted thousands of offshore-related civil audits that have produced tens of millions of dollars. The IRS has also pursued criminal charges leading to billions of dollars in criminal fines and restitutions.
Finally, while acknowledging the reality that the Internal Revenue Service has faced years of budget cuts and deep declines in its workforce (both civil revenue agents and criminal special agents), today’s announcement warns that the agency remains vigilant and aggressive even while resource-constrained:
The IRS remains committed to stopping offshore tax evasion wherever it occurs. Even though the IRS has faced several years of budget reductions, the agency continues to pursue cases in all parts of the world.
U.S. taxpayers with undisclosed offshore accounts or assets should well heed today’s warning from the IRS. With the implementation of tax exchange mechanisms such as FATCA, and other enforcement initiatives like the Swiss Bank Program, the IRS has access now to far more information about the offshore activities of U.S. taxpayers than ever before. And non-compliant taxpayers who fail to take voluntary, corrective action now will surely face harsh consequences when they are invariably discovered by the IRS or other tax authorities.
Posted in Criminal Tax, FATCA, FBAR, Foreign Account Tax Compliance Act, IGA, Intergovernmental Agreement, IRS Audits, IRS Criminal Investigation Division, Offshore Voluntary Disclosure Initiative (OVDI), Offshore Voluntary Disclosure Program (OVDP), Streamlined Filing Compliance Procedures, Swiss Bank Program, U.S. Department of Justice Tax Division	| Tagged DOJ, FATCA, Foreign Account Tax Compliance Act, foreign bank, intergovernmental agreement, Internal Revenue Service, irs criminal investigation, Justice Department, Offshore Voluntary Disclosure Program, Swiss Bank Program, voluntary disclosure	| 1 Reply
Internal Revenue Service Begins Reciprocal Automatic Exchange of Tax Information Under FATCA IGAs
Posted on October 3, 2015 by Matthew D. Lee
On October 2, 2015, the Internal Revenue Service announced that it had achieved a key milestone in implementation of the Foreign Account Tax Compliance Act (FATCA), a critical anti-tax evasion law passed by Congress in 2010 but not fully implemented until July 2014. The milestone announced by the IRS was the exchange of financial account information with certain foreign tax administrations by September 30, 2015. To achieve the reciprocal exchange of tax information by the September 30 deadline, the IRS successfully and timely developed the information system infrastructure, procedures, and data use and confidentiality safeguards to protect taxpayer data while facilitating reciprocal automatic exchange of tax information with certain foreign jurisdiction tax administrators as specified under the intergovernmental agreements (IGAs) implementing FATCA.
“Meeting the Sept. 30 deadline is a major milestone in IRS efforts to combat offshore tax evasion through FATCA and the intergovernmental agreements,” said IRS Commissioner John Koskinen. “FATCA is an important tool against offshore tax evasion, and this is a significant step in the process. The IRS appreciates the assistance of our counterparts in other jurisdictions who have helped to make this possible.”
The reciprocal, automatic exchange of information with certain partner jurisdictions is part of the IRS’s overall efforts to implement FATCA, enacted in 2010 by Congress to target non-compliance by U.S. taxpayers using foreign accounts or foreign entities. FATCA generally requires withholding agents to withhold on certain payments made to foreign financial institutions (FFIs) unless such FFIs agree to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.
In response to the enactment of FATCA and other jurisdictions’ interest in facilitating and participating in the exchange of financial account information, the U.S. government entered into a number of bilateral IGAs that set the groundwork for cooperation between the jurisdictions in this area. Certain IGAs not only enable the IRS to receive this information from FFIs, but enable more efficient exchange by allowing a foreign partner to gather the specified information and provide it to the IRS. And some IGAs also require the IRS to reciprocally exchange certain information about accounts maintained by residents of foreign jurisdictions in U.S. financial institutions with their jurisdictions’ tax authorities. Under these reciprocal IGAs, the first exchange had to take place by September 30, giving the IRS a deadline to put in place a process to facilitate this data exchange.
The IRS announcement further stated that the information now available provides the United States and partner jurisdictions an improved means of verifying the tax compliance of taxpayers using offshore banking and investment facilities, and improves detection of those who may attempt to evade reporting the existence of offshore accounts and the income attributable to those accounts.
The IRS will only engage in reciprocal exchange with foreign jurisdictions that, among other requirements, meet the IRS’s stringent safeguard, privacy, and technical standards. Before exchanging with a particular jurisdiction, the United States conducted detailed reviews of that jurisdiction’s laws and infrastructure concerning the use and protection of taxpayer data, cyber-security capabilities, as well as security practices and procedures.
“This groundbreaking effort has fundamentally altered our relationship with tax authorities around the world, giving us all a much stronger hand in fighting illegal tax avoidance and leveling the playing field,” Koskinen said.
The IRS announcement further stated that meeting this deadline reflects a significant international collaboration and partnership with dozens of jurisdictions around the world. The capacity for reciprocal automatic exchange builds on numerous accomplishments including the following:
Development of a consistent data reporting format, or schema, and the agreement to use this format by all jurisdictions;
Establishment of the details and procedures required to assure data confidentiality;
Creation of a data transmission system to meet high standards for encryption and security; and
Cooperation with foreign jurisdiction tax administrations to achieve the timely implementation of this exchange.
The IRS announcement declined to identify which countries received tax information from the IRS, but The Wall Street Journal reported that a total of 34 countries are eligible to receive tax information from the U.S. That list includes the following countries:
Australia, Brazil, Canada, Czech Republic, Denmark, Estonia, Finland, France, Germany, Gibraltar, Guernsey, Hungary, Iceland, India, Ireland, Isle of Man, Italy, Jersey, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mauritius, Mexico, Netherlands, New Zealand, Norway, Poland, Slovenia, South Africa, Spain, Sweden, and the United Kingdom.
The type of information typically exchanged pursuant to the FATCA IGAs consists of the name of the account holder, address, account number, account balance, and amount of dividend and interest payments, among other items. This disclosure applies to accounts above a certain threshold.
The conclusion of the IRS announcement contained another warning to non-compliant taxpayers of the increasing risks of detection:
Koskinen noted the risks of hiding money offshore are growing and the potential rewards are shrinking.
Since 2009, tens of thousands of individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to comply with the U.S. tax system and resolve their tax obligations. At the beginning of 2012, the IRS reopened the Offshore Voluntary Disclosure Program (OVDP), which is open until otherwise announced.
Posted in Criminal Tax, Department of the Treasury, FATCA, Foreign Account Tax Compliance Act, IGA, Intergovernmental Agreement, Internal Revenue Service, IRS Criminal Investigation Division, Offshore Voluntary Disclosure Initiative (OVDI), Offshore Voluntary Disclosure Program (OVDP), Streamlined Filing Compliance Procedures, Treaties	| Tagged FATCA, Foreign Account Tax Compliance Act, IRS, irs criminal investigation, Offshore Voluntary Disclosure Program, tax evasion	| Leave a reply
FATCA Update: Institute of International Bankers Submits Comment Letter on FATCA Regulations
Posted on September 20, 2015 by Matthew D. Lee
The Institute of International Bankers (IIB) has submitted a comment letter (available through Bloomberg BNA here; subscription required) to the Internal Revenue Service addressing various issues arising under the FATCA regulations. According to its website, the IIB is described as follows:
Founded in 1966, the IIB is the only national association devoted exclusively to representing and advancing the interests of internationally-headquartered banking/financial institutions operating in the United States. Its membership is comprised of internationally headquartered institutions from over 35 countries around the world. Collectively, the U.S. branches, agencies, banking subsidiaries, securities affiliates and other operations of the IIB’s member banks are an important source of credit for U.S. borrowers and enhance the depth and liquidity of U.S. financial markets. IIB member banks also inject billions of dollars each year into the economies of major cities across the country through the direct employment of U.S. citizens and permanent residents, as well as through other operating and capital expenditures.
The IIB begins its letter by stating that “[w]e are writing to highlight and suggest ways to resolve issues that our member banks are encountering in connection with implementing certain requirements of the Foreign Account Tax Compliance Act (FATCA).” In summary, the issues, and the proposed resolutions, identified by the IIB are as follows:
Remediating pre-existing accounts after the June 30 deadline. The IIB contends that participating foreign financial institutions (PFFIs) should be allowed to treat pre-existing accounts as “cured” for reporting purposes if the curative documentation is received after the applicable June 30 deadline, but before the reporting deadline in the following year.
Reporting requirements for closed or transferred accounts. The IIB suggests that pre-existing accounts (individuals and entities) subject to a remediation period, and not yet identified or documented for FATCA purposes, should be reported as follows: (1) If the account is closed or transferred prior to the expiry of the remediation period, the account should not be subject to reporting since the account holder’s status has not been determined; and (2) If the account is closed or transferred after the remediation period expires and the account is not cured, the account is subject to reporting based on the applicable presumption rules (although the PFFI may still try to cure the account based on the proposal above).
Clarifying treatment of “professionally managed” entities. The IIB suggests that the IRS should clarify the application of the “managed by” test that will require certain passive entities to be treated as investment entities (and, consequently, as foreign financial institutions (FFIs)).
The IIB suggests that all of these proposed clarifications could be made through the FAQs published in the IRS website.
Remediating pre-existing accounts after the June 30 deadline
The IIB notes that PFFIs are generally required to remediate pre-existing accounts held by individuals that have U.S. indicia. For pre-existing accounts held by individuals, the remediation deadlines are June 30, 2015, for high-value accounts (balance or value greater than $1 million) and June 30, 2016, for other accounts (assuming the effective date of the FFI Agreement is June 30, 2014). If uncured by the applicable June 30 deadline, such accounts are reclassified as recalcitrant (or non-consenting under a Model 2 IGA). Treas. Reg. §1.1471-5(g)(3).
Subject to certain exceptions, PFFIs also are required to remediate pre-existing financial accounts held by entities in order to determine if the entity is a nonparticipating FFI (NPFFI). For entities other than prima-facie FFIs, the remediation deadline is June 30, 2016. If uncured by this date, the entity will generally default to NPFFI status.
Recalcitrant accounts and NPFFIs are subject to reporting under FATCA on Form 8966. It is unclear, however, if such reporting is required if the PFFI obtains curative documentation after the remediation deadline has passed.
The IIB’s proposal to address this issue is as follows: To clarify the consequences of the expiration of the remediation period, the IIB proposes the following approach:
If a PFFI receives curative documentation after the remediation deadline, but before the due date (plus extensions) to file Form 8966, the PFFI may treat the account as cured and not subject to reporting on this form. A financial institution may also rely on the curative documentation for purposes of reporting the chapter 4 status on a Form 1042-S. Furthermore, the affidavits described in the refund procedures of Treas. Reg. §1.14713(c)(7) should not be required, unless withheld tax is to be refunded.
The above proposal would not apply to any recalcitrant account holders subject to FATCA withholding due to their status as recalcitrant or NPFFI account holders.
Reporting requirements for accounts that are closed or transferred before remediation period expires
The IIB comment letter notes that PFFIs are required to report certain information to the IRS regarding financial accounts held by specified U.S. persons, U.S.-owned foreign entities or owner-documented FFIs that are closed or transferred during the year.
It is unclear how the above reporting requirements apply to a pre-existing account (individual or entity) that is not yet identified or documented for FATCA purposes and that is closed or transferred before the expiration of the applicable June 30 remediation deadline. The regulations do not clearly require reporting in such a case. Furthermore, since the PFFI does not know the account holder’s status at the time of the account closure or transfer, reporting does not seem appropriate. The regulations simply do not require a PFFI to reclassify an account holder of a closed or transferred account as recalcitrant or as an NPFFI after the expiration of the remediation period.
The IIB’s proposal to address this issue is as follows: The IRS should provide guidance clarifying that a PFFI is not required to file Form 8966 with respect to an unremediated pre-existing individual or entity account that has been closed or transferred prior to the expiration of its remediation period.
Post-expiration of the remediation period, if a pre-existing account is closed or transferred and is not cured, it would remain subject to reporting based on the applicable presumption rules. (As proposed above a PFFI would treat the account as “cured” for reporting purposes, if the documentation is subsequently received prior to the reporting deadline.)
Clarifying treatment of professionally managed entities
According to the IIB comment letter, there has been some confusion about the treatment of certain passive entities that are managed by other financial institutions. In general, such an entity will be an FFI if: (1) the entity’s gross income is primarily attributable to investing, reinvesting, or trading financial assets; and (2) the entity is managed by another entity that qualifies as an FFI (other than certain investment entities) (“professionally managed”). Treas. Reg. §1.1471-5(e)(4). The regulations also provide examples of the management test, illustrating that a trust managed by a trust company and a fund managed by an entity investment advisor should each be treated as an FFI. Treas. Reg. §1.1471- 5(e)(4)(v) (examples 3 and 6).
Based on these regulations and the related examples, the IIB is concerned that a passive NFFE certification is unreliable if the account holder invests in financial assets and there are indicia that the account holder is managed by a financial institution. Such indicia may include, for example:
A corporate trustee for an account holder that is a trust, foundation, or similar entity, and the trustee’s name reasonably indicates it is a financial institution;
A corporate director for a client that is a corporation, company, or similar entity, and the director’s name reasonably indicates it is a financial institution; or
An individual who, as part of his or her duties as an employee of an entity, acts under a power of attorney for the account holder, and the entity’s name reasonably indicates it is a financial institution.
This list is not exclusive, but it illustrates the type of indicia that may result in a questionable passive NFFE certification.
The IIB comment letter sets forth a potential cure for this problem: where a financial institution suspects (but does not know) that an entity is being professionally managed, the IRS should allow a financial institution to perform additional due diligence and “cure” the types of indicia described above if the entity claiming passive NFFE status also indicates in a written statement that it is not managed by another financial institution. Requiring this additional statement will help ensure that professionally managed entities will not improperly claim passive NFFE status. The written statement could be incorporated as part of the self-certification used by the financial institution opening the account, or provided separately.
Furthermore, in many cases, a financial institution may have actual knowledge that a passive NFFE certification is invalid if the entity making such a certification receives management services from that same financial institution (e.g., through a “discretionary account” or “managed account” in which the financial institution has full discretion over investment decisions) and the entity’s account holds financial assets. Except as noted below, the financial institution receiving the passive NFFE certification may not rely on it. It would be helpful, however, for the IRS to confirm this understanding in order to establish a level playing field in the industry.
Nevertheless, a financial institution may rely on a passive NFFE certification if the entity providing the certification also confirms in a written statement that it is a passive NFFE despite the fact that it is professionally managed (e.g., because it does not meet an applicable gross income test because, for example, most of its assets are real estate, or because it resides in a country that classifies certain entities as passive NFFEs, even if they are actively managed (e.g., Canada)).
If an entity maintains the view that it is a passive NFFE despite being professionally managed and fails to provide a written statement, a financial institution should have the option of: ( I) asking the entity for a new Form W-8 indicating an FFI status; or (2) treating the entity as an owner-documented FFI (“ODFFI”) and reporting all its specified US owners and certain debtors on Forms 8966 as long as the financial institution has the information it needs to report.
The IIB’s proposal to deal with this problem: The IIB proposes that the IRS issue an FAQ that provides guidance consistent with the comments above, namely that:
Potential indicia of management by another financial institution may be cured by obtaining an additional written statement from the passive NFFE that it is not professionally managed; and
Providing a discretionary mandate or similar service will generally result in the financial institution having actual knowledge that the entity is an FFI (in which case the financial institution has the option to collect a new tax form or treat the entity as an ODFFI), unless the entity provides an additional written statement establishing that it is a passive NFFE despite being professionally managed.
Posted in FATCA, Foreign Account Tax Compliance Act	| Tagged FATCA, Foreign Account Tax Compliance Act	| Leave a reply
FATCA Update: Treasury Relaxes September 30 Deadline for Model 1 IGA Jurisdictions to Exchange Tax Information
Posted on September 18, 2015 by Matthew D. Lee
With less than two weeks remaining until many countries are required to exchange tax information with the U.S. pursuant to the Foreign Account Tax Compliance Act (FATCA), the U.S. has agreed to provide partner jurisdictions with more time to implement information exchange systems. Today, the Treasury Department and the Internal Revenue Service issued Notice 2015-66 which relaxes the September 30, 2015, deadline for countries which have signed Model 1 Intergovernmental Agreements (IGAs) to hand over information regarding accounts held by U.S. taxpayers. As of today, 112 countries have either signed an IGA with the U.S. or agreed in substance to the terms of an IGA. (A complete list is available here.) Under the terms of the Model 1 IGA, once the agreement enters into force, information relating to calendar year 2014 is generally required to be reported to the U.S. by September 30, 2015.
Treasury has released two versions of the Model 1 IGA. A Model 1A IGA provides for reciprocal information exchange between the United States and the partner jurisdiction. The obligation to exchange information generally begins after the IGA enters into force under Article 10(1) of the IGA and the competent authorities provide notification that each is satisfied that the other jurisdiction has in place the necessary safeguards to ensure that the information received will remain confidential and be used solely for tax purposes and the infrastructure necessary for an effective exchange relationship. A Model 1B IGA provides for information to be exchanged only by the partner jurisdiction. Under a Model 1B IGA, the obligation for a partner jurisdiction to exchange information with the United States begins when the IGA enters into force under Article 10(1) or Article 12(1) (as applicable) of the IGA.
Once an IGA has entered into force and any relevant notifications described above for the Model 1A IGA have been provided, Article 2 of both versions of the Model 1 IGA requires the partner jurisdiction to obtain and exchange specified information with respect to each U.S. reportable account. Under Article 3(5) of the Model 1 IGA, the partner jurisdiction is obligated to obtain and exchange information within nine months after the end of the calendar year to which the information relates. In the case of information required to be obtained and exchanged with respect to 2014 pursuant to a Model 1 IGA that is in force, the 2014 information should be exchanged by the partner jurisdiction by September 30, 2015.
Notice 2015-66 recognizes that many countries that have signed IGAs, or have agreed to such in principle, are continuing to work through their internal procedures in order to bring the IGA into force. Such countries are continuing to develop and implement systems needed for automatic exchange and may not have those systems in place by September 30, 2015. In addition, several partner jurisdictions are in the process of enacting legislation to implement their IGAs, without which they are unable to exchange tax information with the U.S. For these reasons, Treasury and the IRS have decided to relax the September 30 reporting deadline.
Model 1 IGA Jurisdictions for Which the Obligation to Exchange Has Not Taken Effect
For those Model 1 IGA jurisdictions where the obligation to exchange information has not yet taken effect, Notice 2015-66 provides that FFIs in that country will be treated as FATCA compliant, and not subject to withholding, so long as the jurisdiction “continues to demonstrate firm resolve to bring the IGA into force.” Under these circumstances, the deadline to exchange information for calendar year 2014 will be extended one full year, to September 30, 2016. Notice 2015-66 does not, however, change the deadline for FFIs to report information to their local tax authority, which remains governed by law of that country.
Model 1 IGA Jurisdictions for Which the Obligation to Exchange Is In Effect
For those Model 1 IGA jurisdictions where the obligation to exchange is in effect now, Notice 2015-66 provides that FFIs in that country will be treated as FATCA compliant, and not subject to withholding, so long as the partner jurisdiction notifies the U.S. before September 30 that it requires more time, and “provides assurance that the jurisdiction is making good faith efforts to exchange the information as soon as possible.” Notice 2015-66 does not, however, change the deadline for FFIs to report information to their local tax authority, which remains governed by law of that country.
Notice 2015-66 provides a much-needed reprieve for Model 1 IGA countries and affords such jurisdictions more time to implement information exchange systems and, if necessary, legislation to implement IGAs. Unless the Model 1 IGA jurisdiction modifies its internal deadline for reporting, FFIs in those jurisdictions will still have to report information regarding their U.S. reportable accounts to their respective tax authorities irrespective of the relaxed deadlines in Notice 2015-66. Today’s announcement also provides a reprieve, of sorts, to non-compliant U.S. taxpayers who maintain financial accounts at FFIs in Model 1 IGA jurisdictions. The relaxation of the September 30 deadline for reporting to the U.S. affords such taxpayers additional time to take steps to become compliant, by utilizing the various IRS voluntary disclosure programs such as the Offshore Voluntary Disclosure Program or the Streamlined Filing Compliance Procedures. Once a foreign jurisdiction turns over account information to the U.S., non-compliant taxpayers generally cannot take advantage of the IRS disclosure programs and will be subject to audit or, worse, a criminal investigation.
Posted in Criminal Tax, Department of the Treasury, FATCA, Foreign Account Tax Compliance Act, IRS Audits, IRS Criminal Investigation Division, Offshore Voluntary Disclosure Initiative (OVDI), Offshore Voluntary Disclosure Program (OVDP), Streamlined Filing Compliance Procedures, U.S. Department of Justice Tax Division	| Tagged FATCA, Foreign Account Tax Compliance Act, Offshore Voluntary Disclosure Program	| 2 Replies
Three More Swiss Banks Have Secured Non-Prosecution Agreements with the DOJ
Posted on September 11, 2015 by Stephanie C. Chomentowski
Since our last update, three more Swiss banks have reached resolutions with the Justice Department under its Swiss Bank Program –Valiant Bank AG, Schroder & Co. Bank AG, and Hypothekarbank Lenzburg AG. To resolve their respective tax-related criminal offenses, Valiant Bank agreed to pay a penalty of $3.3 million, Schroder Bank agreed to pay a penalty of $10.3 million, and HBL agreed to pay a penalty of $560,000.
In press releases, the DOJ described the relevant conduct of each of the banks in relation to their U.S. accountholders as follows:
Valiant Bank (announced yesterday)
Valiant traces its origins to 1824 and is headquartered in Bern, the capital of Switzerland. Today, Valiant is the successor of 40 banks.
Valiant offered hold mail services and numbered accounts to its U.S. clients, including some U.S. clients who had not provided Valiant with an Internal Revenue Service (IRS) Form W-9. Valiant also accepted funds from 19 UBS accountholders who exited UBS. Eleven of these 19 U.S. persons provided a signed Form W-9. The remaining eight U.S. persons who did not were later forced to close their Valiant accounts.
For 26 accountholders who refused to sign a Form W-9, Valiant cashed out or converted into gold hundreds of thousands (and even millions) of dollars in account balances. In late November 2011, one accountholder withdrew more than one million Swiss francs in various currencies and 114,000 Swiss francs in gold coins, gold bars and precious metal. Another accountholder withdrew $2 million in cash and wired 400,000 Swiss francs to a U.S. bank. In both instances, the accountholders refused to sign a Form W-9. Other accountholders withdrew only amounts under $10,000 either by U.S. dollar cash withdrawals or by check or wire transfer to the United States, or transferred large sums to non-U.S. institutions. For example, one accountholder transferred over 435,000 euros to France and $350,000 to Luxembourg. Two other accountholders each transferred 75,000 Swiss francs to Dubai and closed their accounts with cash withdrawals of over 300,000 Swiss francs.
In 2009, an accountholder refused to sign a Form W-9 and requested that Valiant ignore the accountholder’s U.S. status. The accountholder’s non-U.S. spouse later opened a separate account at Valiant, and the accountholder transferred more than $1 million into that account. According to an “Agreement of Donation” between the accountholder and the accountholder’s non-U.S. spouse, the purpose of the transfer was “to make a donation” and “without any consideration.” The agreement provided that the donation was “irrevocable.” The non-U.S. spouse then transferred the funds to UBS and instructed Valiant to close the account.
Some U.S.-related accounts at Valiant were held in the name of non-U.S. entities with one or more U.S. beneficial owners. In one case, a British Virgin Islands entity opened an account at Valiant through a third-party Swiss entity assigned to manage the account. The entity holding the account designated four U.S. persons as beneficial owners, but signed a Valiant form declaring that the account was for the benefit of non-U.S. persons.
Since Aug. 1, 2008, Valiant had 330 U.S.-related accounts, out of a total of 600,000 accounts. The maximum aggregate dollar value of the U.S.-related accounts was $147.4 million. Valiant will pay a penalty of $3.304 million.
Schroder Bank (announced 9/3/2015)
Hypothekarbank Lenzburg AG (announced 8/27/2015)
HBL offered a variety of traditional Swiss banking services that it knew could assist, and that did assist, U.S. clients in the concealment of assets and income from the Internal Revenue Service (IRS). For example, HBL, upon client request, did not send mail associated with some U.S.-related accounts to the United States. In addition, HBL offered numbered accounts to its clients, a service by which access to information about an account, including the identity of the accountholder, was limited to only certain employees of HBL. In a handful of instances, the accountholders of U.S.-related accounts who refused to provide a Form W-9 or who admitted that they were not tax compliant withdrew significant amounts of cash or physical assets when HBL forced these accounts to be closed.
In or about 2008, Swiss bank UBS AG publicly announced that it was the target of a criminal investigation by the IRS and the department, and that it would be exiting and no longer accepting certain U.S. clients. In a later deferred prosecution agreement, UBS admitted that its cross-border banking business used Swiss privacy law to aid and assist U.S. clients in opening accounts and maintaining undeclared assets and income from the IRS. HBL opened one account for a U.S. person who exited UBS. For another long-standing holder of a U.S.-related account, HBL received a transfer of funds from an account held at UBS into a pre-existing account at HBL.
Another accountholder who resided in the United States for many years had two accounts, one of which was a numbered account. In 2012, the accountholder’s relationship manager requested a Form W-9 for the numbered account and the accountholder refused to provide one. As a result, the relationship manager directed the accountholder to close the numbered account. Thereafter, the accountholder came to Lenzburg to close the numbered account. The accountholder withdrew 240,000 Swiss francs and 12,000 euros and purchased precious metals in the amount of 318,000 Swiss francs.
Since Aug. 1, 2008, HBL had 96 U.S.-related accounts with an aggregate value of $69.8 million. HBL’s average annual revenue attributable to U.S.-related accounts in the form of fees, commissions and earnings on client funds that were loaned out by HBL was $198,000, or a total of $1.2 million since Aug. 1, 2008. HBL will pay a penalty of $560,000.
Under the Swiss Bank Program, eligible Swiss banks that had notified the DOJ by December 31, 2013 of an intent to participate in the Program were eligible to resolve any potential criminal liabilities in the U.S. by completing the following:
Pay appropriate penalties
According to the terms of these non-prosecution agreements, each bank agrees to cooperate in any related criminal or civil proceedings, demonstrate its implementation of controls to stop misconduct involving undeclared U.S. accounts and pay penalties in return for the DOJ’s agreement not to prosecute these banks for tax-related criminal offenses.
The Justice Department released the following documents with each of these announcements:
The Valiant Bank non-prosecution agreement and statement of facts (available here).
The Schroder Bank non-prosecution agreement and statement of facts (available here).
The HBL non-prosecution agreement and statement of facts (available here).
Posted in Criminal Tax, FATCA, FBAR, Form 8938, IRS Criminal Investigation Division, Offshore Voluntary Disclosure Program (OVDP)	| Tagged FATCA, FBAR, irs criminal investigation, Justice Department, Offshore Voluntary Disclosure Program, Swiss Bank Program, Swiss banks, Switzerland	| Leave a reply
Swiss Banks Bank Zweiplus and Banca Stato Have Entered into Non-Prosecution Agreements under the DOJ’s Swiss Bank Program
Posted on August 21, 2015 by Stephanie C. Chomentowski
Two more Swiss banks have reached resolutions with the Justice Department under its Swiss Bank Program. Yesterday, DOJ announced that bank zweiplus ag (Bank Zweiplus) and Banca dello Stato del Cantone Ticino (Banca Stato) have each entered into a non-prosecution agreement for any tax-related criminal offenses and agreed to pay a penalty of just over $1 million and $3 million, respectively.
In its announcement yesterday, the DOJ described the relevant conduct of each of these banks as in relation to their U.S. accountholders as follows:
Bank Zweiplus was founded in July 2008 as a retail bank based in Zurich. Offices located in Geneva and Basel, Switzerland, were closed in 2008 and 2012, respectively. Since Aug. 1, 2008, Bank Zweiplus maintained and serviced 44 U.S.-related accounts with an aggregate value of approximately $12.1 million.
Bank Zweiplus was aware that U.S. taxpayers have a legal duty to report to the Internal Revenue Service (IRS) their ownership of bank accounts outside the United States and to pay taxes on income earned in such accounts. Nevertheless, in disregard of U.S. laws, the bank provided a variety of traditional Swiss banking services that assisted some U.S. taxpayers in concealing their undeclared accounts. For example, Bank Zweiplus maintained numbered accounts and accounts held in the name of structures which were effectively owned or controlled by U.S. persons, including structures in the British Virgin Islands and the Bahamas.
Bank Zweiplus cooperated with the department during its participation in the Swiss Bank Program and encouraged its U.S. clients to enter the IRS Offshore Voluntary Disclosure Program. Bank Zweiplus will pay a penalty of $1.089 million.
Banca Stato was established in 1915 and is headquartered in Bellinzona, Switzerland. Banca Stato was aware that U.S. taxpayers had a legal duty to report to the IRS and pay taxes on the basis of all of their income, including income earned in accounts that the U.S. taxpayers maintained at the bank. Despite this, the bank opened and serviced accounts for U.S. clients who the bank knew or had reason to know were not complying with their U.S. income tax obligations.
In 2001, Banca Stato entered into a Qualified Intermediary Agreement with the IRS. In 2001, the bank issued an internal directive prohibiting U.S. persons without a Form W-9 on file with the bank from buying U.S. securities. However, prior to 2011, Banca Stato’s relationship managers were not instructed to, and did not, evaluate or screen incoming U.S. clients for U.S. tax compliance status. At that time, more than 70 percent of the assets under management were related to U.S. accountholders who had not provided a Form W-9 to the bank.
In 2011, Banca Stato implemented a project that it called “Colombo” to change the manner in which it handled U.S. clients. The bank recognized both risks and rewards of handling U.S. clients. As to the former, the bank recognized that “[w]e can no longer have clients who are U.S. Persons who have not signed the W-9 form.” But the bank also recognized an opportunity to attract new U.S. clients because many Swiss banks declined to service U.S. persons from Ticino, Switzerland, and the bank perceived “a huge demand from fully tax-compliant U.S. Persons . . . attracted by the brand BancaStato (especially because we have no branches in the US).”
Banca Stato entered into a relationship with a Lugano-based U.S. Securities and Exchange-registered investment advisory firm to partner in attracting U.S. persons living and working in the Ticino region who could not open or maintain accounts at other institutions. The bank paid the firm a one-time finder’s fee of 0.5 percent on the incoming funds. Despite the bank’s decision to refuse to open new accounts of U.S. persons without a Form W-9, it did not always adhere to this policy.
Banca Stato offered a variety of traditional Swiss banking services that it knew would and in certain instances did assist U.S. clients in concealing assets and income from the IRS, including hold mail and code name or numbered accounts. In addition, the bank employed a variety of other means or conduct that it knew or should have known would assist U.S. taxpayers in concealing their Banca Stato accounts, including opening accounts for U.S. taxpayers who left other banks being investigated by the department and allowing U.S. clients to direct repeated wire transfers between $9,000 and $9,900 in an effort to conceal their Swiss bank accounts from U.S. authorities.
During the applicable period, Banca Stato maintained and serviced 187 U.S.-related accounts with an aggregate maximum balance of approximately $137 million. Banca Stato will pay a penalty of $3.393 million.
According to the terms of the non-prosecution agreements announced yesterday, each bank agrees to cooperate in any related criminal or civil proceedings, demonstrate its implementation of controls to stop misconduct involving undeclared U.S. accounts and pay penalties in return for the DOJ’s agreement not to prosecute these banks for tax-related criminal offenses.
The Justice Department released the following documents with its announcement:
The Bank Zweiplus non-prosecution agreement and statement of facts (available here).
The Banca Stato non-prosecution agreement and statement of facts (available here).
Posted in Criminal Tax, Foreign Account Tax Compliance Act, Swiss Bank Program, U.S. Department of Justice Tax Division	| Tagged DOJ, FATCA, foreign bank, Swiss Bank Program, Swiss banks, tax crime	| Leave a reply