Source: http://rubinontax.floridatax.com/2014/06/
Timestamp: 2017-04-24 07:30:37
Document Index: 575063702

Matched Legal Cases: ['§ 3717', '§ 901', '§3717', '§901', '§ 3717', '§ 3717', '§6166', '§6166', '§6402', '§6402', '§6403', '§6403', '§6403', '§ 6166', '§ 6402', '§ 6166', '§125', '§ 10', '§ 10', '§ 10']

RUBIN ON TAX: June 2014
LEARN MOST OF WHAT YOU NEED TO KNOW ABOUT THE NEW STREAMLINED FOREIGN ACCOUNT 5% PENALTY DISCLOSURE PROCEDURE IN 5 MINUTES
I’ve summarized the key points and requirements, and the principal advantages and disadvantages of using, the new procedure vs. the regular OVDI program route in a mind map. The map is available online at this link (hint: click the icon in the upper right hand corner of the map with two arrows on it to view the map full screen). Posted by
A CLOSER LOOK INTO FBAR LATE PAYMENT AND INTEREST PENALTIES THROUGH THE ZWERNER SETTLEMENT – WHAT WERE THE PENALTIES AND INTEREST? - HOW WERE THEY COMPUTED?
This closer look at these issues was prepared by my partner Richard (Rick) Josepher. While much about the Zwerner case (U.S. v. Zwerner, Case No. 13-22082-CIV, So. Dist. Fl.) has been discussed regarding the FBAR penalties, there has not been much attention paid to the 6% late payment penalty and interest applicable to FBAR penalties which are not paid timely. The late payment and interest would arise in cases where the FBAR penalty is assessed but not timely paid. They do not arise in OVDP settlements as the FBAR penalty is paid without interest and late penalties under the terms of the OVDPs. Since these additional penalties are not insignificant, it is important to consider them in analyzing FBAR penalty cases. Background. Zwerner was widely publicized. It was noteworthy because the government asserted that Zwerner should pay the maximum 50% FBAR penalty for each of three years in which he failed to willfully file FBARs. Imposition of the penalty for each of three years results in an aggregate penalty of approximately 150% the high balance in the account over the three years. In contrast to the multi-year imposition of the FBAR penalty asserted in Zwerner, the offshore voluntary disclosures programs (OVDPs) have imposed an offshore penalty for a single year. On June 9, 2014, approximately two weeks following the verdict finding that Zwerner’s failure to file the FBARs was wilful, he and the U.S. reached a settlement. They agreed that the FBAR penalty of 50% would apply to two of the three years but not to all three years, and they agreed that the late payment penalty and interest would apply to each of those two years. The Zwerner Settlement. A. Stipulated Settlement. The stipulated settlement reads in part as follows: “Under the terms of the settlement, by September 2, 2014, Zwerner is to fully pay the United States the 50% FBAR penalties assessed against him for 2004 and 2005 in the amounts of $723,762 and $745,209 respectfully, interest thereon of $21,336.11 and $20,947.52 respectively, plus statutory penalties that have accrued under 31 U.S.C. § 3717(e)(2) on the FBAR penalty assessments for 2004 and 2005 of $128,016.64 and $125,685.11 respectively. Once that payment is made, the parties will stipulate to dismiss this action with prejudice.” B. FBAR and Late Payment Penalty and Interest . Below are shown the FBAR, late payment and interest penalties. The penalties and interest amounted to almost $300,000, as follows: YEAR FBAR PENALTY LATE PAYMENT INTEREST DATE ASSESSED 2004 723,762 128,017 21,336 6/21/11 2005 745,209 125,685 20,948 8/10/11 TOTAL 1,268,971 253,702 42,284 1. Late Payment Penalty. The late payment penalty is “not to exceed” six (6%) percent per year penalty computed from the date of the assessment of the FBAR penalty, computed pursuant to 31 U.S.C. 3717(e)(2), and 31 C.F.R. § 901.9(d). In Zwerner, the penalty appears to have been computed at 6%. Based upon my review, the late payment penalty appears to be computed at 6% (rather than at a lower rate as permitted by statute), in cases where it is not otherwise compromised. 2. Interest for Late Payment. The interest due in Zwerner was computed at one (1%) percent per annum from the date of the assessment pursuant 31 U.S.C. §3717(b) and 31 CFR §901.9. The interest rate is based upon the current value of Treasury funds at the time of the demand for payment, and is computed pursuant to U.S. Department of the Treasury’s (Treasury) Current Value of Funds Rate (CVFR), published annually by the Secretary of the Treasury in the Federal Register and http://fms.treas.gov/cvfr/index.html. The current rate is 1.0%. 3. The Date of the Delinquency. The date of the “delinquency” starts the running of the interest and penalties and begins on the date the FBAR penalty assessment is mailed unless payment of the penalty is made within 30 days thereafter. As more specifically explained in the Internal Revenue Manual, the late payment penalty and interest are computed as follows: IRM 4.26.17.4.3 (05-05-2008) “Closing the FBAR Case with Penalties 6.E. No interest accrues on FBAR penalties prior to assessment, therefore only the penalty amount would be owed if full payment is made in a pre-assessment case or if payment is made within 30 days after the date a notice of the penalty amount due is first mailed to the filer. Under 31 U.S.C. § 3717(b), interest begins to accrue on the date the FBAR notice of penalty assessment is mailed but no interest is owed on payments received within thirty days from the date a notice of the penalty amount due is first mailed to the filer. In addition to interest, a six percent delinquency penalty applies to amounts remaining unpaid ninety days from the date a notice of the penalty amount due is first mailed to the filer. The applicable interest rate is found at http://fms.treas.gov/cvfr/index.html . This rate is updated at least annually but may be updated quarterly if certain criteria, identified in § 3717(a) (2), are met.” Conclusion. In cases where the FBAR penalty is paid “up front,” as with OVDP settlements, late payment penalties and interest won’t be relevant. However, if FBAR penalties are paid more than 30 days after assessment, or remain unpaid while the FBAR penalties are being contested, as in Zwerner, the late payment penalty and interest can be significant and should be considered. Posted by
If an estate files to extend the due date of its Form 706 estate tax return, it can elect to defer the portion of the estimated estate tax that will be deferred pursuant to its Code §6166 election. It does not make the election itself until it files the Form 706 (prior to the expiration of the extended due date period). Essentially, the estate is divided into two parts – the deferred portion and the nondeferred portion. Like any estate that is required to pay estimated estate taxes by the original 9 month due date for the Form 706, the taxes attributable to the nondeferred portion are due with the Form 4768 extension and the deferred taxes are not yet due. What happens if the taxes payable with the extension that are estimated and paid for the nondeferred portion are in excess of the taxes actually attributable to the nondeferred portion, as determined later upon the preparation and filing of the Form 706? Can the estate get a refund of that overpayment when it files the Form 706, or will the excess be applied toward the taxes attributable to the deferred portion and thus not be refundable? This was the issue before the District Court in the recent case of Estate of Donald McNeely. Interestingly, when the extension payment was made, the taxpayer attempted to specifically allocate the payment solely to the nonexempt portion via an accompanying letter. It sought a refund of the excess of the extension payment over the tax attributable to the nondeferred portion on the Form 706. The District Court held that the excess taxes on the nondeferred portion of $1.979 million need not be refunded by the IRS to the estate, but could instead be applied to the taxes that were otherwise eligible for deferral under Code §6166 as the installment payments became due. The court based its decision on Code §6402 which reads: In the case of any overpayment, the Secretary, within the applicable period of limitations, may credit the amount of such overpayment, including any interest allowed thereon, against any liability in respect of an internal revenue tax on the part of the person who made the overpayment and shall, subject to subsections (c), (d), (e), and (f) refund any balance to such person. The court also noted that even if Code §6402 did not apply on the theory that there was no “overpayment” (a disputed issue in the case), then Code §6403 would allow for a similar result. Code §6403 provides: In the case of a tax payable in installments, if the taxpayer has paid as an installment of the tax more than the amount determined to be the correct amount of such installment, the overpayment shall be credited against the unpaid installments, if any. If the amount already paid, whether or not on the basis of installments, exceeds the amount determined to be the correct amount of the tax, the overpayment shall be credited or refunded as provided in section 6402. The estate made three interesting arguments to support its claim for refund: (1) that its designation of the estimated payment as payment for the nondeferred portion of its estate tax liability, and the IRS's acceptance of that payment, bound the IRS to that designation and required the IRS to refund the excess amount, (2) that §6403 does not apply because the estate paid prior to making the § 6166 election, and (3) that § 6402 requires a refund of the overpayment, rather than a credit, in recognition of the Estate's special rights to defer payment under § 6166. None of those arguments was able to persuade the court to allow the refund. Estate of Donald McNeely, (DC MN 06/12/2014) 113 AFTR 2d ¶ 2014-930 Posted by
Employers who reimburse employees on a pre-tax basis for premiums the employees pay on their own individual health insurance policies (whether under an Obamacare Exchange or otherwise) are at risk for a $100 per day per employee excise tax. This is according to a recent IRS Q&A. There are those that assert such arrangements can be structured through Code §125 to avoid the excise tax. Employers should tread carefully in this area. IRA Q&A; See also Notice 2013-54 Posted by
In a major change to the Offshore Voluntary Disclosure Program, the streamlined filing compliance procedures with their 5% penalty, has been opened up to non-willful violators that reside in the U.S. This is to be contrasted with the 27.5% penalty applicable to the OVDI program participants. Those participating under the streamlined procedures will not have all the benefits of OVDI participation, thus there will be advantages and disadvantages for going this route. Taxpayers and their advisors will still need to run through the various methods available to become compliant to determine which works best. Nonetheless, the new procedures promise to ease the burden on many noncompliant taxpayers. It appears that those who have already paid penalties under the OVDI program and have a closing agreement may not be eligible to participate in the streamlined program and get penalty money back – however, we will have to see how this pans out. There will surely be many displeased past participants in the program that paid significant sums to the IRS that will feel the sting if they are unable to benefit from the substantially reduced penalties. The new announcement is not all good news. It imposes stricter rules on those entering the OVDI, and a higher 50% penalty in circumstances where the applicable financial institution where the account was held is under government investigation. More to come once we have had a chance to review the revised programs and parameters. However, for those that are close to finalizing OVDI programs, immediate action to defer finalization pending review of the new procedures may be recommended. Posted by
Our post from yesterday here discussed how the U.S. Supreme Court ruled in Clark v. Rameker that inherited IRAs are not exempt from creditor claims in bankruptcy. Here are some more observations on that case: Those states who opt out of the Bankruptcy Code exemptions in favor of their own exemptions, may still have an exemption for inherited IRAs. This is because Clark only addressed the federal exemptions applicable in non-opt out states. Debtors in those states providing explicit protection to an inherited IRA should be unaffected by Clark and thus their inherited IRAs should still be protected. One of these states is Florida. Other states which I have read (but not confirmed myself) that have similar exemptions include Alaska, Missouri, North Carolina, Ohio and Texas. The problem with relying on such a state law exemption in planning is that one does not know where the beneficiary who will inherit the IRA will be living at the time of a future bankruptcy. That is, how does one know for sure they will be residing in an opt-out state that has an explicit inherited IRA exemption? Thus, trust planning to avoid the Clark exposure might still be a good idea. The ability to “stretch” out an IRA payment may be contrary to the creditor aspects of the trust – as noted in our earlier posting the trust provisions must be coordinated both with creditor protection objectives and IRA qualification requirements. Some are suggesting that in those states that do not have an inherited IRA exemption, but do have creditor protection for annuities, that the conversion of an IRA into an IRA annuity perhaps may be a way to obtain creditor protection in light of Clark. Posted by
INHERITED IRA EXPOSURE TO CREDITORS–RESOLUTION AT LAST
We have written on the question whether inherited IRAs are exempt from creditors in a federal bankruptcy action here, here, and here. The various courts that have addressed the issue have gone in both directions. The U.S. Supreme Court has now weighed in, and has ruled that inherited IRAs are not exempt from bankruptcy creditor claims. The Court analyzed the issue as to whether inherited IRAs are enough like regular retirement assets (i.e., sums set aside until one stops working) to be entitled to the standard IRA exemption. It did so in an attempt to balance the interests of creditors and debtors, by giving only protection to those accounts that have enough “retirement fund” characteristics. The Court found that certain key aspects of inherited IRAs are not like a retirement asset. In particular, the Court noted (a) inherited IRA holders cannot add new assets, (b) required distributions did not turn on whether the holder has reached retirement age, and (c) holders can withdraw from the IRA without penalty at any time. Thus, it is improper to allow an exemption. The Court held: For if an individual is allowed to exempt an inherited IRA from her bankruptcy estate, nothing about the inherited IRA's legal characteristics would prevent (or even discourage) the individual from using the entire balance of the account on a vacation home or sports car immediately after her bankruptcy proceedings are complete. Allowing that kind of exemption would convert the Bankruptcy Code's purposes of preserving debtors' ability to meet their basic needs and ensuring that they have a “fresh start,” Rousey, 544 U. S., at 325, into a “free pass,” This does not mean inherited IRA benefits cannot be protected against creditors of the recipient. Through the use of trusts and applicable spendthrift and other trust protections that exist under applicable state law, inherited IRA proceeds can be protected by leaving them to trusts instead of outright to the recipients. Of course, planning for such trusts will need to coordinate with the IRA rules for allowance of deferral of required distributions, to the extent such deferral is desirable or otherwise available. CLARK v. RAMEKER, 113 AFTR 2d 2014-XXXX, (S Ct), 06/12/2014 Posted by
Most tax practitioners tack on a Circular 230 disclaimer to their emails and other communications to avoid problems with reliance opinion and covered opinion provisions of Section 10.35 of that Circular. These disclaimers are either never read, or create questions among the few that do read them as to the meaning, effect, and purpose of such disclaimers. With the issuance of revised final Circular 230 regulations, those reliance and covered opinion rules no longer exist, and with them, the need for the disclaimers. As the IRS provided when it issued Proposed Regulations on the subject: "many practitioners currently use a Circular 230 disclaimer at the conclusion of every email or other writing as a measure to remove the advice from the covered opinion rules in § 10.35. In many instances, these disclaimers are frequently inserted without regard to whether the disclaimer is necessary or appropriate. These types of disclaimers are routinely inserted in any written transmission, including writings that do not contain any tax advice. The proposed removal of current § 10.35 eliminates the detailed provisions concerning covered opinions and disclosures in written opinions. Because proposed § 10.37 does not include the disclosure provisions in the current covered opinion rules, Treasury and the IRS expect that these amendments, if adopted, will eliminate the use of a Circular 230 disclaimer in email and other writings." Good riddance! Posted by
I thought we had reached the end of our FBAR streak, but not yet. In a Federal District Court case opinion released last week, the Northern District of California ruled that a U.S. online gambler was obligated to report his internet accounts with offshore poker sites PokerStars.com and PartyPoker.com on an FBAR form. Since the taxpayer could make deposits to, and withdraw from, his poker accounts, the court found that the accounts came within the definition of “a bank, securities, or other financial account.” I don’t know how many U.S. persons have accounts with online gambling sites that are situated outside the U.S., but I am sure that the taxpayer here has plenty of company. If the aggregate balance in all of a taxpayer’s non-U.S. accounts exceeds $10,000 at any time during the year, an FBAR is due. As we all know by now, the penalties for not filing an FBAR can be severe. If one accepts the reasoning and finding of this case, then tax preparers should be adding to their questionnaires whether the taxpayer has any internet account based on an offshore site that funds gambling activities (or any other activity for that manner) for which the taxpayer can make deposits and withdrawals. U.S. v. HOM, 113 AFTR 2d 2014-XXXX, (DC CA), 06/04/2014 Posted by
I have been posting a lot of FBAR-related posts lately. Here’s one more. There has been a question whether owners of “bitcoins” and other virtual currencies that have non-U.S. aspects, are subject to annual reporting on the FBAR form. They don’t appear to be financial accounts, but will the Treasury Department agree? At least unofficially, it appears ownership of virtual currencies do not need to be reported on the June 2013 forms due June 30. So says Rod Lundquist, a Senior Program Analyst in the IRS's Small Business/Self Employed (SB/SE) division, during a recent IRS webinar titled “Reporting of Foreign Financial Accounts on the Electronic FBAR.” Things may change for future years. Since this is not an official position, taxpayers may still want to consider reporting these items if they want to be conservative. Posted by
ZWERNER CASE UNLIKELY TO PROVIDE CONSTITUTIONAL REVIEW OF 50% FBAR PENALTY
The Zwerner case has been discussed here and here. Many hoped that this case may give rise to judicial review of whether the 50% per year FBAR penalty for willful violations passes muster on U.S. Constitution limits on excessive fines. That no longer appears likely as the government and the defendant have now settled the pending litigation regarding that penalty. Posted by
Many states and local jurisdictions impose income taxes on all of the income of their residents. Some of this income may be from sources outside of the state or locality, and thus the source of income jurisdiction may also impose income taxes on that same income. There is no denying the authority of the state or local jurisdiction of residence to tax the income. However, if no credit is granted for taxes on that income imposed by the source jurisdiction, is that an unconstitutional restraint on commerce that is not permitted under the Commerce Clause of the U.S. Constitution? I don’t have an answer for you on that question…yet. But the U.S. Supreme Court has taken on a case that will likely decide this issue. Note that the U.S. Commerce Clause explicitly only limits federal government restrictions on commerce between the states. However, an implied limitation on state and local action under the Commerce Clause has arisen under what is referred to as the “dormant Commerce Clause” that limits state and local power to unjustifiably to discriminate against or burden the interstate flow of articles of commerce. Whether the dormant Commerce Clause requires the above tax credits is the issue the U.S. Supreme Court will decide. The case has the potential to limit the tax revenues of those states and localities that do not provide a tax credit for income taxes of the source jurisdiction. Maryland State Comptroller of the Treasury v. Brian Wynne Posted by