When an issue reaches the level of a “dispute” or a “controversy”, the client has already lost. A prolonged audit means that even if you win the war, you lose many expensive battles along the way. Instead, we work to avoid conflict. We have a deep understanding of the tax legislation and audit process. We leverage this expertise to guide the audit to a rapid close rather than fight every little battle.
Other tax people are experts at managing filings and overall tax strategy, but they may not have ever handled an audit. While under an audit you are losing manpower, living under a cloud of uncertainty, and possibly digging yourself deeper into a hole. Our goal is to resolve the issue as quickly as possible in your favor.
We schedule a meeting with the manager and, we take the most sensitive, most vulnerable issue, and put it right out front. This often makes clients nervous. You can’t hide it, so it is more effective to just get it out of the way. We want it discussed and resolved first. When we attack the big issue and resolve it, right up front the audit loses its plot. There just isn’t anything to the story after that.
Instead of sitting back and responding to the agent’s requests, we package the information and present everything before they ask. Instead of letting them just focus on the issues, we humanize the client and make the agent understand they are just people trying to do good work in the world. Our methods work because of our unparalleled experience and understanding of the culture, methods, and processes of the IRS. We speak their language. We don’t fight against them; we work with them. By guiding the process and structuring the solutions, we achieve great savings for you, and peace with the IRS.
Jim had a 32-year career at IRS. He held every job from Revenue Agent to National Director of Appeals. He followed his IRS career with nearly 12 years at first PriceWaterhouse and then at the merged firm of PricewaterhouseCoopers. His position at PWC was National Director of Dispute Resolution in the firm’s Washington National Tax Practice, where he resolved disputes for many of the Fortune 50 companies in the United States.
Tom had a 30-year career at the IRS - while Director of Alternative Dispute Resolution Programs, Tom pioneered the mediation and arbitration programs. He also founded the IRS Appeals international program and directed a nationwide network of International Specialists. At the U.S. Senate Finance Committee, Tom was a Legislative Fellow with Chairman Max Baucus, D-Mont, and the Government Affairs Institute, Georgetown University. He was responsible for IRS tax administration legislative initiatives including voluntary compliance for Examination, Collection, and Appeals.
Steve had a 37-year career at IRS, including over 30 years in Appeals. As a Team Manager in Appeals Technical Guidance, he managed subject matter experts responsible for national coordination and settlement of numerous corporate and individual structured transactions. He also specialized in reporting foreign bank and financial accounts and reportable transactions. As the Area Director of Appeals International, Steve managed a staff that had responsibility for coordination and resolution of all international issues within IRS Appeals. Steve was also instrumental in developing new Alternative Dispute Resolution Programs and is a trained mediator.
Our pool of consultants includes former District Directors, national program leaders, Appeals Officers, IRS Counsel Litigating Attorneys, and Revenue Agents.
They are selected both for their expertise and their ability to work with our clients. Our people are the best of the best, who leverage both their skills and their personalities to service our clients.
For many years, U.S. persons that have an interest in foreign financial accounts, and meet the reporting threshold of $10,000 at any time during the calendar year, are required to annually file a with the Treasury Department form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). The FBAR is separate from the income tax return and identifies bank accounts and investments outside the United States. They of course are also required to report income on their Form 1040, since Americans are taxed on their global income.
The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 and targets noncompliance by U.S. taxpayers with foreign accounts. FATCA now requires that you file, in addition, Form 8938, Statement of Specified Foreign Financial Assets, along with your Form 1040. The FBAR and FATCA forms duplicate a great deal of the information required to be reported, compounding the difficulty.
Many individuals have only recently become aware of these reporting requirements and are taking action to resolve any issues relating to prior years. Under the Offshore Voluntary Disclosure Programs (OVDP), the IRS has collected more than $5 billion in back taxes, interest, and penalties from over 33,000 voluntary disclosures. The OVDP was reopened in 2012 and IRS has raised the ‘offshore penalty’ to 27.5%. The program is open indefinitely until IRS announces otherwise.
IRS has released new procedures to allow U.S. taxpayers living abroad, who have simple tax returns and owe $1,500 or less, an opportunity to get current with their tax filing obligations without facing penalties or additional enforcement action. U.S. taxpayers should take care in making a decision on whether to apply for the OVDP. For some taxpayers, the penalties that apply under OVDP will suggest that alternative action is appropriate. For others, electing into the program and then opting out may be the preferred route, and explain why there is reasonable cause for not filing tax returns, information returns, or FBARs previously.
A potential bright spot in the OVDP program is the opt-out provision. The threat of a full, normal examination would be coupled with appeal rights. This is an option that should be considered.
The IRS has reorganized its Large Business and International (LB&I) Division operations. LB&I now has an International Individual Compliance office, and also set up a Global High Wealth Industry group. Now you didn’t know you were an “Industry”, did you? They have collected agents from across the country, armed them with the toughest IRS Industry Counsel, and are three years into examining all “Global High Wealth People,” whether they reside in, or outside, the United States. What does this kind of examination look like?
In the past, the individual Form 1040s might be examined. Later, a related partnership might be examined, and still later a related corporation or trust. The Service has become convinced that tax evasion or avoidance by high net-worth individuals is accomplished by having many entities with intertwined transactions. Therefore, the services’ approach is to put all the returns in the hands of one team for a thorough examination. This is an excruciating process for you. The IRS is committed to extracting your full fair share.
It is important to recognize that the Global High Wealth audits are organized with a team of examiners and specialists, taking an “enterprise” approach to target all the international business operations controlled by the high-wealth individual. LB&I Counsel attorneys are becoming involved from the beginning of the audit, assisting on international tax issues. These audits generally follow procedures for LB&I large business audits, generating significant requests for information from you, and often taking several years. Contact Casimir Consulting at the onset of the examination. We will assist you by meeting with the IRS to discuss the Quality Examination guidelines that apply, define roles and expectations for the exam plan. During the process, alternative dispute resolution techniques, including early referral to IRS Appeals and fast track settlement are available.
We open the lines of communication and design a reasonable settlement that both parties can live with, and we don’t depend on the IRS to come up with a solution. Small teams of consultants will work with you to develop a resolution strategy.
Our approach is to meet with IRS representatives face-to-face with “settlement in mind.” We also provide assistance with international tax legislation analysis, advice to clients on reporting, and on compliance.
The IRS released additional guidance on the 2012 Offshore Voluntary Disclosure Program. Under the 2009 and 2011 programs, the IRS has collected more than $5 billion in back taxes, interest and penalties from over 33,000 voluntary disclosures.1 Since January 2012 when the IRS reopened the OVDP, another 1,500 disclosures were made. 2
The OVDP is part of the IRS effort to stop offshore tax evasion and encourage tax compliance. For the 2012 OVDP, the “offshore penalty” is raised to 27.5% (up from a 25% offshore penalty for 2011). Smaller offshore accounts less than $75,000 in each of the years covered by the OVDP would face a 12.5% offshore penalty, or a 5% penalty for limited situations involving de minimis contact. The latest OVDP is open for an indefinite period until the IRS announces otherwise.
The IRS has posted online Frequently Asked Questions & Answers for the 2012 OVDP. Additional details on eligibility are provided and examples updated with references to the new filing compliance procedures.3 In the news release, IRS announced that it is tightening OVDP eligibility requirements. In situations when a taxpayer appeals a foreign tax administrator’s decision authorizing the release of account information to the IRS, the taxpayer is required to notify the U.S. Justice Department. Taxpayers would not be eligible for the OVDP if the taxpayer fails to notify the U.S. Justice Department about the appeal. 4
IRS released their proposed plan to help U.S. citizens residing overseas, particularly dual citizens, for catching up with tax filings and resolving foreign retirement plan issues.5 New procedures will be available beginning on September 1, 2012 to allow U.S. taxpayers living abroad, who are low compliance risks, an opportunity to get current with their tax filing obligations, without facing penalties or additional enforcement action. Generally, those with simple tax returns and owing $1,500 or less in tax for any of the covered years would qualify.6 This is welcome news for U.S. taxpayers living abroad who have only recently become aware of their filing requirements for U.S. federal income tax returns and reports of Foreign Bank and Financial Accounts (FBARs).7
The new procedures also will allow resolution of issues related to foreign retirement plans. Income tax treaties may allow for income deferral under U.S. tax law, but only if an election is made on a timely basis. The streamlined procedures will be made available to resolve low compliance risk situations, even though the election was not made on a timely basis.
Key elements of the new procedures for low compliance risk U.S. taxpayers living abroad to get current with their tax obligations include:
• Filing delinquent tax returns along with appropriate related information returns for the past three years;
• Filing delinquent FBARs for the past six years;8
• Providing additional information regarding compliance risk.
IRS said that the intensity of the IRS review for these submissions would be based on the level of compliance risk. For those taxpayers presenting a low compliance risk, there would be an expedited IRS review, and IRS would not assert penalties or pursue follow-up actions.
Those submissions that present higher compliance risk would not be eligible for the expedited procedure, and would be subject to a more thorough review.
Risk factors taken into account would focus on indications of sophisticated tax planning or avoidance, or material economic activity in the United States. The presence of high compliance risk factors could lead to an audit, covering more than three tax years, and following a process similar to opting out of the ODVP.9
U.S. taxpayers residing overseas who are claiming reasonable cause for failure to file tax returns, information returns, or FBARs have to explain why there is reasonable cause for not filing previously.10
As with the announcement of the reopening of the OVDP in January 2012, the IRS said that more details would be forthcoming. Additional guidance on the low compliance risk program should be posted online prior to the effective date of the new procedure on September 1, 2012.
U.S. taxpayers living abroad with higher compliance risks should take care in making a decision on whether to apply for the new OVDP. For some taxpayers, the penalties that apply under OVDP will suggest that alternative action is appropriate. For others, electing into the program and then opting out may be the preferred route.
1IRS News Release, IR-2012-64, June 26, 2012: http://www.irs.gov/newsroom/article/0,,id=258430,00.html
2See IR-2012-5, January 2012 and Offshore Voluntary Disclosure Program - Third Edition In Play, May 11, 2012: http://casimirconsulting.com/news/.
3See 2012 Offshore Voluntary Disclosure Program, Frequently Asked Questions & Answers, June 26, 2012: http://www.irs.gov/businesses/small/international/article/0,,id=256774,00.html
42012 Offshore Voluntary Disclosure Program, Frequently Asked Questions & Answers #21, June 26, 2012.
5IRS News Release, IR-2012-65, June 26, 2012: http://www.irs.gov/newsroom/article/0,,id=258431,00.html.
6IRS New Filing Compliance Procedures for Non-Resident U.S. Taxpayers: http://www.irs.gov/businesses/small/international/article/0,,id=256772,00.html.
7See The month of June includes key dates for U.S. citizens and resident aliens who need to file income tax and FBAR forms, May 31, 2012: http://casimirconsulting.com/news/.
8See IRS web site for additional details on FBAR: http://www.irs.gov/businesses/small/article/0,,id=148849,00.html.
9IRS Opt Out and Removal Guide: http://www.irs.gov/pub/newsroom/2011ovdi_opt_out_and_removal_guide_and_memo_june1_2011.pdf.
10See IRS Fact Sheet FS-2011-13, December 2011, for additional details on reasonable cause, and a summary of information about federal income tax return, FBAR filing requirements and potential penalties.
Some key dates are fast approaching for filing of income tax returns and Reports of Foreign Bank and Financial Accounts (FBAR forms) by U.S. citizens and resident aliens residing overseas. These dates are particularly important for large numbers of individuals who only recently discovered that they have income tax and/or FBAR filing requirements.
If you are a U.S. citizen or resident alien, the rules for filing income tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside.
If you are a U.S. citizen or resident alien residing overseas, or are in the military on duty outside the U.S., on the regular due date of your U.S. income tax return, you are allowed an automatic 2-month extension to file your return and pay any amount due without requesting an extension. For a calendar year return, the automatic 2-month extension for calendar year 2011 income tax returns is to June 15, 2012.
If you are unable to file your return by June 15, you can request an additional extension to October 15 by filing Form 4868 (Application for Automatic Extension of Time To File U.S. Individual Income Tax Return) before the automatic 2-month extension date. However, any tax due payments made after June 15 will be subject to both interest charges and failure to pay penalties.
Note that under the Foreign Account Tax Compliance Act (FATCA), U.S. individuals with foreign financial assets at a $50,000 threshold must report those assets to the IRS. This reporting is made on Form 8938, Statement of Specified Foreign Financial Assets, which taxpayers attach to their federal income tax return, beginning with the 2011 tax return.
TD F 90-22.1 (Report of Foreign Bank and Financial Accounts) is separate from the income tax return. Generally, U.S. individuals with an interest in foreign financial accounts at a $10,000 threshold at any time during the calendar year are required to file an FBAR, which is due on June 30 and is mailed separately to the Department of Treasury. There are two significant differences on timing between the FBAR form and income tax returns:
It will be helpful to consult the IRS comparison chart of the new Form 8938 and the FBAR requirements.1 The chart sets out key reporting differences, such as who must file, reporting threshold, what is reported, where to file, the types of foreign assets and whether they are reportable.
Opportunities to resolve issues relating to unfiled tax returns and FBARs Widespread publicity about FBAR filing requirements, new Form 8938 (Statement of Specified Foreign Financial Assets, required as part of 2011 tax returns), and issuance of proposed regulations on the implementation of FATCA rules (Foreign Account Tax Compliance Act)2 all point to increased enforcement of offshore compliance by tax authorities.
Many individuals have only recently become aware of these reporting requirements and are taking action to resolve any issues relating to prior years. One option is to elect into the 2012 Offshore Voluntary Disclosure Program.3 The program is indefinite and could be modified or ended at any point. In addition, disclosure initiative terms are typically not available if a taxpayer has been contacted first by the IRS.
However individuals choose to proceed with regard to prior years, those who have current filing obligations will want to keep these key dates in mind:
• June 15, 2012 – File 2011 income tax returns or file Form 4868 for an extension.
• June 30, 2012 – FBAR (TD F 90-22.1) must be received by the Department of the Treasury.
The resolution of prior year reporting issues can begin with timely filing of current tax returns and FBAR forms on a going-forward basis.
1 IRS Issue Management Resolution System report, May 2012, http://www.irs.gov/businesses/article/0,,id=255986,00.html
2 See “FATCA–“Transition Relief is Our Priority”May 23, 2012” http://casimirconsulting.com/news/
3See “Offshore Voluntary Disclosure Program - Third Edition In Play” May 11, 2012 ” http://casimirconsulting.com/news/
Speakers on Proposed Regulations for Foreign Account Tax Compliance Act Deliver the Message at IRS Hearing – “Transition Relief Is Our Priority”
On May 15th, the Internal Revenue Service held a public hearing on proposed regulations for implementation of the Foreign Account Tax Compliance Act (FATCA), which was enacted in 2010 in the Hiring Incentives to Restore Employment Act (the HIRE Act), Public Law 111-147, and targets non-compliance by U.S. taxpayers with foreign accounts. The proposed regulations (REG-121647-10) at about 400 pages are voluminous and generated significant comments. Rules are set forth for implementing a step-by-step process on information reporting, and withholding by Foreign Financial Institutions (FFIs), non-financial foreign entities (NFFEs) and U.S. withholding agents.
The hearing was very well attended, and twenty-one representatives of financial institutions, banking associations and tax institutes spoke at the hearing.
On the IRS panel at the hearing in the auditorium at the Washington, D.C. IRS headquarters were five representatives from the IRS Office of Chief Counsel, Associate Chief Counsel (International), and from the Treasury Department, the Associate International Tax Counsel. Each speaker summarized their comments for ten minutes; the panel did not ask any questions of the speakers.
Common themes developed from the presentations as the morning turned into the afternoon, during the three-and-a-half hour hearing. While many speakers agreed that steps should be taken to reduce tax evasion globally, several cautioned that a balanced approach is needed, taking into account the impact on foreign financial institutions and their customers.
Earlier this year, the Internal Revenue Service (IRS) reopened the Offshore Voluntary Disclosure Program (OVDP) to taxpayers with undisclosed income from offshore accounts in order to get them into compliance and current on their tax returns. The IRS has collected over $4 billion from prior programs in 2009 and 2011 (the 2011 program closed last September, and those who came in after the program closed will be treated under the 2012 OVDP program). So far, the IRS has received over 33,000 voluntary disclosures from the offshore initiatives.
The penalty structure of the 2012 OVDP is similar to the 2011 program; generally, the key elements include:
- Filing original and amended tax returns, offshore-related information returns and Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), for up to eight tax years prior to the disclosure.
- Paying tax on the deficiency, plus interest for up to eight years, as well as a 20% accuracy-related penalty and any delinquency penalties.
- Paying an offshore penalty in lieu of all other penalties that may apply, including FBAR and information return penalties.
For the 2012 OVDP program, the offshore penalty would be equal to 27.5% of the highest aggregate balance in foreign bank accounts or value of foreign assets during the eight full tax years prior to the disclosure (up from a 25% offshore penalty for 2011). Smaller offshore accounts less than $75,000 in each of the years covered by the OVDP would face a 12.5% offshore penalty, or a 5% penalty for limited situations involving de minimis contact. The latest OVDP program is open for an indefinite period until the IRS announces otherwise.1
Additional Guidance Expected
The IRS is aware of circumstances where the application of the OVDP may appear to be too severe given the facts of the case, prompting a taxpayer to consider opting-out of the OVDP and undergoing an examination. Last year, the IRS provided guidance on the opt-out option, clarifying that an opt-out may reflect a preferred approach and a taxpayer opting out of OVDP should not be treated in a negative fashion.2
It is welcome news that for the 2012 OVDP, the IRS is developing new procedures for dual citizen taxpayers.3 For example, a dual citizen may be delinquent in filing, but owe no U.S. tax. Additionally, due to reasonable cause or mitigating factors in the case of a violation, the IRS might determine that an FBAR penalty does not apply. In fact, the IRS has provided information for U.S. citizens or dual residents residing outside the U.S. about FBAR filing requirements and FBAR penalties not being imposed when the IRS determines that the failure to file is due to reasonable cause.4
Importantly, under the OVDP program, IRS Examiners do not have discretion to settle cases. While taxpayers are not required to pay a penalty under OVDP greater than what they would otherwise be liable for under existing law, in practice, the IRS examiner will compare the amount due under the OVDP to the tax, interest and applicable penalties without regard to reasonable cause.5
The opt-out provision in the OVDP program appears to offer limited wiggle room.
“A potential bright spot in the OVDP program is the opt-out provision. The threat of a full, normal examination would be coupled with full, normal appeal rights. This is an option which definitely should be considered.”
–Jim Casimir, Founding Partner, Casimir Consulting
We will keep you posted about additional specifics on the 2012 OVDP, along with updates to the Frequently Asked Questions, expected from the IRS in the near future.
Comparison Chart Now Available On Offshore Reporting Requirements
A May 2012 IRS Issue Management Resolution System report includes a comparison chart of the new Form 8938, Statement of Specified Foreign Financial Assets, and Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR).6
Under the Foreign Account Tax Compliance Act (FATCA), U.S. individuals with foreign financial assets at a $50,000 threshold must report those assets to the IRS. This reporting is made on Form 8938, which taxpayers attach to their federal income tax return, beginning with the 2011 tax return. U.S. individuals with an interest in foreign financial accounts at a $10,000 threshold any time during the calendar year are required to file an FBAR.
Note that the Form 8938 filing requirement does not replace a taxpayer’s obligation to file an FBAR, and individuals should file each form for which they meet the reporting threshold. The chart is an excellent resource and gives a detailed breakdown of frequently asked questions. Also, the IRS is holding a public hearing on May 15th to hear comments on the proposed FATCA regulations, which were released in February 2012, and we are closely following developments.
Tax Legislation Outlook
After the November Presidential and Congressional elections, the U.S. Congress is expected to convene a Lame Duck session to address the expiration of stimulus measures, George W. Bush’s tax cuts and tax extenders. The Capitol Hill tax press is referring to this convergence as “Taxmageddon.” If Congress does nothing, tax rates will increase on ordinary income, capital gains and dividends.
On top of it all, in January 2013, mandatory budget cuts in domestic and defense spending may take effect, a process called sequestration. With such a crowded legislative agenda for November and December this year, Congress may not be able to complete all of its priorities by December 31st. The speculation is that Congress may enact a framework for a deficit plan that might include some new revenue, extend some or all of the Bush tax cuts and delay a sequestration. Depending on the outcome of the elections, everything could very well carry over to the 113th Congress. These are important considerations to take into account for resolving any tax disputes in 2012.
For additional information, please contact Jim Casimir at firstname.lastname@example.org or Tom Louthan at email@example.com
1 IRS News Release, IR-2012-5, January 9, 2012, http://www.irs.gov/newsroom/article/0,,id=252162,00.html
2IRS Opt Out and Removal Guide, http://www.irs.gov/pub/newsroom/2011ovdi_opt_out_and_removal_guide_and_memo_june1_2011.pdf
3IRS News Release, IR-2012-5, supra note 1.
4IRS Fact Sheet 2011-13, December 2011, http://www.irs.gov/newsroom/article/0,,id=250788,00.html
5IRS Frequently Asked Questions and Answers, FAQ 50: http://www.irs.gov/businesses/international/article/0,,id=235699,00.html
6IRS Issue Management Resolution System, Hot Issues report, May 2012, http://www.irs.gov/businesses/article/0,,id=255986,00.html