Captive Insurance and Other Tax Reduction Strategies – The Good, Bad, and Ugly

By Lance Wallach                                                                  May 14th

Every accountant knows that increased cash flow and cost savings are critical for businesses.  What is uncertain is the best path to recommend to garner these benefits.

Over the past decade business owners have been overwhelmed by a plethora of choices designed to reduce the cost of providing employee benefits while increasing their own retirement savings. The solutions ranged from traditional pension and profit sharing plans to more advanced strategies.

Some strategies, such as IRS section 419 and 412(i) plans, used life insurance as vehicles to bring about benefits. Unfortunately, the high life insurance commissions (often 90% of the contribution, or more) fostered an environment that led to aggressive and noncompliant plans.

The result has been thousands of audits and an IRS task force seeking out tax shelter promotion. For unknowing clients, the tax consequences are enormous. For their accountant advisors, the liability may be equally extreme.

Recently, there has been an explosion in the marketing of a financial product called Captive Insurance Plans. These so called “Captives” are typically small insurance companies designed to insure the risks of an individual business under IRS code section 831(b). When properly designed, a business can make tax-deductible premium payments to a related-party insurance company. Depending on circumstances, underwriting profits, if any, can be paid out to the owners as dividends, and profits from liquidation of the company may be taxed as capital gains.

While captives can be a great cost saving tool, they also are expensive to build and manage. Also, captives are allowed to garner tax benefits because they operate as real insurance companies. Advisors and business owners who misuse captives or market them as estate planning tools, asset protection vehicles, tax deferral or other benefits not related to the true business purpose of an insurance company face grave regulatory and tax consequences.

A recent concern is the integration of small captives with life insurance policies. Small captives under section 831(b) have no statutory authority to deduct life premiums. Also, if a small captive uses life insurance as an investment, the cash value of the life policy can be taxable at corporate rates, and then will be taxable again when distributed.  The consequence of this double taxation is to devastate the efficacy of the life insurance, and it extends serious liability to any accountant who recommends the plan or even signs the tax return of the business that pays premiums to the captive.

The IRS is aware that several large insurance companies are promoting their life insurance policies as investments with small captives. The outcome looks eerily like that of the 419 plans and 412(i) plans mentioned above.

Remember, if something looks too good to be true, it usually is. There are safe and conservative ways to use captive insurance structures to lower costs and obtain benefits for businesses. And, some types of captive insurance products do have statutory protection for deducting life insurance premiums (although not 831(b) captives). Learning what works and is safe is the first step an accountant should take in helping his or her clients use these powerful, but highly technical insurance tools. 

Lance Wallach speaks and writes extensively about VEBAs, retirement plans, and tax reduction strategies.  He speaks at more than 70 conventions annually, writes for 50 publications, and was the National Society of Accountants Speaker of the Year.  Contact him at 516.938.5007 or visit www.vebaplan.com.

    The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or other entity.  You should contact an appropriate professional for any such advice.

The Bank Secrecy Act Requires a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR)

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October 24, 2012     By Lance Wallach, CLU, CHFC

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U.S. persons to avoid taxes by hiding money offshore. The FBAR covers a calendar year and must be filed no later than June 30th of the following year and includes any interest a U.S. person has. The Bank Secrecy Act requires that a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), be filed if the aggregate balances of such foreign accounts exceed $10,000 at any time during the year.

This form is used as part of the IRS's enforcement initiative against abusive offshore transactions and attempts by

· Offshore bank accounts;
· Offshore mutual funds;
· Offshore hedge funds;
· Offshore variable universal life insurance policies;
· Offshore variable annuities a/k/a Swiss Annuities;
· Debit card and prepaid credit card offshore accounts.

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

ABOUT THE AUTHOR: Lance Wallach
Lance Wallach, CLU, ChFC, CIMC, speaks and writes extensively about financial planning, retirement plans, and tax reduction strategies. He is an American Institute of CPA’s course developer and instructor and has authored numerous best selling books about abusive tax shelters, IRS crackdowns and attacks and other tax matters. He speaks at more than 20 national conventions annually and writes for more than 50 national publications.

Copyright Lance Wallach, CLU, CHFC
More information about Lance Wallach, CLU, CHFC

FBAR fines, IRS coming after YOU

Lance Wallach

If you had money overseas you need to act now. The IRS is coming to get you. Many overseas banks are reporting to the IRS on people that had money in accounts. OVDI and opting out are ways to deal with some problems.

Many tax clients with unreported offshore accounts ask if they will receive the maximum penalties if they decide not to enter into the IRS’s tax amnesty program. That’s a great question considering the IRS uses the threat of severe penalties to gain compliance with the offshore reporting rules.
The current amnesty program, called the Offshore Voluntary Disclosure Program (sometimes called “OVDI” or “OVDP”), allows those with unreported foreign bank and brokerage accounts to pay a 27.5% penalty based on the highest balance of the unreported accounts during the last 8 years. That means if you have an account worth $800,000 today and $1 million in 2009, the IRS would extract a $275,000 penalty.
There are reduced penalties for small accounts and in certain other limited circumstances.
Why would anyone agree to such a huge civil penalty? The answer is simple. Failure to disclose an offshore account can be a felony if intentional and carries civil penalties of up to 50% of the highest balance for each year the account was unreported or $100,000 per year, whichever is higher. That means if you have owned a $500,000 account for the last 4 years the penalty could be $1 million - an amount twice the value of the account! If you don’t believe us, just look at FAQ 12 on the IRS own OVDI website.
Most people who approach the voluntary disclosure program feel like they are between a rock and a hard place. Lose all your money and potentially go to prison versus paying a huge 27.5% penalty. Remember, the penalty is based on the value of the account. Most U.S. taxpayers with offshore accounts have already paid tax on the money they earned. Unless the money is from drug dealing or other illegal activities, the money has already been taxed once.
There is hope, however.  The penalties most often quoted are for willful violations. Yes, there are some business people that intentionally try to hide money from the IRS or a spouse. Most violators, however, simply didn’t know about the law. The typical amnesty applicant is a dual national, an American living overseas, a foreign born American or a person sending money “home” to family in India, Mexico or China.
The IRS’ website does not draw a distinction between these groups. That causes many people who have truly made an honest mistake to needlessly panic.
Recently there has been a growing thought that the courts could strike down the FBAR* penalties law as a violation of the Eighth Amendment to the U.S. Constitution. The Eight Amendment, adopted in 1791, says that “Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.” While most people think of criminal and death penalty cases, there is a growing body of law surrounding the “excessive fines” language. [*An FBAR is a Report of Foreign Bank and Financial Account, the form that U.S. taxpayers must use to report foreign financial accounts yearly.]
In 1998, the U.S. Supreme Court ruled it was unconstitutional to fine a person $357,144 for failing to report cash in excess of $10,000 being removed from the country. Removing cash is not illegal just like opening a foreign account isn’t illegal. The law requires you to report both transactions, however.
In striking down the fine, the court found it was “grossly disproportionate” to the violation.
There is little guidance thus far from the courts, however the IRS has recognized the dangers in enforcing the 50% - per - year penalties on innocent violations. The Internal Revenue Manual used by IRS employee’s notes that the penalties established by Congress is the maximum amounts that can be imposed. Revenue agents are instructed to consider warning letters or lower penalties except in the most egregious cases. You need to be very careful and get good help. You get what you pay for. I am getting lots of calls from people in trouble because their accountants do not know what they are doing on these issues
If you have an unreported foreign account, contact a CPA experienced in foreign reporting requirements. The best would be someone who was in the international division of the IRS. He can probably tell you right away your situation and make suggestions. The decision to file under the OVDI amnesty program or seek a traditional disclosure is one that requires careful investigation. Once you make a traditional disclosure it is impossible to seek amnesty, however an amnesty applicant can always “opt out.”

Lance Wallach, National Society of Accountants Speaker of the Year and member of the American Institute of CPAs faculty of teaching professionals, is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters.  He speaks at more than ten conventions annually and writes for over fifty publications. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education's CPA's Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Mr. Wallach may be reached at 516/938.5007, wallachinc@gmail.com, or at www.taxaudit419.com or www.lancewallach.com.

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

Jail time for failure to file TD F 90-22.1 Report of Foreign Bank and Financial Accounts

Lance Wallach

A former UBS, AG ("UBS") client from Miami Beach, Florida was sentenced to four months in federal prison for willfully failing to file a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts ("FBAR"), for the UBS account the man held with as much as $4,000,0000 in it. This information was released by the U.S. Attorney for the Southern District of Florida on July 25 2012.

The former UBS client paid a civil penalty of $2,000,000 related to the $4,000,000 high account balance stemming from tax year 2006. Additionally, the former UBS client was sentenced to four months in federal prison, three years of supervised release, 250 hours of community service and a $20,000 criminal fine.

The UBS account related to two offshore corporations owned by the man, one in the Virgin Islands and one in the Republic of Panama. These corporations opened accounts at UBS. The man was not named as the direct owner but instead he was deemed only the "beneficial owner." The accounts with UBS were opened from tax years 2005 through 2007.

It is stated that the man was aware of the obligation on the FBAR to report as he had previously filed FBARs for other offshore corporations. An FBAR is required to be filed by both U.S. citizens and residents who have a financial interest in or signatory authority over a non-U.S. financial account with a value of more than $10,000 at any point during the tax year. The $10,000 amount is an aggregation of all non-U.S. financial accounts and not just an analysis on an account-by-account basis.

The information on the former UBS client was turned over after UBS agreed in February 2009 to pay $780,000,000 under a deferred prosecution agreement to settle the claim that UBS conspired to defraud the U.S. by impeding the Internal Revenue Service ("IRS"). UBS also agreed to turn over information to the U.S. Department of Justice on 300 account holders. Google Lance Wallach for more articles on point.

A US citizen or resident that held an account with UBS or any other institution that has not filed the necessary FBARs for the last eight tax years, should immediately reach out to get help to discuss any potential issues they may have and their alternatives. Filing for amnesty and then opting out are two options that our former IRS agents have successfully done for our clients. If not done properly it can be a disaster. We suggest you use a CPA with years of prior experience with the IRS international division.

Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on FBAR, OVDI, IRS tax amnesty and opting-out abusive tax shelters, international tax, and estate planning.  He writes about 412(i), 419, Section79, FBAR, OVDI,  IRS tax amnesty and opting-out and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public Radio’s All Things Considered, and others. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education’s CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation, as well as the AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or lanwalla@aol.com visit www.taxadvisorexperts.com  or www.Lawyer4Audits.com.

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

Issues With Potential Criminal Charges: Voluntary Disclosure-FBAR-OVDI

Lance Wallach

From the IRS website:

New Filing Compliance Procedures for Non-Resident U.S. Taxpayers

The IRS is aware that some U.S. taxpayers living abroad have failed to timely file U.S. federal income tax returns or Reports of Foreign Bank and Financial Accounts (FBARs), Form TD F 90-22.1. Some of these taxpayers have recently become aware of their filing obligations and now seek to come into compliance with the law. The Service is announcing a new procedure for current non-residents including, but not limited to, dual citizens who have not filed U.S. income tax and information returns to file their delinquent returns. This procedure will go into effect on Sept. 1, 2012.

Description of proposed new procedure:

While more details will be forthcoming, taxpayers utilizing the new procedure will be required to file delinquent tax returns, with appropriate related information returns, for the past three years and to file delinquent FBARs for the past six years. All submissions will be reviewed, but, as discussed below, the intensity of review will vary according to the level of compliance risk presented by the submission. For those taxpayers presenting low compliance risk, the review will be expedited and the IRS will not assert penalties or pursue follow-up actions. Submissions that present higher compliance risk are not eligible for the procedure and will be subject to a more thorough review and possibly a full examination, which in some cases may include more than three years, in a manner similar to opting out of the Offshore Voluntary Disclosure Program.

Unfiled Returns

The remedy is to get the returns filed

There are two advantages to filing as soon as possible:
Generally, if a taxpayer is due a refund for withholding or estimated taxes paid, it must be claimed within 3 years of the return due date or risk losing the right to it. The same rule applies to a right to claim a tax credit such as the Earned Income Credit (EIC).
Self-employed persons who do not file a return will not receive credits toward Social Security retirement or disability benefits. Failure to file results in not reporting any self-employment income to the Social Security Administration.
Taxpayers who haven’t filed returns always want to know what problems could result from failure to file returns. The following is from the IRS website:
A long-standing practice of the IRS has been not to recommend criminal prosecution of individuals for failure to file tax returns, provided they voluntarily file, or make arrangements to file, before being notified they are under criminal investigation. The taxpayer must make an honest effort to file a correct return and have income from legal sources. A letter from the IRS concerning taxes is not a notice that a taxpayer is under criminal investigation.
The IRS helps to get people back into the system as part of its long-term plan to improve voluntary tax compliance. The IRS wants to get people back into the system, not prosecute ordinary people who made a mistake. However, flagrant cases involving criminal violations of tax laws will continue to be investigated.

Attention taxpayers who have undisclosed foreign accounts

You need to consider the 2012 Offshore Voluntary Disclosure Program (OVDP)
From question 4 of Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers:
Taxpayers with undisclosed foreign accounts or entities should make a voluntary disclosure because it enables them to become compliant, avoid substantial civil penalties and generally eliminate the risk of criminal prosecution. Making a voluntary disclosure also provides the opportunity to calculate, with a reasonable degree of certainty, the total cost of resolving all offshore tax issues. Taxpayers who do not submit a voluntary disclosure run the risk of detection by the IRS and the imposition of substantial penalties, including the fraud penalty and foreign information return penalties, and an increased risk of criminal prosecution. The IRS remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts. Moreover, increasingly this information is available to the IRS under tax treaties, through submissions by whistleblowers, and will become more available under the Foreign Account Tax Compliance Act (FATCA) and Foreign Financial Asset Reporting (new IRC § 6038D).
From question 3 of Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers:
When a taxpayer truthfully, timely, and completely complies with all provisions of the voluntary disclosure practice, the IRS will not recommend criminal prosecution to the Department of Justice.

IR-2012-5, Jan. 9, 2012

WASHINGTON — The Internal Revenue Service today reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes and announced the collection of more than $4.4 billion so far from the two previous international programs.

The IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.

“Our focus on offshore tax evasion continues to produce strong, substantial results for the nation’s taxpayers,” said IRS Commissioner Doug Shulman. “We have billions of dollars in hand from our previous efforts, and we have more people wanting to come in and get right with the government. This new program makes good sense for taxpayers still hiding assets overseas and for the nation’s tax system.”

The program is similar to the 2011 program in many ways, but with a few key differences. Unlike last year, there is no set deadline for people to apply. However, the terms of the program could change at any time going forward. For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers – or decide to end the program entirely at any point.

“As we’ve said all along, people need to come in and get right with us before we find you,” Shulman said. “We are following more leads and the risk for people who do not come in continues to increase.”

The third offshore effort comes as Shulman also announced today the IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program, reflecting closures of about 95 percent of the cases from the 2009 program. On top of that, the IRS has collected an additional $1 billion from up front payments required under the 2011 program. That number will grow as the IRS processes the 2011 cases.

In all, the IRS has seen 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. Since the 2011 program closed last September, hundreds of taxpayers have come forward to make voluntary disclosures. Those who have come in since the 2011 program closed last year will be able to be treated under the provisions of the new OVDP program.

The overall penalty structure for the new program is the same for 2011, except for taxpayers in the highest penalty category.

For the new program, the penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011.

Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.

Participants face a 27.5 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty. Smaller offshore accounts will face a 12.5 percent penalty. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the new OVDP will qualify for this lower rate. As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.

Lance Wallach, CLU, ChFC, CIMC, speaks and writes extensively about financial planning, retirement plans, and tax reduction strategies.  He is an American Institute of CPA’s course developer and instructor and has authored numerous best selling books about abusive tax shelters, IRS crackdowns and attacks and other tax matters. He speaks at more than 20 national conventions annually and writes for more than 50 national publications.  For more information and additional articles on these subjects, visit www.vebaplan.com, www.taxlibrary.us, lawyer4audits.com or call 516-938-5007

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

Offshore Money, FBAR International Tax and the IRS

      Hg Experts 

           Legal Experts Directory

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     By Lance Wallach, CLU, CHFC Abusive Tax Shelter, Listed Transaction, Reportable Transaction Expert Witness

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FBAR, International Tax, IRS audits be careful. IRS Offshore Voluntary Disclosure Program Reopens Do YOU have money overseas? By Lance Wallach, CLU, CHFC - Recently the Internal Revenue Service reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes.

Additionally, the IRS revealed the collection of more than $4.4 billion so far from the two previous international programs.

The Offshore Voluntary Disclosure Program (OVDP) was reopened following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. This program will remain open indefinitely until otherwise announced.

Lance Wallach and his associates have received thousands of phone calls from concerned clients with questions about the prior programs. Some of Lance’s associates are still very busy helping people with the last program. Not a single person has been audited and most are pleased with the results and are now able to sleep easily without worrying about the IRS. According to Lance, it requires years of experience to obtain a good result from the program.

He suggests using a CPA-certified, ex-IRS agent with lots of international tax experience. While this is not a requirement to file under the program, Lance has heard many horror stories from people who have tried to file by themselves or who have used inexperienced accountants.

“Our focus on offshore tax evasion continues to produce strong, substantial results for the nation’s taxpayers,” said IRS Commissioner Doug Shulman. “We have billions of dollars in hand from our previous efforts, and we have more people wanting to come in and get right with the government. This new program makes good sense for taxpayers still hiding assets overseas and for the nation’s tax system.”

The new program is similar to the 2011 program in many ways, but it has a few key differences. Unlike last year, there is no set deadline for people to apply. However, the terms of the program could change at any time going forward. For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers – or decide to end the program entirely at any point.

“As we've said all along, people need to come in and get right with us before we find you,” Shulman said. “We are following more leads and the risk for people who do not come in continues to increase.”

The third offshore effort accompanies another announcement that Shulman made today, that the IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program. That figure reflects closures of about 95 percent of the cases from the 2009 program. On top of that, the IRS has collected an additional $1 billion from upfront payments required under the 2011 program. That number will grow as the IRS processes the 2011 cases.

In all, the IRS has seen 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. Since the 2011 program closed last September, hundreds of taxpayers have come forward to make voluntary disclosures. Those who come in after the closing of the 2011 program will be able to be treated under the provisions of the new OVDP program.

The overall penalty structure for the new program is the same for 2011, except for taxpayers in the highest penalty category.

The new program’s penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or the value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011.

Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.

Participants face a 27.5 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty. Smaller offshore accounts will face a 12.5 percent penalty. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the new OVDP will qualify for this lower rate. As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.

The IRS recognizes that its success in offshore enforcement and in the disclosure programs has raised awareness related to tax filing obligations. This includes awareness by dual citizens and others who may be delinquent in filing, but owe no U.S. tax.

 Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, abusive tax shelters, financial, international tax, and estate planning.  He writes about 412(i),, 419, Section79, FBAR and captive insurance plans. He speaks at more than ten conventions annually, writes for more than 50 publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public Radio’s “All Things Considered” and others. Lance has written numerous books including “Protecting Clients from Fraud, Incompetence and Scams,” published by John Wiley and Sons, Bisk Education’s “CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation,” as well as the AICPA best-selling books, including “Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots.” He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxadvisorexpert.com.

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

OVDI, FBAR, INTERNATIONAL TAX UPDATE: Deadlines, E-Filing Option and New IRS Form 8938

Lance Wallach
 June 15, 2012 

 American taxpayers. person with a financial interest in, or signature or other authority over, any financial account outside the U.S. must file an annual report on Treasury Form TD F 90-22.1 Report of Financial Accounts, commonly known as an “FBAR” if the aggregate value of all such accounts exceeds 10,000 at any time during the calendar year. Unlike tax returns, which may be mailed on the filing deadline and be considered timely, the FBAR for 2011 must have been received by Treasury by June 30, 2012. As summarized below, over the past year, the Financial Crimes Enforcement Network “FinCEN” has issued guidance regarding extended filing FBAR deadlines and new filing options. The Internal Revenue Service has also issued a new form Form 8938 that requires additional disclosure regarding foreign financial assets. There is now an online filing option that require only one signature. The online form and instructions provide for a more immediate means by which to ensure that the FBAR was received by the June 30 deadline. Since only one signature can be submitted on the electronic form, the e-filing process is not an option for joint filers. For filers not using the e-filing option, this form must be filed with the U.S. Department of Treasury, P.O. Box 32621, Detroit, MI, 48232-0621. The address for commercial delivery is: IRS Enterprise Computing Center, Attn: CTR Operations Mailroom, 4th Floor, 985 Michigan Avenue, Detroit, MI, 48226, contact phone number: 313-234-1062. Note that the contact phone number for courier delivery may not be used to confirm receipt of the FBAR. As clarified in the final regulations which were issued last year, the following definitions determine those individuals and entities subject to the FBAR filing obligation: 1. “United States person” is defined to mean a United States citizen or resident; an entity, including but not limited to a corporation, partnership, or limited liability company, created or organized in the United States or under the laws of the United States; and a trust or estate formed under the laws of the United States. Non-U.S. persons doing business in the United States are not required to file FBARs. 2. A “financial account” includes a savings deposit, demand deposit, checking, securities, security derivatives, debt card, prepaid credit card and any other financial instrument account, including certain insurance products and foreign pension funds. This includes an account with “a mutual fund or similar pooled fund which issues shares available to the general public that have a regular net asset value determination and regular redemptions." An equity interest in a hedge fund or private equity fund is not currently considered to be a “financial account,” though the IRS is considering this question further. A United States person having a financial interest in 25 or more foreign financial accounts, or signature or other authority over 25 or more foreign financial accounts need only provide the number of financial accounts and certain other basic information on the FBAR form. If requested in the future, detailed information concerning each account must be provided. 3. A person has a “financial interest” in an account if he has legal title or is the owner of record, regardless of whether the account is maintained for his benefit. For example, IRS guidance provides that an individual who may access a foreign financial account held on another’s behalf due to a power of attorney and who is the owner of record on the account has a “financial interest” in such account and must file the FBAR. In some cases, certain direct and indirect stockholders of corporations, partners of partnerships and persons holding voting or equity interests in other entities may be required to file FBARs with respect to foreign financial accounts of these entities. In particular, these rules apply to a United States person who owns, directly or indirectly, more than 50 percent of (a) the voting power or the total value of the shares of a corporation, (b) the interest in profits or capital of a partnership, or (c) the voting power, total value of the equity interest or assets, or interest in profits. For example, if a U.S. corporation owns 100% of a foreign company that has foreign financial accounts, the domestic corporation must file an FBAR, as must any shareholder who owns more than 50% of the voting power or total value of the shares of the U.S. Corporation. A present beneficial interest in more than 50% of the current income or more than 50% of the assets of a trust that holds a foreign financial account triggers an FBAR filing requirement by the trust beneficiary. However, a trust beneficiary does not need to file the FBAR if the trust, trustee or an agent is a United States person and files an FBAR disclosing the trust’s foreign accounts. A person with a remainder interest in a trust is not within the scope of the FBAR. It is also possible that a discretionary beneficiary of a trust may not have an FBAR filing requirement with respect to the trust. 4. “Signature authority” is defined as the power of an individual to control the disposition of assets held in a foreign financial account by direct communication (whether in writing or otherwise) with the financial institution that maintains the financial account. An individual who merely has the power to allocate assets within an account does not have “signature authority” for the purposes of the FBAR filing requirement. Note that a United States person that causes an entity to be created for the purpose of evading the FBAR requirement shall have a reportable financial interest. In addition to any applicable FBAR filing obligations, certain individual U.S. taxpayers holding specified foreign financial assets with an aggregate value exceeding $50,000 must report information about those assets on new Form 8938. Unlike the FBAR, which is filed with the Treasury separate from any other tax filings by a June 30 deadline, Form 8938 must be attached to the individual taxpayer’s annual income tax return. Higher asset thresholds apply to U.S. taxpayers who file a joint tax return or who reside abroad (see below). Form 8938 reporting applies for specified foreign financial assets in which the taxpayer has an interest in taxable years starting after March 18, 2010. For most individual taxpayers, this means they should have started filing Form 8938 with their 2011 income tax return. Individual taxpayers that hold interests in foreign financial accounts may thus need to report such accounts on at least three separate forms: their individual U.S. tax return, the FBAR and Form 8938. Individual taxpayers are encouraged to consult with their tax advisers to determine which of these or other forms may be required. The penalty for failure to file the FBAR, if non-willful, is up to $10,000. Willful failures to comply with the filing requirement incur penalties of up to $100,000 or 50% of the foreign financial account balances; criminal penalties may also apply. The IRS says willfulness can be a conscious effort to avoid learning about FBAR reporting. In its internal audit guidance, the IRS says that with hardly any diligence, a taxpayer could have learned of the FBAR filing requirements quite easily. Thus taxpayers with foreign accounts are advised to read the information the government specifies in its tax forms and instructions. A failure to follow-up on this knowledge may provide evidence of “willful blindness.” The penalty for failure to file Form 8938 is up to $10,000 for a failure to disclose the foreign financial assets and an additional $10,000 for each 30-days of non-filing after the IRS issues a notice of failure to disclose, for a maximum potential penalty of $60,000; criminal penalties may also apply. I suggest that when dealing with these very important issues, it is important to utilize a competent CPA with many years of experience in dealing with international tax. In my opinion a long-term former employee of the IRS who was in the international division would be the first step. If that CPA also was an IRS appeals Officer at sometime in his career that would be a plus. The reason for this is we have seen excellent results when a US taxpayer files for amnesty and then opts out. If this tricky procedure is done properly the US taxpayer ends up dealing with the appeals division of the IRS. When you deal with the Appeals Division of the IRS you almost always get a better deal and pay less taxes that could result in a savings of thousands of dollars. I have received a very large number of phone calls form US taxpayers who are trying to deal with some or all of these issues. Almost all of the advise they have received from CPA’s or attorney’s has been in my opinion been flawed. By filing for amnesty and then properly opting out most taxpayers will save thousands. Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, abusive tax shelters, financial, international tax, and estate planning. He writes about 412(i), 419, Section79, FBAR and captive insurance plans. He speaks at more than ten conventions annually, writes for more than 50 publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public Radio’s “All Things Considered” and others. Lance has written numerous books including “Protecting Clients from Fraud, Incompetence and Scams,” published by John Wiley and Sons, Bisk Education’s “CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation,” as well as the AICPA best-selling books, including “Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots.” He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxadvisorexpert.com. The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

FBAR International Tax OVDI

Lance Wallach

FBAR and international tax are hot issues that are costing people a lot of money. If you don’t do it right you will have IRS problems. Be careful who helps you. It may cost you a lot of money, or in the extreme time in Jail.
U.S. citizens with financial interest or signature authority over any foreign financial account (including bank, brokerage, securities, or other types of financial accounts) located outside of the United States, are required to report that information each year. Since most, if not all, U.S. citizens residing in a foreign country have a foreign bank account for their ordinary banking activities, they are subject to this same reporting requirement. If a person is required to file FBARs retroactively, they only have to file them for the last six years. The statute of limitations for assessing FBAR penalties is six years from the due date of the FBAR.

A failure to file the FBAR may subject the taxpayer to a willful or a non-willful civil penalty, in absence of reasonable cause. The civil penalty for willfully failing to file an FBAR can be up to $100,000 or 50% of the total account balance at the time of the violation. Non-willful violations are subject to a penalty of up to $10,000 per violation. However, if the failure to file was due to reasonable cause, as determined by the IRS, then there is no penalty. Please be very careful how you do this.

The IRS will consider factors such as taxpayer's reliance on a professional tax advisor, no indication of intent to conceal income or assets and other additional facts that weigh in favor of a determination that the violation was due to reasonable cause. The IRS will consider the facts and circumstances of the taxpayer's situation before imposing a penalty and may instead issue a warning letter. I have received hundreds of phone calls from people with big IRS problems. Many were caused by them getting bad advise.

The IRS reopened the Offshore Voluntary Disclosure Program (2012 OVDP) with News Release IR-2012-5 on January 9, 2012. The 2012 OVDP will remain open for an indefinite period of time, with no set deadline for taxpayers to apply. The overall penalty structure for the 2012 OVDP requires individuals to pay a penalty of 27.5% of the highest aggregate balance in foreign accounts/entities or value of foreign assets during the eight tax years prior to disclosure. Some participants, in limited circumstances, will be eligible for a lower penalty of 12.5% or 5%.

Taxpayers must consider their specific situation before making a decision about how best to become compliant with the U.S tax laws. With the announcement of the 2012 OVDP, they and their advisors need to determine whether they should follow the guidance provided in IRS Fact Sheet FS-2011-13, file returns for the past six years and hopefully be granted reasonable cause relief or, alternatively, participate in the 2012 OVDP, file and pay taxes for the past eight years to obtain amnesty from criminal prosecution. They should also consider filing and then opting out. If done correctly this may be the best solution. Consider using an ex ITS agent who was with the international division of the IRS. If he is a CPA that is even better. I have found you get want you pay for. Do not try to do this on your own. Do not use a CPA unless he has years of experience on these issues. You do not want him to learn on the job.

Lance Wallach, National Society of Accountants Speaker of the Year and member of the American Institute of CPAs faculty of teaching professionals, is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters.  He speaks at more than ten conventions annually and writes for over fifty publications. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education's CPA's Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Mr. Wallach may be reached at 516/938.5007, wallachinc@gmail.com, or at www.taxaudit419.com or www.lancewallach.com.

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

IRS Tax Audits, 419 and 412i plans, Tax resolution services

IRS Tax Audits, 419 and 412i plans, Tax resolution services: Check out http://taxadvisorexperts.com! Expert CPA help with 419a, 419e, 419, 412i, welfare benefit plans, 6707a penalties, form 8886, IRS audits, Section 79, Captive insurance, FBAR, tax masters, jk harris, wpi, us tax shield.

Guaranteed Ways to Grow Your Business

Guaranteed Ways to Grow Your Business

IRS Tax Audits, 419 and 412i plans, Tax resolution services

IRS Tax Audits, 419 and 412i plans, Tax resolution services: Check out http://taxadvisorexperts.com! Expert CPA help with 419a, 419e, 419, 412i, welfare benefit plans, 6707a penalties, form 8886, IRS audits, Section 79, Captive insurance, FBAR, tax masters, jk harris, wpi, us tax shield.

Beat the IRS: Big Trouble Ahead For 412i and 419 Plan Participants - Lance Wallach

Beat the IRS: Big Trouble Ahead For 412i and 419 Plan Participants - Lance Wallach

IRS fines | Stacey Arenas | Pulse | LinkedIn

IRS fines | Stacey Arenas | Pulse | LinkedIn

Transfer Pricing

By Lance Wallach

The IRS dedicates enormous resources toward dealing with taxpayer’s who are involved with any form of transfer pricing. The transfer pricing provisions of IRC 482 address four general types of transactions between commonly owned or controlled parties.
1- Use or transfer of tangible property
2- Services
3- Loans
4- Use or transfer of intangible property (especially cost sharing agreements)

Use of tangible property: When one member of a controlled group rents or leases property to another member of the group, the price paid for use of such property must equal an arm’s length amount. Per Treas. Reg. 1.482-2(c )(2)(i), the arm’s length amount is determined by reference to the amount that would have been charged between independent parties for use of the same or similar property under similar circumstances.

Determination of what is arm’s length for fair rental value transactions:
a) Period of use
b) Location of use
c) Owner’s investment in property or rent paid
d) Expenses of maintaining the property
e) Type of property
f) Condition of property

Transfer of tangible property: When sales or transfers of tangible property are made between related parties (sales of goods), the arm’s length price generally is the price that an unrelated party would pay for similar property under similar circumstances.

Determination of what is arm’s length for inter-company sales: The regulations specify six methods used to determine whether an arm’s length amount has been charged between members of a controlled group. Treas. Reg.1.482-3(a), states that the “best method” should be used to determine arm’s length price. The IRS views the “best method” as the method that produces the most reliable results based on facts and circumstances. The IRS is well aware of the fact that many transfer pricing studies are prepared with the intention to validate year-end inter-company cost of sales regardless of whether they are arm’s length just to avoid the IRC 6662 penalties. Taxpayer’s would be best served if transfer pricing studies were prepared by knowledgeable experts in the field of transfer pricing.

Inter-company Services: When one member performs services for another member of a controlled group, an arm’s length charge is required. This includes services such as marketing, management, technical services, or any other type of service. Such services can be provided by one party for the joint benefit of all members, or can be provided between two members of the controlled group.

Determination of what is arm’s length for inter-company services: The arm’s length standard for services between related parties is found in Treas. Reg. 1.482-2(b)(3) which states, “ an arm’s length charge for services rendered shall be the amount which was charged or would have been charged for the same or similar services in independent transactions with or between unrelated parties under similar circumstances considering all relevant facts.” The arm’s length charge for services between related parties will depend upon the facts related to the services provided. The pricing rules fall within three categories:
1) An arm’s length charge will be based on the amount that would have been charged by an unrelated party. This generally means that the price should be based on reimbursement of cost, plus a mark-up for profit.
2) An arm’s length charge may be based on only the costs incurred, provided that certain criteria are met.
3) No charge is necessary, if certain criteria are met.

The area that concerns the IRS most with these type transactions are technical services fees provided by larger U.S corporations to its foreign CFC’s which are not charged. In regards to smaller cases, the IRS typically examines management fees in detail to ensure they are arm’s length.

Inter-company Loans: In the context of IRC 482, most of the areas of conflict in this area revolve around interest. When loans are made between members of a controlled group, interest rates charged do not always meet the required arm’s length standard.

Determination of what is arm’s length for inter-company loans: The arm’s length standard for loans between related parties is found in Treas. Reg. 1.482-2(a)(2) which states that “ an arm’s length rate of interest shall be a rate of interest which was charged, or would have been charged, at the time the indebtedness arose, in independent transactions with or between unrelated parties under similar circumstances.”

Factors that are listed in Treas. Reg. 1.482-2(a)(2) that should be considered in determining arm’s length interest are:
a) The principle amount and duration of the loan.
b) The security involved
c) The credit standing of the borrower
d) The prevailing interest rate where the loan was made

The regulations provide further guidance in the following areas:
a) Safe harbor rules
b) Ordering rules
c) Determination of bona fide indebtedness
d) Period for which interest is charged

Transfers of intangible properties: When transfers of intangible property are made between controlled parties, the arm’s length price is often difficult to determine, in part because the property’s value derives from intellectual capital such as ideas, the outcome of research and development or creation of software.

Determination of what is arm’s length for transfer of intangible property: The regulations specify four methods to determine whether an arm’s length amount has been charged between the members of a controlled group with respect to the transfer or use of intangible property. Treas.Reg.1.482-4(a) states that the “best method” should be used to determine the arm’s length price between related parties. Controlled parties may enter into a qualified cost sharing arrangements to share costs related to developing intangibles. They may also contribute existing intangibles for use in further development or for use in developing new and distinct intangibles.

The following general rules of Treas.Reg.1.482-7(a) and (b) apply to qualified cost sharing arrangements:
a) Two or more controlled participants agree to share the costs of developing intangibles.
b) Costs are shared based on each participant’s share of reasonably anticipated benefits from the intangibles to be developed.
c) A “buy-in” must be paid to the participant that contributes pre-existing intangible property to the qualified cost sharing arrangement.

As with transfer pricing reports, cost sharing agreements should be prepared by qualified experts who are knowledgeable in this area. If examined by the IRS, the cost sharing agreement will be reviewed in detail. For further insight refer to the Coordinated Issue Paper utilized as a guideline for the IRS personnel dated June 5th 2009.

Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters. He writes about 412(i), 419, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public Radio's All Things Considered, and others. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education's CPA's Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxaudit419.com and www.taxlibrary.us

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

Protecting Clients from Fraud, Incompetence and Scams

Lance Wallach

 Nov 12

Parts of this article are from the book published by John Wiley and Sons, Protecting Clients from Fraud, Incompetence and Scams, authored by Lance Wallach.

Every financial expert out there knows that bad faith and bad planning can take down even the biggest firms, wiping out millions of dollars of value in an instant. Whether it's internal fraud, a scammer, or an incompetent planner that takes your client's cash, the bottom line is: The money is gone and the loss should have been prevented.

Filled with authoritative advice from financial expert Lance Wallach, Protecting Clients from Fraud, Incompetence, and Scams equips you as an accountant, attorney, or financial planner with the weaponry you need to detect bad investments before they happen and protect your clients' wealth - as well as your own.

Sharp and savvy in its frank, often humorous, and authoritative examination of financial fraud and mismanagement, you'll learn about the dysfunctional sectors in the financial industry and:

• Protecting your retirement assets
• Asset protection basics
• Shifting the risk equation: insurance maneuvers
• Reevaluating existing insurance
• What financial advisors and insurance agents "forget" to tell their clients
• The truth about variable annuities
• What you must know about life settlements
• The smart way to approach college funding

The news for the past two years has been filled with gloom and dangers: Swindles, Bernie Madoff, rip-offs, and the collapse of Bear Stearns and Lehman Brothers. But the party's over, and with that era done, it's more important than ever for you to perform the due diligence on all financial maneuvers affecting the money you oversee and provide your clients with assurance in the form of practical solutions for risk and asset management.

A pragmatic blueprint for identifying trouble spots you can expect and immediately useful solutions, Protecting Clients from Fraud, Incompetence, and Scams equips you with the resources, strategies, and tools you need to effectively protect your clients from frauds and financial scammers.

Herewith is an excerpt from Lance Wallach's book, Protecting Clients from Fraud, Incompetence and Scams:

The IRS has been cracking down on what it considers to be abusive tax shelters. Many of them are being marketed to small business owners by insurance professionals, financial planners, and even accountants and attorneys. I speak at numerous conventions, for both business owners and accountants. And after I speak, many people who have questions about tax reduction plans that they have heard about always approach me.

I have been an expert witness in many of these 419 and 412(i) lawsuits and I have not lost one of them. If you sold one or more of these plans, get someone who really knows what they are doing to help you immediately. Many advisors will take your money and claim to be able to help you. Make sure they have experience helping agents that have sold these types of plans. Make sure they have experience helping accountants who signed the tax returns. IRS calls them material advisors and fines them $200,000 if they are incorporated or $100,000 if not. Do not let them learn on the job, with your career and money at stake.

Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, abusive tax shelters, financial, international tax, and estate planning.  He writes about 412(i), 419, Section79, FBAR, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public Radio’s All Things Considered, and others. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education’s CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation, as well as the AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxadvisorexpert.com or www.taxaudit419.com.

The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or other entity.  You should contact an appropriate professional for any such advice.

OVDI, FBAR, INTERNATIONAL TAX UPDATE: Deadlines, E-Filing Option and New IRS Form 8938

Lance Wallach

June 15, 2012

American taxpayers. person with a financial interest in, or signature or other authority over, any financial account outside the U.S. must file an annual report on Treasury Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts, commonly known as an “FBAR” if the aggregate value of all such accounts exceeds 10,000 at any time during the calendar year. Unlike tax returns, which may be mailed on the filing deadline and be considered timely, the FBAR for 2011 must have been received by Treasury by June 30, 2012.

As summarized below, over the past year, the Financial Crimes Enforcement Network “FinCEN” has issued guidance regarding extended filing FBAR deadlines and new filing options. The Internal Revenue Service has also issued a new form Form 8938 that requires additional disclosure regarding foreign financial assets.

  
There is now an online filing option for FBARs that require only one signature. The online form and instructions provide for a more immediate means by which to ensure that the FBAR was received by the June 30 deadline. Since only one signature can be submitted on the electronic form, the e-filing process is not an option for joint filers. 

 For filers not using the e-filing option, this form must be filed with the U.S. Department of Treasury, P.O. Box 32621, Detroit, MI, 48232-0621. The address for commercial delivery is: IRS Enterprise Computing Center, Attn: CTR Operations Mailroom, 4th Floor, 985 Michigan Avenue, Detroit, MI, 48226, contact phone number: 313-234-1062. Note that the contact phone number for courier delivery may not be used to confirm receipt of the FBAR.

As clarified in the final regulations which were issued last year, the following definitions determine those individuals and entities subject to the FBAR filing obligation:

1. “United States person” is defined to mean a United States citizen or resident; an entity, including but not limited to a corporation, partnership, or limited liability company, created or organized in the United States or under the laws of the United States; and a trust or estate formed under the laws of the United States. Non-U.S. persons doing business in the United States are not required to file FBARs.

2. A “financial account” includes a savings deposit, demand deposit, checking, securities, security derivatives, debt card, prepaid credit card and any other financial instrument account, including certain insurance products and foreign pension funds. This includes an account with “a mutual fund or similar pooled fund which issues shares available to the general public that have a regular net asset value determination and regular redemptions."

An equity interest in a hedge fund or private equity fund is not currently considered to be a “financial account,” though the IRS is considering this question further.

A United States person having a financial interest in 25 or more foreign financial accounts, or signature or other authority over 25 or more foreign financial accounts need only provide the number of financial accounts and certain other basic information on the FBAR form. If requested in the future, detailed information concerning each account must be provided.

3. A person has a “financial interest” in an account if he has legal title or is the owner of record, regardless of whether the account is maintained for his benefit. For example, IRS guidance provides that an individual who may access a foreign financial account held on another’s behalf due to a power of attorney and who is the owner of record on the account has a “financial interest” in such account and must file the FBAR.

In some cases, certain direct and indirect stockholders of corporations, partners of partnerships and persons holding voting or equity interests in other entities may be required to file FBARs with respect to foreign financial accounts of these entities. In particular, these rules apply to a United States person who owns, directly or indirectly, more than 50 percent of (a) the voting power or the total value of the shares of a corporation, (b) the interest in profits or capital of a partnership, or (c) the voting power, total value of the equity interest or assets, or interest in profits. For example, if a U.S. corporation owns 100% of a foreign company that has foreign financial accounts, the domestic corporation must file an FBAR, as must any shareholder who owns more than 50% of the voting power or total value of the shares of the U.S. Corporation.

A present beneficial interest in more than 50% of the current income or more than 50% of the assets of a trust that holds a foreign financial account triggers an FBAR filing requirement by the trust beneficiary. However, a trust beneficiary does not need to file the FBAR if the trust, trustee or an agent is a United States person and files an FBAR disclosing the trust’s foreign accounts. A person with a remainder interest in a trust is not within the scope of the FBAR. It is also possible that a discretionary beneficiary of a trust may not have an FBAR filing requirement with respect to the trust.

4. “Signature authority” is defined as the power of an individual to control the disposition of assets held in a foreign financial account by direct communication (whether in writing or otherwise) with the financial institution that maintains the financial account. An individual who merely has the power to allocate assets within an account does not have “signature authority” for the purposes of the FBAR filing requirement.

Note that a United States person that causes an entity to be created for the purpose of evading the FBAR requirement shall have a reportable financial interest.
 
In addition to any applicable FBAR filing obligations, certain individual U.S. taxpayers holding specified foreign financial assets with an aggregate value exceeding $50,000 must report information about those assets on new Form 8938. Unlike the FBAR, which is filed with the Treasury separate from any other tax filings by a June 30 deadline, Form 8938 must be attached to the individual taxpayer’s annual income tax return. Higher asset thresholds apply to U.S. taxpayers who file a joint tax return or who reside abroad (see below).

Form 8938 reporting applies for specified foreign financial assets in which the taxpayer has an interest in taxable years starting after March 18, 2010. For most individual taxpayers, this means they should have started filing Form 8938 with their 2011 income tax return. Individual taxpayers that hold interests in foreign financial accounts may thus need to report such accounts on at least three separate forms: their individual U.S. tax return, the FBAR and Form 8938. Individual taxpayers are encouraged to consult with their tax advisers to determine which of these or other forms may be required.


 
The penalty for failure to file the FBAR, if non-willful, is up to $10,000. Willful failures to comply with the filing requirement incur penalties of up to $100,000 or 50% of the foreign financial account balances; criminal penalties may also apply. The IRS says willfulness can be a conscious effort to avoid learning about FBAR reporting. In its internal audit guidance, the IRS says that with hardly any diligence, a taxpayer could have learned of the FBAR filing requirements quite easily. Thus taxpayers with foreign accounts are advised to read the information the government specifies in its tax forms and instructions. A failure to follow-up on this knowledge may provide evidence of “willful blindness.”

The penalty for failure to file Form 8938 is up to $10,000 for a failure to disclose the foreign financial assets and an additional $10,000 for each 30-days of non-filing after the IRS issues a notice of failure to disclose, for a maximum potential penalty of $60,000; criminal penalties may also apply.

I suggest that when dealing with these very important issues, it is important to utilize a competent CPA with many years of experience in dealing with international tax. In my opinion a long-term former employee of the IRS who was in the international division would be the first step. If that CPA also was an IRS appeals Officer at sometime in his career that would be a plus. The reason for this is we have seen excellent results when a US taxpayer files for amnesty and then opts out. If this tricky procedure is done properly the US taxpayer ends up dealing with the appeals division of the IRS. When you deal with the Appeals Division of the IRS you almost always get a better deal and pay less taxes that could result in a savings of thousands of dollars.

I have received a very large number of phone calls form US taxpayers who are trying to deal with some or all of these issues. Almost all of the advise they have received from CPA’s or attorney’s has been in my opinion been flawed. By filing for amnesty and then properly opting out most taxpayers will save thousands.

 Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, abusive tax shelters, financial, international tax, and estate planning.  He writes about 412(i), 419, Section79, FBAR and captive insurance plans. He speaks at more than ten conventions annually, writes for more than 50 publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public Radio’s “All Things Considered” and others. Lance has written numerous books including “Protecting Clients from Fraud, Incompetence and Scams,” published by John Wiley and Sons, Bisk Education’s “CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation,” as well as the AICPA best-selling books, including “Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots.” He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxadvisorexpert.com.

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

419 Welfare Benefit Plans

HG EXPERTS - - Legal Experts Directory

May 9, 2012     By  Sam Susser

---

A view from a former IRS Agent, CPA, College Professor

Welfare Benefit Plans (WBP), also known as Welfare Benefit Trusts and Welfare Benefit Funds are vehicles by which employers may offer their employees and retirees with certain types of insurance coverage (e.g., life insurance, health insurance, disability insurance, and long-term care), as well as other benefits such as severance payments and educational funding. If properly designed and in compliance with IRC sections 419 and 419A, WBPs offer employers with a valid tax deduction. However, as is the case with many plans that offer opportunities for deductibility, some WBPs fail to comply with Code standards, invite abuse, and otherwise are used inappropriately as a basis to reduce taxable income.
It is, therefore, not surprising that the Internal Revenue Service (IRS) has targeted WBP, designating many such plans as “listed transactions.” The IRS’ attack arsenal includes, but is not limited to: Notice 2007-83 (where the IRS intends to challenge claimed tax benefits meeting the definition of a “listed transaction”); Notice 2007-84 (where the IRS may challenge trust arrangements purporting to provide non-discriminatory medical and life insurance benefits, if such plans are, in substance, discriminatory); Revenue Ruling 2007-65 (where the IRS will not disallow deductions for such arrangements for prior year tax years, except to the extent that deductions have exceeded the amount of insurance included on the participant’s Form W-2 for a particular year), and IR-2007-170 (the IRS’ guidance position on WBPs). Accordingly, taxpayers who have claimed deductions pursuant to Internal Revenue Code (Code) Section 419 are receiving letters from the IRS inviting them to an audit.
THE GOOD:
Let’s start off with a proposition that may surprise many of you – the IRS is generally good. No, that’s not an oxymoron. The rest of this article is in the words of Sam Susser:

For over 35 years, I have had the privilege of representing the IRS and the US taxpayers on tax audits. Our goal was to always determine the correct tax –whether the outcome was a deficiency or a refund. The bottom line, which the IRS supported, was to “do the right thing.” Over these years, I have met and befriended many competent and exemplary agents. As with all industries, there are a few who simply go through the motions, and there are a few who are simply incompetent. Fortunately, the latter two groups are in the minority. Now that I represent clients who are being audited by IRS, my objectives have not changed. The right thing must still be done. I only hope to get a well-versed agent who knows the law and can make a determination based on facts and circumstances, and not by preconceived notions.
I have been resolving the WBP issue mostly at the Revenue Agent (RA) level. Most RAs are knowledgeable in the area of WBP, and it it a pleasure dealing with them. My clients became involved with both abusive plans as well as what I determined to be non-abusive plan. Because most clients have sought the opinions of an independent professional tax attorney, CPA, Enrolled Agent , or other independent professionals who the IRS deems to be knowledgeable and capable of rendering an opinion on a Plan, Prior to 2007 I had a good case for abating the penalty and any interest thereon due to the reasonable cause exception. The RAs accepted my briefs for penalty relief and I usually resolved the case agreed at the agent’s level. The right thing was being done by both sides. Since 2007 the bar has been raised in meeting the reasonable cause exception. Simply put, if taxpayers failed to file Forms 8886 with their tax returns, the penalty could no longer be abated due to reasonable cause. If we do not come to an agreement, the case would, at taxpayer’s additional expense, proceed to the Appeals Division. This would normally be a good strategy in nebulous circumstances. With rare exceptions this is not a good strategy under these circumstances as explained later.
Just as there are good and bad IRS agents, there are good and bad WBPs. The abusive plans that have been sold should not affect those plans that adhere to the spirit of the tax laws. Thus, of the many plans sold to taxpayers, some can be considered “good.” The “bad” WBPs should not taint the “good” ones.
IR-2007-170, Oct. 17, 2007, recognizes that “[t]here are many legitimate welfare benefit funds that provide benefits, such as health insurance and life insurance, to employees and retirees. However, the arrangements the IRS is cautioning employers about is primarily benefits the owner or other key employees of businesses, sometimes in the form of distributions of cash, loans, or life insurance policies.”
THE BAD:
A persistent pattern that I see with WBPs is that the IRS appears to presumptively hold such plans as improper contrary to the statement in IR-2007-170. From what I have indirectly encountered, it appears that the IRS may interview the plan administrator, with the primary objective of securing the plan’s participants (and audit targets) rather than determining whether the limitations of a Code Section 419 deduction were satisfied. No determination is made as to whether the plan meets or fails to meet Code requirements. The plan participants then receive audit letters: one to the entity claiming the deduction, and the other to the owner(s) of such entity. These audit letters are generally accompanied by a lengthy “canned” Information Document Request (IDR) ostensibly written by IRS attorneys.
During my decades with the IRS, IDRs are usually focused documents seeking very specific documents and information to determine whether further action is required. However, my review of IDRs on the subject of WBPs shows them to be akin to document production demands in a civil litigation. The IRS basically wants everything associated with the WBP – there is no specific focus. Moreover, they have a very expansive definition of documents, and seek them whether they are in the taxpayer’s possession, or in the possession of the taxpayer’s “attorneys, accountants, affiliates, advisers, representatives, or other persons directly or indirectly employed by you, hired by you, or connected with you, or your representatives, and anyone else subject to your control.”
What was most disturbing about these IDRs that I have seen is the fact that the RAs also have, on a number of occasions, requested copies of the tax returns for the tax year(s) under audit. This indicated to me, especially since the name of the WBP is repeatedly mentioned in the IDR, that my client was selected from the list provided by the plan administrator to the IRS. This in itself is not necessarily bad since this is a useful tool for the IRS in obtaining names of participants of plans that might not meet the muster of the Code and IRS pronouncements. However, I would think that the “give me everything from everybody” approach should not be the first step in an IRS inquiry into the validity of a WBP.
Other clients received audit letters with a similar IDR requesting information including copies of the returns under examination. These clients, however, had stopped participating in the plan many years prior to the audit years. Nonetheless, since the client's name was still on the Plan’s list of participants, the client was going to be audited. The IRS takes the position that the cash surrender value of any life insurance policy in the plan is available to the client and is therefore income to that client for the year the IRS has decided to audit Accordingly, the RAs are proposing adjustments in years in which no deduction to the WBP have been taken.
THE … ?
To rub salt into the wound, the RA has enclosed an explanation as to why the deduction is disallowed, and has proposed a statutory underpayment penalty. The tax law provides for a penalty to be imposed where a taxpayer makes a substantial understatement of their tax liability. For individual taxpayers, a substantial underpayment exists when the understatement for the year exceeds the greater of ten percent of the tax required to be shown on the return, or $5,000. This is a relatively low threshold and is easily met by most taxpayers. The penalty is twenty percent of the tax underpayment.
Following the RA’s review, the taxpayer can expect to receive a 20 – 40 page “boiler-plated” or “canned” write-up, which will wind up as the Revenue Agent Report (RAR). The RARs that I’ve seen appear obviously drafted by IRS attorneys. Sometimes the RAR is shortened as a result of “cut and paste” procedures assembled by the RA. The RARs also contain alternative positions for these proposed disallowances. Taxpayers and representatives can take little comfort when all indications lead to the conclusion that the IRS has made a determination prior to assessing all the facts and circumstances of any given case standing on its own merits. My concern is that the WBP that meet IRS requirements are swept together with those that do not, and are unjustly branded as “bad.” The participants of these “good” plans must now overcome the preconceived notions of the RA. This becomes a difficult task as RAs won't deviate from the “boiler-plated” positions, forcing the taxpayer to expend funds in seeking further relief . The Appeals Division has similarly received a directive to sustain the RA RAR thus effectively eliminating the appeals right the taxpayers normally have. The only "appeals" route a taxpayer can take is to petition the Courts for a hearing. The time, expense, and outcome in defending a WBP under this scenario are enigmatic (hence the “…?”), and well, simply put, can really become downright UGLY!
CONCLUSION:
The IRS needs to examine WBPs on a plan by plan basis, and make a determination based on the facts and circumstances of each plan. Specifically, they should be charged with independently evaluating whether a particular WBP generally adheres to the Code and the IRS’s issued pronouncements. The RA and those in charge of this project should be cognizant of the statement issued by Donald L. Korb (Chief Counsel for the IRS): “The guidance targets specific abuses involving a limited group of arrangements that claim to be welfare benefit funds.” (emphasis provided). He continues to state that: “[T]oday’s action sends a strong signal that these abusive schemes must stop.” (emphasis provided). For those plans that the IRS deems to be abusive, the IRS can concentrate its resources in auditing the plan participants. The IRS hierarchy needs to eliminate the UGLY, recognize the GOOD, and pursue the BAD

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

ABOUT THE AUTHOR: Sam Susser
Sam Susser began his IRS career on 2/1/71, and spent most the succeeding years as an international examiner with brief stints in the Review Section and the Appeals Division. He closed out his IRS tenure spending four years as International Team Manager for South Florida. Currently Sam is in private practice and can be reached at 561-742-1005

Copyright Lance Wallach, CLU, CHFC
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