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How to Find Your Spouse’s Secret Offshore Bank Account: Using U.S. Tax Reporting Requirements as a Discovery Tool for Locating Foreign Assets

Presented by:Matthew D. Lee, Blank Rome LLPG. Daniel Jones, CBIZ

Matthew D. Lee

Matthew D. Lee is a former U.S. Department of Justice trial attorney who concentrates his practice on all aspects of white collar criminal defense and federal tax controversies. He has extensive experience in advising clients on issues regarding foreign bank account reporting (FBAR) obligations, the Foreign Account Tax Compliance Act (FATCA), and the Internal Revenue Service’s 2009 Offshore Voluntary Disclosure Program, 2011 Offshore Voluntary Disclosure Initiative, and 2012 Offshore Voluntary Disclosure Program. He has represented hundreds of U.S. taxpayers with undisclosed foreign bank accounts. Mr. Lee has published numerous articles regarding the IRS voluntary disclosure programs and FBAR and FATCA reporting obligations and speaks frequently on these topics.He has also represented clients in all stages of proceedings before the Internal Revenue Service, including audits, appeals, and collections, and Tax Court and district court litigation. Mr. Lee also has experience in conducting corporate internal investigations and advising clients as to corporate compliance issues involving the Bank Secrecy Act, the USA Patriot Act, FATCA, and anti-money laundering laws and regulations. Mr. Lee has represented both corporations and individuals in criminal investigations involving tax, money laundering, health care, securities, public corruption, and fraud offenses, and has significant experience in handling all stages of federal litigation including trials and appeals. Mr. Lee publishes a blog devoted to addressing the latest developments in the tax controversy field at www.taxcontroversywatch.com.

G. Daniel Jones, CPA, CFF

Dan Jones is a Managing Director for CBIZ MHM, LLC, a division of CBIZ, Inc. (NYSE: CBZ) in the FFS Group, which includes forensic accounting, litigation support and valuation services. After graduation from Temple University, Dan began his professional career as an Internal Revenue Agent for the U.S. Treasury Department from 1973-1977, where he also served as an expert witness for the Department of Justice. In 1982 he helped establish the firm of Jones, Hayward & Lenzi, CPA’s.Since 1976, Dan has been qualified as an expert witness in the Federal, Pennsylvania, New Jersey, Tennessee, state courts and the counties of Philadelphia, Bucks, Montgomery, Delaware, Chester, Lancaster and Monroe in Pennsylvania.Active in professional, community and charitable affairs, Dan has served, or currently serves, on the boards of Continental Bank; Marine Corps – Law Enforcement Foundation; Torresdale-Frankford Country Club; Accountants Professional Liability Group (Orion Capital, NYSE); and Progress Bank (PFNC-OTC). He has also served as an adjunct professor at Philadelphia University and is a member of the American and Pennsylvania Institutes of CPAs.Dan has presented at over 30 conferences during the last dozen years on forensic accounting, tax and family law related issues. He has also authored articles in national and local publications.

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Introduction

• Internal Revenue Service now requires more disclosure than ever of the offshore assets and offshore activities of U.S. taxpayers•Harsh financial penalties, and even criminal

prosecution, can result from the failure to make such disclosures•Significant amount of information regarding offshore

activities can be gleaned from U.S. tax reporting forms•Discovery requests should be specifically tailored to

request this type of information4

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The Case of Dr. Michael Brandner: A Cautionary Tale

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United States v. Michael Brandner, M.D.

•Dr. Brandner is a plastic surgeon in Anchorage, Alaska• In 2007, Dr. Brandner’s wife of 28 years files for

divorce in Alaska Superior Court•Dr. Brandner devises scheme to defraud his wife and

hide millions of dollars of assets from his wife and the Court•Shortly after his wife files for divorce, Dr. Brandner

converts $3 million into five cashier’s checks and drives south to Central America

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Dr. Brandner’s 6,891 mile journeyfrom Alaska to Panama

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Dr. Brandner’s banking activity

•Opens account at Capital Bank in Panama, and deposits five cashier’s checks worth over $3 million. Government alleges that this account was opened to conceal assets from wife.• It turns out that the banker in Panama assisting Dr.

Brandner was cooperating with the U.S. government in a separate fraud investigation. Banker advises Dr. Brandner of the requirement to file the FBAR form with the Internal Revenue Service.•Dr. Brandner later transfers another $1.5 million (primarily

from an IRA account at Pensco Trust Company) to the Panama account, again to conceal assets from his wife.

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Dr. Brandner’s banking activity (continued)

•Alaska court enters a divorce decree on April 19, 2011, and awards wife the funds in the Pensco IRA account.•On May 10, 2011, the banker records a phone call to Dr.

Brandner, who states that respect to the funds awarded to his wife, “my intention is to not hand it over to the court.” Banker advises Dr. Brandner of a new U.S.-Panama tax treaty that could be problematic, and Dr. Brandner asks banker to assist in further concealing assets from wife.•Dr. Brandner creates Evergreen Capital LLC, which is

structured to disguise Brandner’s identity as beneficial owner.

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Dr. Brandner’s banking activity (continued)

• In August 2011, Dr. Brandner opens account in name of Evergreen Capital at Bank of America in Seattle.•$4.65 million wire transferred from Panama to Bank of

America account.•U.S. Department of Homeland Security seizes all funds

from the Bank of America account on September 12, 2011.

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Federal Charges Filed

1. February 9, 2012: U.S. Department of Justice files federal forfeiture lawsuit in California alleging that Dr. Brandner engaged in wire fraud and money laundering to conceal assets from his wife.

2. September 18, 2013: federal grand jury in Alaska returns indictment charging Dr. Brandner with seven counts of wire fraud and seeking forfeiture of $4.6 million in funds concealed from wife and divorce court.

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Why is tax reporting regarding offshore activities more important

today than in the past?

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Offshore Assets

• The world is more globally integrated• Easier to invest assets offshore• Easier to access jurisdictions with strict privacy/secrecy rules;

very strong asset protection rules.• Easier to hide assets from the IRS (and from a spouse)• The IRS and the DOJ have responded in kind . . .

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IRS Offshore Focus

IRS Commissioner Douglas H. Shulman:• “Combating international tax evasion is a top priority for the IRS. We have

additional cases and banks under review. The situation will just get worse in the months ahead for those hiding assets and income offshore.” (February 8, 2011)• “Tax secrecy continues to erode. . . . We are not letting up on international

tax issues, and more is in the works. For those hiding cash or assets offshore, the time to come in is now. The risk of being caught will only increase.” (February 8, 2011)• “Our focus on offshore tax evasion continues to produce strong, substantial

results for the nation’s taxpayers . . . . As we’ve said all along, people need to come in and get right with us before we find you. . . . We are following more leads and the risk for people who do not come in continues to increase.” (January 9, 2012)

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Justice Department Offshore Compliance Initiative

“The Tax Division’s top litigation priority is the concerted civil and criminal effort to combat the serious problem of non-compliance with our tax laws by U.S. taxpayers using secret offshore bank accounts – a problem that a 2008 Senate report concluded costs the U.S. Treasury at least $100 billion annually.”

– U.S. Department of Justice website

Key Enforcement Milestones

•End to historic Swiss bank secrecy laws– Believed to be 52,000 U.S. accounts at UBS alone– UBS agreement with U.S. government and turnover of

names

•Numerous criminal cases filed against accountholders, advisors, and bankers•Global crackdown on use of secret bank accounts

(Israel, India, and many other countries)•Over 100 Swiss banks seeking amnesty as of February

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Key Enforcement Milestones (continued)

• IRS Offshore Voluntary Disclosure Programs (2009 to the present)– Over 40,000 individuals have enrolled– Over $5.5 billion in additional revenue to U.S. Treasury

•Passage and implementation of Foreign Account Tax Compliance Act in 2013 will end bank secrecy worldwide and impose global transparency and information sharing• Indictment of Credit Suisse expected imminently

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Foreign Bank Account (FBAR) Reporting Requirements

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Foreign Bank Accounting Reporting

• Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (“FBAR”), now known as FinCEN Form 114• Primary weapon in the IRS’ arsenal for enforcing information

reporting• Severe penalties for noncompliance: criminal and civil• Required as part of Bank Secrecy Act, not Internal Revenue

Code; hence, penalties more stringent than Internal Revenue Code penalties• Obligation to file introduced in 1970s but enforcement was lax

prior to 2009

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Who is required to file an FBAR?

• An FBAR must be filed if all of the following requirements are satisfied:– Filer is a U.S. Person;– U.S. Person has a financial account;– U.S. Person has a direct or indirect financial interest in, or

signature or other authority over, the financial account; – Financial account is in a foreign country, including the

foreign branch of a U.S. bank; and– Aggregate account balances exceed $10,000 (USD) at any

point during calendar year

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What is reported on the FBAR?

• A U.S. Person must report all their financial interests in, or signature or other authorities over, foreign financial accounts.• Financial accounts include:

– Bank accounts with offshore banks;– Securities and brokerage accounts with offshore financial

institutions;– Commodity futures and options account;– Insurance policy with a cash value and an annuity policy;

and– Shares in a mutual fund

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FinCEN 114 (new form)

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FinCEN 114

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FinCEN 114

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FinCEN 114

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Form TD F 90-22.1 (old form)

Form TD F 90-22.1

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FBAR Penalties for Non-Compliance

• Criminal penalties for willful violations:– Up to 5 years imprisonment and $250,000 fine

• Civil penalties– Non-willful violation: Up to $10,000 for each violation– Willful violation: Greater of $100,000 or 50 percent of the

balance in the account at the time of the violation

• Both civil and criminal penalties may be imposed together.•Assisting a U.S. person in evading reporting may also result

in tax and money laundering charges, and seizure and forfeiture of the assets in the account.

Example of exposure to FBAR sanctions

1. assume balance in BDA a/c since 2008 is $5M

2. Sale of a foreign based hedge fund a/c created balance just before meltdown.

3. No form 90-22.1 or Sch B, 1040 answered or filed

4. Husband never told CPA and never discussed with wife.

5. But H's AA knew about it and was sympathetic to wife. She drops a dime.

6. Penalty exposure to H (and the marital estate)

Year Balance Penalty Cum Pen All amounts in millions

2008 $5.0 $ 2.5 $ 2.5

2009 4.2 2.1 4.6

2010 4.6 2.3 6.9

2011 5.4 2.7 9.6

2012 6.0 3.0 12.6

2013 7.0 3.5 $ 16.1

Conclusion; you may have located a $7M asset for division with your client.

How do you handle the potential liabilty of $16M if you

- Represent wife?

- Represent husband?

Foreign Bank Account Reporting on Income Tax Returns

•Must report income from foreign account on Schedule B (interest/dividends) and Schedule D (capital gain/loss)•Must also check the box on Form 1040, Schedule B,

Part III– Also, Forms 1120, 1120-S, 1065, 706, and 990

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Form 1040, Schedule B

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Foreign Tax Credit (FTC)

Form 1040, Line 47

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If there is a foreign tax credit claimed, it "could" lead to discovery of significant marital assets or income.

1. Request certificates of tax withheld at source.

That reflects dividends paid and foreign taxes withheld

If there are dividends, think about it and work backwards to

imply asset values.

2. Assume a Foreign Tax Credit of say $150,000 on form 1116 is disclosed.

A. if at 15% = $150,000

B. Dividend earned or received = $1,000,000

C. If dividend is 40% of net income = $2,500,000 is Hs share

D. If value compared to div is 5x, the asset is $12,500,000.

E. if the PE ratio is 15X, the implied value is $37,500,000

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Foreign Account Tax Compliance Act (FATCA)

Foreign Asset Reporting

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What is FATCA?

• “The Foreign Account Tax Compliance Act (FATCA) is an important development in U.S. efforts to improve tax compliance involving foreign financial assets and offshore accounts.” (www.IRS.gov) • FATCA was enacted in 2010 as part of the Hiring Incentives to Restore

Employment (HIRE) Act• Under FATCA, U.S. taxpayers with specified foreign financial assets that

exceed certain thresholds must report those assets to the IRS. This reporting will be made on Form 8938, which taxpayers attach to their federal income tax return, starting with the 2011 tax filing season.• In addition, FATCA will require foreign financial institutions to report

directly to the IRS information about financial accounts held by U.S. taxpayers, or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest.

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Two Primary FATCA Requirements

• In general terms, foreign financial institutions are annually required to report to the U.S. government information about financial accounts held by U.S. taxpayers, or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest.•U.S. taxpayers with specified foreign financial assets

that exceed certain thresholds must report those assets to the IRS annually on the Form 8938 information return.

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FATCA Policy in Context of U.S. Tax Laws

• U.S. taxpayers’ investments have become increasingly global in scope.• Recognition that foreign financial institutions (“FFIs”) are in best

position to identify and report with respect to their U.S. account holders.• Absent reporting by FFIs, some U.S. taxpayers may attempt to

continue to evade U.S. tax by hiding money in offshore accounts.• “To prevent this abuse of the U.S. voluntary tax compliance system

and address the use of offshore accounts to facilitate tax evasion, it is essential in today’s global investment climate that reporting be available with respect to both the onshore and offshore accounts of U.S. taxpayers.” (Preamble to Final Regulations).

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What Does FATCA Require of Foreign Banks?

• FATCA requires foreign banks and financial institutions (FFIs) to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. In order to avoid withholding under FATCA, a participating FFI will have to enter into an agreement with the IRS to:

– Identify U.S. accounts;– Report certain information to the IRS regarding U.S. accounts; and – Withhold a 30 percent tax on certain U.S.-connected payments to non-participating

FFIs and account holders who are unwilling to provide the required information.

• Registration take places through an online system which opened January 1, 2014. • FFIs that do not register and enter into an agreement with the IRS will be

subject to withholding on certain types of payments relating to U.S. investments.

FATCA Implementation Through Intergovernmental Agreements

•As of May 1, 2014:– Treasury has signed 30 agreements with foreign

jurisdictions to implement FATCA– Treasury has reach agreements in substance with 29

other foreign jurisdictions to implement FATCA

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FATCA Asset Reporting Regime

• New Internal Revenue Code provision enacted as part of 2010 HIRE Act• Requires reporting of specified foreign financial assets if

aggregate value exceeds certain thresholds• Applies to tax years beginning with 2011• Requires that new information return be attached to a

taxpayer’s U.S. income tax return entitled Form 8938, “Statement of Foreign Financial Assets”

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Form 8938

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What is a “Specified Foreign Financial Asset”?

A specified foreign financial asset (SFFA) is:• Any financial account maintained by a foreign financial

institution– Foreign bank accounts– Foreign mutual funds– Foreign hedge funds– Foreign private equity funds– Certain foreign insurance products

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Form 8938 – Part I

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What is a SFFA? (continued)

• Other foreign financial assets held for investment that are not in an account maintained by a U.S. or foreign financial institution, namely:– Stock or securities issued by someone other than a U.S.

person– Any interest in a foreign entity– Any financial instrument or contract that has as an issuer

or counterparty that is other than a U.S. person– Foreign pensions and deferred compensation plans– Foreign trusts and estates (if “specified individual” is

aware of its existence)

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Form 8938 – Part II

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Form 8938 – Part II (continued)

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Other U.S. Tax Information ReturnsAddressing Offshore Activities

U.S. Tax Information Returns Requiring Disclosure of Foreign Assets and Activities

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• Form 3520 – Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts• Form 3520-A – Annual Information Return of Foreign Trust

With a U.S. Owner• Form 5471 – Information Return of U.S. Persons With Respect

to Certain Foreign Corporations• Form 8621 – Information Return by a Shareholder of a PFIC or

Qualified Electing Fund • Form 8865 – Return of U.S. Persons With Respect to Certain

Foreign Partnerships

Form 3520 – Foreign Trusts & Foreign Gifts

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• Purpose of the form• Information reporting

Distributions from foreign trustsUS owner of a foreign trustGifts and bequests from foreign persons

• Filed with the US taxpayer’s income tax return• Mandatory filing obligation with penalties of $10,000 or up to

35% of the fair value of property transferred to or received from the trust or 5% of the gross value of the trust

Form 3520-A – Foreign Trust with U.S. Owner

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• Purpose of the form• Separate filing by the foreign trust – not part of the U.S.

owner’s tax return• Provides details about:

Foreign trust and its P&L and balance sheetFair market value of the distributions (if any)US Owner(s), income attributable to each US owner and

the value of US owner’s interest in trust• Mandatory – US owner subject to penalty of $10,000 or 5% of

gross value of assets

Form 5471 – Controlled Foreign Corporations

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• Purpose of the form• Controlled foreign corporation (“CFC”) – More than 50% of vote

or value held by US Shareholders (each with a 10% or greater voting interest)• Different filing obligations

Category 2 – US director or officerCategory 3 – Investment into a foreign corporationCategory 4 – Controlling US shareholderCategory 5 – Non-controlling US shareholder

Form 5471 – Controlled Foreign Corporations

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• Form 5471 can be filed on behalf of other taxpayers but such taxpayers must attached a statement to their tax returns indicating such.

• Penalties for non-compliance - $10,000 per Form 5471 and return remains open for audit

Form 5471 – Controlled Foreign Corporations

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Schedule Details Categories

2 3 4 5

General Identification information √ √ √ √

Sch. A Shares on issue by class √ √

Sch. B U.S. Shareholders in foreign corp. √ √

Sch. C,E,F Profit & loss, balance sheet & foreign taxes paid √ √

Sch. G Other investment information √ √ √ √

Sch. H Earnings & Profits √ √

Sch. I Shareholder’s income from foreign corporation √ √

Sch. J Accumulated Earnings & Profits √ √

Sch. M Transactions between controlled entities √

Sch. O, Pt I Investing/selling shareholder information √

Sch. O, Pt II Transaction details of buying/selling stock √

Form 5471 – Controlled Foreign Corporations

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Form 8621 – Passive Foreign Investment Companies

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• Purpose of the form• Passive foreign investment company – foreign corporation

with 75% or more passive income or 50% or more passive income generating assets. Excludes CFCs.

• No dollar threshold or 10% threshold• Elections for recognizing income• Draconian regime for taxing income and gains from PFICs

unless elections made to recognize income over term of investment

• Report income and gains on sales

Form 8865: Foreign Partnerships

•Purpose of form •Requires disclosure of

– Identity of partners– Affiliates of partnership– Income statement of partnership– Balance sheet of partnership– Transactions between partnership and partners

•Financial penalties and possibility of criminal prosecution for failure to file form

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Obtaining Information Directly From the Internal Revenue Service

Other Options for Obtaining Tax Information

• Internal Revenue Code 6103(e)(1)(B) authorizes either individual to request “return information” from IRS regarding a jointly filed return– “return information” includes the tax return and supporting

schedules/information returns

•Divorced/separated spouses may also request, in writing, that the IRS disclose details regarding collection activities undertaken with respect to jointly filed returns (IRC 6103(e)(8))•Use IRS Forms 4506 or 4506-T, or Freedom of Information

Act, to request this information

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Discovery Checklist

• Form 1040 (tax return) and all schedules/attachments• FBAR forms

– TD F 90-22.1 (prior to 2014)– FinCEN Form 114 (starting in 2014)

• Form 8938 (FATCA asset disclosure form)• Form 3520• Form 3520-A• Form 5471• Form 8621• Form 8865

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What if you discover that your client has a secret offshore bank account?

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IRS Offshore Voluntary Disclosure Program

• To date, over 40,000 individuals have come forward and enrolled, and the U.S. government has collected $5.5 billion.• IRS reopened program on January 9, 2012.• Similar to the 2011 program, but with a few significant

differences:– Open for an indefinite period of time until otherwise announced –

terms of Offshore Voluntary Disclosure Program (“OVDP”) could change at any time;

– Requires individuals to pay an FBAR penalty of 27.5% (compared to 25% in the 2011 program), may be reduced to 12.5% or 5% in certain circumstances; and

– 8 year “rolling” look-back period with exclusion of compliant years.

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OVDP(continued)

•More stringent eligibility requirements:– U.S. government receipt of taxpayer information from

“John Doe” summons, treaty request, or similar action is disqualifying event;

– Taxpayers who appeal foreign tax administrator’s decision to release account information must notify U.S. Attorney General or be disqualified;

– IRS may in its discretion designate certain classes of taxpayers ineligible.

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Questions?

Matthew D. LeeBlank Rome LLP

One Logan SquarePhiladelphia, PA 19103

(215) 569-5352(215) 832-5352 (facsimile)Lee-M@BlankRome.com

G. Daniel JonesCBIZ MHM, LLC

401 Plymouth Road, Suite 200Plymouth Meeting, PA 19462

(610) 862-2210(215) 432-6309 (cell)Gdjones@cbiz.com

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Circular 230 NoticeTo ensure compliance with IRS Circular 230, you are hereby notified that any discussion of federal tax issues in this presentation is not intended or written to be used, and it cannot be used by any person for the purpose of: (A) avoiding penalties that may be imposed on them under the

Code; and (B) promoting, marketing or recommending to another party any

transaction or matter addressed herein. This disclosure is made in accordance with the rules of Treasury Department Circular 230 governing standards of practice before the Service.