February 2018
Private Client Cross Border News

The following are some articles on international private client matters which we thought would be of interest to you.  
Tax Court's Statute-of-Limitations Ruling Hinders IRS FBAR Investigation

The U.S. Tax Court has dealt a blow to the Internal Revenue Service in the agency's pursuit of tax evaders who fail to file Foreign Bank Account Reporting (FBAR) forms.

The Court looked at whether the six-year statute of limitations outlined in the Tax Code applied to FBARs. FBARs must be filed by individuals who hold more than $10,000 in any foreign held account at any moment throughout the tax year.

The IRS attempted to seek information, and possibly impose penalties, against an individual for tax filings from 2006 to 2008. The taxpayer in question had filed his tax returns in time, but failed to disclose holdings in a foreign bank account.

Although there is typically a three-year statute of limitations for when the IRS can investigate deficient tax filings, in this case, the agency moved to enact Code Section 6038(D) and connected it to Code Section 6501(e)(1)(A)(ii). Code Section 6038(D) requires that an individual file a statement disclosing interests in specified foreign financial assets if their total value exceeds certain thresholds, while Code Section 6501(e)(1)(A)(ii) extends the period for a possible investigation to six years.

The IRS initially filed the notice of deficiency against the individual for the tax years from 2006 to 2008 in December of 2014, believing that the six-year statute would be in effect. However, the Tax Court determined that since Section 6038(D) and 6501 were enacted on March 18, 2010, they could not retroactively be implemented to prosecute a case dating back to before the requirement was put in place.

The ruling meant that the individual did not have to pay additional taxes, and could make the IRS avoid or even rethink its strategy when attempting to find information on individuals with holdings in foreign bank accounts in attempts to recoup taxes owed.

The decision does not, however, preclude the IRS from looking further into an individual's past to detect potential fraud or evasion. Those cases, backed by evidence, allow the IRS to paint a complete picture of any potential wrongdoing for prosecution. In this specific case, no evidence of wrongdoing was found.

The IRS and Department of Justice continue to accelerate their efforts in identifying tax evaders and those who fail to file timely disclosures. They have recently had success in prosecuting individuals who willingly fail to file FBARs. A U.S. resident, originally from Korea, was sentenced in January to six months in prison as well as forced to pay a $14 million fine for failing to report approximately $28 million held in Swiss bank accounts. The settlement came after more than five years of investigation and with cooperation from the individual.
U.S. Taxpayer Advocate Highlights International Tax Issues in Annual Report to Congress

In January, Nina Olsen, the U.S. National Taxpayer Advocate, released her Annual Report to Congress, highlighting a number of areas where the IRS fell short on its obligations in 2017 - or areas where the tax agency should make improvements in 2018. In particular, Olsen singles out concerns with the IRS's passport denial and revocation program and FATCA's lack of a "Same Country Exemption."

Olsen's concerns with the agency's passport denial program centers around its notification procedures. She claims current procedures don't allow for adequate notice and don't provide an opportunity for the delinquent taxpayer to be heard.

The program, which is being rolled out now - and stands to impact thousands of taxpayers - isn't a new concept; it stems from a law passed by Congress in 2015, but is just now being implemented. The program requires that the State Department deny an individual's passport application, or revoke or place limitations on their existing passport, should the IRS deem the individual to be "seriously delinquent" on their federal tax debt. A taxpayer is considered "seriously delinquent" when their federal tax debt exceeds $50,000, adjusted annually for inflation, including assessed interest and penalties.

Under current program procedures, the IRS sends a stand-alone notice to the delinquent taxpayer. The notice certifies the debt as seriously delinquent and explains the passport consequences at the same time, leaving no time for the taxpayer to present their case. The advocate recommends that the process be changed to ensure adequate advance notice by offering a 90-day period for taxpayers residing outside the U.S. and 30 days for those living within the U.S. to be heard. Despite the advocate's recommendations, the program has rolled out as planned.

Meanwhile, the advocate's issue with FATCA carries over from last year's report. Olsen continues to call for a "Same Country Exemption," which would exempt expats from FATCA reporting obligations in the country where they are a "bona fide resident." The move, according to the advocate, would help expats in their efforts to obtain bank accounts and mortgages. She claims the current requirements are too enforcement-heavy and make the assumption that expat taxpayers are purposely evading taxes, ultimately taking a guilty-until-proven-innocent approach. Implementing a Same Country Exemption would help reduce hardships placed on both taxpayers and foreign financial institutions, Olsen says.

Overall, the advocate raises 21 problem areas in her report to Congress - one more than 20 that the report is required to identify - and it appears that her office is starting to put more emphasis on supporting the rights of international taxpayers.

We thank you for taking the time to read our newsletter.  If we can be of service please do get in touch by e-mail or telephone.  


Jack Brister and Alicea Castellanos
Co-Founding Partners
International Wealth Tax Advisors


This e-newsletter is published by International Wealth Tax Advisors, LLC (IWTAs) and is not intended to be, nor should it be used as a substitue fo specific tax advice on any matter or set of circumstances.  It does not purport to be comprehensive or to render tax advice and is solely intended to provide general information for the clients and professional contacts.