WHO TO CONTACT DURING THE LIVE EVENT For Additional Registrations: -Call Strafford Customer Service 1-800-926-7926 x1 (or 404-881-1141 x1) For Assistance During the Live Program: -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN. IMPORTANT INFORMATION FOR THE LIVE PROGRAM This program is approved for 2 CPE credit hours. To earn credit you must: • Participate in the program on your own computer connection (no sharing) – if you need to register additional people, please call customer service at 1-800-926-7926 ext.1 (or 404-881-1141 ext. 1). Strafford accepts American Express, Visa, MasterCard, Discover. • Listen on-line via your computer speakers. • Respond to five prompts during the program plus a single verification code. • To earn full credit, you must remain connected for the entire program. New IRS Foreign Compliance Initiatives: FATCA Accuracy Exams, Offshore Service Providers, 1120F Waiver Processes TUESDAY, FEBRUARY 26, 2019, 1:00-2:50 pm Eastern FOR LIVE PROGRAM ONLY
Transcript
WHO TO CONTACT DURING THE LIVE EVENT
For Additional Registrations:
-Call Strafford Customer Service 1-800-926-7926 x1 (or 404-881-1141 x1)
For Assistance During the Live Program:
-On the web, use the chat box at the bottom left of the screen
If you get disconnected during the program, you can simply log in using your original instructions and PIN.
IMPORTANT INFORMATION FOR THE LIVE PROGRAM
This program is approved for 2 CPE credit hours. To earn credit you must:
• Participate in the program on your own computer connection (no sharing) – if you need to register
additional people, please call customer service at 1-800-926-7926 ext.1 (or 404-881-1141 ext. 1).
Strafford accepts American Express, Visa, MasterCard, Discover.
• Listen on-line via your computer speakers.
• Respond to five prompts during the program plus a single verification code.
• To earn full credit, you must remain connected for the entire program.
New IRS Foreign Compliance Initiatives: FATCA Accuracy
Exams, Offshore Service Providers, 1120F Waiver Processes
TUESDAY, FEBRUARY 26, 2019, 1:00-2:50 pm Eastern
FOR LIVE PROGRAM ONLY
Tips for Optimal Quality
Sound Quality
When listening via your computer speakers, please note that the quality
of your sound will vary depending on the speed and quality of your internet
connection.
If the sound quality is not satisfactory, please e-mail [email protected]
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY
THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY
OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT
MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR
RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
You (and your employees, representatives, or agents) may disclose to any and all persons,
without limitation, the tax treatment or tax structure, or both, of any transaction
described in the associated materials we provide to you, including, but not limited to,
any tax opinions, memoranda, or other tax analyses contained in those materials.
The information contained herein is of a general nature and based on authorities that are
subject to change. Applicability of the information to specific situations should be
determined through consultation with your tax adviser.
THE LB&I CAMPAIGN APPROACH
Identify areas of greatest non-compliance through:
Data analytics
Feedback from the Field
Feedback from the tax community
Deploy resources to areas of non-compliance
Transparent to taxpayers
Focus on mid-market companies
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LB&I CAMPAIGNS
The Campaigns: Fundamentally alter the way that LB&I performs work Focus on narrow areas with the goal of achieving compliance objectives and
making the best use of limited resources Aim to improve communication within LB&I by including Executive Lead in
feedback loop
These campaigns primarily feature issue-based examinations, but sometimes also employ other compliance processes, including so-called “soft letters.”
To date, LB&I has initiated approximately 50 campaigns, about half of which involve foreign issues. The latest announcement was on October 30, 2018, which identified 5 additional campaigns; 3 of which involve foreign issues: Offshore Service Providers FATCA Filing Accuracy 1120F Delinquent Returns
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PRIOR LB&I CAMPAIGNS WITH FOREIGN ISSUES –INDIVIDUAL
Denied or withdrawn - qualified applicants should reapply 1. Soft Letters (Letter 4935) giving
streamline and other options, requesting
filing of Form 15023 in response
2. Issue-based exams
Swiss bank program
campaign
Using information obtained in the US Department of
Justice Swiss Bank Program, the IRS will verify compliance
by identified US persons with reporting of beneficial
ownership of foreign financial accounts.
Variety, including exams
Forms 3520 / 3520-A IRS wants to improve compliance with respect to timely
and accurate filing of these returns related to ownership of
and transactions with foreign trusts.
Examinations and penalties assessed by
the campus when forms are late or
incomplete
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LB&I NEW FOREIGN CAMPAIGNS
Campaign Description Treatment stream
Form 1120-F
Delinquency and
Waiver
Encourage foreign entities to timely file Forms
1120-F and address compliance risk for
delinquent Forms 1120-F.
1. Soft Letter (Letter 5958)
2. Examinations
FATCA Accuracy
Initiative
Focus on FFIs and NFFEs who do not meet
FATCA filing obligations.
Variety, including “termination of the FATCA
status.”
Offshore Service
Providers
TPs who engaged offshore service providers to
create entities and tiered structure to conceal
beneficial ownership of accounts and assets for
purposes of tax evasion
Issue-based examinations
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1120-F Delinquent Returns Campaign
“The objective of the Delinquent Returns Campaign is to encourage foreign entities to timely file Form 1120-F returns and address the compliance risk for delinquent 1120-F returns. This is accomplished by field examinations of compliance risk delinquent returns and external education outreach programs. The campaign addresses delinquent-filed returns, Form 1120-F U.S. Income Tax Return of a Foreign Corporation.”
“Form 1120-F must be filed on a timely basis and in a true and accurate manner for a foreign corporation to claim deductions and credits against its effectively connected income. For these purposes, Form 1120-F is generally considered to be timely filed if it is filed no later than 18 months after the due date of the current year's return. The filing deadline may be waived, in situations based on the facts and circumstances, where the foreign corporation establishes to the satisfaction of the commissioner that the foreign corporation acted reasonably and in good faith in failing to file Form 1120-F per Treas. Reg. Section 1.882-4(a)(3)(ii). LB&I Industry Guidance 04-0118-007 dated 2/1/2018 established procedures to ensure waiver requests are applied in a fair, consistent and timely manner under the regulations.”
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1120-F DELINQUENCY AND WAIVER CAMPAIGN
LB&I has data suggesting that many companies doing business in the U.S. are not meeting their filing obligations
LB&I is planning to use in-house data from audits of related taxpayers, as well as various external data sources, to identify companies who do not meet their filing obligations
Initial approach will involve a “soft letter” outreach
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Delinquent 1120-F – Disallowance of Deductions
Foreign corporations are generally required to file Form 1120-F tax returns reporting ECI.
Generally, foreign corporations can arrive at net taxable income by taking into account the same set of deductions and credits that are available to domestic corporations.
However, if the Form 1120-F is filed more than 18 months after the due date of the tax return, section 882(c)(2) disallows the deductions.
If there is an issue as to whether there is a filing requirement (ECI), it is possible to file a protective return (check box on 1120-F), which will preserve the right to deductions and credits in the event that TP is determined to have ECI for the year.
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Delinquent 1120-F – Protective Returns and Treaty Positions
Under Treas. Reg. § 1.882-4(a)(3)(vi), a foreign corporation that conducts limited activities in the U.S. that it determines do not give rise to ECI may nonetheless file a return for the taxable year on a timely basis under Treas. Reg. § 1.882-4(a)(3)(i) to protect its right to receive the benefit of deductions and credits if it is later determined that the determination of no ECI is incorrect. The return does not need to report any gross income as ECI or any
deductions or credits, but should include a statement that the return is being filed to protect the foreign corporation’s right to deductions and credits.
A foreign corporation may follow the same procedure if it determines initially that it has no U.S. tax liability under the provisions of an applicable income tax treaty. If a FC is claiming it does not have a permanent establishment in the U.S.
under a treaty, it must generally disclose that position on Form 8833. Failure to attach a Form 8833 to a Form 1120-F may lead to the imposition
of a penalty in the amount of $10,000/year. Section 6712.
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Delinquent 1120-F – Waiver of Disallowance
Section 1.882-4(a)(3)(ii) of the Treasury Regulations provides that a late-filing foreign corporation may request a waiver from the IRS that would allow the corporation to take the otherwise disallowed deductions and credits into account if the IRS determines that the TP acted with reasonable cause and in good faith in failing to timely file a return.
On February 1, 2018, LB&I issued a memorandum (LB&I-04-0218-0007) providing guidance for handling delinquent Forms 1120-F and waiver requests. This guidance will be incorporated into the Internal Revenue Manual
at IRM 4.61, International Program Audit Guidelines.
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Delinquent 1120-F – Waiver Guidance
If the foreign corporation cooperates in the process of determining its income tax liability for the year for which the return was not filed, the Examiner is to consider the following factors set out in § 1.882-4(a)(3)(ii)(A) to (F) in determining whether to recommend a waiver: Whether the corporation voluntarily identifies itself to the Internal Revenue
Service as having failed to file a U.S. income tax return before the Internal Revenue Service discovers the failure to file;
Whether the corporation did not become aware of its ability to file a protective return (as described in paragraph (a)(3)(vi) of this section) by the deadline for filing a protective return;
Whether the corporation had not previously filed a U.S. income tax return; Whether the corporation failed to file a U.S. income tax return because, after
exercising reasonable diligence (taking into account its relevant experience and level of sophistication), the corporation was unaware of the necessity for filing the return;
Whether the corporation failed to file a U.S. income tax return because of intervening events beyond its control; and
Whether other mitigating or exacerbating factors existed.
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Delinquent 1120-F Guidance
Taxpayer Not Under Exam. LB&I Revenue Agents are instructed not to accept delinquent 1120-F returns directly from taxpayers who are not under exam (inform FC to file in normal way) and not to discuss the possibility of a waiver being granted.
Taxpayers Under Exam. Assuming exam determines that a Form 1120-F is delinquent, if a waiver is requested, it should be evaluated. If there is no waiver request on file, FC should be informed of the option to request a waiver.
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Delinquent 1120-F Guidance – Decision on Waiver Request
Exam Team, along with Territory Manager, makes recommendation
Authority to grant/deny a waiver request has been delegated to LB&I Deputy Commissioners and the two CBA Directors of Field Operations (DFO)
All proposed grants/denials are provided to an independent “Waiver Committee,” which is composed of executives and charged with reviewing proposed denials for consistency.
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1120-F Soft Letter – Letter 5958 (Part 1)
Dear:
Re: [name, address and TIN (if any) of foreign corporation]
Our records show that during [2015] the foreign corporation named above engaged in transactions within the United States that might constitute the conduct of a U.S. trade or business. If it was engaged in a U.S. trade or business during [2015], your corporation should have filed Form 1120-F, U.S. Income Tax Return of a Foreign Corporation, whether or not it had a net profit in that year, and should have paid:
the corporation income tax on any income effectively connected with that trade or business, and
any branch profit taxes for which it is liable by reason of conducting a U.S. trade or business during [2015].
Note: If your corporation doesn’t follow a calendar year filing, then it may be required to file more than one annual Form 1120-F for its taxable years that include portions of [2015].
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1120-F Soft Letter –Form 5958 (Part 2)
If during [2015] your corporation maintained an office or place of business in the United States, you were required to file Form 1120-F by the 15th day of the 3rd month after the end of your tax year. If during [2015] you were engaged in a U.S. trade or business and your corporation didn’t maintain an office or place of business in the United States, then you should have filed Form 1120-F by the 15th day of the 6th month after the end of your tax year.
If your corporation conducted limited activities in the United States and you determined that such activities didn’t result in gross income that was effectively connected with the conduct of a trade or business within the United States, you may nonetheless file a return for that tax year on a timely basis. By doing so, your corporation may protect its right to receive the benefit of deductions and credits attributable to any gross income if it is later determined that its original determination was incorrect. A statement indicating that the return is being filed for this reason (is a "protective return") should be included with the return.
If your corporation qualified for an exemption from paying tax under an income tax treaty, you must still file a Form 1120-F and attach a Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b).
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1120-F Soft Letter – Letter 5958 (Part 3)
We don’t have a record that you filed either of the above forms. Therefore, we need you to verify whether you filed those or any other applicable tax forms for the year of January 1 to December 31, [2015]. Provide us copies of any of the forms listed below, including proof of mailing and the amount of taxes paid, if any, within 45 days from the date of this letter.
Form 1120-F, U.S. Income Tax Return of a Foreign Corporation Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns
Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return Form 941, Employer's QUARTERLY Federal Tax Return Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or
7701(b)
If you haven’t filed any required forms (e.g. 1120-F, 8833, etc.), attach the completed forms to a copy of this letter and return them to us. If the address that we have on file for your corporation and have used above is incorrect, please provide us with the correct address so we can update our records. If you don’t believe your corporation is required to file a Form 1120-F, attach a detailed explanation to this letter and return it to us.
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1120-F Soft Letter – Letter 5958 (Part 4)
We have enclosed a self-addressed envelope for your convenience and a copy of this letter for your records. Please include payment for any tax due, plus interest as provided by law. For more information, see Tax Topic 653, IRS Notices and Bills, Penalties, and Interest Charges, at www.irs.gov/taxtopics.
We’re sending you this as an inquiry. This inquiry is not an audit of your tax return, or of your failure to file one. If we don’t receive a response from you within 45 days from the date of this letter, either in writing or by phone, we may take further action, which could include initiating an audit based solely on the information we have received to date.
If you have questions, contact the person listed at the top of this letter. You may call us at the contact telephone number listed above (not a toll-free call) or, if you prefer, you can write to the return address above.
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Offshore Service Providers Campaign
“The focus of this campaign is to address U.S. taxpayers who engaged Offshore Service Providers that facilitated the creation of foreign entities and tiered structures to conceal the beneficial ownership of foreign financial accounts and assets, generally, for the purpose of tax avoidance or evasion. The treatment stream for this campaign will be issue-based examinations.”
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OSPs– Other Sources of Information: Insiders/Whistleblowers/the Press
In 2008, the German government paid $6 million to a LGT Bank employee for a computer disk with 1,400 depositor names, leading to investigations in Germany, UK, Canada, Spain, and the U.S.
International Consortium of Investigative Journalists (ICIJ) Panama Papers (Mossack Fonseca law firm – 11.5 million docs) 2016;
Paradise papers (Appleby law firm in Bermuda, Asiaciti trust service co.) in 2017 and 2018;
Offshore Leaks (122,000 offshore companies, 12,000 intermediaries), primarily in BVI, Cook Islands, and Singapore; entities incorporated through Portcullis and Commonwealth Trust Limited (2013);
Bahamas Leaks (1.3 million files, 38 GB, 175,000 companies) from corporate registry of the Bahamas in 2016;
Lux Leaks (complicated structures mostly for multi-nationals).
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OSPs – Example of IRS Use of Leaked Data
In LaRue v. U.S., No. 3:15-cv-00705, (D. Or. Dec. 22, 2015), the IRS issued a Formal Document Request (FDR) to the LaRues. The IRS sought documents related to foreign trusts, entities, and accounts potentially related to the federal income tax liabilities of Petitioners for 1997 through 2009 and 2011 through 2013.
The IRS claimed “that the petitioners used Portcullis Trustnet Group to facilitate a scheme where the petitioners set up offshore trusts to improperly avoid U.S. income tax.”
Portcullis Trustnet Group is one of the offshore service providers identified in the ICIJ database, and LaRue could be linked to a Cook Islands trust via publicly available documents on the ICIJ website.
The LaRues filed a petition to quash the FDR and the IRS filed a motion to deny the petition to quash.
On December 22, 2015, the court granted the IRS’s motion to deny the petition to quash the FDR.
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OSPs – Sources of Information: Treaties, TIEAs &International Cooperation
Treaty Requests or Tax Information Exchange Agreements (TIEA) The U.S. has issued John Doe summonses on behalf of some Treaty
partners (Norway, the Netherlands), and some partners may be in a position to reciprocate.
In June of 2018, the U.S., U.K., Canada, Australia, and the Netherlands formed new “Joint Chiefs of Global Tax Enforcement.” (J5) Focus includes enablers as well as cypto-/cyber-crime
On the criminal side of the IRS, the new (2017) National Coordinated Investigations Unit (NCIU) has proven successful, and one of its focuses is international tax enforcement.
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OSPs – Potential Source of Information: Exchange of Information – TIGTA Report
Dated September 11, 2017, Ref. No. 2017-30-077 Goals of EOI Program:
Carry out effective Exchange of Information in a timely manner in accord with Treaties and other international instruments;
Assist examiners and investigators in securing tax info from other countries;
Follow disclosure laws re: taxpayer info;
EOI Program does not publish business results due to restrictions under section 6105.
TIGTA looked at: Automatic Exchange of Information (AEOI) Program – regular and
systemic; Mutual Collection Assistance Request (MCAR) Program – U.S. and other
countries collecting each other’s taxes; Spontaneous Exchange of Information Program.
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OSPs – Potential Sources of Information: Automatic Exchange of Information (TIGTA)
Generally FDAPI-type info (interest, dividends, etc.) TIGTA analyzed receipt of AEOI data – 2011 to 2015 Received data from 28 countries (OECD members):
7 of the 28 sent data every year; 6 of the 28 sent data for four years; 8 of the 28 sent data for three years; 4 of the 28 sent data for two years; and 3 of the 28 sent data for just one year.
IRS Spent $2.5 million to process and upload data into searchable database, but some records cannot be uploaded/searched.
In 2012, IRS paused AEOI to update processes IRS employs in evaluating whether exchange partners have appropriate legal framework to safeguard exchanged info.
U.S. AEOI remained paused until at least 2016. Seven treaty partners paused after 2012 or 2013 in light of the
reciprocal nature of the obligations.
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OSPs – Potential Source of Information: Issues with AEOI Data (TIGTA)
AEOI Data Not Widely Shared Only a small number of IRS employees have access to data
36 RAs (only one from LB&I GHW Group) 25 ROs (7 from SB/SE International Collection group)
TIGTA recommends broader access for groups with high-wealth/international area – change likely coming
IRS Fails to Circle Back When Data Fails to Upload TIGTA identified 5 countries where the IRS failed to upload
80% of the data received (47.5% to 76%)
Some data appears to be unfindable despite records indicating that it had been uploaded (309,559 records from 2 countries)
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OSPs – Potential Source of Information: Spontaneous Exchange of Information (TIGTA)
Incoming – reviewed by analysts (only one analyst available from September 2015 forward) or CI
New Criteria in 2016: Most incoming routed to appropriate divisions/functions
Exception: LB&I Business Compliance Group – only accepted if potential tax adjustment of $500,000 or more (or $200,000 for non-filers)
Still working out kinks: 22 of 46 forwarding memos in the January to April 2016 timeframe contained errors about underlying information
New protocol for translations (Advance Pricing group for short docs and W&I Multilanguage Office for longer docs)
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OSP – Potential Source of Information: FinCEN’s Targeted GTOs
FinCEN has issued Geographic Targeting Orders (GTOs) requiring U.S. title companies to identify the natural person(s) behind shell companies used to pay for high-end real estate (without a bank loan) covering several metropolitan areas. Initially issued in January 2016; updated in: July, 2016, February, 2017, August 2017, and most recently on
November 15, 2018.
What is covered? Residential real property, designed for occupancy of 1-4 families; Any part of purchase price paid by currency, cashier’s check, certified check, traveler’s check, personal or
business check, money order, funds transfer, or virtual currency (new!).
Who must be identified? Any person owning 25% or more of purchasing entity.
Title companies can rely on purchaser or representatives of purchaser.
Current coverage – amount of purchase more than $300,000: NY – Manhattan, Brooklyn, Queens, Bronx, Staten Island FL – Miami-Dade, Broward, and Palm Beach Counties CA – Los Angeles, San Diego, San Francisco, San Mateo, and Santa Clara counties TX – Bexar (San Antonio), Dallas, and Tarrant (Fort Worth) counties HI – City and County of Honolulu NV – Clark County (Las Vegas) WA – King County (Seattle) IL – Cook County (Chicago) MA – Suffolk and Middlesex Counties (Boston)
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OSPs – Potential Source of Information: G5 Beneficial Ownership Initiative
On April 14, 2016, five European Union countries (G5) announced the start of a pilot initiative for automatic exchange of information on beneficial ownership in order to provide tax and other authorities with complete information.
The G5 commit to establishing registers for the reporting of the beneficial owners of companies, trusts, foundations, shell companies, and other relevant entities. Arrangements should also be identified and available for tax administration and law enforcement authorities. The G5 sent a letter calling on all other jurisdictions to do so.
To be effective, as with the CRS, the exchange should be on a global basis. Hence, the letter, which was sent to the G-20 ministers, solicited their support of this initiative. The letter called on the OECD, along with the FATF, to prepare a new, single global standard for the exchange of beneficial ownership info. The standard should cover “the robust identification of beneficial ownership, the range of entities and arrangements which should be covered by such an exchange, timing of the exchange and wider exchange procedures.”
54 countries have committed to help develop the beneficial ownership standard.
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OSPs – Potential Source of Information: Congressional Investigations
The Senate Permanent Subcommittee on Investigations engaged in an investigation of offshore tax shelters in 2006. Tax Haven Abuses: The Enablers, The Tolls and Secrecy, August 1, 2006. Led to significant civil securities and tax claims against the
Wyly brothers (owners of Michael’s Stores). See In re Wyly, Bankr. N.D. Tex., No. 14-35043 BJH.
Also led to criminal charges against principals of Seattle-based Quellos Group, who were working with groups in the UK and IOM. United States v. Greenstein, W.D. Wash. No. 08-cr-00296 RSM.
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Matthew D. Lee is a former U.S. Department of Justice trial attorney who concentrates his practice on white collar criminal defense, government investigations, and federal tax controversies.
Mr. Lee represents businesses and individuals in all stages of proceedings before the Internal Revenue Service, including audits, appeals, and collections, and Tax Court and district court litigation. He also 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 Offshore Voluntary Disclosure Programs. He has represented hundreds of U.S. taxpayers with undisclosed foreign financial assets. Mr. Lee has published numerous articles regarding the IRS voluntary disclosure programs and FBAR and FATCA reporting obligations and speaks frequently on these topics.
Mr. Lee also conducts corporate internal investigations and advises 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 represents companies and individuals in criminal investigations involving tax, money laundering, health care, securities, FCPA, public corruption, and fraud offenses, and has significant experience in handling all stages of federal litigation including trials and appeals.
Mr. Lee is the author of Foreign Account Tax Compliance Act Answer Book (Practising Law Institute) and publishes a blog entitled Tax Controversy and Financial Crimes Report (https://taxcontroversy.foxrothschild.com).
• Offshore Voluntary Disclosure Program (OVDP) ended on September 28, 2018, following highly successful 2009, 2011, and 2012 programs:
– Provided participating taxpayers with amnesty from criminal prosecution by filing of amended tax returns and payment of taxes, interest, and penalties.
– More than 56,000 voluntary disclosures since 2009 (versus 100 on average annually under traditional voluntary disclosure program).
– More than $11.1 billion in back taxes, interest, and penalties collected.
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New Voluntary Disclosure Regime
• Announced November 20, 2018.
• Applies to both offshore and domestic voluntary disclosures ocurringpost-September 28, 2018.
• Six-year covered period.
• New penalty framework: • Civil fraud penalty will ordinarily be applied for to the one year with the
highest tax liability (but could apply to all six years).
• Willful FBAR penalties will apply for undisclosed offshore assets, subject to mitigation guidelines in IRM.
• Taxpayers have the right to request Appeals Conference.
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LB&I CAMPAIGN – FATCA FILING
ACCURACY
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FATCA and the End of Tax Havens
and Banking Secrecy
• Anti-tax evasion law passed by Congress in 2010
• Became fully effective July 1, 2014
• Requires foreign financial institutions (FFIs) to annually disclose account information regarding U.S. customers or face 30% withholding tax/penalty on U.S.-source payments
• Despite some initial controversy, FATCA has been largely embraced globally
• Three primary obligations of FFIs under FATCA:
– Due diligence on existing and new customers;
– Annual reporting of U.S. customers;
– Withholding.
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Current Status of FATCA Implementation
• Intergovernmental Agreement implementation:– 113 jurisdictions with IGAs signed or agreed to in substance
• The overall purpose of FATCA is to detect, deter and discourage offshore tax abuses through increased transparency, enhanced reporting and strong sanctions. Foreign Financial Institutions and certain Non-Financial Foreign Entities are generally required to report the foreign assets held by their U.S. account holders and substantial U.S. owners under the FATCA.
• This campaign addresses those entities that have FATCA reporting obligations but do not meet all their compliance responsibilities.
• IRS will address noncompliance through a variety of treatment streams, including termination of FATCA status.
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FATCA Responsible Officers
and Compliance Obligations
• Each participating FFI is required to adopt a compliance program under the authority of a responsible corporate officer (known as a “FATCA Responsible Officer”).
• Compliance program must include policies, procedures, and processes sufficient for the participating FFI to satisfy the due diligence, reporting, and withholding requirements of FATCA.
• Each participating FFI must undertake periodic reviews of its compliance and must certify such compliance to the IRS.
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FATCA Compliance Certifications
• Certification of Preexisting Accounts:– Addresses whether FFI had any formal or informal practices to assist
account holders in avoidance of Chapter 4 reporting.
– In most cases, this was due by December 15, 2018.
• Periodic Certification of Effective Internal Controls:– Each certification period is three years.
– Due by July 1 following conclusion of each certification period.
– In most cases, this was due by December 15, 2018.
• Draft version of certification forms available at https://www.irs.gov/businesses/corporations/draft-fatca-certifications.
• The RO must certify that to the best of the RO’s knowledge, after conducting a reasonable inquiry, the FFI did not have any formal or informal practices or procedures in place from August 6, 2011, through the date of such certification to assist account holders in the avoidance of FATCA.
• A reasonable inquiry for this purpose is a review of the participating FFI’s procedures and a written inquiry, such as email requests to relevant lines of business, that requires responses from relevant customer on-boarding and management personnel as to whether they engaged in any such practices during that period.
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Certification of Preexisting Accounts
• Practices or procedures that assist account holders in the avoidance of FATCA include, for example, any of the following:
– Suggesting that account holders split up accounts to avoid classification as a high-value account;
– Suggesting that account holders of U.S. accounts close, transfer, or withdraw from their account to avoid reporting;
– Intentional failures to disclose a known U.S. account;
– Suggesting that an account holder remove U.S. indicia from its account information; or
– Facilitating the manipulation of account balances or values to avoid thresholds.
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Periodic Certification
• The FATCA Responsible Officer must certify:– The RO (or designee) has established a compliance program that is in
effect as of the date of the certification and that has been subjected to periodic review by the RO (or designee);
– With respect to material failures: (a) there are no material failures for the certification period; or (b) if there are any material failures, appropriate actions were taken to remediate such failures and to prevent such failures from reoccurring; and
– With respect to any failure to withhold, deposit, or report to the extent required under the FFI agreement, the FFI has corrected such failure by paying any taxes due (including interest and penalties) and filing the appropriate return (or amended return).
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Periodic Certification
Specific Questions
• Were there any material failures that occurred during the certification period?
• Were there any events of default during the certification period?
• Examples:– Deliberate or systemic failure to report U.S. accounts;
– Deliberate or systemic failure to deposit taxes withheld;
– Deliberate or systemic failure to accurately report recalcitrant account holders;
– Imposition of a criminal or civil penalty or sanction with respect to anti-money laundering compliance;
– Establishment of tax reserve or provision for a potential future tax liability relating to FATCA compliance;
– Failure to perform material obligations required under FATCA with respect to due diligence, verification, withholding, or reporting.
– Failure to obtain waiver of foreign law to permit reporting of U.S. accounts;
– Failure to significantly reduce the number of recalcitrant account holders;
– Making incorrect claims for refund under the collective refund procedures; and/or
– Failure to undertake timely corrective actions to remedy a material FATCA failure.
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The Criminalization of FATCA?
• The Justice Department is using efforts to evade FATCA disclosures as premise for money laundering and other charges against promoters and enablers.
• United States v. Robert Bandfield et al. (2015 E.D.N.Y.)– Individuals and offshore entities charged with securities fraud and money
laundering involving an offshore “pump and dump” securities scheme– Paragraph 21 of indictment alleges that the defendant “defraud[ed] the
United States by impeding, impairing, obstructing and defeating the lawful governmental functions of the IRS in the ascertainment, computation, assessment and collection of revenue, specifically federal income taxes under, inter alia, FATCA; and . . . laundering money by facilitating financial transactions to and from the United States, which transactions involve proceeds of fraud in the sale of securities.”
Oct. 5, 2018 | ABA Tax Section Fall Meeting, Atlanta -Transparency Tide or Transparency Tsunami?
• United States v. Chris Messalas (2017 E.D.N.Y)– Two defendants were alleged to have engaged in a conspiracy to
launder approximately $2 million in proceeds of a “pump and dump” securities fraud scheme by depositing shares into offshore accounts in the names of nominees in locations including Cyprus and the Bahamas.
– The scheme was designed to launder a portion of the fraudulent proceeds from the stock manipulation scheme from the United States through offshore accounts, and circumvent reporting requirements under the Foreign Account Tax Compliance Act.
Oct. 5, 2018 | ABA Tax Section Fall Meeting, Atlanta -Transparency Tide or Transparency Tsunami?
• On September 12, 2018, Adrian Baron, former CEO of Loyal Bank Ltd., an offshore bank, pleaded guilty in federal court to conspiracy to defraud the U.S. by failing to comply with FATCA. He was extradited from Hungary in July 2018 and served approximately 6 months in U.S. prison.
• According to court documents, in June 2017, an undercover agent met with Baron and explained that he was a U.S. citizen involved in stock manipulation schemes and was interested in opening multiple corporate bank accounts at Loyal Bank.
• The undercover agent informed Baron that he did not want to appear on any of the account opening documents for his bank accounts at Loyal Bank, even though he would be the true owner of the accounts. Baron responded that Loyal Bank could open such accounts and provide debit cards linked to them.
Oct. 5, 2018 | ABA Tax Section Fall Meeting, Atlanta -Transparency Tide or Transparency Tsunami?
• In July 2017, the undercover agent again met with Baron and described how his stock manipulation scheme operated, including the need to circumvent the IRS reporting requirements under FATCA.
• During the meeting, Baron stated that Loyal Bank would not submit a FATCA declaration to regulators unless the paperwork indicated “obvious” U.S. involvement.
• Subsequently, in July and August 2017, Loyal Bank opened multiple bank accounts for the undercover agent. At no time did Baron or Loyal Bank request or collect FATCA information from the undercover agent.
Oct. 5, 2018 | ABA Tax Section Fall Meeting, Atlanta -Transparency Tide or Transparency Tsunami?
