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On June 21, 2016 we posted  US Taxpayers Are Receiving Automated $10,000 Penalty Assessments For Late Filed Form 5471's & 5472's - We Can Help! where we discussed that we have been receiving a lot of calls from businesses who have recently received penalty notices regarding late filed or non-filed Form 5471 & 5472's. The Internal Revenue Service imposes an automatic penalty of $10,000 whenever an individual or company is late in filing an information return disclosing their interest in a foreign corporation, regardless of whether there is any associated underreported of income or tax deficiencies.

Now in a recently updated International Practice Unit (IPU), IRS has explained the Code Sec. 6679 penalty for certain U.S. persons that are required to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations, but fail to file, fail to file on time, or file an incomplete form. The IPU includes, among other things, insight as to what constitutes reasonable cause for failing to file.

A Category 2 filer is a U.S. citizen or resident who is an officer or director of a foreign corporation in which a USP has acquired, in one or more transactions:

• . . . stock which meets the 10% stock ownership requirement (described below) with respect to the foreign corporation, or
• . . . an additional 10% or more (in value or voting power) of the outstanding stock of the foreign corporation.

For purposes of both Categories 2 and 3, the stock ownership threshold is met if a USP owns 10% or more of the (i) total value of the foreign corporation's stock, or (ii) total combined voting power of all classes of stock with voting rights. (Reg. § 1.6046-1(a), Reg. § 1.6046-1(c) ). A USP is treated as having acquired stock in a foreign corporation when the person has an unqualified right to receive it. (Reg. § 1.6046-1(f)(1))

A Category 3 filer is:

• . . . A USP who acquires stock in a foreign corporation which, when added to any stock owned on the date of acquisition, meets the 10% stock ownership requirement with respect to the foreign corporation,
• . . . A USP who acquires stock which, without regard to stock already owned on the date of acquisition, meets the 10% stock ownership requirement with respect to the foreign corporation,
• . . . A person who is treated as a U.S. shareholder under Code Sec. 953(c) with respect to the foreign corporation,
• . . . A person who becomes a USP while meeting the 10% stock ownership requirement with respect to the foreign corporation, or
• . . . A USP who disposes of sufficient stock in the foreign corporation to reduce his or her interest to less than the 10% stock ownership requirement. (Code Sec. 6046, Reg. § 1.6046-1(c))

There are a number of exceptions to the filing requirement for Category 2 and 3 filers, including when multiple persons are required to file Form 5471 and applicable schedules with respect to the same foreign corporation for the same period (in which case the form may be jointly filed).

Guidance for examiners. IRS examiners are instructed to determine whether a taxpayer who is required to file Form 5471 in fact filed a timely and accurate form. As noted above, the Form 5471 is due when the USP's income tax return is due, with extensions (and taking into account if the last day for filing was a weekend or legal holiday), and must be filed with that return. If one was not timely filed, or it wasn't complete, then penalties may be asserted unless the failure was due to reasonable cause.

While identifying Forms 5471 that were required, but not filed, for the exam year(s), examiners are instructed to consider reviewing whether similar failures occurred in earlier tax years. The IPU notes that the related income tax returns for the prior years are not required to be under exam to assess penalties under Code Sec. 6679.

There are ways to defend against these automatic assessments and request penalty abatement. These four defenses should be considered when your receive a $10,000 penalty for filing an international information return after the due date.

 

On September 20, 2017, the Eastern District of Pennsylvania issued an important taxpayer friendly opinion regarding the "willfulness" standard in FBAR penalty matters. 

In Bedrosian v. United States, Case No. 2:15-cv-05853-MMB (E.D. Pa., Sept. 20, 2017), the court held that the government had not met its burden in proving that Bedrosian had willfully violated FBAR reporting requirements. 

This opinion could have a major effect on future IRS decisions in the offshore compliance arena and may cause some taxpayers, to seek a more aggressive approach in addressing prior non-compliance.

Bedrosian represents yet another loss, after Pomerantz and Hom, for the government, where the court ruled that the IRS failed to meet the burden for proving a willful FBAR penalty violation.

In U.S. v. Williams, (CA 4 2012),  the Fourth Circuit, overturning the district court's finding, held that the taxpayer was liable for a willful violation the FBAR reporting requirement.

In U.S. v. McBride, (DC UT 2012), the district court found that the taxpayer was liable for a willful violation the FBAR reporting requirement.

In U.S. v. Bohanec, (DC CA 2016) 118 AFTR 2d 2016-6757, the district court found that the taxpayer's failure to timely file a FBAR was willful where, among other things, he refused to give the foreign bank his home address, never informed his tax preparer that the account existed, never asked for any professional advice on any requirements regarding the account, stopped employing a bookkeeper or keeping any books after opening the foreign bank account, and made several misrepresentations under penalty of perjury when he applied to participate in IRS's Offshore Voluntary Disclosure Program (OVDP).

Bedrosian Challenges FBAR Based Upon Illegal Exaction.

An illegal exaction claim involves money that was “improperly paid, exacted, or taken from the claimant in contravention of the Constitution, a statute, or a regulation.” (Norman v. U. S., (Fed. Cir. 2005) 429 F.3d 1081) Where a taxpayer is able to establish that he paid taxes that were improperly collected by the government, he succeeds on such a claim.

Arthur Bedrosian is a U.S. citizen who has had a successful career in the pharmaceutical industry over the past several decades, including as Chief Executive Officer at Lannett Company, Inc., a manufacturer and distributor of generic medications. In the early '70s, he opened a savings account with a bank in Switzerland; at some point, at least as early as 2005, a second account was added.

Throughout the decades that Bedrosian maintained the Swiss accounts, he did not prepare his own tax returns and instead had his accountant do so. Bedrosian did not inform the accountant of the bank accounts until the 1990s, because, he stated, the accountant never asked about them. When informed, Bedrosian indicated that the accountant told him that he had been breaking the law for the past 20 years by not reporting the accounts. He also said that the damage was already done, that Bedrosian should do nothing, and that the issue would be resolved on Bedrosian's death when the assets in the Swiss accounts would be repatriated as part of his estate and taxes would be paid on them then. Based on this advice, as well as his fear that he would be penalized for his years of noncompliance, Bedrosian did not report either Swiss account on his tax returns until 2007, when the accountant died and he hired a new accountant.

Bedrosian filed a federal income tax return for 2007 that reflected, for the first time, that he had assets in a foreign financial account in Switzerland. He also filed a FBAR for the first time in 2007. But, he only reported the existence of one of his Swiss accounts (which had assets totaling approximately $240,000) and did not report the other account (which had assets totaling approximately $2.3 million). Bedrosian did not report any of the income that he earned on either Swiss account on his 2007 return.

Sometime after 2008, the Swiss bank told Bedrosian that it would be providing his account information to the U.S. government. Around this time, prior to the government's initiation of its investigation, Bedrosian hired an attorney to look into his reporting obligations for the Swiss accounts. In August 2010, he filed an amended 2007 federal return on which he reported the approximately $220,000 of income he had earned from the Swiss accounts; he also filed an amended FBAR for 2007, on which he reported both bank accounts. Although Bedrosian took this corrective action before the government began its audit, he did not do so until after IRS had discovered the existence of the two accounts.

IRS initiated its investigation of Bedrosian in April 2011, with a focus on tax year 2008. Beginning then, Bedrosian engaged with IRS cooperatively, providing them with all documentation requested. The investigation culminated in a case panel of IRS agents recommending that Bedrosian be penalized for nonwillful violations of the FBAR reporting requirement and that the case against him be closed. For reasons unclear in the record, the case wasn't closed but instead was re-assigned to another IRS agent, who conducted her own review and concluded that Bedrosian's violation had been willful.

On July 18, 2013, IRS sent Bedrosian a letter stating that it was imposing a penalty for his willful failure to file the FBAR form for tax year 2007. The proposed penalty was $975,789, 50% of the maximum value of the account ($1,951,578), the largest penalty possible under the regs.

Bedrosian filed suit in the district court alleging illegal exaction, i.e., that an unwarranted penalty was imposed on him; IRS counterclaimed for full payment of the penalty, as well as accrued interest on the penalty, a late payment penalty, and other statutory additions to the penalty. Both parties sought summary judgment.

Been Assessed a 50% Willful FBAR Penalty?

 

 

Contact the Tax Lawyers at 

Marini& Associates, P.A. 

 

 

for a FREE Tax Consultation

at: www.TaxAid.com or www.OVDPLaw.com or

Toll Free at 888-8TaxAid (888) 882-9243

The number of calls is likely to spike, if prior tax law changes are any indication. After Congress passed economic stimulus legislation in 2008, the IRS was “deluged” with more than 150 million telephone calls from taxpayers, a 125 percent increase from the previous year, according to the report.

This is a huge problem for people receiving threatening letters from the IRS who want to make arrangements to pay their tax debt. 

and to Call Back Later!  

 

Levying Your Wages or Your Bank Account!

  

Contact the Tax Lawyers at 

Marini & Associates, P.A. 

 

 

for a FREE Tax Consultation

at: www.TaxAid.com or www.OVDPLaw.com or

Toll Free at 888-8TaxAid (888) 882-9243

 

While the name of the 2017 Tax Act was "Tax Cuts and Jobs Act," it doesn't appear like the corporate tax cuts are creating many US Jobs.

The Tax Cuts and Jobs Act was supposed to spur hiring and investment at companies as the maximum corporate tax rate was slashed from 35 to 21 percent, according to Republican proponents. But Democrats point to evidence that many major corporations are instead using the savings to buy back their own stock.

Major corporations have authorized $200 billion in share buybacks in the two months since the passage of the new tax law while more than 55,000 American workers have been laid off, according to Senate Democrats. Democrats slam Republican tax cut for $97 billion wave in corporate share buybacks.

Cisco Systems, for example, announced plans this month to buy back $25 billion in shares, while Wells Fargo said in January it would buy back 350 million shares, valued at $22.5 billion. According to a survey of Morgan Stanley analysts, only 13 percent of tax cut savings will go towards worker compensation, while 43 percent will go to wealthy shareholders and executives via buybacks and dividends. To date, corporations have spent more than 30 times as much on buybacks alone as on bonuses and pay raises.

“Just a few hours ago, corporations crossed the $200 billion mark in stock buybacks this year,” said Sen. Ron Wyden, D-Ore., the ranking Democrat on the Senate Finance Committee, on the Senate floor Wednesday. “Stock buybacks are windfalls that drive up the value of investment portfolios for CEOs and high-flyers. And they’re coming in at a rate 30 times greater than worker bonuses—30 to one! They’re on pace to double the amount from the first quarter of last year.”

He pointed out that the wealthiest 10 percent of earners own 84 percent of all the stock held by Americans. “So when it comes to these buybacks, a huge majority of families are on the outside looking in,” said Wyden. “Moms and dads balancing the rent, the grocery bill, the cost of gas and electricity, they don’t get much of anything out of a corporate handout that gets swallowed up by windfalls for big-time investors.”

“I also got to spend time with local businesses in Wisconsin last week, learning about how the tax reform law is making them better and making them much more competitive. It’s really something,” said House Speaker Paul Ryan, R-Wis., during a press conference Tuesday.

“These small businesses told me that tax reform is enabling them to increase capital investments in their people, in their equipment, in their training. I’ve talked to many business leaders, small businesses who are now confident they can go take a risk and expand employees, expand operations, giving bonuses, giving raises, adding to the benefits. This is what area are seeing all over the country. Wages for hardworking Americans are increasing and paychecks are getting bigger. And this is all thanks to tax reform, and people are actually noticing it.”

Sources:

AccountingToday

CNBC

New York Times