Bitcoin Tax Reporting Requirements

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Bitcoin has been in the news frequently lately, particularly since the collapse of the Japanese-based Bitcoin exchange, Mt. Gox. Bitcoin is a digital currency and peer-to-peer payment system created in 2009. Since 2009, the use of bitcoins has expanded significantly. Bitcoins can be bought and sold for various currencies, generally through a series of online exchanges where participants can bid on bitcoins from individuals or buy them at market price from companies.

The unique characteristics of Bitcoin as a digital currency leaves many questions about tax reporting requirements, such as whether users of Bitcoin must file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR).U.S. taxpayers who have an interest in, or signatory or other authority over a foreign financial account, such as a bank account, securities or other similar foreign accounts must file an FBAR if the aggregate value of the foreign accounts exceeds $10,000 at any time during the calendar year. As of October 1, 2013 the FBAR form must be filed through the Financial Crimes Enforcement Network’s (FinCEN’s) Bank Secrecy Act E-Filing System on or before June 30thof the year following the calendar year being reported. For example, toreport foreign accountsheld open in 2013, the taxpayer must file the FBAR by June 30, 2014.

The first major issue with whether a U.S. taxpayer must file an FBAR on a Bitcoin account is whetherthese accounts qualify as a “financial account” as defined on the FBAR form.  The FBAR instructions define a “financial account” to include “a securities, brokerage, savings, demand, checking, deposit, time deposit, or other account maintained with a financial institution (or other person performing the services of a financial institution).”

FinCEN could deem a Bitcoin account a financial account, particularly since FinCEN has required some exchanges to register as Money Service Businesses.  SeeFIN-2013-G001, “Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies,” March 18, 2013.  Furthermore, bitcoins can be spent like regular currency to purchase items or can be exchanged for various currencies that would be subject to the FBAR requirements if held in a financial account.

On the contrary, significant parallels can be drawn between bitcoins and a safety deposit box holding gold coins.  A user that owns bitcoins can essentially print out the bitcoins on paper and hold them physically, such as holding gold coins in a safety deposit box.  The IRS has stated that a U.S. taxpayer who owns gold coins in a safety deposit box has “direct ownership” of this asset, which means the taxpayer does not need to file an FBAR or a Form 8938, Statement of Specific Foreign Financial Assets (discussed below).  However, if the gold coins are held in an account at a foreign bank, the value of those gold coins, and possibly bitcoins, must be reported on the FBAR and Form 8938.

As discussed above, the U.S. taxpayer who owns bitcoinsmay also be required to file Form 8938, Statement of Specific Foreign Financial Assets with his or her annual tax return, if the Bitcoin accounts are financial accounts.  Whether a taxpayer is required to file this form depends on where the taxpayer lives, the taxpayer’s filing status, and the value in the accounts.  For example, unmarried taxpayers living in the United States must file Form 8938 if the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

Failure to comply with the above reporting requirements can result in steep penalties to the unwitting taxpayer.  Failure to file an FBAR may result in civil penalties for negligence, pattern of negligence, non-willful, and willful violations.  These penalties range from a high penalty for willful violations, equal to the greater of $100,000 or 50% of the balance in the account at the time of violation, to a low penalty of $500 for negligent violations.  For failing to file a correct Form 8938, the taxpayer could face a failure-to-file penalty of $10,000, criminal penalties, and if the failure to file results in underpayment of tax, an accuracy-related penalty equal to 40% of the underpayment of tax and a fraud penalty equal to 75% of the underpayment of tax.

U.S. taxpayers who have bitcoins would benefit from the experienced tax attorneys of the Law Office Of Jeffrey B. Kahn, P.C. representing you to avoid the pitfalls associated with failure to comply with the reporting requirements associated with owing bitcoins.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

What To Look For In Selecting A Tax Attorney For OVDI / FBAR

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With the full enforcement of the Foreign Account Tax Compliance Act (“FATCA”)starting July 1, 2014, all of the foreign banks have been requiring their U.S. account holders to disclose their social security numbers and other information so that the foreign bank may comply with this law and report their U.S. account holders to the IRS and avoidforced withholding on their U.S. investments.  That being the case, there has been an increase in inquiries to our office about going into the Offshore Voluntary Disclosure Initiative (“OVDI”) and filing missed FBAR’s.

In 2009 our firm was one of the first firms to offer assistance to those taxpayers looking to come into compliance under the first OVDI program (that one was called the Offshore Voluntary Disclosure Program or “OVDP”).  Since then a lot more companies have entered into the marketplacewith mass advertising on the internet offering their services to bring taxpayers into OVDI.  But with so many companies listed out there, who do you call?

Four Things You Should Consider In Making Your List Of Attorneys To Call:

  1. Only Deal With Tax Law Firms. Make sure the company is a tax law firm and not a CPA firm.  CPA firms typically do tax filings and other regular tax related stuff.OVDI applications involve legal issues which CPA firms cannot handle.  In addition, CPA’s do not have attorney-client privilege.  That is important because until you are accepted into OVDI, you could be subject to criminal prosecution or civil fraud.  So talk only to an attorney in a tax law firm for OVDI related stuff.
  2. Look At The Tax Law Firm’s Practice Area. Check out the firm’s website to determine the tax attorney’s major practice areas. Do they have information where they talk about FBAR, OVDI and other related stuff? Many of them have that in their blog or news area. That way you knew they have some idea and most likely experience in dealing with such cases.
  3. What Access To The Tax Attorney Is Being Offered. As most of the stuff can be done via email/phone/mail you do not need to be so focused on where the tax law firm is located. Instead be focused on getting access to speak with the tax attorney to get good feeling about your case.
  4. Does The Tax Attorney Offer A Free Initial Consultation? Most of the firms will have free initial phone consultation. Make use of it. If the receptionist answers your call tell you are looking for someone to consult about FBAR and OVDI.  A tax law firm who regularly does this kind of work will hook you up with the tax attorney you need to speak with for a confidential consultation.Some might be available right away but if they are really good at what they do youshould not be dissuaded if youhave to make an for the telephone conference.  Remember that the attorney is setting aside time so that he can exclusively devote full attention to your call. 

Some Things To Consider BEFORE You Make The Call.

Before you start making calls keep the following details handy:

  • Number of foreign financial accounts you have
  • When were they opened
  • The maximum balance at any point of time during each year and yearend balance in each accounts and the total balance of all account for each year. You can use the treasury department exchange rates to determine the $ equivalent.
  • If you haven’t reported the interest in those accounts in your tax returns then details of interest earned in those accounts for each year
  • Whether joint accounts or if anyone else has any authority to deposit or withdraw from those accounts.

What To Ask?

Here are few points

  • Discuss the situation. Let the attorney know that (a) you did not report interest in my foreign accounts and (b) you didn’t file FBAR for the years when the total of your foreign accounts exceeded $10,000. Once you tell that, the attorney should start asking more details and that’s when you will need information I suggested to collect in the above section.
  • The Process. Afterhearing your information, the attorney should suggest what he thinks is best in your case and tell you what the process would be like. If you are offered a free face-to-face consultation where you can see the attorney and let him review your documents(i.e., tax returns, bank statements, etc.), you should accept this offer.
  • Charges & Penalty.  Ask the attorney how bad is your situation. Ask how good the chances of you getting cleared from criminal charges are.  Ask what can be the maximum penalty and how good are chances of getting penalty waived or reduced. Ask what would be his strategy or reasoning to waive or reduce the penalty.
  • Time.  Ask the attorney how long will the entire process take.
  • Price. Ask the attorney what he would charge for the entire process. You should find that firms will either charge based on time spent and costs incurred or a set amount.  For those charging based on time spent and costs incurred, ask the attorney what would be the approximate time and costs. Firms who charge in this manner will usually have different levels of staff whose rates vary based on their level of skill or expertise so you should ask who else would be involved, their rates and impact to the total time charges.  For those firms who offer a set amount, ask what and all will they do and what you will have to do.  Some firms may even offer alternatives that if certain tasks are delegated to you or other third parties such as your accountant, the amount charged by the tax law firm can be less.

How Do You Know Which Tax Attorney Is Best For You?

The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. are highly skilled in handling OVDI cases and can effectively represent you no matter what is the make-up or circumstances of your unreported foreign assets and unreported foreign income.  We will keep you informed step-by-step of the progress in your case and present your case in the best possible way to avoid any pitfalls and gain the maximum benefits conferred by this program.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

Jeff Kahn hosted on Mr Credit ESPN talk show – Mar 12 2014

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Board certified tax attorney Jeffrey B. Kahn discusses the following issues on ESPN’s Mr. Credit.

Aired on March 12 2014

a. The Gingrich-Edwards tax loophole…Am I in danger? http://www.cnbc.com/id/101464691

b. What about this tax return software that seems to be everywhere now? Are these causing people the problems I’m assuming they are causing?

c. How is working with the IRS now that they have been short-staffed for some time? Do you expect things to get worse or better over time?

Do I need to file Form 8938, “Statement of Specified Foreign Financial Assets”?

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In an effort to combat taxpayers who are not reporting income earned on foreign assets, the IRS has implemented a new Form 8938, Statement of Specified Foreign Financial Assets, that beginning with the 2011 tax year must be included with a taxpayer’s Form 1040 if the taxpayer holds specified foreign financial assets with an aggregate value exceeding $50,000.  Prior to 2011, taxpayers had to disclose foreign financial accounts with an aggregate value exceeding $10,000 in a separate filing with the U.S. Treasury using exclusively a form called the Foreign Bank Account Report (“FBAR”).  The FBAR filing requirement still applies even though a taxpayer is now required to include Form 8938 with his or her Form 1040.

The authority for this new form comes from Section 511 of the Hiring Incentives to Restore Employment (HIRE) Act, P.L. 111-147, adding new Sec. 6038D, which states that a specified person who holds an interest in specified foreign financial assets must attach Form 8938 to that person’s income tax return, provided the aggregate value of the person’s foreign financial assets exceeds $50,000. While the minimum threshold for filing a Form 8938 is $50,000.00 in foreign assets, higher asset thresholds apply to U.S. taxpayers who file a joint tax return or who reside abroad. 

The penalty for failure to file Form 8938 is $10,000. If a taxpayer does not file Form 8938 within 90 days of the IRS’s mailing a notice of failure to file the form, an additional penalty of $10,000 is imposed for each 30-day period or part of a 30-day period after the initial 90-day period the failure to file continues, up to a maximum amount of $50,000. In addition to a penalty for failing to file Form 8938, an accuracy-related penalty may be imposed. Taxpayers are subject to a penalty equal to 40% of the underpayment of tax if the underpayment results from a transaction that involved undisclosed specified foreign financial assets. Lastly, taxpayers must pay a penalty of 75% of the underpayment if the underpayment is due to fraud.

You must file Form 8938 if:

1.         You are a specified individual. 

A specified individual is:

  • A U.S. citizen
  • A resident alien of the United States for any part of the tax year
  • A nonresident alien who makes an election to be treated as resident alien for purposes of filing a joint income tax return
  • A nonresident alien who is a bona fide resident of American Samoa or Puerto Rico

AND

2.         You have an interest in specified foreign financial assets required to be reported. 

A specified foreign financial asset is:

  • Any financial account maintained by a foreign financial institution
  • Other foreign financial assets held for investment that are not in an account maintained by a US or foreign financial institution, namely: stock or securities issued by someone other than a U.S. person
  • Any interest in a foreign entity, and
  • Any financial instrument or contract that has as an issuer or counterparty that is other than a U.S. person.

AND

3.         If you live in the U.S. and the aggregate value of your specified foreign financial assets is more than the reporting thresholds that applies to you:

  • Unmarried taxpayers living in the US: The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year
  • Married taxpayers filing a joint income tax return and living in the US: The total value of your specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year
  • Married taxpayers filing separate income tax returns and living in the US: The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

OR

If you live abroad and the aggregate value of your specified foreign financial assets is more than the reporting thresholds that applies to you:

  • You are filing a return other than a joint return and the total value of your specified foreign assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year; or
  • You are filing a joint return and the value of your specified foreign asset is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.

The IRS deems a taxpayer to be living abroad where:

a.         You are a U.S. citizen whose tax home is in a foreign country and you are either a bona fide resident of a foreign country or countries for an uninterrupted period that includes the entire tax year, or

b.         You are a US citizen or resident, who during a period of 12 consecutive months ending in the tax year is physically present in a foreign country or countries at least 330 days.

If you have never reported your foreign investments on your U.S. Tax Returns, you should seriously consider participating in the IRS’s Offshore Voluntary Disclosure Initiative (OVDI).  Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law.  If you are not in OVDI, civil Penalties start at 50% of the value of the foreign assets and you could be subject to criminal charges. Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.

Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in San Francisco, Los Angeles and elsewhere in California qualify you for OVDI.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

U.S. Taxpayers Owning An Interest In A Foreign Entity

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A U.S. taxpayer who holds an interest in a foreign entity may not realize that he or she must comply with complex tax reporting requirements as a result of holding an interest in the foreign entity.  First, a U.S. taxpayer who is a shareholder of a “controlled foreign corporation” (CFC), as defined in 26 U.S.C. § 957, must pay taxes on certain income of the CFC, such as foreign investment income.

A U.S. taxpayer who has a financial interest in a foreign entity may be required to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), if the foreign entity is the owner of record or holder of legal title of foreign accounts, such as bank accounts or stocks, and the aggregate value of the foreign accounts exceeds $10,000 at any time during the calendar year.  As of October 1, 2013 the FBAR form must be filed through the Financial Crimes Enforcement Network’s (FinCEN’s) Bank Secrecy Act E-Filing System on or before June 30th of the year following the calendar year being reported.  For example, to report foreign accounts held open in 2013, the taxpayer must file the FBAR by June 30, 2014.

Whether the U.S. taxpayer is deemed to have a financial interest in a foreign account and thus may be required to file an FBAR to report the entity’s foreign accounts depends in part on the type of entity involved and the taxpayer’s interest in the entity.  The U.S. taxpayer is deemed to have a financial interest in a foreign financial account if the owner of record of legal title is a corporation for which the U.S. taxpayer owns directly or indirectly (i) more than 50% of the total value of shares of stock, or (ii) more than 50% of the voting power of all shares of stock.  If the U.S. taxpayer has either (i) an interest in more than 50% of a partnership’s profits, or (ii) an interest in more than 50% of the partnership capital, then the U.S. person is deemed to have a financial interest in the foreign accounts held by the partnership.  Finally, a U.S. taxpayer is deemed to have a financial interest in a foreign financial account if the owner of record of legal title is any other entity in which the U.S. taxpayer owns directly or indirectly more than 50% of the voting power, total value of equity interest or assets, or interest in profits.  If the U.S. taxpayer falls into one of the above categories, he or she must report the foreign accounts on an FBAR if the aggregate balance exceeds $10,000 at any time during the year.

Certain U.S. taxpayers who own an interest in a foreign corporation may also be required to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations.  Form 5471 gives several categories of persons who must file this form.  For example, a U.S. citizen or resident who acquires stocks in a foreign corporation and the stock interest is either (i) 10% or more of the total value of the foreign corporation’s stock, or (ii) 10% or more of the total combined voting power of all classes of stock with voting rights.  Depending on the category in which the taxpayer falls, he or she may be required to attach additional schedules to the Form 5471.  A taxpayer who may be involved in a foreign partnership must follow similar rules by filing a Form 8865.

In addition to filing the above forms form, the U.S. taxpayer must follow certain reporting requirements on his or her annual tax return.  First, the U.S. taxpayer must include a completed Schedule B, Interest and Ordinary Dividends, with his or her annual tax return.  On Schedule B, the taxpayer will complete Part III, Foreign Accounts and Trusts, which asks whether, at any time in the year, the taxpayer had a financial interest in or signatory authority over a foreign financial account.  Schedule B also asks whether the taxpayer is required to file an FBAR, and if so, in which foreign country the financial account was located.

The U.S. Taxpayer may also be required to file Form 8938, Statement of Specific Foreign Financial Assets with his or her annual tax return.  In the case of holding an interest in a foreign entity, the U.S. taxpayer may list as financial assets, for example, any stocks or securities issued by a foreign corporation and any partnership interest in a foreign partnership.  Whether a taxpayer is required to file this form depends on where the taxpayer lives, the taxpayer’s filing status, and the value in the accounts.  For example, unmarried taxpayers living in the United States must file Form 8938 if the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

Failure to comply with the above reporting requirements can result in steep penalties to the unwitting taxpayer.  Failure to file an FBAR may result in civil penalties for negligence, pattern of negligence, non-willful, and willful violations.  These penalties range from a high penalty for willful violations, equal to the greater of $100,000 or 50% of the balance in the account at the time of violation, to a low penalty of $500 for negligent violations.

The penalties for failing to file a Form 5471 or Form 8865 depend in part on the category of taxpayer, but may include a $10,000 penalty for each failure to file, plus an additional $10,000 per month if the Form 5471 is not filed within 90 days of the deadline.  All taxpayers who fail to file a Form 5471 or Form 8865 also may be subject to criminal penalties and penalties for understating the financial assets.

For failing to report income received from a CFC and failing to file a correct Schedule B and Form 8938, the taxpayer could face a failure-to-file penalty of $10,000, criminal penalties, and if the failure to file results in underpayment of tax, an accuracy-related penalty equal to 40% of the underpayment of tax and a fraud penalty equal to 75% of the underpayment of tax.

U.S. taxpayers who may have a financial interest in a foreign entity would benefit from the experienced tax attorneys of the Law Office Of Jeffrey B. Kahn, P.C. representing you to avoid the pitfalls associated with failure to comply with the reporting requirements associated with owing an interest in a foreign entity.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

Required Disclosures To The IRS Of Indian Accounts – NRE, NRO and PPF

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The U.S. government requires U.S. tax persons to report their “worldwide income” from any source whether it is earned in the U.S. or abroad.  A U.S. tax person includes both U.S. citizens, green card holders and other persons satisfying the substantial presence in the U.S. standard.

Indian nationals residing in the U.S. who hold Indian accounts with an aggregate balance of over $10,000 (U.S.) are required to report those accounts on a Foreign Bank Account Report (“FBAR”).  In addition, any income earned on those accounts need to be included on any U.S. income tax returns.

There are different types of Indian accounts that an Indian national may hold.  A Non-resident Ordinary Account (“NRO”) is an account made for income earned in India.  Income earned on an NRO may be taxed by the Indian government.  There is a limit of $1 million (U.S.) net of taxes that can be repatriated from an NRO in any given year.

A Non-resident External Account (“NRE”) is an account which allows an Indian national to hold income earned outside of India and is not taxed by the Indian government.  There is no limit on the amount that can be repatriated.

Funds held in both NRO’s and NRE’s must be in Indian Rupees.

Taxes paid to the Indian tax authorities for interest income earned from an NRO may be claimed as foreign tax credit on the U.S. tax return to avoid “double taxation”.

Another type of account an Indian national may hold is a Public Provident Fund (“PPF”).  A PPF is savings vehicle that has restrictions on withdrawals and any earnings on a PPF are not taxed by the Indian government.  Only an Indian citizen residing in India may initially open a PPF but if he or she becomes a resident of another country while holding the PPF, he or she may be allowed to hold the PFF under certain circumstances.  While this type of account may be utilized as a retirement fund in India, it is not recognized by the U.S. as a tax-deferred retirement account.  Therefore, the U.S. requires that income on PPF’s be included on an Indian national’s U.S. income tax return.

Recently, the IRS has announced more aggressive efforts in cracking down on Indian account holders, particularly in Northern California.  If you have never reported income from your foreign accounts or foreign investments on your U.S. Tax Returns, you should seriously consider participating in the IRS’s Offshore Voluntary Disclosure Initiative (“OVDI”) which allows taxpayers to come forward to avoid criminal prosecution and not have to bear the full amount of penalties normally imposed by IRS.  Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

Court Authorizes IRS to Issue Summonses for Records Relating to U.S. Taxpayers with Offshore Bank Accounts

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A number of U.S. taxpayers with beneficial ownership and control over funds held in accounts at Zurcher Kantonalbank and its affiliates (collectively, ZKB) in Switzerland, and The Bank of N.T. Butterfield & Son Limited and its affiliates (collectively, Butterfield) in the Bahamas, Barbados, Cayman Islands, Guernsey, Hong Kong, Malta, Switzerland, and the United Kingdom, have admitted failing to report income earned from their offshore accounts on their federal tax returns.  The IRS has reason to believe that other U.S. taxpayers who held or presently hold similar accounts at ZKB, Butterfield, and their affiliates have done the same in violation of federal tax law.  In December 2012, three employees of ZKB were indicted for conspiring with U.S. taxpayers and others to hide at least $423 million from the IRS in secret Swiss bank accounts.

On November 7, 2013, U.S. District Judges in the Southern District of New York entered orders authorizing the IRS to issue summonses requiring Bank of New York Mellon (Mellon) and Citibank NA (Citibank) to produce information about U.S. taxpayers who may be evading or have evaded federal taxes by holding interests in undisclosed accounts at ZKB; and requiring Mellon, Citibank, JPMorgan Chase Bank NA (JPMorgan), HSBC Bank USA NA (HSBC), and Bank of America NA (Bank of America) to produce similar information in connection with undisclosed accounts at Butterfield.

In these actions, the Court granted the IRS permission to serve what are known as “John Doe” summonses on Mellon, Citibank, JPMorgan, HSBC, and Bank of America.  The IRS uses John Doe summonses to obtain information about possible tax fraud by individuals whose identities are unknown.  The John Doe summonses direct these five banks to produce records identifying U.S. taxpayers with accounts at ZKB, Butterfield and their affiliates, including other foreign banks that used ZKB and Butterfield’s U.S. correspondent accounts at Mellon, Citibank, JPMorgan, HSBC, and Bank of America to service U.S. clients.

The information that the banks are required to turn over to the IRS will provide information about individuals using financial institutions from Switzerland to the Cayman Islands to Hong Kong to avoid their U.S. tax obligations.  As the U.S. government is continuing its commitment to uncover and identify taxpayers who tried to hide money overseas as a way to avoid federal taxes, U.S. taxpayers still holding accounts who have not come clean should come forward and do the right thing before it is too late.

Federal tax law requires U.S. taxpayers to pay taxes on all income earned worldwide.  U.S. taxpayers must also report foreign financial accounts if the total value of the accounts exceeds $10,000 at any time during the calendar year.  Willful failure to report a foreign account can result in a fine of up to 50% of the amount in the account at the time of the violation and may even result in the IRS filing criminal charges.

If you have never reported your foreign investments on your U.S. Tax Returns, you should seriously consider participating in the IRS’s Offshore Voluntary Disclosure Initiative (OVDI).  Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law.  Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.

Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in San Francisco, Los Angeles and elsewhere in California qualify you for OVDI.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

HSBC Clients With Asian Accounts Said to Face U.S. Tax Probe

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The Justice Department is conducting a criminal investigation of HSBC Holdings Plc clients who may have failed to disclose accounts in India or Singapore to the IRS.  Already some U.S. taxpayers have received a letter from the Justice Department that said prosecutors had “reason to believe that you had an interest in a financial account in India that was not reported to the IRS on either a tax return or a Treasury Department report disclosing foreign accounts”.  The letter goes on to state “You are advised that you are a subject of a criminal investigation being conducted by the Tax Division. Destroying or altering documents relating to the probe constitutes a serious violation of federal law, including but not limited to obstruction of justice”.

The letters went to U.S. residents who have ties to India, including people who inherited money from relatives or maintained assets there after leaving the country. Some letters referred to undisclosed bank accounts in Singapore.

This probe shows how the U.S. is expanding its crackdown on offshore tax evasion beyond Switzerland its largest bank, UBS. London-based HSBC is Europe’s biggest lender by market value and appears to be IRS’ next big target.  For the IRS to be sending letters to U.S. taxpayers means that prosecutors got data on HSBC account holders from the bank.

UBS avoided prosecution by admitting it aided tax evasion from 2000 to 2007, paying $780 million, and agreeing to disclose secret account data on more than 250 clients. It later agreed to disclose data on another 4,450 clients.  Officials at HSBC are likely cooperating with IRS in releasing data in an effort to avoid the same magnitude of fines that UBS had to pay.

The IRS is placing more than 800 people to analyze data from foreign banks and compare it to what was reported on U.S. taxpayers’ tax returns.  The IRS is also increasing staff in eight overseas offices, including Hong Kong and the IRS is opening offices in Beijing, Sydney and Panama City.

The IRS boasts that they just took down the largest private wealth management bank in the world (UBS).  Do you really think they are going to have trouble doing the next one?  The Asian banks recognize this and do not want to have a UBS-type situation. They want to do it nice and quiet. They don’t want to be the focus of attention. The Department of Justice and IRS are devoting a ton of resources to this issue.

If you have never reported your foreign investments on your U.S. Tax Returns, you should seriously consider participating in the IRS’s Offshore Voluntary Disclosure Initiative (OVDI).  Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law.  Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

Foreign Gifts and Inheritances – When Do You Need to File Form 3520?

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If you receive a gift or inheritance from a foreign person or other foreign entity, you may need to file Form 3520- Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts.

Is it foreign income or a foreign gift or bequest?

The first step in determining if you need to report your foreign gift or bequest to the IRS is to determine if the cash or property received is income or can be characterized as a gift. Income, of course, would be reported as income on your personal income tax return. If there were payments made to you in previous years that should have been characterized as income and you did not report that income on your U.S. income tax returns, you should seriously consider entering into the Offshore Voluntary Disclosure Initiative (OVDI) to avoid the maximum civil penalties and avoid criminal charges Amounts paid for qualified tuition or medical bills on behalf of a U.S. person are not considered gifts or income.   If the money or property received from the foreign person or entity can be rightfully characterized as a gift or bequest, then you need to consider whether you meet the filing thresholds to report the gifts.
What is the value of the foreign gift or bequest?

If during the course of a calendar year:

(a) The value of the gifts and bequests received from a nonresident alien individual or foreign estate, which must also include gifts or bequests received from foreign persons related to the nonresident alien individual or foreign estate, exceeds $100,000, OR

 

(b) The value of the gifts received from foreign corporations or foreign partnerships, which must also include gifts received from foreign persons related to the foreign corporations or partnerships, exceeds $15,102 in 2013, or $15,358 in 2014 (this value is adjusted annually for inflation),

THEN you must file Form 3520.

Where the donor (the person making the gift) is related to another donor, the IRS requires that you must aggregate these gifts to determine whether the filing threshold is met.  For example, if your uncle in Pakistan gives you $50,000 and your aunt in India gives you $60,000 in the same year, the sum of their gifts would mandate that the $100,000 filing threshold was met.   These gifts would be reported on Part IV of Form 3520.

Where and when to file Form 3520?

Form 3520 is filed separately from your income tax return.  The due date for filing Form 3520 is the same as the dues date for filing your federal individual income tax return, including extensions.  The form should be sent to the Internal Revenue Service Center, P.O. Box 409101, Ogden, UT 84409.

There may be penalties if you do not file your Form 3520 or if it is incomplete or inaccurate.  For foreign gifts, you may be subject to a penalty equal to 5%, but not to exceed 25%, of the amount of the foreign gift or bequest for each month for which failure to report continues. For distributions from foreign entities, the penalty is equal to the greater of $10,000 or 35% of the gross value of the distributions from the foreign entity.

U.S. taxpayers who receive a gift or inheritance from a foreign person or other foreign entity would benefit from the experienced tax attorneys of the Law Office Of Jeffrey B. Kahn, P.C. representing you to avoid the pitfalls associated with failure to comply with the reporting requirements associated with the receipt of foreign gifts.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

 

Tax Return Preparers Face IRS Scrutiny and Criminal Prosecution for Assisting in Income Tax Evasion By Not Disclosing Clients’ Foreign Income And Foreign Accounts.

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The U.S. tax laws require that U.S. taxpayers must report their worldwide income, regardless of whether they are living in the U.S. or abroad.  In addition all U.S. taxpayers who have an interest in, or signatory or other authority over a bank, securities or other similar foreign accounts must file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), if the aggregate value of the foreign accounts exceeds $10,000 at any time during the calendar year.

In addition to filing an FBAR form, the U.S. taxpayer must follow certain reporting requirements on his or her annual tax return.  First, the U.S. taxpayer must include a completed Schedule B, Interest and Ordinary Dividends, with his or her annual tax return.  On Schedule B, the taxpayer will complete Part III, Foreign Accounts and Trusts, which asks whether, at any time in the year, the taxpayer had a financial interest in or signatory authority over a foreign financial account.  Schedule B also asks whether the taxpayer is required to file an FBAR, and if so, in which foreign country the financial account was located.

The U.S. Taxpayer may also be required to file Form 8938, Statement of Specific Foreign Financial Assets with his or her annual tax return.  Whether a taxpayer is required to file this form depends on where the taxpayer lives, the taxpayer’s filing status, and the value in the accounts.

Failure to comply with the above reporting requirements can result in steep penalties to the unwitting taxpayer including civil and criminal charges.  When investigating tax evasion, however, the IRS does not limit its inquiries to those who are responsible for paying taxes.

U.S. tax law provides that any person who willfully aids or assists in, counsels, or advises the preparation of a tax return or other IRS document that is fraudulent or false as to any material matter can be charged with a crime. If convicted, this is a three year felony that carries a maximum three year prison sentence and a fine of up to $250,000. An individual does not need to sign the document in question to found guilty of this crime and this statute is often is used to catch tax preparers, accountants, or lawyers who help taxpayers cheat on their taxes. IRC §7206(2).

In June 2012, three managers (David Kalai, Nadav Kalai, and David Almog) of a tax return preparation service called, United Revenue Service (“URS”), were indicted before the United States District Court for the Central District of California.  The indictment alleged that the defendants prepared false individual income tax returns which did not disclose the clients’ foreign financial accounts nor report the income earned from those accounts. If convicted, each defendant faces a maximum of three years in prison for each count and a maximum fine of $250,000 for each count.

This indictment appears to be just the beginning of the Justice Department’s attempts in California to prosecute not only those who have undeclared foreign bank accounts and under- (or un-) reported income to the IRS, but those who have assisted the taxpayers with improperly reducing (or avoiding altogether) their income tax liability to the IRS.

If you are under investigation or have been charged with a crime related to false preparation or false presentation of tax returns or you have just learned from your client that foreign income and foreign bank accounts needed to be reported on tax returns, you should speak with an experienced criminal tax defense attorney at the Law Offices Of Jeffrey B. Kahn, P.C. who can help you determine the most effective course of action.

Description: Protect yourself from loosing your license and being charged with fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in San Francisco, Los Angeles and elsewhere in California defend you from the IRS.