Streamlined Filing Compliance Procedures

Foreign Assets Disclosure and Reporting • Getting to know Streamlined Foreign • Streamlined Programs: Remediation Eligibility Who is a U.S. Taxpayer? Responsibility of US Citizen and Residents Streamlined Domestic Offshore Procedures Who Is Ineligible? Streamlined Foreign Offshore Procedures Trap for the Unwary • FBAR Form 3520 • Form 8865 • Form 8938 • Form 926 • Form 5471 Webinar Overview: & much more!

Who is a U.S. Taxpayer? • U.S. Citizens • Lawful permanent residents – Green Card holder • Those satisfying the substantial presence test of IRC section 7701(b)(3). • To meet this test, a person must be physically present in the United States on at least: • 1. 31days during the current year, and2. 183 days during the 3-year period that includes the current year and the 2 years immediately before that, considering: • All the days a person was present in the current year, and • One -Third (1/3) of the days a person was present in the first year before the current year, and • One - Sixth (1/6) of the days a person in the second year before the current year.

Responsibility of US Citizen and Residents • File income tax returns reporting worldwide income (Form 1040) • File required US international informational tax returns • File FBARs on FinCen Form 114

Foreign Assets Disclosure and Reporting • Form 3520 Annual Return to report transactions with foreign trust and receipt of certain foreign gift • Form 926Return by a U.S Transferor of property to a foreign corporation • Form 5471Information Return of U.S. persons with respect to certain foreign corporations • Form 8865Return of U.S. person with respect to certain foreign partnerships • Form 8621PFICs • FBAR • Form 8938Foreign Financial Assets

Form 3520 Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts • Under IRC 6048, taxpayers must report various transactions involving foreign trusts, including the creation of a foreign trust by a United States person, transfers of property from a United States person to a foreign trust, and receipt of distributions from foreign trusts. • This return also reports the receipt of gifts from foreign entities under IRC 6093F. • The penalty for returns reporting gifts is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.

Form 926 Return by a U.S. Transferor of Property to a Foreign Corporation • Under IRC 6038B, taxpayers must report transfers of property to foreign corporations and other information. • The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.

Form 5471 Information Return of U.S. Persons with Respect to Certain Foreign Corporations • Under IRC $ 6035, 6038 and 6046, certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) must report information. • The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

Form 8865 Return of U.S. Persons with Respect to Certain Foreign Partnerships • Under IRC $ 6038, 6038B, and 6046A, United States persons with certain interests in foreign partnerships must report interests in and transactions of these foreign partnerships, transfers of property to these foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests. • Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency. • The penalty is capped at $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.

FBAR • Who Must Report? • Individuals Must Must File FBARs if they Have: • Financial Interest in, Signatory Authority or Other Authority Over One or More Accounts (Bank Accounts, Brokerage Accounts, Mutual Fund Accounts) in a Foreign Country • Penalty A person who willfully fails to file an FBAR or files an incomplete or incorrect FBAR, may be subject to a civil monetary penalty of $100,000 or 50% of the balance in the account at the time of the violation, whichever is greater. Willful violations may also be subject to criminal penalties.

Form 8938 A specified foreign financial asset (SFFA) is: • Any financial account maintained by a foreign financial institution – Foreign bank accounts – Foreign mutual funds – Foreign hedge funds – Foreign private equity funds – Certain foreign insurance products • Penalty • In general, Form 8938 penalties will be $10,000 per year.

Efforts by IRS • IRS’s latest efforts is to promote tax compliance and to crack down on offshore tax evasion • These program will ease the financial and legal pain for expatriate Americans who live and work abroad • They relax the penalties that a taxpayer with an overseas account might otherwise face for failing to disclose a foreign account What Does the IRS Know? • Never Underestimate What Information The IRS Can Find Out on its Own: • Tax Return Preparer Must Forewarn Clients About the Increasing Breadth of Information That Can Be Gathered by IRS, and Department of Justice (DOJ) on Noncompliant Taxpayers Through Social Media • Foreign Bankers Are Often meticulous in Keeping Notes of Prior Phone Calls and Meetings with Clients or Advisors • No Such Thing as a Secret Account • Taxpayer Must be prepared to Credibly Explain to IRS Why They Failed to Disclose Foreign Accounts and Why They Did Not Make a Voluntary Disclosure?

Streamlined Programs: Remediation Eligibility • Streamlined Programs Initiated in 2012 • Technically Two Programs • Streamlined Domestic Offshore Procedures • Streamlined Foreign Offshore Procedures • Common Theme of Both Programs is Requirement That Taxpayer Certify Under Penalty of Perjury That His Conduct Was Not Willful – Conduct was due to negligence, or mistake or conduct that is the result of good faith misunderstanding of the requirements of the law, accidental failure to report • IRS does not explicitly define “non-willful”. They review each case on an individual basis • Only available to Individual and Estate (Not entities) • Always include a certification narrative (reasonable cause statement) and attach Form 14654 or 14653 • Failed to report foreign financial assets and pay taxes

Streamlined Domestic Offshore Procedures • IRS extended streamline procedure to American Living in the U.S. with undisclosed foreign accounts who previously were ineligible from participating in the streamlined procedure • Such person who come forward now will owe back taxes, interest, and a reduce “miscellaneous offshore penalty” equal to five percent of their undisclosed foreign financial assets. • Taxpayers Residing In US Requires Taxpayer to Have Filed Prior US Tax Returns for Most Recent 3 Years AND • Limited to Filing Amended Returns (No Original Returns Permitted if None Originally Filed), AND • Carries a Potential 5% Miscellaneous Penalty for Unreported Account/Assets

Getting to Know Streamlined Domestic • What must I submit? • For each of the most recent three years for which the U.S. tax return due date – or extended due date - has passed (the "covered tax return period"), file amended tax returns, together with all required information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621); • For each of the most recent six years for which the FBAR due date has passed (the "covered FBAR period"), file any delinquent FBARS; and • Pay a miscellaneous offshore penalty. The full amount of the tax, interest, and miscellaneous offshore penalty should be submitted with the amended tax returns.

Miscellaneous Offshore Penalty for Streamlined Domestic 1. How is the miscellaneous offshore penalty calculated? — It is equal to 5 percent of the highest aggregate balance of the taxpayer’s foreign financial assets that are subject to the penalty during the years in the covered tax return period and the covered FBAR period. 2. How is the highest aggregate balance determined? — By tallying the year-end account balances and year-end asset values of all the foreign financial assets subject to the penalty for each year in the covered tax return period and the covered FBAR period and selecting the highest aggregate balance from among those years.

Streamlined Foreign Offshore Procedures • U.S. taxpayers must satisfy the following requirements: • The applicable non-residency requirement (for joint return filers, both spouses must satisfy the non-residency requirement); and • Have failed to file an FBAR with respect to a foreign financial account; OR foreign investment related informational forms, and • The failure to file an FBAR/Foreign investment related forms must have resulted from non willful conduct. • U.S. Taxpayer living abroad who disclose their foreign accounts and settle their tax bills under Streamlined Foreign Offshore Procedure won’t be charged any penalties. Instead, they will simply owe back taxes and interest. • File 3 years of delinquent or amended tax or information return and pay tax and interest • File 6 years of delinquent FBARs

Up to 365 days in the U.S. in year one (or any other year of the look-back period) • Getting to know Streamlined Foreign (+) • Up to 365 days in the U.S. in year two (or any other year of the look-back period) • At least 330 days (or more) outside of the U.S. in year three (or any year of the look-back period). (+) The non-residency requirement has two strands: • First, the taxpayer must have a non-U.S. abode. • Second, the taxpayer must have lived outside of the U.S. for 330 full days or more in at least one of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) has passed. Satisfaction of non-residency requirement. A helpful formula that illustrates the extreme scenario:

Getting to Know Streamlined Foreign Example #2: • A taxpayer who spends 36 days in the U.S. in year one, 36 days in the U.S. in year two, and 36 days in the U.S. in year three fails the nonresidency requirement. • Why? Because there are 365 days in a year and in no year could he have spent at least 330 days outside of the United States. Instead, the maximum number of days that he spent outside of the U.S. in each year was 329 days, one day shy of the 330-day threshold. • As you can see, the rigid requirements of the nonresidency requirement can play the role of “spoiler” to well intentioned taxpayers wanting to "get right” with the IRS.

Getting to Know Streamlined Foreign Interesting question to ponder: • Is the taxpayer in example 2 who is deemed ineligible for streamlined foreign, eligible for streamlined domestic? • Only if he has filed his U.S. tax returns for each of the most recent three years for which the U.S. tax return due date - or extended due date - has passed (a key requirement for streamlined domestic) • If the taxpayer in example 2 filed U.S. tax returns in two of the most recent three years for which the U.S. tax return due date has passed, but neglected to do so in just one year, not only would he be ineligible for streamlined foreign but he would also be ineligible for streamlined domestic!

Getting to Know Streamlined Foreign • Remaining Requirements • U.S. taxpayer must file delinquent or amended tax returns, together with all required information returns (e.g, Forms 3520, 5471, and 8938) for each of the most recent three years for which the U.S. tax return due date – or extended due date – has passed; and • File any delinquent FBARs for each of the most recent six years for which the FBAR due date has passed.

Polling Question: How Many years of delinquent FBAR needs to be filed in Streamline Compliance Procedure? A. 3 Years B. 6 Years

Streamlined Assets • Streamlined Assets refers to the assets which are reportable either on FBAR or Form 8938. • Some assets like personal real estate investment in foreign country are not included • Other assets such as Canadian RRSP (Registered Retirement Saving Plan) is included on the FBAR and Form 8938 but NOT computed as part of the penalty. (Elect income deferral on retirement plans permitted by Treaty)

IRS Audit and Verification • Returns submitted under either the foreign or domestic offshore procedures are not automatically selected for audit. Instead, they are subject to “verification.” • Through verification, the examining agent can request account statements and other relevant documents to verify the information reported. • However, this does not mean that an examination is impossible. On the contrary, such returns may be selected for audit under the existing audit selection processes applicable to any U.S. tax return • Taxpayers who are eligible to use the streamlined procedures and who follow all of the instructions are not subject to failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, or FBAR penalties, even if their returns are subsequently selected for audit. • First, any previously assessed penalties relating to the years that are selected for audit will not be abated. • Second, to the extent that the IRS determines an additional tax deficiency for a return submitted under these procedures, it can assert additional tax and penalties relating to that additional deficiency. • Finally, the IRS will unleash the full arsenal of penalties if it determines that the original tax noncompliance was due to fraud and/or that the FBAR violation was willful.

IRS Audit and Verification • Tax returns will be processed no different than any other returns submitted to the IRS. Reading between the lines, what the IRS seems to suggest is not to expect confirmation for receipt of the returns. • Assuming a taxpayer's streamlined submission is rejected, the only remaining option for coming into compliance with one's U.S. tax obligations is to file amended 1040s and delinquent international returns in what is known as a “quiet disclosure.” • With respect to the Streamlined Domestic Offshore Procedures, the five-percent miscellaneous penalty is imposed on a broader base of foreign assets - not just those relating to FBAR reporting.

Who Is Ineligible? • Those taxpayers who cannot certify that their failure to report all income, pay all tax, and submit all required information returns was due to nonwillful conduct. • Those taxpayers who are under criminal investigation by IRS Criminal Investigation. • Those taxpayers who are undergoing a civil examination, regardless of whether that examination relates to unreported foreign assets.

Polling Question: Is late filing and late payment penalties applicable for tax returns filed under Streamlined Filing Procedures? A. Yes B. No

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Streamlined Filing Compliance Procedures