The List of High Penalty Banks Expands to Twelve

We’ve blogged often about the IRS Offshore Voluntary Disclosure Program (check the index for a full list).  One of recurring topics has been that since the IRS reserves the right to make changes to the details of the program, it is likely in taxpayers’ best interest to look into the OVDP sooner rather than later.  Already once since the program began, for example, the IRS has increased the penalty rate paid by those participating in the program.

One change the IRS has made to the OVDP since its inception is to identify situations in which taxpayers pay a higher penalty than the norm for the OVDP.  The current OVDP penalty rate is 27.5%.  By comparison, the penalties for failure to disclose foreign accounts or assets outside of the program can be as high as 50% and can involve criminal charges and possible jail time.  In some cases, in the so-called streamlined OVDP, which is available only for taxpayers whose failure to report was unwillful, the penalties are lower, but the standard for the program is currently 27.5%.  In the case of certain banks, however, the penalty even in the OVDP is 50%.  Specifically, if a taxpayer in the OVDP has undisclosed accounts at any of the banks on the IRS’s list, they incur the increased penalty on all their accounts, not just those at the specific institution.  Participation in the program still prevents criminal prosecution.

Ten of these banks have been on this list since August 2014.  The IRS recently added the final two, bringing the total to the following twelve banks:

  1. UBS AG
  2. Credit Suisse AG, Credit Suisse Fides and Clariden Leu Ltd.
  3. Wegelin & Co.
  4. Liechtensteinische Landesbank AG
  5. Zurcher Kantonalbank
  6. swisspartners Investment Network AG, swisspartners Wealth Management AG, swisspartners Insurance Company SPC Ltd. and swisspartners Versicherung AG
  7. CIBC FirstCaribbean International Bank Limited, its predecessors, subsidiaries and affiliates
  8. Stanford International Bank, Ltd., Stanford Group Company and Stanford Trust Company, Ltd.
  9. The Hong Kong and Shanghai Banking Corporation Limited in India (HSBC India)
  10. The Bank of N.T. Butterfield & Son Limited (also known as Butterfield Bank and Bank of Butterfield), its predecessors, subsidiaries and affiliates
  11. Sovereign Management & Legal, Ltd., its predecessors, subsidiaries and affiliates (effective 12/19/14)
  12. Bank Leumi le-Israel B.M., The Bank Leumi le-Israel Trust Company Ltd, Bank Leumi (Luxembourg) S.A., Leumi Private Bank S.A. and Bank Leumi USA (effective 12/22/14)

This list has come to be largely thanks to FATCA (that’s the Foreign Account Tax Compliance Act), a 2010 law that empowers the IRS to enter into information sharing agreements with foreign governments or foreign financial institutions directly.  The aim is to gather information on undisclosed accounts and assets held by US depositors.

The silver lining is that the above list does not apply to taxpayers who participate in the streamlined OVDP, which includes a much lower penalty of 5%.

Horowitz Law Offices has represented numerous clients in connection with the IRS’s offshore disclosure programs since their inception.  You are welcome to contact us at (312) 787-5533 or


Medical Marijuana in Illinois is Still Hazy

410 ILCS 130, otherwise known as the Compassionate Use of Medical Cannabis Pilot Program Act, went into effect at the beginning of this year.  Scheduled to expire on January 1, 2o18, the program is meant to allow the medical use of marijuana in the state of Illinois.  Illinois is one of 20 states to have a medical cannabis program.  Some of those states have decriminalized recreational use as well.  Illinois’s program comes with specific and steep regulations for growers and dispensers and while these may have made Illinois medical marijuana infrastructure slow to develop, the largest complication comes from the fact that whatever Illinois law may say, marijuana is still a Schedule I controlled substance under the federal Controlled Substances Act.  This situation leads to confusion for those trying to grow and sell cannabis, the patients intending to use it, and also for the tax professionals and accountants looking to assist these businesses.

The Department of Justice has said, essentially, that it’s not going to go after marijuana in states that have legalized it (medical or recreational), so long as those laws conform to a few requirements like ensuring marijuana is not used by minors.  Illinois’s program meets those requirements.  Congress has gone one step further recently and, in the recesses of a giant spending bill, included a prohibition on the DOJ using such funds to pursue marijuana in states where it’s legal.  The strangeness of Congress instructing a federal agency not to enforce a law that Congress itself passed aside, this should provide relative confidence to the Illinois patient looking to make use of medical marijuana.

For businesses and the professionals interested in helping them, unfortunately, things are less clear.  Again, the DOJ shouldn’t be breaking down the doors of an Illinois dispensary, but because growing and selling marijuana is still illegal by federal law, other issues arise.  Banks, for example, are reluctant to handle accounts for marijuana businesses.  These companies also run into problems when it comes time to file their taxes.  The Internal Revenue Code prohibits a company from declaring as deductions any expenses incurred in the performance of illegal activity.  In other words, if a business buys a piece of equipment, they can write that off as an expense and deduct it from their taxes.  But if the business is a marijuana dispensary, their work is technically illegal by federal law and thus they cannot deduct the expense.  The end result is that taxes on cannabis businesses can be much higher than on other companies and that could make operation fiscally unfeasible.  There’s some room for creativity here, for example selling more than just marijuana and attributing expenses to that part of the business, but the situation remains far from ideal.

For tax professionals, the chief problem is what happens when you’re assisting your clients to break the law.  The Illinois State Bar Association recently released their opinion on how attorneys can navigate the law.  They were unfortunately unable to give much concrete advice.  The Department of Justice shouldn’t be the immediate concern since they have been instructed first by the executive and now the legislative branches of the federal government to, as it were, leave this one alone, but professional regulatory agencies haven’t been told the same.  The ISBA opinion explained that there’s no problem in an attorney giving advice to a client on the legality or illegality of possible actions.  Explaining the law is safe.  When a lawyer gets involved transactionally, preparing an operating agreement for example, then the attorney is assisting their client to break federal law and the ARDC  (The Attorney Regulation and Disciplinary Commission of the Illinois Supreme Court) could arguably go after that attorney’s ability to practice law in Illinois.

The issue comes down to marijuana being classified a Schedule I controlled substance.  If federal law was changed to leave the matter of the states, the situation would be clearer.  As it stands, things are hazy and look likely to remain that way for the foreseeable future.

Horowitz Law Offices assists clients with their state, federal and international tax concerns.  You are welcome to contact us at (312) 787-5533 or


Receipt of Foreign Gifts

With ever changing demographics and the aging of the baby boomer generation more and more situations arise where U.S. residents or citizens are receiving gifts from family or others who are not residents, citizens or otherwise in the U.S. (Non U.S. Persons).  These gifts can lead to gray areas in terms of tax treatment.

The basic rule for gift tax is that the person giving the gift (the donor) pays tax.  The person receiving the gift (the donee) does not count the gift as income for tax purposes.   There is an annual exclusion to this tax, an amount you may gift without incurring gift tax.  This is currently $14,000 annually.  Spouses may also gift unlimited amounts to each other without owing gift taxes.

When the donor is a Non U.S. Person, gift tax may or may not be owned.  (NB the situation is different if the Non U.S. Person is an expatriate.)  The tax treatment of the gift depends on several factors, chief among them just what exactly is being gifted.  The relevant terms of art are tangible versus intangible property and whether or not the property is situated within the U.S.   While some situations are straightforward, for example a house geographically in the United States is tangible property situated in the U.S., gifts are often the transfer of liquid cash and these situations are considerably less clear.  IRS regulations, the Internal Revenue Code, and case law on these questions do not provide a clear, single answer.

Before getting to those other factors we must first decide if what is being transferred is U.S. Property.  The answer is not simple and within the IRS itself there are contradictory pronouncements as to what is and what is not U.S. Property.

One of the classic examples is the transfer of jewelry.  If the transfer is made in the U.S. then it is U.S. property thereby creating a gift tax liability on the donor.  Instead of jewelry, what if the gift is made by handing the donee a check?  Is that U.S. property?  If the gift transfer is made via wire transfer is that sufficient to keep it from being classified as U.S. property?  Is an actual transfer of cash required to avoid classification of U.S. property?  Notwithstanding actual Internal Revenue Code sections on the point, the IRS itself is not in total agreement in classifying each of these methods.

Once past the issue of U.S. property, the analysis next turns to where the transfer takes place.  What if the Non U.S. Person transfers funds from their bank account in a U.S. branch of a U.S. or foreign financial institution?  What if the Non U.S. Person transfers funds from their foreign account of a foreign financial institution to the dome’s account in a U.S. branch of a U.S. or foreign financial institution?  What if the Non U.S. Person transfers funds from their foreign account of a foreign financial institution to the dome’s account in a foreign branch of a foreign institution?  Once again, there are conflicting pronouncements and legal holdings among these various scenarios.

Regardless of how and where a gift transfer is made, any U.S. Person receiving a gift or inheritance from a Non U.S. Person is required to file IRS form 3520 if the gift is over a certain threshold.  Note this reporting obligation is on the recipient not the donor.

Horowitz Law Offices represents clients in issues related to the receipt of foreign gifts.  You are welcome to contact us at 312 787 5533 or

The Alphabet Soup of Illinois Sales Tax

In Illinois, as in many states, three things are the chief subjects of taxation: property, income and consumption.  That last one is where sales and use tax come from.  A consumption tax is a tax assessed on what a taxpayer uses, as opposed to income tax, a tax on wages, and property tax, a tax on what a taxpayer owns.  In Illinois, consumption tax takes the form of four related taxes which are commonly referred to by the abbreviations ROT, SOT, RUT and SUT.

ROT is the Retail Occupation Tax and SOT is the Service Occupation Tax.  The difference between is just the nature of what’s being purchased, goods for retail and service for service.  Otherwise the taxes are largely the same thing.  These are what most people would call sales tax.  You got to a store or a service provider and tax is added to your bill.  That’s ROT or SOT.  The business collects the tax at the time the purchase is made and later remits those taxes to the state on its regularly filed sales tax returns.  The tax is technically assessed on the consumer but it’s the business’s job to collect.  Failure to do so or filing false sales tax returns can carry harsh penalties for business.

RUT and SUT are the Retail Use Tax and the Service Use Tax.  Use tax isn’t as well known as sales tax, probably because you’ll never see a line item for it on a receipt.  The point of use tax is to catch what sales tax misses.  It’s assessed on goods and services used in the State of Illinois for which the consumer paid less than Illinois’s sales tax rate–currently that’s 6.75%.  That means if you buy something online or by catalog and pay no sales tax on that purchase, you now owe use tax on it (if you use the good or service within Illinois) equal to 6.75% for most products and services (certain purchases are eligible for a reduced rate, e.g. food and some prescription drugs, while other purchases like automobiles incur higher rates).  Similarly, if you purchase something in another state and pay less than Illinois’s sales tax rate and you use the item in Illinois, you owe use tax equal to the sales tax difference.  That is, if you pay 4% sales tax for something and use it in Illinois, you owe use tax equal to 2.75%, the Illinois rate of 6.75% less the 4% you paid.

Unlike sales tax, it is the job of the consumer, not the merchant or service provider, to collect use tax and remit it to the state.  It is thus the consumer who might face penalties for failure to pay the tax owed.  For the last several years, Illinois income tax returns (Forms IL-1040) have included line items regarding use tax.

In the case of all four taxes–ROT, SOT, RUT, SUT–the penalties for failure to file or for filing incorrect returns, can be severe.  For years the Attorney General has been aggressive in investigating and prosecuting sales and use tax evaders.  Gas station owners have gotten into the news repeatedly but other business have been targeted, including restaurants, liquor stores, doctor offices, and especially business that deal in frequent cash transactions.

Horowitz Law Offices has represented numerous taxpayers before the Illinois Department of Revenue regarding sales and use tax audits, motions before the Board of Appeals, and all other Illinois tax matters.  You are welcome to contact us at 312-787-5533 or


Offshore Disclosure 101

In 2009 the IRS ran a short program for offshore voluntary disclosure.  In 2011 they ran a similar program.  In 2012 they began a third offshore disclosure program, this one without an expiration attached.  Intead of expiration, the IRS is free to change the particulars of the program when it choose, for example increasing the penalties.  That program, the Offshore Voluntary Disclosure Program or OVDP continues today.

All three variations off the OVDP shared a common purpose.  In exchange for submitting information to the IRS regarding previously undisclosed offshore/foreign accounts and assets, taxpayers receive reduced penalties and avoid criminal prosecution.  The IRS has long had a similar program in place for domestic disclosure as well.

Without the protection of the OVDP, the penalties are severe for failing to disclose offshore assets to the Department of the Treasury or failing to disclose offshore income.  They include high penalties and can also include jail time.  Participation in the OVDP does not spare the taxpayer all penalties, like some other tax amnesty programs have in the past, but the program does spare the taxpayer criminal prosecution and the penalties to be paid as part of participation are much lower than what one would otherwise face.

There’s one important caveat.  Once the IRS or the Treasury Department begins investigation into a taxpayer’s offshore assets–and such  investigation typically begins before the taxpayer is notified about it–they are no longer eligible for the OVDP.  With the 2010 Foreign Account Tax Complicate Act (FATCA), a law that will allow for the automatic exchange of information between the IRS on foreign financial institutions regarding US depositors, coming into full force this July, the IRS’s ability to investigate offshore assets is stronger than ever before.  Twenty-two countries have already signed FATCA agreements with the US and many more have agreements in various stages of completion.

Each tax situation is of course unique and you should always consult a tax professional to determine the best course of action for you.  Horowitz Law Offices has represented numerous clients in their participation with the OVDP, with offshore reporting requirements, and other Federal, Illinois and Chicago tax matters.  You are welcome to contact us at (312) 787-5533 or


The Prosecutor Who Wiped Out Arthur Andersen May Be Coming For Your Bank

At first glance the name Leslie Caldwell might not mean much.  Ms. Caldwell is President Obama’s appointment to head the Criminal Division of the Department of Justice.  She was confirmed last month.  This new position follows a stretch of relatively quiet private practice.  But more than a decade ago, Ms. Caldwell made waves as the chief prosecutor in the case that destroyed accounting juggernaut Arthur Andersen.  Ms. Caldwell’s appointment certainly doesn’t seem an accident in light of the Justice Department’s increase focus on foreign banks like Credit Suisse and BNP Paribas.

In the wake of the Enron collapse, Ms. Caldwell headed up an investigation of Arthur Andersen LLP, one of the largest accounting firms in the world at the time, for their possible culpability in the Enron scandal.  An investigation characterized by aggressive conduct on the part of Ms. Caldwell, the resulting conviction was later overturned nine to zero by the Supreme Court.  The damage had already been done, however, and Arthur Andersen had lost its client base.

Not long after Ms. Caldwell’s current appointment, Credit Suisse plead guilty to the tune of $2.6 billion in fines and the French bank BNP Paribas will face a fine of between $8 and $9 billion in addition to a temporary on the bank’s ability to conduct transactions in U.S. dollars.  With FATCA expanding the U.S.’s ability to collect information on foreign accounts and assets and providing increased leverage on foreign financial institutions, it’s reasonable to expect more investigations, more fines, and more agreements so hare information on U.S. depositors.

The silver lining for taxpayers with as yet undisclosed offshore assets is to be found in the IRS’s Offshore Voluntary Disclosure Program (OVDP).  By coming clean to the IRS about their offshore accounts and foreign assets, taxpayers receive reduced penalties and avoid criminal prosecution.  If the IRS has already begun investigating the taxpayer, however, they are no longer eligible for the OVDP.  Recently instituted rules also remove the penalty reduction if the IRS or the Department of Justice has begun an investigation into the bank holding the taxpayer’s accounts.

Horowitz Law Offices has  represented clients through the OVDP since its inception.  You are welcome to contact us at (312) 787-5533 or



The Rising Stakes of Sales Tax Evasion in Illinois

For the last several years, the Illinois Attorney General has repeatedly issued press releases to announce the results of yet another sales tax indictment.  While at the federal level, the focus on tax enforcement seems to be primarily on offshore assets and accounts, at the state level the focus has landed mostly on sales and use tax.  Gas stations have gotten most of the coverage, bringing tens of millions of dollars of lost tax revenue to the state, but in our practice representing taxpayers in connection with sales and use tax cases, we’ve seen plenty of other types of businesses be the subject of Department of Revenue investigations.

Liquor stores have been the target of investigations by the Attorney General and the Department of Revenue.  Medical businesses also seem frequently to come up.  This is often because while many medications are taxed in Illinois at a reduced rate (the same rate at which most food is taxed) some medications or medical products are still taxed at the higher rate imposed on ordinary purchases.  Businesses operating with frequent cash transactions, restaurants for example, are also often on the radar.

In 2012 the Illinois General Assembly created a new crime in Illinois, Sales Tax Evasion.  The penalties depend on the amount of taxes invaded, but any amount the offense is considered a felony and entails possible jail time.  For amounts less than $500, Sales Tax Evasion is a Class 4 felony (1-3 years in prison), less than $10,000 is a Class 3 felony (2-5 years in prison), less than $100,000 is a Class 2 felony (3-7 years in prison) and more than $100,000 is a Class 1 felony (6-30 years in prison).  This in addition to repaying the taxes evaded, plus interest and penalties.

Horowitz Law Offices represents taxpayers before the IRS, the Illinois Department of Revenue and the Chicago Board of Finance.  You are welcome to contact us at (312) 787-5533 or


Obama 2015 Budget Proposes Tax Revenue Increase

The White House has released its proposed budget for the 2015 fiscal year.  The Congressional Budget Office (CBO), reports that the proposed budget would increase tax revenue by $1.4 trillion over the next decade.  It would also cut deficits by $1.o5 trillion and fund new proposed spending, the CBO has said.

The White House’s own numbers are more optimistic than the non-partisan CBO’s, projection cumulative deficits of $4.9 trillion compared to the CBO’s projection of $6.6 trillion over the next ten years.  The two estimates differ primarily because the CBO forecasts slower economic growth, which would result in lower tax revenue.

The proposed budget increases revenue by limiting tax breaks for the wealthy and for businesses, increasing taxes on tobacco products, creating a new millionaire tax, and restoring estate and gift taxes to the higher rates they had in 2009.  The budget also proposes to increase spending by canceling the automatic spending cuts to military and domestic programs, which were part of the ‘sequester,’ and increasing funds to job training programs and expanding tax credits for low-income taxpayers.

The proposed budget is of course just that, a proposal.  Congress has the final word of the purse strings.  The chances of the Obama budget being passed as-is are nonexistent.  The GOP has advanced a budget put together my Representative Paul Ryan that proposes deep spending cuts and no tax increases.  In both cases, the budgets may be designed more to support stump speeches for November’s election.  Unless one party gains control of both houses of Congress in that election, we are likely to face another budget standoff like those of recent years.

Horowitz Law Offices represents individual and business taxpayers for a variety of tax concerns before the Internal Revenue Service, the Illinois Department of Revenue and the Chicago Board of Finance.  You are welcome to contact us at (312) 787-5533 and


IRS Weighs in on Virtual Currency

Online cryptocurrencies like bitcoin have been around a few years now and every few months they end up in the news, often when the value of one virtual currency spikes or drops.

Two days ago, the IRS issued Noticed 2014-21 which addresses how the IRS will treat virtual currency for tax purposes.  The long and short of it is that the Department of Treasury and the IRS do not treat virtual currencies like bitcoin as currency.  Instead for purposes of tax they are treated as property.  This means virtual currency is not applicable for the various sorts of tax situations that could arise, for example, from the changing relative values of Euros and US Dollars.  As property, however, the changing value of virtual currency counts as gains or losses.  Virtual currency received as compensation for employment is considered wages.  For both purposes, the fair market value in US dollars has to be calculated.  The IRS further explained that payments  made in virtual currency incur the same reporting requirements as payments made through other means. Failure to treat virtual currency transactions in accordance with the notice may leave taxpayers subject to penalties, the same failing to comply with any other tax laws.

Horowitz Law Offices represents individual and corporate taxpayers before the Internal Revenue Service, Illinois Department of Revenue, and the Chicago Board of Finance.  You are welcome to contact us at (312) 787-5533 or


Supreme Court Rules: Severence Pay Taxable

Yesterday, the Supreme Court ruled on the case of United States v. Quality Stores.  Reversing the decision of the lower courts, the Supreme Court found that severance pay are taxable wages for FICA purposes.  The justices ruled 8-0, with Justice Kagan recusing herself from the case.

The case arose during the bankruptcy proceedings of Quality Stores, Inc. and its affiliates.  As part of the Chapter 11 proceedings, Quality Stores made severance payments to employees who were involuntarily terminated.  Quality Stores withheld taxes as required under the Federal Insurance Contributions Act (FICA).  These taxes are collected to fund Medicare and Social Security.  Later, Quality Stores sought a refund of those taxes, believing FICA did not actually apply to severance payments.  The IRS did not allow or deny the refund, so Quality Stores brought action in the Bankruptcy Court, which ruled in Quality Stores’s favor.  The District Court and the Sixth Circuit Court of Appeals upheld that decision.  The Supreme Court reversed it.

The decision is uncomplicated.  FICA defines wages as “all remuneration for employment” and the Supreme Court holds that severance payments plainly fit that standard.  They are paid in consideration for employment, thus they are subject to the tax.  The opinion further points out that within the Act’s lengthy list of exceptions, severance payments made because of retirement for disability are specifically exempted.  There would be no need for such a provision unless severance payments were generally subject to tax.

Horowitz Law Offices represents individuals and businesses before the IRS, the Illinois Department of Revenue, and the Chicago Board of Finance.  You are welcome to contact us at (312) 787-5533 or


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