Federal Tax News
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:
- UBS AG
- Credit Suisse AG, Credit Suisse Fides and Clariden Leu Ltd.
- Wegelin & Co.
- Liechtensteinische Landesbank AG
- Zurcher Kantonalbank
- swisspartners Investment Network AG, swisspartners Wealth Management AG, swisspartners Insurance Company SPC Ltd. and swisspartners Versicherung AG
- CIBC FirstCaribbean International Bank Limited, its predecessors, subsidiaries and affiliates
- Stanford International Bank, Ltd., Stanford Group Company and Stanford Trust Company, Ltd.
- The Hong Kong and Shanghai Banking Corporation Limited in India (HSBC India)
- The Bank of N.T. Butterfield & Son Limited (also known as Butterfield Bank and Bank of Butterfield), its predecessors, subsidiaries and affiliates
- Sovereign Management & Legal, Ltd., its predecessors, subsidiaries and affiliates (effective 12/19/14)
- 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 firstname.lastname@example.org
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 email@example.com
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 firstname.lastname@example.org
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 email@example.com
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 firstname.lastname@example.org
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 email@example.com
Last week, the IRS and the Department of the Treasury, released a set of amendments to the final regulations to implement the Foreign Account Tax Compliance Act (FATCA). The final regulations had been released the beginning of last year and the law is slated to go into effect beginning in July. These recent amendments address concerns raised since the release of the final regs.
Passed in 2010 as part of the HIRE Act, FATCA aims to combat tax evasion by allowing the IRS to create agreements to work with foreign governments or financial institutions to obtain information on US depositors. To date 22 countries have signed FATCA agreements with the US, with many others at various stages of completing agreements. There are two models for these agreements, one in which the IRS deals with foreign governments who in turn communicate with the financial institutions in their countries, and a second where the IRS talks directly to the foreign financial institutions. In either model the end goal is the same, gathering information on US depositors to identify tax evasion.
FATCA has received criticism and resistance since it was first passed. Some have blamed it for the spike in US citizens renouncing their citizenship since 2010. Some foreign financial institutions have also pushed back against the law, while others have decided no longer to accept US depositors.
Treasury officials have said they expect FATCA to be a model for future laws in other countries, for there eventually to be an established framework of information sharing among countries and financial institutions to combat tax evasion. Earlier this month, the Organization for Economic Cooperation and Development announced new standards for the automatic, FATCA-like exchange of financial information across borders.
Augmented in their efforts by FATCA, the IRS continues an aggressive stance toward US citizens who keep money offshore to evade paying tax or who fail to report those assets. The penalties for failing to declare foreign financial assets or evading taxes through offshore accounts are severe and can include time in prison. Since 2009, the IRS has continued its Offshore Voluntary Disclosure Program, which allows taxpayers to “come clean” regarding previously undisclosed offshore bank accounts and other assets and to receive a reduction in penalties and to avoid criminal prosecution.
Horowitz Law Offices represents taxpayers before the IRS in connection with offshore disclosure, reporting requires (including FBARs), and for other tax concerns. You are welcome to contact us as (312) 787-5533 or firstname.lastname@example.org
We have been treated over the years to memorable quotes by Yogi Berra. Among some of the more well known are: “if you come to a fork in the road, then take it” and “déjà vu all over again.” One of his lesser known quotes is “nobody goes to that restaurant anymore because it’s too crowded.” The IRS inadvertently treaded on that quote this week when it announced to the public: “We do not want anyone calling the IRS next week because too many people will be calling.”
The rationale is a combination of budget cuts affecting staffing IRS phones and the Federal Holiday on Monday crunching calls into four days instead of five.
Notwithstanding, the rationale, one has to admit the IRS does have a sense of humor.
A critical deadline is coming up for Swiss banks on December 31st. Under agreements put in place last summer, the IRS has implemented a bank version of its offshore voluntary disclosure programs (OVDP /OVDI) that have been in place for individuals since 2009.
The programs offered to these Swiss banks may have serious ramifications for their depositors. These programs provide for the banks to obtain non-prosecution agreements from the IRS. Banks may also seek non-target letters. What’s perhaps most important is what these agreements do not include. They provide protection only for the banks, not for any of their depositors.
Part of the requirements for a Swiss bank to obtain one or more of these agreements is a for the Swiss bank to offer up (“hand over”) information regarding its U.S. depositors and its employees and agents. In some if not many cases, this information will provide the IRS with a road map of how Swiss bank employees and agents may have advised U.S. depositors to commit criminal violations of the Internal Revenue Code. It also provides a quite literal road map to the front door of U.S. depositors who may have not disclosed their foreign offshore accounts and or failed to report income from those accounts.
In our practice we are aware of stepped up pressure by certain Swiss banks to encourage their U.S. account holders to enter into the IRS Offshore Voluntary Disclosure Program. Examining the details of the IRS Non-Prosecution Agreements may provide the motivation for this. One of the requirements s of the program is for the Swiss bank to pay penalties for its potentially criminal actions. One way for the Swiss banks to reduce the amount of the penalties is to show substantial efforts to encourage U.S. depositors to enter into the IRS disclosure (OVDP) initiative. Moreover the first deadline for submitting an application for a Non-Prosecution Agreement is December 31, 2013 thereby providing a possible reason for Swiss banks to ramp up pressure on its U.S. Offshore Account Holders.
Horowitz Law Offices represents U. S. taxpayers who maintain foreign offshore bank accounts. You are welcome to contact us at: 312 787 5533 or email@example.com .
We have written frequently written about the FATCA statute. Every month, more and more FATCA agreements are being negotiated between the U.S. and foreign governments. These agreements provide for foreign banks to disclose U.S. depositor information to the U.S. government. To this point, we are aware of several major foreign banks that have sent letters to their depositors which state that either via FATCA or separate unrelated agreements, the bank is going to release their information to the IRS. The letters advise that if the depositors have not properly reported their foreign income and or accounts to the IRS, they ought to seek tax advice.
Recently it’s not just large bank that are issuing these types of disclosure letters. Rather, smaller banks are beginning to issue letters to the same effect.. In other words, the IRS is digging deeper.
Horowitz Law Offices has represented clients with offshore bank account issues for several years. If you have an offshore account disclosure question, or other tax matter, you are welcome to contact us at 312 787 5533 or firstname.lastname@example.org.