The Department of Justice has Received 106 Requests from Swiss Banks to Enter its Swiss Bank Program to Avoid Prosecution

"Anyone who thinks they can hide money in Switzerland is fooling themselves," because of support received from Switzerland, said Kathryn Keneally, assistant attorney general for the Justice Department Tax Division, speaking at the January 25 session of the Civil & Criminal Tax Penalties Committee.

The Justice Department's Swiss bank program, announced in August, provides Swiss banks an opportunity to come forward, cooperate, disclose their illegal conduct, and be eligible for non-prosecution agreements -- or in egregious cases, deferred prosecution agreements.

The DOJ has received 106 letters of intent through its Swiss bank program, according to Keneally. None of the 14 banks currently subject to criminal investigation is included in this number. However, the number of 106 banks is subject to caveats about eligibility.

"We have not determined that they are all banks, or are Swiss banks. We may have some entities that are trying to get in the program but don't quite fit in the definition," Keneally said. She does not expect 106 non-prosecution or deferred prosecution agreements.

"From our point of view, every bank that comes forward under the program is a new source of information for us," Keneally said. "Given the information we expect to receive from these banks about closed accounts and where the money went, I would think that anybody anywhere in the world that has an unreported offshore bank account will be well advised to come forward."

Keneally isn't surprised that a significant number of the letters of intent indicate that the banks are still early in their internal investigations and may try to become category 3 banks. Category 3 is reserved for banks that did not violate United States law.

The program says the banks can reduce their penalties if they can show they encouraged their account holders into the voluntary disclosure program, and after that encouragement, the disclosures came in. But if account holders volunteer information on their own and their banks failed to encourage compliance, the banks will not get credit, Keneally said.

"We are very appreciative of the support received from Switzerland," added Keneally, saying that the program provides a mechanism to allow all Swiss banks to find a resolution, "to take the cloud off of the Swiss financial industry, which is a globally important financial center."

""The goal of that program is to make offshore bank accounts unattractive as a means of tax evasion. And I think we will be at it for as long as it takes," she said. "This is not a trend but fits into what we should be doing."

"We have a lot of avenues for getting information now, some of them visible and some of them not visible. Anyone who thinks they can hide their money in Switzerland or elsewhere is full of themselves and has been for a long time," Keneally said.

What about banks in other countries? Keneally said that DOJ is proceeding country by country. Information can be had more easily from other countries with U.S. treaties and tax information exchange agreements.

OVDP

"We are better off with a voluntarily compliant taxpayer than another criminal tax prosecution," Keneally said. Account holders who received an account closing letter from their banks can still come into the offshore voluntary disclosure program (OVDP), she noted.

Maryland Legislators Have Agreed To Cut Estate Tax

After passing on, people want to be sure that their assets are properly disbursed to family members. However, these assets often face estate tax law, which can cut into the value.
This tax varies from state to state, and has an impact on where wealthy retirees choose to live after leaving the work force for good. According to the Maryland Reporter, legislators have agreed to reduce the state's high estate tax by returning it to federal standards, which may help keep retirees in Maryland.
"We're going to phase out the estate tax, and raise it to the federal level," Senate President Mike Miller told the Maryland Economic Development Association. "I hope we're going to move forward on the inheritance and estate tax."
The move to reduce the estate tax would cut Maryland taxes by $14 million this fiscal year, and as much as $87 million in four years. Currently, the estate and inheritance tax accounts for less than 2 percent of all state revenues, as very few estates pay any taxes.
Maryland isn't the only state to consider cutting its estate tax, as New York Gov. Andrew Cuomo recently proposed $2 billion in tax cuts. According to The New York Times, this includes raising the estate tax exemption from $1 million to $5.25 million. The main goal behind this move is to reduce the number of New Yorkers who leave the Empire State when retiring. Cuomo's proposal included an array of other cuts, which has garnered support.
"We need to change the environment and the perception of New York as a high-tax state," Randy Wolken, the president of the Manufacturers Alliance of New York State, told the news source.

Supreme Court to decide whether bankruptcy protection applies to inherited IRAs

N.J.S.A. 25:2-1 provides for conveyances in trust for use of persons making them void as to creditors.  The statute deals with frauds and fraudulent conveyances.  This statute makes “self settled trusts” to avoid creditors void against public policy.

Notwithstanding, the same statute exempts from creditors and bankruptcy transfer to “qualifying trusts.”  “Qualifying trusts” are limited to IRC Section 401–Pension, Profit Sharing and Stock Bonus Plans; 403–Qualifying Annuity Plans; 408-Individual Retirement Accounts (IRAs); 408-Roth IRAs; 409-Employee Stock Ownership Plans (ESOPs); 529-Qualified Tuition Programs and 530-Coverdell Education Savings Accounts.

Because of a conflict in the circuit courts the United States Supreme Court has agreed to review whether an Inherited IRA may qualify for a bankruptcy exemption under Bankruptcy Code §522(b)(3)(C)

In Clark, Brandon C., In re (2013, CA7), 2013 WL 1729600 cert granted 11/26/2013 the court held that a debtor's inherited IRA may not qualify for a bankruptcy exemption under Bankruptcy Code §522(b)(3)(C). As explained below, the Seventh Circuit decision conflicted with decisions of the Fifth and Eighth Circuits. Thus, in taking the case, the Supreme Court will resolve the conflict.

Bankruptcy exemption requirements. 

A bankruptcy exemption under 11 USC 522(b)(3)(C) must meet two requirements:

(1) the amount the debtor seeks to exempt must be “retirement funds,” and

(2) those retirement funds must be exempt from income taxation under one of several specified Internal Revenue Code provisions, including Code Sec. 408 which provides a tax exemption for IRAs.

Facts of Seventh Circuit decision.  In August of 2000, Ruth Heffron established an individual retirement account (IRA) and named her daughter, Heidi Heffron-Clark, as the sole beneficiary. Ruth Heffron died in September of 2001, and the account passed to Heidi. In December of 2001, Heidi had the balance in her mother's IRA transferred to an inherited IRA. Heidi and her husband (the debtors) took monthly distributions from the inherited IRA. Neither of the debtors was retired at the time.

In October of 2010, the debtors filed a Chapter 7 bankruptcy petition, and claimed the inherited IRA (which contained $293,300) as exempt under Bankruptcy Code §522(b)(3)(C) (11 USC 522(b)(3)(C)) and under Wisconsin law. The bankruptcy trustee and a judgment creditor objected to the exemption, and the bankruptcy court ruled in their favor, denying the exemption. The federal district court, to which the decision was appealed, reversed and held that the inherited IRA qualified for a bankruptcy exemption. This decision was appealed to the Seventh Circuit, which held against the debtors.

Conflicting decisions.  Under the leading cases of Chilton v. Moser (5^th Cir. 2012) 674 F3d 486 and Doeling v. Nessa (2010, 8^th Cir. Bktcy) 426 BR 312, the funds in a debtor's inherited IRA do not have to be the debtor's  “retirement funds” (a term that the Bankruptcy Code does not define) to satisfy the bankruptcy exemption requirements under Bankruptcy Code §522(b)(3)(C) or §522(d)(12). It is enough if the funds were ever “retirement funds.”

Seventh Circuit disagreed.  Unlike the courts in Chilton  and Nessa  , the Seventh Circuit said that the word “retirement” in “inherited individual retirement account” designated the funds' source, not their current status (i.e., as non-retirement funds). Unlike a regular IRA, an inherited IRA is a time-limited, tax-deferral vehicle, but not for holding wealth for use after the new owner's retirement, the court said. Heidi, as owner of the inherited IRA, was required to begin taking distributions under the Code Sec. 401(a)(9) required minimum distribution rules, even though she was still working. The Seventh Circuit noted that, instead of being dedicated to Heidi's retirement years, the inherited IRA had to begin distributing assets within a year of Ruth's death, and the payout had to be completed in as little as five years. Money counts as “retirement funds” only when held for the owner's  retirement—here, Heidi's, the bankruptcy court had concluded. Thus, the funds in the inherited IRA did not meet this standard. The Seventh Circuit agreed, finding that the bankruptcy judge “got this right.”

By the time Heidi and her husband filed for bankruptcy, the money in the inherited IRA did not represent anyone's  retirement funds, the Seventh Circuit said. To treat this account as exempt under Bankruptcy Code §522(b)(3)(C) would be to shelter from creditors a “pot of money” that could be freely used for current consumption. Thus, the Seventh Circuit reversed the district court's decision, and thereby created a conflict among the circuits.

Supreme court grants cert.  The Supreme Court has now agreed to resolve this conflict.

Overseas Tax Havens Toppled By IRS

I recently was interviewed by Private Wealth Magazine in regard to FATCA and the substance of cooperation agreements being entered into between the US and other countries.

The article, authored by Eric L. Reiner follows.

Some of the world’s most notorious secret account havens have agreed to give information about U.S. taxpayers to the Internal Revenue Service.

In a 24-day span ending December 19, eight jurisdictions -- the Cayman Islands, Costa Rica, Jersey, Guernsey, the Isle of Man, Bermuda, Malta and the Netherlands – signed separate agreements with the IRS to help it implement the Foreign Account Tax Compliance Act (FATCA), enacted by Congress to uncover offshore tax evasion. Deals with more countries are in the works.
An IRS intergovernmental agreement “obligates the foreign country to require its investment funds and other financial institutions, unless they are exempt, to collect certain information from their U.S. account holders and report it to their country’s tax authority, which will then report the information to the IRS,” explains accountant Jay Bakst, a partner in the financial services practice of EisnerAmper LLP, an advisory and accounting firm in New York.

Institutions in countries that have yet to ink an intergovernmental agreement must enter into an agreement with the IRS to report directly to it or face 30-percent withholding on certain income from U.S. sources.

Reportable data includes the client’s name, address and tax identification number, plus information on account deposits, withdrawals and balances. Reporting begins in 2015, when 2014 account data will be furnished to the IRS.

For advisors and their U.S. clients, the Cayman Islands accord is particularly significant. The British territory’s toney and secretive banks, private funds and insurance outfits are popular with affluent Americans, and for some of them the new pact could prove a game changer.
Prior to the Cayman government’s November 29 agreement with the IRS, Cayman banks that didn’t have income from the U.S. -- and which were therefore unaffected by FATCA’s withholding on U.S.-source income -- had little motivation to comply with the American law. The same was true for Cayman funds with no U.S. income. But the intergovernmental agreement means an institution will be breaking its own country’s law by failing to report U.S. investors’ information to its government. That is a “strong incentive” to turn over the data regardless of whether withholding would apply, Bakst says.

For advisors with international clients, attorney Frank L. Brunetti points out that most IRS intergovernmental agreements are reciprocal. For example, the IRS will be reporting to Costa Rica about its taxpayers in the U.S.

International clients should also be aware that multilateral agreements are expanding, where “multiple countries are sharing in the same exchange-of-information protocol,” says Brunetti. He is a partner at Scarinci Hollenbeck in Lyndhurst, N.J., as well as an academic observer to the United Nations Committee of Experts on Cooperation in International Tax Matters.
“Governments are cooperating with each other because they are looking for revenue, and they’re getting much better at it with the technology and the laws,” Brunetti says. “There are not many places for the international billionaire to hide assets anymore.”