The Offshore Voluntary Disclosure Program has Netted the Government 6.5 Billion Dollars

FS-2014-6, June 2014
Stopping offshore tax cheating and bringing individuals, especially high net-worth individuals, back into the tax system has been a top priority of the Internal Revenue Service for several years.
IRS offshore voluntary disclosure programs are designed to encourage taxpayers with undisclosed offshore assets to become current with their tax liabilities. The programs have been part of a wider effort to stop offshore tax evasion, which includes enhanced enforcement, criminal prosecutions and implementation of third-party reporting via the Foreign Account Tax Compliance Act (FATCA).
The latest series of voluntary programs began in 2009. Overall, the three voluntary programs have resulted in more than 45,000 voluntary disclosures from individuals who have paid about $6.5 billion in back taxes, interest and penalties. Here are highlights of the different variations of the IRS offshore efforts since 2009:
2009 OVDP
The IRS announced the 2009 Offshore Voluntary Disclosure Program (OVDP) in March 2009. It offered taxpayers an opportunity to avoid criminal prosecution and a settlement of a variety of civil and criminal penalties in the form of single miscellaneous offshore penalty. It was based on existing voluntary disclosure practices used by IRS Criminal Investigation.
Generally, the miscellaneous offshore penalty for the 2009 program was 20 percent of the highest aggregate value of the unreported offshore accounts from 2003 to 2008. Participants were also required to file amended or late returns and FBARs for those years.
Concurrent publicity associated with U.S. enforcement actions against certain foreign banks led to strong demand of this voluntary program.
In the 2009 OVDP the IRS received 15,000 disclosures prior to the Oct. 15 closing date that year. It resulted in the collection of $3.4 billion in back taxes, interest and penalties. It also led to another 3,000 disclosures after the closing date.
2011 OVDI
The 2009 program resulted in many disclosures and furthered the investigation of many individuals and financial institutions that facilitated non-compliance with U.S. tax laws.  As these investigations continued, the IRS responded to requests from tax practitioners that additional individuals sought to come forward and voluntarily disclose their offshore accounts.
In February 2011, the IRS announced the 2011 Offshore Voluntary Disclosure Initiative (OVDI), which lasted until Sept. 9 of that year.
Generally, participants of this program paid a 25-percent miscellaneous offshore penalty on the highest aggregate value of unreported offshore accounts from 2003 to 2010. In addition, some participants were eligible for special 5-percent or 12.5-percent penalties, depending on the severity of their noncompliance.
The 2011 OVDI drew 15,000 disclosures and resulted in the collection of $1.6 billion in back taxes, interest and penalties for the 70 percent of cases that were closed that year.
2012 OVDP
After the two prior voluntary programs, continued strong interest by taxpayers and tax professionals led to a third program. In January 2012, the IRS revised the terms of the 2011 OVDI program and made it permanent until further notice.
Under the 2012 Offshore Voluntary Disclosure Program, participants pay a penalty of 27.5 percent of the highest aggregate balance or value of offshore assets during the prior eight years. The 5 or 12.5 percent penalties remained in effect for certain taxpayers.
In June 2012, the IRS added an option to the existing disclosure program that enabled some U.S. citizens and others residing abroad to catch up on their filing requirements and avoid large penalties if they owed little or no back taxes. This option took effect in September of that year. This 2012 program has drawn 12,000 disclosures since its inception.
2014 Changes to Offshore Programs
In June 2014, the IRS announced major changes in the 2012 offshore account compliance programs, providing new options to help taxpayers residing in the United States and overseas. The changes are anticipated to provide thousands of people a new avenue to come back into compliance with their tax obligations.
And with expansion of the streamlined procedures for non-willful taxpayers, the IRS will also adjusted the terms for taxpayers participating in the OVDP whose conduct may reflect willful non-compliance. The changes modify the OVDP program to make it suited for taxpayers seeking relief from potential criminal prosecution.
All told, the three voluntary programs have resulted in more than 45,000 voluntary disclosures from individuals who have paid about $6.5 billion in back taxes, interest and penalties.

IRS Lets U.S. Residents Use OVDP Streamlined Program But Increases Penalty to 50%

For the first time, the IRS will permit resident U.S. taxpayers to participate in its streamlined filing compliance program, the agency announced June 18.

The change was one of several made to the Service's offshore voluntary disclosure program, including increasing the miscellaneous offshore penalty from 27.5 percent to 50 percent

The IRS announced the streamlined program, which was designed to aid U.S. taxpayers living abroad to come into compliance with reporting obligations, in June 2012.

Eligibility was limited to nonresident taxpayers who could demonstrate a low level of compliance risk and who did not owe more than $1,500 of tax for each of the three years covered by the program. Practitioner response to the streamlined program was initially positive but they soon raised questions about the program's usefulness to taxpayers.

In addition to permitting resident U.S. taxpayers to use the streamlined program, the IRS has also eliminated the $1,500 tax threshold and the risk questionnaire. Taxpayers must certify that previous compliance failures were not willful.

Under the revised program, all penalties will be waived for nonresident U.S. taxpayers and resident taxpayers will be subject only to a miscellaneous offshore penalty equal to 5 percent of the foreign financial assets that gave rise to the tax compliance issue.

OVDP Changes

The most significant change to the OVDP was an increase in offshore penalties from 27.5 percent to 50 percent. According to the IRS news release, the increased penalty applies "if, before the taxpayer's OVDP pre-clearance request is submitted, it becomes public that [the taxpayer's] financial institution" is under investigation by the IRS or Justice Department.

Other changes to OVDP announced by the IRS include requiring more information from applicants, submitting account statements and offshore penalty payment when the OVDP application is filed, permitting taxpayers to submit electronically, and eliminating the existing reduced penalty percentage for non-willful taxpayers.

Florida Man, 87, Owes 150% Record Penalty on Swiss Account

This was posted in today's Accounting Today

By David Voreacos and Susannah Nesmith

(Bloomberg) A federal jury found an 87-year-old Florida man owes the U.S. government civil penalties amounting to 150 percent of the value of his Swiss bank account, the biggest such penalty by percentage on record, his lawyers said.

Carl Zwerner must pay a 50 percent penalty on the annual value of the account in 2004, 2005 and 2006, a total of more than $2 million, for willfully failing to file a U.S. Treasury form called a Report of Foreign Bank and Financial Accounts, or FBAR, jurors in Miami ruled yesterday.
Prosecutors and the Internal Revenue Service have often used civil FBAR penalties, which sometimes exceed criminal fines, as a weapon in their criminal crackdown on offshore tax evasion.

Many of the more than 70 taxpayers charged since 2009 have pleaded guilty, paying an FBAR penalty of 50 percent of the high account balance for only one year.
The threat of such penalties has helped to drive U.S. taxpayers into an IRS amnesty program that lets holders of undeclared offshore accounts avoid prosecution. They must pay back taxes, fines and penalties and tell the IRS which banks and bankers helped them hide their money. Since 2009, more than 43,000 Americans have joined, paying $6 billion to the U.S. Credit Suisse AG pleaded guilty last week to helping Americans evade taxes and agreed to pay $2.6 billion in penalties.
The FBAR penalty in the Zwerner case is unusual because the IRS sought 50 percent for each of four years-a total of 200 percent-in a civil case, not a criminal one. Zwerner didn't owe a penalty for 2007, the jurors found.

Excessive Fines
U.S. District Judge Cecilia Altonaga will hear arguments on June 6 over whether the penalties against Zwerner violate the constitutional prohibition against excessive fines, said Martin Press, his lawyer. She'll ultimately decide on the size of the judgment, the Justice Department said in a statement.
"As this jury verdict shows, the cost of not coming forward and fully disclosing a secret offshore bank account to the IRS can be quite high," Kathryn Keneally, the head of the tax division, said in the statement.

"They can get 50 percent for the non-filing of one piece of paper, and 200 percent for the non-filing of four pieces of paper," Press said in a phone interview. "The question is whether such a massive penalty is appropriate for simply a disclosure form which carries no tax."

Zwerner had a Swiss account at ABN Amro Group NV, the Netherlands' third-biggest bank. His account was valued at $1.48 million in 2004, and his FBAR penalty was $723,762; the value in 2005 was $1.49 million, and the penalty was $745,209; and the value in 2006 was $1.55 million, with a $772,838 penalty, according to Press. The total penalties were $2.24 million.

Obama pays an effective federal tax rate of 20.4 percent in 2013

The President and his spouse, Michelle released their 2013 income tax return as did the Vice President. Barack and Michelle Obama paid $98,169 in tax on $481,098 in adjusted gross income, for an effective federal tax rate of 20.4 percent, while Joe and Jill Biden paid $96,378 on $407,009 in AGI, for an effective tax rate of 23.7 percent.

Both families received most of their income from wages: a bit less than $395,000 for the Obamas, a bit more than $306,000 for the Bidens.

Both the Obamas and the Bidens were hit with the alternative minimum tax: $9,513 for the Obamas, $2,815 for the Bidens.

The Obamas reported $104,809 in business income -- primarily from the president's book sales -- and $6,575 in interest income.

The Bidens reported $24,396 in business income -- primarily from Jill Biden's book sales -- and $168 in interest income.

The Obamas experienced a 20 percent drop in their 2013 income compared with 2012. The couple's 2012 return reported $608,611 in AGI and $112,214 in federal taxes paid, for an effective rate of 18.4 percent.

The Bidens' 2012 return showed $385,072 in AGI and $87,851 in federal taxes paid, for an effective rate of 22.8 percent.

Interestingly the Vice President collected Social Security benefits -- $30,552 in 2013.

Both the President and Vice President made contributions to charity: $59,251 from the Obamas (12.3 percent of AGI) to 32 charities.

The Bidens donated $20,523 (5 percent of AGI) to eight charities.

Bottom of Form

Bitcoins Are Property Not Currency

In Notice 2014-21, 2014-16 IRB, 03/25/2014, The Internal Revenue Service (IRS) announced that it is aware that "virtual currency" may be used to pay for goods or services, or held for investment. Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. In some environments, it operates like " real" currency - i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance - but it does not have legal tender status in any jurisdiction.

Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as " convertible" virtual currency. Bitcoin is one example of a convertible virtual currency. Bitcoins can be digitally traded between users and can be purchased for, or exchanged into, U.S. dollars, Euros, and other real or virtual currencies.

In general, the sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability. The notice addresses the U.S. federal tax consequences of transactions in, or transactions that use, convertible virtual currency, and the term " virtual currency."

The notice provides a list of frequently asked questions (FAQs). Listed below are some of these questions.

Q-1: How is virtual currency treated for federal tax purposes?

A-1: For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.

Q-2: Is virtual currency treated as currency for purposes of determining whether a transaction results in foreign currency gain or loss under U.S. federal tax laws?

A-2: No. Under currently applicable law, virtual currency is not treated as currency that could generate foreign currency gain or loss for U.S. federal tax purposes.

Q-3:Must a taxpayer who receives virtual currency as payment for goods or services include in computing gross income the fair market value of the virtual currency?

A-3: Yes. A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received.

Q-4:What is the basis of virtual currency received as payment for goods or services?

A-4: The basis of virtual currency that a taxpayer receives as payment for goods or services in Q&A-3 is the fair market value of the virtual currency in U.S. dollars as of the date of receipt

Q-5:Howisthe fair market value of virtual currency determined?

A-5: For U.S. tax purposes, transactions using virtual currency must be reported in U.S. dollars. Therefore, taxpayers will be required to determine the fair market value of virtual currency in U.S. dollars as of the date of payment or receipt. If a virtual currency is listed on an exchange and the exchange rate is established by market supply and demand, the fair market value of the virtual currency is determined by converting the virtual currency into U.S. dollars (or into another real currency which in turn can be converted into U.S. dollars) at the exchange rate, in a reasonable manner that is consistently applied.

Q-6:Does a taxpayer have gain or loss upon an exchange of virtual currency for other property?

A-6: Yes. If the fair market value of property received in exchange for virtual currency exceeds the taxpayer's adjusted basis of the virtual currency, the taxpayer has taxable gain. The taxpayer has a loss if the fair market value of the property received is less than the adjusted basis of the virtual currency.

Q-7: What type of gain or loss does a taxpayer realize on the sale or exchange of virtual currency?

A-7: The character of the gain or loss generally depends on whether the virtual currency is a capital asset in the hands of the taxpayer. A taxpayer generally realizes capital gain or loss on the sale or exchange of virtual currency that is a capital asset in the hands of the taxpayer. For example, stocks, bonds, and other investment property are generally capital assets. A taxpayer generally realizes ordinary gain or loss on the sale or exchange of virtual currency that is not a capital asset in the hands of the taxpayer. Inventory and other property held mainly for sale to customers in a trade or business are examples of property that is not a capital asset.

Q-8: Does a taxpayer who " mines" virtual currency (for example, uses computer resources to validate Bitcoin transactions and maintain the public Bitcoin transaction ledger) realize gross income upon receipt of the virtual currency resulting from those activities?

A-8: Yes, when a taxpayer successfully " mines" virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income.

A-9: Is an individual who " mines" virtual currency as a trade or business subject to self-employment tax on the income derived from those activities?

A-9: If a taxpayer's " mining" of virtual currency constitutes a trade or business, and the " mining" activity is not undertaken by the taxpayer as an employee, the net earnings from self-employment (generally, gross income derived from carrying on a trade or business less allowable deductions) resulting from those activities constitute self-employment income and are subject to the self-employment tax.

Q-10:Does virtual currency received by an independent contractor for performing services constitute self-employment income?

A-10: Yes. Generally, self-employment income includes all gross income derived by an individual from any trade or business carried on by the individual as other than an employee. Consequently, the fair market value of virtual currency received for services performed as an independent contractor, measured in U.S. dollars as of the date of receipt, constitutes self-employment income and is subject to the self-employment tax. Q-11:Does virtual currency paid by an employer as remuneration for services constitute wages for employment tax purposes?

A-11: Yes. Generally, the medium in which remuneration for services is paid is immaterial to the determination of whether the remuneration constitutes wages for employment tax purposes. Consequently, the fair market value of virtual currency paid as wages is subject to federal income tax withholding, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax and must be reported on Form W-2, Wage and Tax Statement .

Q-12: Is a payment made using virtual currency subject to information reporting?

A-12: A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property. For example, a person who in the course of a trade or business makes a payment of fixed and determinable income using virtual currency with a value of $600 or more to a U.S. non-exempt recipient in a taxable year is required to report the payment to the IRS and to the payee. Examples of payments of fixed and determinable income include rent, salaries, wages, premiums, annuities, and compensation.

Q-13: Is a person who in the course of a trade or business makes a payment using virtual currency worth $600 or more to an independent contractor for performing services required to file an information return with the IRS?

A-13: Generally, a person who in the course of a trade or business makes a payment of $600 or more in a taxable year to an independent contractor for the performance of services is required to report that payment to the IRS and to the payee on Form 1099-MISC, Miscellaneous Income. Payments of virtual currency required to be reported on Form 1099-MISC should be reported using the fair market value of the virtual currency in U.S. dollars as of the date of payment. The payment recipient may have income even if the recipient does not receive a Form 1099-MISC

Q-14: Are payments made using virtual currency subject to backup withholding?

A-14: Payments made using virtual currency are subject to backup withholding to the same extent as other payments made in property. Therefore, payors making reportable payments using virtual currency must solicit a taxpayer identification number (TIN) from the payee. The payor must backup withhold from the payment if a TIN is not obtained prior to payment or if the payor receives notification from the IRS that backup withholding is required

Q-15:Are there IRS information reporting requirements for a person who settles payments made in virtual currency on behalf of merchants that accept virtual currency from their customers?

A-15: Yes, if certain requirements are met. In general, a third party that contracts with a substantial number of unrelated merchants to settle payments between the merchants and their customers is a third party settlement organization (TPSO). A TPSO is required to report payments made to a merchant on a Form 1099-K, Payment Card and Third Party Network Transactions, if, for the calendar year, both (1) the number of transactions settled for the merchant exceeds 200, and (2) the gross amount of payments made to the merchant exceeds $20,000. When completing Boxes 1, 3, and 5a-1 on the Form 1099-K, transactions where the TPSO settles payments made with virtual currency are aggregated with transactions where the TPSO settles payments made with real currency to determine the total amounts to be reported in those boxes. When determining whether the transactions are reportable, the value of the virtual currency is the fair market value of the virtual currency in U.S. dollars on the date of payment.

Q-16:Will taxpayers be subject to penalties for having treated a virtual currency transaction in a manner that is inconsistent with this notice prior to March 25, 2014?

A-16: Taxpayers may be subject to penalties for failure to comply with tax laws. For example, underpayments attributable to virtual currency transactions may be subject to penalties, such as accuracy-related penalties under section 6662. In addition, failure to timely or correctly report virtual currency transactions when required to do so may be subject to information reporting penalties under section 6721 and 6722. However, penalty relief may be available to taxpayers and persons required to file an information return who are able to establish that the underpayment or failure to properly file information returns is due to reasonable cause.

The U.S. Tax Court holds that a trust holding rental real estate properties qualifies for the section 469(c)(7) passive activity exception.

The passive loss rules operate by requiring taxpayers to classify their income and losses into various categories. Then the rules limit the extent to which losses in the passive category can be used to offset income in the other categories.
The passive loss rules require income and losses to be classified into one of three categories: active, passive, or portfolio.
Active income includes the following:

·       Wages, salary, commissions, bonuses, and other payments for services rendered by the taxpayer.

·       Profit from a trade or business in which the taxpayer is a material participant.

·       Gain on the sale or other disposition of assets used in an active trade or business.

·       Income from intangible property if the taxpayer's personal efforts significantly contributed to the creation of the property.

Portfolio includes the following:

·       Interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business.

·       Gain or loss from the disposition of property that produces portfolio income or is held for investment purposes.

Section 469 provides that income or loss from the following activities is treated as passive:

·       Any trade or business or income-producing activity in which the taxpayer does not materially participate.

·       Subject to certain exceptions, all rental activities, whether the taxpayer materially participates or not.

Although the Code defines rental activities as passive activities, several exceptions allow losses from certain real estate rental activities to offset nonpassive (active or portfolio) income.

Section 469 specifies that the following types of activities are to be treated as passive:

·       Any trade or business or income-producing activity in which the taxpayer does not materially participate.

·       Subject to certain exceptions, all rental activities.

Material Participation in a Real Property Rental Trade or Business

An exception to the general rule relates to a special rule for material participation in a real estate rental trade or business. Losses from real estate rental activities are not treated as passive losses for certain real estate professionals. To qualify for nonpassive treatment, a taxpayer must satisfy both of the following requirements:

·       More than half of the personal services that the taxpayer performs in trades or businesses are performed in real property trades or businesses in which the taxpayer materially participates.

·       The taxpayer performs more than 750 hours of services in these real property trades or businesses as a material participant.

Taxpayers who do not satisfy the above requirements must continue to treat losses from real estate rental activities as passive losses.

Recently on March 27 the U.S. Tax Court held that a trust holding rental real estate properties qualifies for the section 469(c)(7) passive activity exception, because services performed by the trustees are considered personal services performed by the trust and the trust materially participated in the real estate business activities (Frank Aragona Trust et al. v. Commissioner, 142 T.C. No. 9, No. 15392-11 (2014) ).

It has been noted that the case will have important ramifications for section 1411. Section 1411 provides that the 3.8 percent tax will not apply if the trust materially participates in the underlying trade or business. The ultimate conclusion of the case is that the trust materially participated in its rental business.

Supreme Court Rules Severance Pay Can Be Taxed

Bloomberg, by Greg Storh rported today that the U.S. Supreme Court decided in favor of the Obama administration in a dispute over taxes on severance compensation, overturning a lower court decision that could have forced the IRS to refund more than $1 billion.

The court said payments to laid-off workers are subject to Social Security and Medicare taxes under the Federal Insurance Contributions Act, or FICA. It was a victory for the Internal Revenue Service, which has been fighting more than 2,400 refund claims from companies and their ex-employees.

The justices’ unanimous ruling yesterday came in the case of Quality Stores Inc., once the country’s largest agricultural specialty retailer. The defunct company fired 3,100 workers when it closed its stores in 2001 and 2002, paid the taxes on their severance and then asked a bankruptcy judge to order the IRS to refund $1 million.

Writing for the court, Justice Anthony Kennedy said the payments were subject to tax. He rejected the company’s contention that what it called supplemental unemployment compensation was exempt from the FICA.

“The severance payments here were made to employees terminated against their will, were varied based on job seniority and time served and were not linked to the receipt of state unemployment benefits,” he wrote. “Under FICA’s broad definition, these severance payments constitute taxable wages.”