FOREIGN BANK ACCOUNTS,

JAMES BOND AND THE IRS

September 22, 2006

Thomas C. Roberge & Company

St. Petersburg and Sarasota

Telephone: (727) 822-9393

Contact: Troberge@RobergeCo.com

Copyright, 2006, Thomas C. Roberge & Company

All Rights Reserved

This newsletter is written by Robert Blumenfeld of our staff.  Bob has been with us for about four years.  Prior to joining us he spent most of his career as a senior attorney with the IRS International Headquarters in Washington, DC.  While there he was in charge of the examination of estate tax returns, foreign trusts and inheritance tax issues for foreign nationals.  He was also extensively involved in handling plea bargaining negotiations for the government in the international white-collar fraud area.

Bob has been an invaluable addition to our staff.  Bob is affectionately known as The Tax Doctor.  The following is reproduced from a monthly newspaper column he writes for several Florida east coast publications.  It discusses reporting and compliance issues for foreign bank and security accounts that are owned or controlled, directly or indirectly, by U.S. persons.  The term "persons" is a technical IRS term that includes individuals, corporations, trusts, partnerships and the like.

In the course of my practice, I have been contacted by several people who had bank accounts in foreign countries.  There is nothing wrong with this per se, but these people generally failed to report the existence of these accounts on their United States income tax returns, and failed to report the interest earned, dividends earned, or capital gains which took place in that account.  When most of us think of foreign bank accounts, we envision a James Bond like person schussing down the Alps, chasing beautiful, scantily clad young ladies who generally succumb to his charms. To a tax attorney this is a tale involving felonies and misdemeanors which, if not handled carefully, could result in a trip to jail for the client.

During the 1960's the Treasury Department determined that many wealthy Americans were opening bank accounts in tax haven countries.  The majority of these people did not report the income from these accounts on their United States tax returns.  It was perceived by the United States Congress that there were only three reasons for opening such an account; avoiding creditors, illicit activities (such as drug sales) and tax evasion.  This led Congress to enact the Bank Secrecy Act of 1970, requiring American citizens to report their interests in or authority over any foreign bank accounts to the United States Treasury Department.  This directive results in two disclosure requirements; on the 1040 itself, at schedule B, there is a question about whether or not the taxpayer had an interest in a foreign financial account.  If one answers yes to this question, one is then required to name the foreign country and fill out a form TD F 90-22.1 which must be submitted directly to the United States Treasury Department.  This account need not be owned directly in the name of the taxpayer; if the taxpayer owns more than 50% of a corporation which controls such an account, he is required to make the disclosure on his income tax return.

Failure to adhere to these requirements is a felony under section 7206(1) of the Internal Revenue Code.  Specifically the felony is for giving false and misleading information on the tax return.  Some people try to avoid this issue by not checking either yes or no on the tax return.  Courts have taken a position that by leaving this question unanswered, the taxpayer who signed such a return knew that this was not true and correct as to every material matter and was found to be guilty of the felony of giving false and misleading information to the Internal Revenue Service.  In addition to this, the taxpayer is generally guilty of income tax evasion because he or she failed to report the interest, dividend, and capital gain components of the accounts on his 1040.

Simply failing to file Treasury Department form 90-22.1, known as the Report of Foreign Bank and Financial Accounts (FBAR), is punishable by a fine which is the lesser of 10% of the maximum amount of money in the foreign account or $100,000.  Thus we can see that an American citizen who has such a secret foreign account is headed for grief if he or she is apprehended by the Internal Revenue Service.

The typical pattern which the IRS finds consists of a foreign bank located in a tax haven country in which funds are deposited.  The bank invests these funds in various ways generating income from dividends, interest, and capital gains.  The bank gives the client a debit card which is used for cash advances and purchases which are perceived by the card holder to be untraceable.  Recently however, the IRS has gotten access to lists of credit cards with foreign banks.  Using these lists, the IRS is able to trace the source of funds to bank accounts to and by United States taxpayers who are not reporting the income or fulfilling the Treasury Department notification requirements.  When news of this IRS initiative hit the media, many owners of these foreign accounts became very nervous.  The IRS had a principal desire to get the income from these accounts reported on the tax returns, and a secondary aim to have the FBAR form reported to the U.S. Treasury.  Obviously if anybody who had such an account came forth to the IRS, they could be subject to criminal sanctions and substantial fines.

Again remember that the IRS wants these people to get these accounts back into the tax system.  To do this the IRS created a voluntary compliance division whose purpose was to help people repatriate these accounts without any criminal sanctions.  The key to this lies in the word voluntary.  The taxpayer must come forth of his own will and volition and report the existence of such an account to the IRS.  It's really not quite that simple.  Generally clients retain me to meet with the Internal Revenue Service on an anonymous basis; that is no names or Social Security numbers are disclosed at the first meeting.  The meeting is with an IRS panel which contains two criminal investigators, two auditors, and members of the IRS District Council.  I, representing the anonymous taxpayer, disclose the existence of an account in a foreign country, the facts and circumstances under which the account was created, and the amount of income not reported on a taxpayer's last six years of 1040's.  Additionally I need to disclose the largest amount of assets which the account had ever held, and whether or not this account is linked to a foreign credit card.  Ultimately I have to show the IRS bank statements substantiating these figures.

After I leave the meeting, the IRS officials discuss the situation.  If the Criminal Investigation Division agrees not to prosecute, they will send a letter indicating that we may proceed in repatriating the account with no criminal sanctions.  Obviously if the Criminal Investigation Division determines that there is a criminal violation, it becomes very difficult to continue the repatriation process.  This can call for some additional negotiation with the IRS.  A caveat is necessary here.  Voluntary compliance is only available to people who are not under current Internal Revenue examination.  If the taxpayer, a partnership in which he has invested, or a corporation under the taxpayer's control is either under examination or has received a notification of examination from the Internal Revenue Service, it is too late to follow the path of voluntary compliance.

Next month I will walk you through some of the cases which I worked on in a voluntary compliance area with the Internal Revenue Service and the results which I was able to achieve.

Robert Blumenfeld is the Tax Doctor.  Please contact us at (727) 822-9393 or at Troberge@RobergeCo.com if you have questions.  Thank you Bob and welcome to our newsletter.

Happy banking everybody.