Senate Committee Approves U.S.- Chile Tax Treaty

A U.S. Senate committee has approved a bilateral tax treaty between the U.S. and Chile, an agreement deemed essential to keeping American taxpayers competitive in the South American country.

The Senate Foreign Relations Committee has approved a bilateral tax treaty between the U.S. and Chile.

The treaty is not official yet and now heads to the Senate for a vote; the Senate must give its advice and consent to ratification with a two-thirds majority vote. Once the Senate takes action to approve the Treaty, which is not yet scheduled, the President must sign the instruments of ratification to complete the approval and ratification process.

“I expect this legislation will receive broad, bipartisan support in the full Senate,” said Sen. Jim Risch (R-Idaho), ranking member of the Committee.

The Committee vote was 20-1, the only dissenting vote that of Sen. Rand Paul (R-Ky.). He proposed an amendment, which was defeated, that would have added more requirements the U.S. would have to meet to collect the bank records of American citizens in Chile. (Paul has often contested treaty proposals because of privacy concerns.)

The Senate does not ratify treaties but instead gives its advice and consent, empowering the president to proceed with ratification.

“Chile is one of our strongest democratic partners in the Americas, and this treaty will help protect and grow U.S. foreign direct investment, facilitate U.S. economic engagement in the region and strengthen the hand of U.S. companies operating in Chile,” said U.S. Senator Bob Menendez (D-N.J.), chairman of the Committee.
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Citing a fuzzy definition, the American Tax Court holds that the IRS lacks authority to assess and collect after an owner of foreign companies fails to file or pay penalties. How will this play out in future cases?

The U.S. Tax Court, in Farhy v. Commissioner, has distinguished between a penalty that the IRS is authorized to issue and a penalty that has been properly assessed.

For the tax years 2003 through 2010, Alon Farhy owned 100% of Katumba Capital Inc., a foreign corporation incorporated in Belize. For the tax years 2005 through 2010, Farhy was 100% owner of Morningstar Ventures Inc., also a foreign corporation incorporated in Belize.

Farhy had a reporting requirement under Section 6038(a) to report his ownership interests in both companies: Taxpayers must usually file Internal Revenue Service Form 5471, “Information Return of U.S. Persons With Respect to Certain Foreign Corporations,” to disclose interest or ownership in a foreign corporation. Failure to do incurs penalties starting at $10,000 per form per year.

During the years at issue, Farhy participated in an illegal scheme to reduce the amount of income tax that he owed and, in February 2012, signed an affidavit describing his role in that scheme. He was granted immunity in a non-prosecution agreement that he signed that September. Four years later, the IRS notified Farhy of his failure to file the 5471s; the Tax Court has acknowledged that Farhy’s failure to file was willful and not due to reasonable cause.

In late 2018, the IRS assessed an initial penalty (under Internal Revenue Code Sec. 6038(b)) of $10,000 for each year at issue and continuation penalties totaling $50,000 per year. The IRS did comply with the written supervisory approval requirements for the penalties. A few months later, the IRS levied to collect the penalties.

Defendant’s Answer
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International Taxpayers One Big Focus Of New IRS Plan

After the IRS unveils its plans to spend billions in new funding, wealthy and international taxpayers can expect new attention from the agency in coming years.

The Internal Revenue Service has released its strategic operating plan for the next decade, the agency’s blueprint for how it plans to spend $80 billion in funding that was green lighted by last year’s passage of the Inflation Reduction Act.

More than $45 billion of the funding is slated for enforcement. The IRS will also be hiring tens of thousands of new employees, partially to make up for ongoing attrition and years of declining funding and staffing. The remainder of the funding will go toward IRS taxpayer services, operations support and business systems modernization.

The plan provides “a vision for the future” of U.S. tax administration, IRS Commissioner Daniel Werfel wrote in the introduction to the 150-page document, including “new capacities, including specialized skills, in place to unpack the complex filings of high-income taxpayers and large corporations and partnerships.”

This will address “a growing chasm between the number of experienced compliance personnel at the IRS who audit high-income, high-wealth tax filings for compliance (about 2,600 employees) and the roughly 30,000 individuals making more than $10 million a year, 60,000 large corporations and 300,000 large partnerships and S corps,” the agency said.
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U.S. Government Concedes In Case Of Large Foreign Gifts

An American citizen got a big cash gift from his mom back in Poland. The U.S. government went after him for failure to report foreign gifts – but now has changed its tune regarding “reasonable cause” and “willful” failure to file.

The U.S. Department of Justice has conceded in Wrzesinski v US that an American citizen and a native of Poland does not owe penalties for failing to file IRS Form 3520, “Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts,” after receiving $830,000 from his mother in Poland.

Krzysztof Wrzesinski immigrated to America in 2005 at age 19 and for the past nine years he has been a Philadelphia police officer. In 2010, his mother, Barbara Wrzesinska, a citizen and resident of Poland, made a gift to her son of $830,000 after winning the Polish lottery.

Wrzesinski visited his mother in mid-November 2010 and while there phoned his tax advisor in the United States to ask if he needed to document the gift in the U.S. The advisor, a tax accountant and an Enrolled Agent, told Wrzesinski there was no need to include the gift on his U.S. tax returns and that there was no other U.S. legal requirement in connection with the gift. Wrzesinski received the money in four payments from December 2010 to March 2011.

A Problem Unearthed
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Calls For U.S. Wealth Tax Again Grow Louder

After years of debate, discussion and indecision over income gaps, some states have proposed laws to tax the uber-rich even as President Biden calls for the same. Is America ready to cross this major threshold of taxation?

The U.S. may or may not eventually tax the wealthy – but some states aren’t waiting to see.

Wealth tax proposals have been put forward – with varying success, observers say – in California, Connecticut, Hawaii, Illinois, Maryland, New York and Washington. Other states may follow.

Legislation includes possible wealth taxes, stronger estate taxes and taxing income from realized and unrealized capital gains. Proposals run from a general tax on net assets of more than $1 billion USD to a capital gains surcharge and double-digit taxes on individuals with state taxable income exceeding $1 million. Lawmakers want to tax stocks, bonds and other assets that can appreciate in value yet currently do not trigger a tax payment until sold; New York’s proposal, for instance, could produce almost a 30% tax on the capital gain income of rich New York City residents.

In California, a state representative has claimed that a wealth tax would raise $22 billion in revenue. Washington state – home to dozens of billionaires such as Microsoft co-founder Bill Gates – could raise about $3 billion annually through a proposed 1% tax on financial assets (the first $250 million of assets would be exempt).

The Arguments

Nationally, 30% of wealth ($39 trillion in 2022) is held by the 0.25% of households with total wealth over $30 million and white, non-Hispanic families hold 86% of America’s wealth. The wealthiest 1% of Americans have seen their fortunes grow 19 times faster than the bottom half of the population during the last decade, according to anti-poverty and other groups, in part because the U.S. taxes capital gains more favorably than it does income. Proponents say that taxing wealth could fund social programs, combat inequality and advance racial justice.
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Questions Abound For FinCEN Beneficial Ownership Database

A key part of the Financial Crimes Enforcement Network’s activity under the Corporate Transparency Act is a sprawling database. How to build it – and who should have access?

The Financial Crimes Enforcement Network (FinCEN) has issued a Notice of Proposed Rulemaking to implement provisions of the Corporate Transparency Act (CTA) that govern the access to beneficial ownership information (BOI). The regs kick in Jan. 1 next year.

A rule issued last fall requires most corporations, LLCs and similar entities created in or registered to do business in the U.S. to report information about their beneficial owners to FinCEN. (“Beneficial owner” is generally an individual with at least 25% of the ownership interests of an entity.)

The idea was greater exposure of “criminals, corrupt actors and anyone trying to hide ill-gotten gains in the United States,” with a non-public database for use by law enforcement, financial institutions and other authorities both American (local and federal) and foreign. (Written comments on the notice and proposal will be accepted through Feb. 14.)

When filing BOI reports, the rule requires a reporting company to identify itself and report four pieces of information about each of its beneficial owners: name, birthdate, address and “a unique identifying number and issuing jurisdiction from an acceptable identification document.” Companies created or registered before Jan. 1, 2024, have until Jan. 1, 2025, to file their initial reports; companies created or registered after Jan. 1, 2024, will have 30 days to file after being informed they have to do so.

Court Deems A Foundation A Foreign Trust, Greenlighting Tax Penalties

Foreign assets are always tricky for U.S. tax reporting. A recent court decision also shows that differentiating a foundation from a trust is pivotal.

The levying of tax penalties stood in a recent federal appeals court decision on whether a private foundation was a foreign trust subject to such penalties.

In the Rost v. U.S., the U.S. Court of Appeals for the Fifth Circuit upheld tax penalties against U.S. citizen John Rebold, who failed to report his personal-use Liechtenstein “Stiftung” (a non-charitable private foundation) as a foreign trust.

The decedent Rebold formed the Enelre Foundation in 2005 for the general support and education of him and his children. He transferred $2 million to the foundation in 2005 and $1 million in 2007 and did not disclose the transactions to the IRS.

Rebold later learned that the IRS would consider his foundation a foreign trust with the associated reporting requirements. He filed the reports belatedly, in 2013, and the IRS assessed penalties.

Under IRC Sec. 6048, a U.S. person must report creation of a foreign trust, transfers to a foreign trust and distributions received by a foreign trust; ownership of the trust must also be disclosed. Annual filing forms are 3520 and 3520-A, and penalty for failing to file is the greater of $10,000 or 35% of the gross value of property contributed to a foreign trust.

Rebold paid the penalties and then filed a refund action, arguing that the penalties were improper because the reporting requirements for the private foundation were unclear, even though he’d been told as early as 2010 (a year before the IRS announced a new Offshore Voluntary Disclosure Initiative, aka OVDI) that his tax-reporting position was obvious.

He was assessed $1,380,252.35 in penalties and negotiated to reduce these penalties by half. He paid the reduced penalties and filed for an administrative refund claim, which was ultimately taken over by his estate after his death. The estate argued that the foundation wasn’t a foreign trust, claiming that the rules defining trusts are vague and that the IRS never designated that a Stiftung was a foreign trust.

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Residency Status Under A Treaty: Case Could Eventually Affect FBAR "Escape Hatch" Does residency status under a treaty affect whether a taxpayer must file FBAR forms? An often-used “escape hatch” to avoid FBAR filing may be the subject of future litigation after a judge’s order.

A recent decision from the U.S. District Court for the Southern District of California ruled in part for one side and in part for the other in Aroeste v. United States, a case of Report of Foreign Bank and Financial Accounts (FBAR) filing and penalties and where a request for records might just the first stage in litigation that could impact many FBAR non-filers.

Plaintiffs Alberto and Estella Aroeste sued the U.S. to recoup penalty payments and to discharge still- outstanding penalties for the non-filing of an FBAR for 2012 and 2013. The penalties were assessed after a three-year administrative audit of the Aroestes’ filings for tax years 2011 through 2015. The U.S. counterclaimed against the plaintiffs to recover the balance of unpaid penalties.

The district court partially stayed the case while it awaits a U.S. Supreme Court decision in Bittner v. U.S. That case presents a conflict over statutes under the Bank Secrecy Act whether a “violation” is the failure to file an annual FBAR no matter the number of foreign accounts or whether there is a separate violation for each account improperly reported.

The California district court said a decision in Bittner will control any penalties the plaintiffs owe.

Discovery question

Neither side disputed some details of this case. For example, an IRS audit of both plaintiffs’ tax filings for the 2011 through 2015 resulted in an assessment of some $3 million in back taxes and penalties, most of that from penalties assessed for failure to file information returns. The IRS audit led to the FBAR penalties at issue in this lawsuit, which were assessed only for tax years 2012 and 2013 because the plaintiffs did not disclose their holdings in various foreign bank accounts during those tax years.

The Aroestes seek in discovery the entire administrative record of the IRS during the now-completed audit – more than 7,000 pages. Read More
Supreme Court Decides For Bittner In Case Of FBAR Penalties A narrow U.S. Supreme Court decision in Bittner has curtailed federal penalties in a major case involving failure to file FBARs.



The U.S. Supreme Court has ruled 5-4 against a $2.72 million fine on a businessman who didn’t file reports for five years when he was living in Romania.

This case, Bittner v. United States, presented a conflict over statues under the Bank Secrecy Act (BSA). The question is whether a “violation” under the BSA is the failure to file an annual FBAR no matter the number of foreign accounts or a separate violation for each account that isn’t properly reported.

Regulations require filing a single annual FBAR for anyone with an aggregate balance over $10,000 in foreign accounts. The penalty for non-willful violation is up to $10,000.

Bittner maintained that he owed $50,000, or the penalty for each year. The IRS claimed he owed for each account, a total of 272 violations.

Writing for the Court, Justice Neil Gorsuch backed Bittner. “The BSA treats the failure to file a legally compliant report as one violation carrying a maximum penalty of $10,000, not a cascade of such penalties calculated on a per-account basis,” Gorsuch wrote.

Gorsuch also said the government had tried to penalize Bittner without fair warning under the statute that punishments would be handed out on per-account. He called the government’s attempt to assess a massive penalty against Bittner “incongruous” with how it would have treated someone with a single high-balance account.

Alexandru Bittner was born in Romania in 1957, immigrated to the U.S. in 1982 and became a citizen five years later. He returned to Romania in 1990, where he became a successful businessman and investor. He lived there for more than 20 years and was unaware that he was required to file U.S. income tax returns or FBARs. After returning to the U.S. in 2011, he engaged an accountant to prepare and file the returns and FBARs.

The IRS determined that he had failed to timely file FBARs for 2007 through 2011 and sought a maximum penalty: Read More
FinCEN Issues Proposed Rules On Disclosing - And Protecting - Ownership Information

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The Corporate Transparency Act intensifies disclosure of beneficial ownership info to authorities. FinCEN is proposing access restrictions and requirements.

The Financial Crimes Enforcement Network (FinCEN) has issued a Notice of Proposed Rulemaking that would implement provisions of the Corporate Transparency Act (CTA) that govern the access to beneficial ownership information (BOI).

The notice proposes how BOI can be disclosed; how financial institutions and regulators would access such information; protection of this information; and penalties for failing to follow applicable requirements, among other details. The regs would kick in on Jan. 1, 2024.

The proposed regs follow the final reporting rule that FinCEN issued on Sept. 30, 2022, requiring most corporations, LLCs and other similar entities created in or registered to do business in the U.S. to report information about their beneficial owners to FinCEN. (“Beneficial owner” is generally defined as an individual with at least 25% of the ownership interests of an entity.)

Implementation of the CTA promises, authorities claim, greater exposure of “criminals, corrupt actors and anyone trying to hide ill-gotten gains in the United States.” The Act authorizes FinCEN to disclose BOI “under specific circumstances” to five categories of recipients:

-U.S. federal, state, local and Tribal government agencies requesting the information for specified purposes;
-Foreign law enforcement, judges, prosecutors, central authorities and competent authorities (foreign requesters);
-Financial institutions (FIs) using BOI to facilitate compliance with customer due diligence requirements;
-Federal functional regulators and other appropriate regulatory agencies assessing FIs for compliance with customer due diligence; and
-The U.S. Department of the Treasury.

The CTA gives the American Treasury “a unique degree” of access to BOI, including making the information available to any Treasury official whose duties require BOI inspection or disclosure or for tax administration. The new proposed rule aims to track these authorizations.

Also under the proposed rule, foreign requesters would be required to make their requests for BOI through intermediary federal agencies. In addition to meeting other criteria, requests from foreign requesters would have to be made either under an international treaty, agreement or convention or via a request made by law enforcement or other legal authorities in a trusted foreign country.

Proposals are one thing, databases another: The task is still ahead for FinCEN to gather and keep safe such a wealth of owners’ information.

Have a question? Contact Alicea Castellanos, Global Taxes LLC.

How The IRS Shares Taxpayer Information A recent case highlights how freely taxpayers’ data flows between national borders – and how holders of international assets must realize how much overseas tax authorities can learn about them fast.

The Internal Revenue Service is ready, willing and able to help authorities worldwide with tax enforcement – especially with the sharing of taxpayers’ information.

In Zhang v. United States, taxpayers recently appealed a decision from the U.S. District Court for the Northern District of California that denied their petition against an IRS summons for information. The summons was at the request of the Canadian tax authority; the U.S. and Canada have a bilateral tax treaty.

The Ninth Circuit Court sided with the IRS, saying the agency can seek information for a foreign government if the request satisfies accepted guidelines.

The appellants in the case didn’t dispute that the IRS satisfied its burden (as set by the precedent 1964 case U.S. v. Powell) by establishing a prima facie case of good faith. Instead, they argued, the district court should have considered evidence of Canada’s bad faith relevant to whether issuing the summons would constitute an abuse of the court’s process.

“We have recently considered and rejected nearly identical arguments,” the Circuit Court replied. “We do so again today.”

How and why sharing info happens

Nations share tax information primarily in three ways:

· Automatic exchanges (e.g., BEPS Action 5 OECD minimum standard and the FATCA) are routine and usually associated with standardized financial/bank transactions.

· Spontaneous exchanges, when one country alerts another about a potential tax issue (usually facilitated by bilateral tax treaties); and

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How The IRS Shares Taxpayer Info With Other Governments

A recent case highlights how freely taxpayers’ data flows between national borders – and how holders of international assets must realize how much overseas tax authorities can learn about them fast.

The Internal Revenue Service is ready, willing and able to help authorities worldwide with tax enforcement – especially with the sharing of taxpayers’ information.

In Zhang v. United States, taxpayers recently appealed a decision from the U.S. District Court for the Northern District of California that denied their petition against an IRS summons for information. The summons was at the request of the Canadian tax authority; the U.S. and Canada have a bilateral tax treaty.

The Ninth Circuit Court sided with the IRS, saying the agency can seek information for a foreign government if the request satisfies accepted guidelines.

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