Along with a host of others, many US-Iranian dual nationals are now becoming aware of their US tax and reporting obligations and trying to become US tax compliant. All fine and good. In advising these clients, however, the professional cannot forget that Iran is a sanctioned country and that the US has some very complicated sanction rules in place with Iran. Generally, the sanction rules prohibit US persons from engaging in most business activities with Iran unless a license is first obtained from the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC).
My blog post today, imparts knowledge graciously shared by George M. Clarke, a tax partner at Baker & McKenzie in Washington D.C. George and I have worked on a number of very complex tax matters together and George has an expertise in dealing with the thorny issues presented when the Iran sanction laws and US tax laws create a dangerous combination for a client with Iranian connections who wishes to become US tax compliant.
Who is a “US Person” Subject to Iran Sanction Rules?
First, who is a “US person” subject to the Iranian Transaction Regulations (ITR)? The answer given to me by George was surprising. George pointed me to the relevant ITR Section. I think the answer will surprise you, too.
The ITR defines a “U.S. Person” as “any United States citizen, permanent resident alien, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States.” This means, for example, that any individual with U.S. citizenship or permanent residency is a US person for purposes of the ITR wherever they reside, wherever they work — even if the individual is also an Iranian citizen, residing in Iran! US companies all over the world are dragged into the definition, including their foreign branches. The definition also includes individuals who are physically present in the US. This means that a Swiss or a Pakistani, or even an Iranian national who is physically present in the US, perhaps on a student or trainee visa or even a tourist visa, is covered by the ITR.
What Can and Cannot be Done?
While certain types of activities are permitted, most business by US persons with Iran is strictly prohibited under the ITR. For example, a “US person” cannot invest in Iran, or sell most goods there whether the sale is directly from the US or through a third country, such as the United Arab Emirates. Significantly for US individuals with tax compliance issues, US persons are generally prohibited from depositing and maintaining funds in Iranian banks. If the institution is a government-controlled one (e.g., Bank Melli), the OFAC rules will clearly be violated. If the financial institution is a private one, the underlying facts and circumstances must be examined, such as the source of the deposited funds. In theory, a purely personal transaction may not be troublesome under the ITR. Further inquiries must be made, however, such as where did the money come from? If from an Iranian business or an Iranian asset sale, an OFAC license to undertake these transactions will have been required for a US person.
Certain permissible activities include transactions involving informational materials such as the import and export of books, music, or movies; export of food is generally also permitted. OFAC licenses can also be obtained for certain types of transactions such as dealing with medical supplies or pharmaceutical products or activities related to the travel industry.
Other activities require obtaining an OFAC license beforehand, which, generally speaking will not be easy to obtain. The OFAC license application is not a form. Rather it is a letter written and presented to OFAC that describes the transactions to be engaged in. For example, George explained a simple transaction that unfortunately becomes very complicated due to the ITR – say you inherit real property located in Iran. Since having this property is in violation of the ITR, you wish to dispose of it. In order to dispose of the inherited property, however, you need a specific license issued by OFAC. Without the license in hand, it is illegal to sell your inherited Iranian property. Only when you have obtained the OFAC license will you have proper authorization to dispose of the property in Iran. Don’t forget, you will probably need the assistance of an Iranian attorney, real estate agent and the like. These persons cannot assist you without violating the ITR unless their activities are covered by the OFAC license. Gets complicated, doesn’t it? More detailed information can be found at the US Dept. of the Treasury Iran Sanctions Resource.
US Tax Compliance May Mean Admitting to An OFAC Violation- What Should I Do?
On June 18th the IRS announced a new Offshore Voluntary Disclosure Program and new Streamlined Programs for US persons to become tax compliant with regard to their unreported offshore accounts or assets. You can read more about these programs here.
The interplay between US tax and the ITR cannot be overemphasized. Some clients have been engaged in prohibited business activities with Iran or have investments there such as factories or rental real estate. Due to fear of the Iran sanction rules, income from these foreign activities has not been reported. In addition, many have bank or other financial accounts with Iranian institutions. Maintaining such accounts in Iran may be prohibited under the ITR since it may constitute the prohibited importation of services from Iran as well a prohibited investment in Iran. If the account is kept in certain OFAC-designated institutions (e.g., Bank Saderat, Bank Melli, Bank Sepah), the account holder will have committed an additional ITR violation, that of dealing with a prohibited party on the SDN list.
Any US persons with unauthorized Iranian business activities or undeclared Iranian financial accounts may face possible civil and / or criminal penalties under both OFAC’s regulations and the US tax laws. While it is safe to say that Iran and its financial institutions won’t be signing on for FATCA compliance any day soon, I am seeing clients who have transacted Iranian business through banks in other jurisdictions that are reporting under FATCA. This is especially troublesome for US clients who have transacted business through a Swiss bank that is now participating in the Swiss-DOJ Non-Prosecution Program. The details of what was transacted in or with Iran may eventually unravel as information is at some time later revealed perhaps through a Swiss-US Tax Treaty request.
US persons facing these complicated tax and OFAC issues need proper counsel with legal professionals skilled in both US tax and OFAC matters. They should not be entering either the OVDP or Streamlined programs without a full understanding of the risks and possible options available to remedy the tax and OFAC transgressions. “Voluntary Disclosures” are possible under OFAC as well as the US tax laws, and in both cases, can mean a significant reduction in penalties that would otherwise be imposed if OFAC or IRS discovers the violations first.
Original Post By: Virginia La Torre Jeker, J.D.