Introduction:
Superb article by @RTMitchell is the equivalent of a landscape PAINting of the lives of #Americansabroad. As Paul Atkinson of @AARO implies, it's actually US @citizenshiptax that has made #FATCA #GILTI #PFIC impediments to Americans living outside the USA in the 21st Century. https://t.co/ZvYK82EB2p pic.twitter.com/MGTrRocO0r
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) September 23, 2021
Harrington v. Comm’r, T.C. Memo. 2021-95 | July 26, 2021 | Lauber, J. | Dkt. No. 13531-18
Short Summary: Mr. Harrington is a U.S. citizen; his wife is a dual citizen of the United States and Germany. Mr. Harrington sold his house after meeting Mr. John Glube, a Canadian attorney for Eastern Wood Harvesters (EHW). He then provided these proceeds—$350,000—to Mr. Glube, who deposited that amount in a Union Bank of Switzerland (UBS) account under the name of Reed International, Ltd. (the “Reed Account”). At trial, Mr. Harrington testified that he lent this $350,000 as part of his effort to stabilize EHW, a company in which he became an employee. Later, EHW went under due to the European Union banning the import of North American softwood products, products that EHW sold.
Congress enacted the statutory basis for the requirement to report foreign bank and financial accounts in 1970 as part of the “Currency and Foreign Transactions Reporting Act of 1970,” which came to be known as the “Bank Secrecy Act” or “BSA.” These anti-money laundering and currency reporting provisions, as amended, were codified at 31 USC 5311 – 5332, excluding section 5315.
The Secretary of the Treasury subsequently delegated the authority to administer civil compliance with Title II of the BSA to the Director of FinCEN. IRS Criminal Investigation (CI), however, maintains authority to enforce the criminal provisions of the BSA.
While FinCEN retains rule-making authority with respect to FBAR reporting, FinCEN redelegated civil FBAR enforcement authority to the IRS.
The FBAR regulations require that a United States person, including a citizen, resident, corporation, partnership, limited liability company, trust and estate, file an FBAR to report:
It has been more than 60 years since the Supreme Court held that, under 28 U.S.C. § 1346(a)(1), taxpayers seeking to file federal tax claims against the government in federal court must pay the full amount of tax prior to filing suit. See Flora v. U.S., 362 U.S. 145, 177 (1960). As a result, many taxpayers with large tax assessments often find it more difficult to obtain judicial review of IRS actions, particularly where important procedural rights are lost due to inaction.
But, by its own terms, 28 U.S.C. § 1346(a)(1) only applies to “internal-revenue taxes” and claims related to “internal-revenue laws.” Clearly, federal income taxes and penalties within Title 26 of the United States Code (i.e., the “I.R.C.”) may fall within these definitions. However, do other statutory provisions outside the I.R.C. also fall within the purview of 28 U.S.C. § 1346(a)(1) and the Flora rule?
Introduction: Looking For Mr. FBAR – Outside Looking In Rather Than Inside Looking Out
FBAR cases are newsworthy. For the last decade blogs and legal journals have been populated by some of the most important FBAR questions of the day.
These questions (most of which are unresolved) include:
– What does willfulness mean in the context of the failure to file an FBAR? What if an individual incorrectly answers the FBAR question on Schedule B?
– What accounts are required to be reported? Gambling accounts? Crypto currency accounts? Gift card balances?
– What does “reasonable cause” mean and when can reasonable cause apply?
– and most recently: Can the Government impose a separate penalty on each unreported account or can only one penalty be reported based on the requirement of one FBAR form?
Congress enacted the statutory basis for the requirement to report foreign bank and financial accounts in 1970 as part of the “Currency and Foreign Transactions Reporting Act of 1970,” which came to be known as the “Bank Secrecy Act” or “BSA.” These anti-money laundering and currency reporting provisions, as amended, were codified at 31 USC 5311 – 5332, excluding section 5315.
The Secretary of the Treasury subsequently delegated the authority to administer civil compliance with Title II of the BSA to the Director of FinCEN. IRS Criminal Investigation (CI), however, maintains authority to enforce the criminal provisions of the BSA.
While FinCEN retains rule-making authority with respect to FBAR reporting, FinCEN redelegated civil FBAR enforcement authority to the IRS.
The FBAR regulations require that a United States person, including a citizen, resident, corporation, partnership, limited liability company, trust and estate, file an FBAR to report:
A failure to file a FBAR report may result in criminal exposure—that is, the possibility of a criminal indictment or investigation. For several years, the IRS has publicly touted its intention to strongly enforce the FBAR reporting requirements.
Introduction – Looking For Mr. FBAR
What’s new?
I haven’t written a post about Mr. FBAR for quite some time. But, a post about the recent Boyd Case at Tax Connections, by Darlene Hart got me thinking about FBAR again. For those interested – where the IRS successfully argued that it was appropriate to impose penalties on each individual account – here is the case:
Those who know little about Mr. FBAR might find this introduction to FBAR – although written in 2012 – helpful. Incidentally, it’s pretty obvious that Russia’s Foreign Bank account reporting laws were based on an admiration of Treasury’s success with the FBAR rules.
The purpose of this post
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Thoughts From A Conversation About Green Cards And Taxes
The purpose of this is to reinforce some very simple points. I find that people always have more trouble remembering what’s simple.
Moving to America
1. Taxation of income from your remaining “non-U.S. assets”
You will be shocked to find that many of your “foreign assets” will be subject to particularly punitive U.S. taxation.
2. Reporting of your “non-U.S. assets”
If you are moving to America, you are moving from another country. You will very likely retain financial assets and bank accounts in that country. From a U.S. perspective, these assets are “foreign” and therefore a “fertile ground” for taxation and penalties.
Section 6048 of the Internal Revenue Code requires a United States person, as defined for FBAR reporting, (and the executor of the estate of a US decedent) to file Form 3520 to report:
Additionally, an owner of a foreign trust might be required to file a Substitute Form 3520-A if the foreign trust fails to file Form 3520-A (See SUBSTITUTE Form 3520-A below). Here is Form 3520 and Instructions.
Although the Internal Revenue Code (IRC) refers to trusts in numerous sections, nowhere in the IRC is the term “trust” actually defined. There is a definition of foreign trust. IRC Section 7701(a)(31)(B) says: “The term ‘foreign trust’ means any trust other than a trust described in subparagraph (E) of paragraph (30).” Subparagraph (E) describes “any trust if (i) a court within the United States is able to exercise primary supervision over the administration of the trust, and (ii) one or more United States persons have the authority to control all substantial decisions of the trust.”
So a foreign trust is one that is not under the jurisdiction of United States courts or controlled by a United States person. But what is a “trust”?
A failure to file FBARs and Form 8938 can result in numerous civil tax penalties. Criminal penalties are also a possibility, which could result in jail time.
The FBAR civil penalties have two tiers, depending on whether your conduct was willful or non-willful:
These penalties can be assessed for each account and for each year a FBAR should have been filed, but wasn’t. So a taxpayer with 5 foreign accounts and 5 years of unfiled FBARs could have 25 FBAR violations. In practice, examiners may recommend only one penalty per year and may even recommend a single penalty for multiple years of violations.
The U.S. Internal Revenue Service is seeking what is said to be a record US$119.6m in penalties over what it has claimed in California district court documents were violations of the FBAR regulations, which require Americans to disclose their overseas financial accounts above a certain amount each year.
Foreign Bank Account Report penalties are famously high, which is why tax experts often stress to their clients the importance of complying, particularly as the penalties for “wilful” non-compliance are that much greater.
The case (U.S. vs Burga, No. 5:19-cv-03246-EJD), emerged in the U.S. media recently, where it was noted that court documents had claimed that Francis Burga and her late husband, Margelus Burga, had some 294 foreign bank accounts between 2004 and 2009, in Liechtenstein, the British Virgin Islands, Switzerland, Singapore, Japan, Panama, China and Vietnam, for which they had failed to file the requisite FBARs.
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The Foreign Account Tax Compliance Act (FATCA) is an important development in U.S. efforts to combat tax evasion by U.S. persons holding accounts and other financial assets offshore. The Treasury Department and the IRS continue to develop guidance concerning FATCA. For current and more in-depth information, please visit FATCA.
Under FATCA, certain U.S. taxpayers holding financial assets outside the United States must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets. There are serious penalties for not reporting these financial assets (as described below). This FATCA requirement is in addition to the long-standing requirement to report foreign financial accounts on FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) (formerly TD F 90-22.1).
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