Showing posts with label FBAR. Show all posts
Showing posts with label FBAR. Show all posts
Fatca, Fbar, And Ovdi, OVDP, Lance Wallach
Fatca, Fbar, And Ovdi, OVDP, Lance Wallach: Detailed information about FBAR filing, exceptions to filing requirements, delinquent FBAR submissions and more. Property Taxes
Important FBAR and International Tax Information For 2012
By Lance Wallach
For individual tax returns (Forms 1040) due to be filed in 2012 (due this year by April 17, 2012, unless extended), the IRS has issued new Form 8938, "Statement of Specified Foreign Financial Assets," requiring the disclosure of certain foreign accounts and assets.
Whether an individual is required to file this form is complicated, but basically this applies to the following assets if owned in 2011:
Financial accounts in foreign financial institutions.
Any stock or securities issued by foreign corporations or entities, any interest in a foreign partnership, trust or estate, as well as any financial instrument or contract issued by a foreign person, and foreign pension plans and deferred compensation arrangements (but not foreign social security). You are not, however, required to report foreign assets (1) if the assets are held in a U.S. brokerage account; (2) if you are required to disclose the asset on certain other tax form such as Form 3520 or Form 5471; or (3) if such assets (other than stock) are used in your trade or business.
Financial accounts in foreign financial institutions.
Any stock or securities issued by foreign corporations or entities, any interest in a foreign partnership, trust or estate, as well as any financial instrument or contract issued by a foreign person, and foreign pension plans and deferred compensation arrangements (but not foreign social security). You are not, however, required to report foreign assets (1) if the assets are held in a U.S. brokerage account; (2) if you are required to disclose the asset on certain other tax form such as Form 3520 or Form 5471; or (3) if such assets (other than stock) are used in your trade or business.
Whether you have to file Form 8938 depends on the total value of such foreign assets at year end as well as the highest value at any point in the year. For U.S. citizens and residents filing joint tax returns, you must file Form 8938 if the year-end value of the foreign assets is $100,000 or more or, if the value at any time during the year exceeded $150,000. On joint returns, all foreign-based assets owned by the spouses are considered in determining these thresholds. For married spouses filing separately and for unmarried persons, the thresholds are $50,000 (year end) and $75,000 (high value during the year).
There are different rules regarding certain persons who live abroad. There are also rules regarding valuation of certain assets. These are spelled out in greater detail in the Form 8938 instructions.
If required, Form 8938 is to be filed with your Federal Income Tax Return (Form 1040). Currently only individuals having filing requirements must fill out the Form 8938, but it is expected that this will be extended to corporations, partnerships and trusts in the future.
The IRS may impose penalties for failure to file Form 8938 if you lack reasonable cause or willfully neglected to file. In addition, if you underpay your tax as a result of a transaction involving an undisclosed foreign financial asset, the penalty for such failure may be 40 percent of the underpayment (instead of the normal 20 percent). In addition, the statute of limitations for assessing tax may be extended if you fail to file the form.
It is important to note that Form 8938 is in addition to the annual Foreign Bank Account Form or "FBAR," which has different filing requirements. The FBAR, generally is required if you have ownership or signature authority over one or more foreign bank accounts with a value of over $10,000 on any date in the prior year. The FBAR is not part of your income tax return, but is filed separately and must be received by the Department of Treasury in Detroit by June 30 (timely mailing does not apply to that form).
Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters. He writes about 412(i), 419, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public Radio's All Things Considered, and others. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education's CPA's Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxaudit419.com and www.taxlibrary.us
The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.
IRS Attacks FBAR Offshore Bank Accounts and Foreign Income
You may want to think about participation in the IRS' offshore tax amnesty program (called the Offshore Voluntary Disclosure Initiative). Do you want to play audit roulette with the IRS? Some clients think they are too small to be prosecuted. They are wrong.
To the average businessperson, only the guys with tens of millions secretly stashed in Swiss bank accounts get prosecuted. Don't tell that to Michael Schiavo, he was just prosecuted for hiding money in a Swiss account back in 2003. How much money does the IRS say he hid? A whopping $90,000. That's all.
But wait, there is more to the story. Schiavo attempted to do a quiet disclosure during the 2009 amnesty but instead of filling out the amnesty paperwork, he simply trusted that by coming forward voluntarily he could avoid criminal prosecution. He was wrong on all counts, nothing is too small for the IRS, and nothing is too old.
If You Are Thinking that Your Foreign Bank Is not Located in Switzerland...
By Lance Wallach, CLU, CHFC
and is a tiny hole in the wall in the middle of nowhere so I am safe, think again. Taxpayer Options: Taxpayers that have willfully chosen to pass on entering the 2009 or 2011 voluntary disclosure programs both have the following options.
1. Do nothing
2. Get into compliance on a go forward basis
3. Make a quiet disclosure (or take no further action where a quiet disclosure was already made)
4. Make a loud disclosure by entering the 3rd version of the Offshore Voluntary Disclosure Initiative (OVDI).
Analysis of Options:
1. Do nothing
Taxpayers that do nothing when faced with this problem are gambling that the IRS does not have the resources to detect their foreign account. In my opinion this is a grave mistake. Every participant in the 2009 and 2011 voluntary disclosure initiatives was required to provide the government with “intel” on the foreign bank(s) they had deposits with. In fact, data mining is considered a key feature of the voluntary disclosure regime. Participants have been required to provide information related to the creation and maintenance of their foreign accounts as well as identify advisors, and others who promoted tax evasion. The government routinely gathered information about activity that formed the basis of the UBS litigation.
UBS bankers were coming onto US soil and counseling US taxpayers that they could deposit funds overseas and that the existence of the account would never be revealed to the US government. Moreover they were advising that any investment income generated by the account would be tax free because if the US government did not know about the income generated by the account it could not tax the investment income. These actions were argued to be aiding and abetting income tax evasion and formed the basis of the suit against UBS. Many other banks around the world are suspected of doing the same thing. In fact, currently there is litigation against 11 additional Swiss banks for the same type of activity. As part of this litigation the main information sought by the US government is the names and account balances of US citizens and residents that have deposits with these Swiss Institutions.
If you are thinking that your foreign bank is not located in Switzerland and is a tiny hole in the wall in the middle of nowhere so I am safe, think again! Recently legislation called FATCA is expected to result in the submission of the names and account balances of every US resident and Citizen worldwide starting in 2014. FATCA forces foreign banks to turn over this information or face a 30% withholding requirement on transfers from U.S. institutions to the foreign bank. Most banks are expected to comply and turn over the names of US Citizens and Residents rather than lose 30% of deposits to the institution from US financial institutions. Up to now, only the United Kingdom has finalized a FATCA pact, pending approval by parliament. France, Germany, Italy, Spain, Switzerland and Japan have pending agreements and the Treasury is negotiating with at least 40 other countries for FATCA agreements.
Since the US government will eventually have actionable knowledge concerning your foreign account doing nothing is not a viable option in the face of the draconian penalty regime at the government’s disposal.
2. Get into compliance on a go forward basis
Some advisors are recommending that taxpayer’s merely get into compliance on a go forward basis and do nothing to address the past non-compliance gambling that the IRS does not have the resources to detect the foreign account. In my opinion this option is also not viable because of the ease with which the U.S. government can flag TDF 90-22.1′s with large balances on its radar screen. I have heard rumors that the Criminal Investigation Division (CID) has assigned a special agent to monitor for just this occurrence.
If I were a CID agent my thought process would be as follows for example.
John Smith has just reported a 1.3 million dollar account balance in the Cayman Islands. Let’s take a look at his prior returns. Hmmmm… for the last 3 years he has made $50,000 a year or so… Thus… the deposit could not have come from previously taxed U.S. income. Did Mr. Smith inherit this money? If he did he better have filed a form 3520 to report the inheritance or I get to hit him with a 35% penalty on the amount of the inheritance! Hmmmm…. No 3520 was filed. Gee… Since I can determine that the funds did not come from previously taxed earnings or from an inheritance there must be something fishy afoot here… Let’s audit this taxpayer. Matter of fact; let’s have the criminal investigation division take a look as well…
As you can see, this is not a viable option.
3. Make a quiet disclosure (or take no further action where a quiet disclosure was already made)
Note: It is still possible to convert a quite disclosure into a loud disclosure by entering into the third version of the OVDI program.
Some advisors are proponents of quiet disclosures. A quiet disclosure is where prior tax returns are amended to report the previously omitted foreign income and the delinquent TDF 90-22.1′s are filed. In a quiet disclosure the Criminal Investigation Division of the IRS is not made aware of the disclosure and again the taxpayer is banking that the IRS does not have the resources to detect the quiet disclosure. This approach has many proponents because if it successful the taxpayer only pays the additional income taxes they should have paid if they would have filed the previous returns correctly plus interest. Often, no penalties are assessed.
The problem with this approach is the IRS has stated publicly that they will criminally prosecute any taxpayer they detect has done this. To make things worse, many unscrupulous tax preparer advisers are advising this approach out of their own self-interest to the detriment of their client’s best interests. This approach results in a revenue stream for them in that they get to prepare the delinquent returns and TDF 90-22.1′s. Additionally they are able to protect their long-term relationship and future revenue streams with their client.
If the tax preparer does what he or she is ethically required to do, refer the client to a reputable tax attorney and have no further communication with the client upon discovery of the foreign account, the preparer knows that the tax attorney is ethically required to hire a new tax preparer to prepare the amended returns and TDF 90-22.1′s because the original preparer is likely to be the first witness called to testify against the taxpayer should the government criminally prosecute the taxpayer. To add insult to injury the preparer’s lack of knowledge as to the reporting requirements surrounding foreign accounts could have contributed to the creation of this tax nightmare as well.
Imagine how easy it would be for the IRS to detect a quiet disclosure. They receive at least 2 amended returns. The current year correctly reports the foreign income and the two open tax years are amended. The IRS receives the current year FBAR timely and the previous two tax years are amended. All the IRS has to do is look for this pattern of reporting to identify taxpayers that are making quiet disclosures.
To make matters worse the government upon discovering a quiet disclosure will deem the act of a quiet disclosure itself as an additional badge of fraud for a subsequent criminal prosecution. It is important to note that a subsequently discovered voluntary disclosure will not automatically result in a criminal conviction for tax fraud as the government still has to prove willfulness and be willing to commit significant resources to prosecuting the case. Each case must be analyzed on an individual facts and circumstances basis but for the reasons cited above this is not ordinarily a viable option except where exposure for criminal liability is determined by an experience tax attorney as extremely remote and a taxpayer is willing to gamble on the attorney’s judgment.
Note: It is still possible to convert a quite disclosure into a loud disclosure by entering into the third version of the OVDI program.
4. Make a loud disclosure
By entering into the third version of the OVDI program a taxpayer makes a loud disclosure. A loud disclosure consist of knocking on the front door of the IRS Criminal Investigation Division and disclosing in writing that you have foreign and possibly even domestic non-compliance issues which may or may not rise to the level of outright criminal behavior that you wish to correct. In essence, a deal is struck with the Criminal Investigation Division that goes like this – in exchange for the taxpayer’s promise to correct all foreign and domestic noncompliance with US tax law (including U.S. Government information reporting requirements) through full cooperation with the IRS’s civil division, the Criminal Investigations unit promises not to prosecute the taxpayer for any applicable tax crimes provided the taxpayer makes a full honest and complete effort to correct their prior income tax returns including paying (or arranging to pay) the additional taxes, penalties or interest.
My Clients routinely and understandably want to know what the worst case scenario is where they come forward. I tell them that the draconian penalties that are on the books were written to give the IRS a club to force people to come forward. The U.S. taxing system is based on voluntary compliance. From a policy perspective it makes little sense to bring the full force of law against those that make a voluntary effort to correct their non-compliance as this would discourage others from doing so as well.
The questions I get are as follows:
- How many prior year returns will I have to amend?
- What will I be penalized for the additional income tax reported on the amended returns surrounding my foreign and domestic non-compliance?
- What will I be penalized for the non-compliance surrounding the TDF 90-22.1′s?
The 2009 OVDP and 2011 OVDI and the current third version of these programs provide certainty when answering these questions.
2. Get into compliance on a go forward basis
3. Make a quiet disclosure (or take no further action where a quiet disclosure was already made)
4. Make a loud disclosure by entering the 3rd version of the Offshore Voluntary Disclosure Initiative (OVDI).
Analysis of Options:
1. Do nothing
Taxpayers that do nothing when faced with this problem are gambling that the IRS does not have the resources to detect their foreign account. In my opinion this is a grave mistake. Every participant in the 2009 and 2011 voluntary disclosure initiatives was required to provide the government with “intel” on the foreign bank(s) they had deposits with. In fact, data mining is considered a key feature of the voluntary disclosure regime. Participants have been required to provide information related to the creation and maintenance of their foreign accounts as well as identify advisors, and others who promoted tax evasion. The government routinely gathered information about activity that formed the basis of the UBS litigation.
UBS bankers were coming onto US soil and counseling US taxpayers that they could deposit funds overseas and that the existence of the account would never be revealed to the US government. Moreover they were advising that any investment income generated by the account would be tax free because if the US government did not know about the income generated by the account it could not tax the investment income. These actions were argued to be aiding and abetting income tax evasion and formed the basis of the suit against UBS. Many other banks around the world are suspected of doing the same thing. In fact, currently there is litigation against 11 additional Swiss banks for the same type of activity. As part of this litigation the main information sought by the US government is the names and account balances of US citizens and residents that have deposits with these Swiss Institutions.
If you are thinking that your foreign bank is not located in Switzerland and is a tiny hole in the wall in the middle of nowhere so I am safe, think again! Recently legislation called FATCA is expected to result in the submission of the names and account balances of every US resident and Citizen worldwide starting in 2014. FATCA forces foreign banks to turn over this information or face a 30% withholding requirement on transfers from U.S. institutions to the foreign bank. Most banks are expected to comply and turn over the names of US Citizens and Residents rather than lose 30% of deposits to the institution from US financial institutions. Up to now, only the United Kingdom has finalized a FATCA pact, pending approval by parliament. France, Germany, Italy, Spain, Switzerland and Japan have pending agreements and the Treasury is negotiating with at least 40 other countries for FATCA agreements.
Since the US government will eventually have actionable knowledge concerning your foreign account doing nothing is not a viable option in the face of the draconian penalty regime at the government’s disposal.
2. Get into compliance on a go forward basis
Some advisors are recommending that taxpayer’s merely get into compliance on a go forward basis and do nothing to address the past non-compliance gambling that the IRS does not have the resources to detect the foreign account. In my opinion this option is also not viable because of the ease with which the U.S. government can flag TDF 90-22.1′s with large balances on its radar screen. I have heard rumors that the Criminal Investigation Division (CID) has assigned a special agent to monitor for just this occurrence.
If I were a CID agent my thought process would be as follows for example.
John Smith has just reported a 1.3 million dollar account balance in the Cayman Islands. Let’s take a look at his prior returns. Hmmmm… for the last 3 years he has made $50,000 a year or so… Thus… the deposit could not have come from previously taxed U.S. income. Did Mr. Smith inherit this money? If he did he better have filed a form 3520 to report the inheritance or I get to hit him with a 35% penalty on the amount of the inheritance! Hmmmm…. No 3520 was filed. Gee… Since I can determine that the funds did not come from previously taxed earnings or from an inheritance there must be something fishy afoot here… Let’s audit this taxpayer. Matter of fact; let’s have the criminal investigation division take a look as well…
As you can see, this is not a viable option.
3. Make a quiet disclosure (or take no further action where a quiet disclosure was already made)
Note: It is still possible to convert a quite disclosure into a loud disclosure by entering into the third version of the OVDI program.
Some advisors are proponents of quiet disclosures. A quiet disclosure is where prior tax returns are amended to report the previously omitted foreign income and the delinquent TDF 90-22.1′s are filed. In a quiet disclosure the Criminal Investigation Division of the IRS is not made aware of the disclosure and again the taxpayer is banking that the IRS does not have the resources to detect the quiet disclosure. This approach has many proponents because if it successful the taxpayer only pays the additional income taxes they should have paid if they would have filed the previous returns correctly plus interest. Often, no penalties are assessed.
The problem with this approach is the IRS has stated publicly that they will criminally prosecute any taxpayer they detect has done this. To make things worse, many unscrupulous tax preparer advisers are advising this approach out of their own self-interest to the detriment of their client’s best interests. This approach results in a revenue stream for them in that they get to prepare the delinquent returns and TDF 90-22.1′s. Additionally they are able to protect their long-term relationship and future revenue streams with their client.
If the tax preparer does what he or she is ethically required to do, refer the client to a reputable tax attorney and have no further communication with the client upon discovery of the foreign account, the preparer knows that the tax attorney is ethically required to hire a new tax preparer to prepare the amended returns and TDF 90-22.1′s because the original preparer is likely to be the first witness called to testify against the taxpayer should the government criminally prosecute the taxpayer. To add insult to injury the preparer’s lack of knowledge as to the reporting requirements surrounding foreign accounts could have contributed to the creation of this tax nightmare as well.
Imagine how easy it would be for the IRS to detect a quiet disclosure. They receive at least 2 amended returns. The current year correctly reports the foreign income and the two open tax years are amended. The IRS receives the current year FBAR timely and the previous two tax years are amended. All the IRS has to do is look for this pattern of reporting to identify taxpayers that are making quiet disclosures.
To make matters worse the government upon discovering a quiet disclosure will deem the act of a quiet disclosure itself as an additional badge of fraud for a subsequent criminal prosecution. It is important to note that a subsequently discovered voluntary disclosure will not automatically result in a criminal conviction for tax fraud as the government still has to prove willfulness and be willing to commit significant resources to prosecuting the case. Each case must be analyzed on an individual facts and circumstances basis but for the reasons cited above this is not ordinarily a viable option except where exposure for criminal liability is determined by an experience tax attorney as extremely remote and a taxpayer is willing to gamble on the attorney’s judgment.
Note: It is still possible to convert a quite disclosure into a loud disclosure by entering into the third version of the OVDI program.
4. Make a loud disclosure
By entering into the third version of the OVDI program a taxpayer makes a loud disclosure. A loud disclosure consist of knocking on the front door of the IRS Criminal Investigation Division and disclosing in writing that you have foreign and possibly even domestic non-compliance issues which may or may not rise to the level of outright criminal behavior that you wish to correct. In essence, a deal is struck with the Criminal Investigation Division that goes like this – in exchange for the taxpayer’s promise to correct all foreign and domestic noncompliance with US tax law (including U.S. Government information reporting requirements) through full cooperation with the IRS’s civil division, the Criminal Investigations unit promises not to prosecute the taxpayer for any applicable tax crimes provided the taxpayer makes a full honest and complete effort to correct their prior income tax returns including paying (or arranging to pay) the additional taxes, penalties or interest.
My Clients routinely and understandably want to know what the worst case scenario is where they come forward. I tell them that the draconian penalties that are on the books were written to give the IRS a club to force people to come forward. The U.S. taxing system is based on voluntary compliance. From a policy perspective it makes little sense to bring the full force of law against those that make a voluntary effort to correct their non-compliance as this would discourage others from doing so as well.
The questions I get are as follows:
- How many prior year returns will I have to amend?
- What will I be penalized for the additional income tax reported on the amended returns surrounding my foreign and domestic non-compliance?
- What will I be penalized for the non-compliance surrounding the TDF 90-22.1′s?
The 2009 OVDP and 2011 OVDI and the current third version of these programs provide certainty when answering these questions.
FBAR/OVDI LANCE WALLACH: Abusive Insurance and Retirement Plans
FBAR/OVDI LANCE WALLACH: Abusive Insurance and Retirement Plans: Abusive Insurance and Retirement Plans
FBAR/OVDI LANCE WALLACH: Abusive Insurance and Retirement Plans
FBAR/OVDI LANCE WALLACH: Abusive Insurance and Retirement Plans: Abusive Insurance and Retirement Plans
FBAR/OVDI LANCE WALLACH: FBAR/OVDI LANCE WALLACH: 419e,412i,419,412,benefit...
FBAR/OVDI LANCE WALLACH: FBAR/OVDI LANCE WALLACH: 419e,412i,419,412,benefit...: FBAR/OVDI LANCE WALLACH: 419e,412i,419,412,benefit plan penalties,audits,tax shelter.fraud
FBAR/OVDI LANCE WALLACH: Expert help with 419a, 419e, 419, 412i, welfare be...
FBAR/OVDI LANCE WALLACH: Expert help with 419a, 419e, 419, 412i, welfare be...: Expert help with 419a, 419e, 419, 412i, welfare benefit plans, 6707a penalties, form 8886, us tax shield
FBAR Offshore Bank Accounts and Foreign Income Attacked by IRS
You may want to think about participation in the IRS’ offshore tax amnesty program (called the Offshore Voluntary Disclosure Initiative). Do you want to play audit roulette with the IRS? Some clients think they are too small to be prosecuted. They are wrong.
To the average businessperson, only the guys with tens of millions secretly stashed in Swiss bank accounts get prosecuted. Don't tell that to Michael Schiavo. He was just prosecuted for hiding money in a Swiss account back in 2003. How much money does the IRS say he hid? A whopping $90,000. That’s it.
But wait, there is more to the story. Schiavo attempted to do a quiet disclosure during the 2009 amnesty but instead of filling out the amnesty paperwork, he simply trusted that by coming forward voluntarily he could avoid criminal prosecution. He was wrong on all counts. Nothing is too small for the IRS, and nothing is too old.
“So, to save a whopping $40,624 in taxes, this guy risked a felony conviction and prison time, not to mention steep penalties that could very easily eat up the entire $90,000, and also his criminal and civil defense costs.
The smart taxpayers are the ones coming forward and not having to look over their shoulders for the next 10 years.
Time is running out. The tax amnesty runs through August but it takes at least days to jump through all the hoops. We will also fight hard to reduce the penalties down even more. Remember, the IRS can go as low as 5%.
The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.
ABOUT THE AUTHOR: Lance Wallach
Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters. He writes about 412(i), 419, and captive insurance plans. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education's CPA's Guide to Life Insurance and Federal Estate and Gift Taxation. He does expert witness testimony and has never lost a case.
Copyright Lance Wallach, CLU, CHFC
More information about Lance Wallach, CLU, CHFC
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
But wait, there is more to the story. Schiavo attempted to do a quiet disclosure during the 2009 amnesty but instead of filling out the amnesty paperwork, he simply trusted that by coming forward voluntarily he could avoid criminal prosecution. He was wrong on all counts. Nothing is too small for the IRS, and nothing is too old.
“So, to save a whopping $40,624 in taxes, this guy risked a felony conviction and prison time, not to mention steep penalties that could very easily eat up the entire $90,000, and also his criminal and civil defense costs.
The smart taxpayers are the ones coming forward and not having to look over their shoulders for the next 10 years.
Time is running out. The tax amnesty runs through August but it takes at least days to jump through all the hoops. We will also fight hard to reduce the penalties down even more. Remember, the IRS can go as low as 5%.
The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.
ABOUT THE AUTHOR: Lance Wallach
Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters. He writes about 412(i), 419, and captive insurance plans. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education's CPA's Guide to Life Insurance and Federal Estate and Gift Taxation. He does expert witness testimony and has never lost a case.
Copyright Lance Wallach, CLU, CHFC
More information about Lance Wallach, CLU, CHFC
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
International Tax, Transfer Pricing, FBAR Problems
The IRS dedicates enormous resources toward dealing with taxpayers who are involved with any form of transfer pricing. The transfer pricing provisions of IRC 482 address four general types of transactions between commonly owned or controlled parties.
1- Use or transfer of tangible property;
2- Services;
3- Loans;
4- Use or transfer of intangible property (especially cost sharing arrangements) .
Use of tangible property: When one member of a controlled group rents or leases property to another member of the group, the price paid for use of such property must be appropriate for an arm’s length amount. Per Treas. Reg. 1.482-2(c)(2)(i), the arm’s length amount is determined by reference to the amount that would have been charged between independent parties for use of the same or similar property under similar circumstances.
Determination of what is arm’s length for fair rental value transactions:
a) Period of use;
b) Location of use;
c) Owner’s investment in property or rent paid;
d) Expenses of maintaining the property;
e) Type of property;
f) Condition of property.
Transfer of tangible property: When sales or transfers of tangible property are made between related parties (sales of goods), the arm’s length price generally is the price that an unrelated party would pay for similar property under similar circumstances.
Determination of what is arm’s length for inter-company sales: The regulations specify six methods used to determine whether an arm’s length amount has been charged between members of a controlled group. Treas. Reg.1.482-3(a), states that the “best method" should be used to determine arm’s length price. The IRS views the “best method" as the method that produces the most reliable results based on facts and circumstances.
The IRS is well aware of the fact that many transfer-pricing studies are prepared with the intention to validate year-end inter-company cost of sales regardless of whether they are arm’s length just to avoid the IRC 6662 penalties taxpayers would be best served if transfer-pricing studies were prepared by knowledgeable experts in the field.
Inter-company Services: When one member performs services for another member of a controlled group, an arm’s length price is necessary. This includes services such as marketing, management, technical services, or any other type of service. Such services can be provided by one party for the joint benefit of all members, or can be provided between two members of the controlled group.
Determination of what is arm’s length for inter-company services: The arm’s length standard for services between related parties is found in Treas. Reg. 1.482-2(b)(3) which states, “ an arm’s length charge for services rendered shall be the amount which was charged or would have been charged for the same or similar services in independent transactions with or between unrelated parties under similar circumstances considering all relevant facts." The arm’s length charge for services between related parties will depend upon the facts related to the services provided. The pricing rules fall within three categories:
1) An arm’s length charge will be based on the amount that would have been charged by an unrelated party. This generally means that the price should be based on reimbursement of cost, plus a mark-up for profit.
2) An arm’s length charge may be based on only the costs incurred, provided that certain criteria are met.
3) No charge is necessary, if certain criteria are met.
The area that concerns the IRS most with these types of transactions is technical services with regard provided by larger U.S corporations to their foreign CPC’s, which are not charged for these services. In regards to smaller cases, the IRS typically examines management fees in detail to ensure they are arm’s length.
Inter-company Loans: In the context of IRC 482, most of the areas of conflict in this area revolve around interest. When loans are made between members of a controlled group, interest rates charged do not always meet the required arm’s length standard.
Determination of what is arm’s length for inter-company loans: The arm’s length standard for loans between related parties is found in Treas. Reg. 1.482-2(a)(2) which states that “ an arm’s length rate of interest shall be a rate of interest which was charged, or would have been charged, at the time the indebtedness arose, in independent transactions with or between unrelated parties under similar circumstances."
Factors that are listed in Treas. Reg. 1.482-2(a)(2) that should be considered in determining arm’s length interest are:
a) The principle amount and duration of the loan.
b) The security involved.
c) The credit standing of the borrower.
d) The prevailing interest rate where the loan was made.
The regulations provide further guidance in the following areas:
a) Safe harbor rules;
b) Ordering rules;
c) Determination of bona fide indebtedness;
d) Period for which interest is charged.
Transfers of intangible properties: When transfers of intangible property are made between controlled parties, the arm’s length price is often difficult to determine, in part because the property’s value derives from intellectual capital such as ideas, the outcome of research and development or creation of software.
Determination of what is arm’s length for transfer of intangible property: The regulations specify four methods to determine whether an arm’s length amount has been charged between the members of a controlled group with respect to the transfer or use of intangible property. Treas.Reg.1.482-4 (a) states that the “best method" should be used to determine the arm’s length price between related parties. Controlled parties may enter into a qualified cost sharing arrangements to share costs related to developing intangibles. They may also contribute existing intangibles for use in further development or for use in developing new and distinct intangibles.
The following general rules of Treas.Reg.1.482-7 (a) and (b) apply to qualified cost sharing arrangements:
a) Two or more controlled participants agree to share the costs of developing intangibles.
b) Costs are shared based on each participant’s share of reasonably anticipated benefits from the intangibles to be developed.
c) A “buy-in" must be paid to the participant that contributes pre-existing intangible property to the qualified cost sharing arrangement.
As with transfer pricing reports, cost-sharing agreements should be prepared by qualified experts who are knowledgeable in this area. The ideal candidate would probably be someone with decades of experience preferably with the IRS in the international taxation area. Said ideal candidate should also of course be a CPA. If examined by the IRS, the cost sharing agreement will be reviewed in detail. For further guidance refer to the Coordinated Issue Paper utilized as a guideline for the IRS personnel dated June 5th 2009.
2- Services;
3- Loans;
4- Use or transfer of intangible property (especially cost sharing arrangements) .
Use of tangible property: When one member of a controlled group rents or leases property to another member of the group, the price paid for use of such property must be appropriate for an arm’s length amount. Per Treas. Reg. 1.482-2(c)(2)(i), the arm’s length amount is determined by reference to the amount that would have been charged between independent parties for use of the same or similar property under similar circumstances.
Determination of what is arm’s length for fair rental value transactions:
a) Period of use;
b) Location of use;
c) Owner’s investment in property or rent paid;
d) Expenses of maintaining the property;
e) Type of property;
f) Condition of property.
Transfer of tangible property: When sales or transfers of tangible property are made between related parties (sales of goods), the arm’s length price generally is the price that an unrelated party would pay for similar property under similar circumstances.
Determination of what is arm’s length for inter-company sales: The regulations specify six methods used to determine whether an arm’s length amount has been charged between members of a controlled group. Treas. Reg.1.482-3(a), states that the “best method" should be used to determine arm’s length price. The IRS views the “best method" as the method that produces the most reliable results based on facts and circumstances.
The IRS is well aware of the fact that many transfer-pricing studies are prepared with the intention to validate year-end inter-company cost of sales regardless of whether they are arm’s length just to avoid the IRC 6662 penalties taxpayers would be best served if transfer-pricing studies were prepared by knowledgeable experts in the field.
Inter-company Services: When one member performs services for another member of a controlled group, an arm’s length price is necessary. This includes services such as marketing, management, technical services, or any other type of service. Such services can be provided by one party for the joint benefit of all members, or can be provided between two members of the controlled group.
Determination of what is arm’s length for inter-company services: The arm’s length standard for services between related parties is found in Treas. Reg. 1.482-2(b)(3) which states, “ an arm’s length charge for services rendered shall be the amount which was charged or would have been charged for the same or similar services in independent transactions with or between unrelated parties under similar circumstances considering all relevant facts." The arm’s length charge for services between related parties will depend upon the facts related to the services provided. The pricing rules fall within three categories:
1) An arm’s length charge will be based on the amount that would have been charged by an unrelated party. This generally means that the price should be based on reimbursement of cost, plus a mark-up for profit.
2) An arm’s length charge may be based on only the costs incurred, provided that certain criteria are met.
3) No charge is necessary, if certain criteria are met.
The area that concerns the IRS most with these types of transactions is technical services with regard provided by larger U.S corporations to their foreign CPC’s, which are not charged for these services. In regards to smaller cases, the IRS typically examines management fees in detail to ensure they are arm’s length.
Inter-company Loans: In the context of IRC 482, most of the areas of conflict in this area revolve around interest. When loans are made between members of a controlled group, interest rates charged do not always meet the required arm’s length standard.
Determination of what is arm’s length for inter-company loans: The arm’s length standard for loans between related parties is found in Treas. Reg. 1.482-2(a)(2) which states that “ an arm’s length rate of interest shall be a rate of interest which was charged, or would have been charged, at the time the indebtedness arose, in independent transactions with or between unrelated parties under similar circumstances."
Factors that are listed in Treas. Reg. 1.482-2(a)(2) that should be considered in determining arm’s length interest are:
a) The principle amount and duration of the loan.
b) The security involved.
c) The credit standing of the borrower.
d) The prevailing interest rate where the loan was made.
The regulations provide further guidance in the following areas:
a) Safe harbor rules;
b) Ordering rules;
c) Determination of bona fide indebtedness;
d) Period for which interest is charged.
Transfers of intangible properties: When transfers of intangible property are made between controlled parties, the arm’s length price is often difficult to determine, in part because the property’s value derives from intellectual capital such as ideas, the outcome of research and development or creation of software.
Determination of what is arm’s length for transfer of intangible property: The regulations specify four methods to determine whether an arm’s length amount has been charged between the members of a controlled group with respect to the transfer or use of intangible property. Treas.Reg.1.482-4 (a) states that the “best method" should be used to determine the arm’s length price between related parties. Controlled parties may enter into a qualified cost sharing arrangements to share costs related to developing intangibles. They may also contribute existing intangibles for use in further development or for use in developing new and distinct intangibles.
The following general rules of Treas.Reg.1.482-7 (a) and (b) apply to qualified cost sharing arrangements:
a) Two or more controlled participants agree to share the costs of developing intangibles.
b) Costs are shared based on each participant’s share of reasonably anticipated benefits from the intangibles to be developed.
c) A “buy-in" must be paid to the participant that contributes pre-existing intangible property to the qualified cost sharing arrangement.
As with transfer pricing reports, cost-sharing agreements should be prepared by qualified experts who are knowledgeable in this area. The ideal candidate would probably be someone with decades of experience preferably with the IRS in the international taxation area. Said ideal candidate should also of course be a CPA. If examined by the IRS, the cost sharing agreement will be reviewed in detail. For further guidance refer to the Coordinated Issue Paper utilized as a guideline for the IRS personnel dated June 5th 2009.
As an expert witness Lance Wallach's side has never lost a case. People need to be careful of 419 Welfare Benefit Plans, 412i plans, Section 79 plans and Captive Insurance Plans. Most of these plans are sold by insurance agents. If you are in an abusive, listed or similar transaction plan you need to file under IRS 6707a. The participant files form 8886, and the salesmen or accountant who signs the tax returns files form 8918 if they got paid over $10,000. They are called Material Advisors and face a minimum $100,000 fine. Some plans are offshore which could involve FBAR or OVDI filings. If you have money overseas you probably need to file for IRS tax amnesty. If you want to reduce the tax we suggest that you first file and then opt out. For more information Google Lance Wallach.
The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.
Transfer Pricing FBAR International Tax Problems By Lance Wallach
International Tax, Transfer Pricing, FBAR Problems
The IRS dedicates enormous resources toward dealing with taxpayers who are involved with any form of transfer pricing. The transfer pricing provisions of IRC 482 address four general types of transactions between commonly owned or controlled parties.
1- Use or transfer of tangible property;
2- Services;
3- Loans;
4- Use or transfer of intangible property (especially cost sharing arrangements) .
Use of tangible property: When one member of a controlled group rents or leases property to another member of the group, the price paid for use of such property must be appropriate for an arm’s length amount. Per Treas. Reg. 1.482-2(c)(2)(i), the arm’s length amount is determined by reference to the amount that would have been charged between independent parties for use of the same or similar property under similar circumstances.
Determination of what is arm’s length for fair rental value transactions:
a) Period of use;
b) Location of use;
c) Owner’s investment in property or rent paid;
d) Expenses of maintaining the property;
e) Type of property;
f) Condition of property.
Transfer of tangible property: When sales or transfers of tangible property are made between related parties (sales of goods), the arm’s length price generally is the price that an unrelated party would pay for similar property under similar circumstances.
Determination of what is arm’s length for inter-company sales: The regulations specify six methods used to determine whether an arm’s length amount has been charged between members of a controlled group. Treas. Reg.1.482-3(a), states that the “best method" should be used to determine arm’s length price. The IRS views the “best method" as the method that produces the most reliable results based on facts and circumstances.
The IRS is well aware of the fact that many transfer-pricing studies are prepared with the intention to validate year-end inter-company cost of sales regardless of whether they are arm’s length just to avoid the IRC 6662 penalties taxpayers would be best served if transfer-pricing studies were prepared by knowledgeable experts in the field.
Inter-company Services: When one member performs services for another member of a controlled group, an arm’s length price is necessary. This includes services such as marketing, management, technical services, or any other type of service. Such services can be provided by one party for the joint benefit of all members, or can be provided between two members of the controlled group.
Determination of what is arm’s length for inter-company services: The arm’s length standard for services between related parties is found in Treas. Reg. 1.482-2(b)(3) which states, “ an arm’s length charge for services rendered shall be the amount which was charged or would have been charged for the same or similar services in independent transactions with or between unrelated parties under similar circumstances considering all relevant facts." The arm’s length charge for services between related parties will depend upon the facts related to the services provided. The pricing rules fall within three categories:
1) An arm’s length charge will be based on the amount that would have been charged by an unrelated party. This generally means that the price should be based on reimbursement of cost, plus a mark-up for profit.
2) An arm’s length charge may be based on only the costs incurred, provided that certain criteria are met.
3) No charge is necessary, if certain criteria are met.
The area that concerns the IRS most with these types of transactions is technical services with regard provided by larger U.S corporations to their foreign CPC’s, which are not charged for these services. In regards to smaller cases, the IRS typically examines management fees in detail to ensure they are arm’s length.
Inter-company Loans: In the context of IRC 482, most of the areas of conflict in this area revolve around interest. When loans are made between members of a controlled group, interest rates charged do not always meet the required arm’s length standard.
Determination of what is arm’s length for inter-company loans: The arm’s length standard for loans between related parties is found in Treas. Reg. 1.482-2(a)(2) which states that “ an arm’s length rate of interest shall be a rate of interest which was charged, or would have been charged, at the time the indebtedness arose, in independent transactions with or between unrelated parties under similar circumstances."
Factors that are listed in Treas. Reg. 1.482-2(a)(2) that should be considered in determining arm’s length interest are:
a) The principle amount and duration of the loan.
b) The security involved.
c) The credit standing of the borrower.
d) The prevailing interest rate where the loan was made.
The regulations provide further guidance in the following areas:
a) Safe harbor rules;
b) Ordering rules;
c) Determination of bona fide indebtedness;
d) Period for which interest is charged.
Transfers of intangible properties: When transfers of intangible property are made between controlled parties, the arm’s length price is often difficult to determine, in part because the property’s value derives from intellectual capital such as ideas, the outcome of research and development or creation of software.
Determination of what is arm’s length for transfer of intangible property: The regulations specify four methods to determine whether an arm’s length amount has been charged between the members of a controlled group with respect to the transfer or use of intangible property. Treas.Reg.1.482-4 (a) states that the “best method" should be used to determine the arm’s length price between related parties. Controlled parties may enter into a qualified cost sharing arrangements to share costs related to developing intangibles. They may also contribute existing intangibles for use in further development or for use in developing new and distinct intangibles.
The following general rules of Treas.Reg.1.482-7 (a) and (b) apply to qualified cost sharing arrangements:
a) Two or more controlled participants agree to share the costs of developing intangibles.
b) Costs are shared based on each participant’s share of reasonably anticipated benefits from the intangibles to be developed.
c) A “buy-in" must be paid to the participant that contributes pre-existing intangible property to the qualified cost sharing arrangement.
As with transfer pricing reports, cost-sharing agreements should be prepared by qualified experts who are knowledgeable in this area. The ideal candidate would probably be someone with decades of experience preferably with the IRS in the international taxation area. Said ideal candidate should also of course be a CPA. If examined by the IRS, the cost sharing agreement will be reviewed in detail. For further guidance refer to the Coordinated Issue Paper utilized as a guideline for the IRS personnel dated June 5th 2009.
2- Services;
3- Loans;
4- Use or transfer of intangible property (especially cost sharing arrangements) .
Use of tangible property: When one member of a controlled group rents or leases property to another member of the group, the price paid for use of such property must be appropriate for an arm’s length amount. Per Treas. Reg. 1.482-2(c)(2)(i), the arm’s length amount is determined by reference to the amount that would have been charged between independent parties for use of the same or similar property under similar circumstances.
Determination of what is arm’s length for fair rental value transactions:
a) Period of use;
b) Location of use;
c) Owner’s investment in property or rent paid;
d) Expenses of maintaining the property;
e) Type of property;
f) Condition of property.
Transfer of tangible property: When sales or transfers of tangible property are made between related parties (sales of goods), the arm’s length price generally is the price that an unrelated party would pay for similar property under similar circumstances.
Determination of what is arm’s length for inter-company sales: The regulations specify six methods used to determine whether an arm’s length amount has been charged between members of a controlled group. Treas. Reg.1.482-3(a), states that the “best method" should be used to determine arm’s length price. The IRS views the “best method" as the method that produces the most reliable results based on facts and circumstances.
The IRS is well aware of the fact that many transfer-pricing studies are prepared with the intention to validate year-end inter-company cost of sales regardless of whether they are arm’s length just to avoid the IRC 6662 penalties taxpayers would be best served if transfer-pricing studies were prepared by knowledgeable experts in the field.
Inter-company Services: When one member performs services for another member of a controlled group, an arm’s length price is necessary. This includes services such as marketing, management, technical services, or any other type of service. Such services can be provided by one party for the joint benefit of all members, or can be provided between two members of the controlled group.
Determination of what is arm’s length for inter-company services: The arm’s length standard for services between related parties is found in Treas. Reg. 1.482-2(b)(3) which states, “ an arm’s length charge for services rendered shall be the amount which was charged or would have been charged for the same or similar services in independent transactions with or between unrelated parties under similar circumstances considering all relevant facts." The arm’s length charge for services between related parties will depend upon the facts related to the services provided. The pricing rules fall within three categories:
1) An arm’s length charge will be based on the amount that would have been charged by an unrelated party. This generally means that the price should be based on reimbursement of cost, plus a mark-up for profit.
2) An arm’s length charge may be based on only the costs incurred, provided that certain criteria are met.
3) No charge is necessary, if certain criteria are met.
The area that concerns the IRS most with these types of transactions is technical services with regard provided by larger U.S corporations to their foreign CPC’s, which are not charged for these services. In regards to smaller cases, the IRS typically examines management fees in detail to ensure they are arm’s length.
Inter-company Loans: In the context of IRC 482, most of the areas of conflict in this area revolve around interest. When loans are made between members of a controlled group, interest rates charged do not always meet the required arm’s length standard.
Determination of what is arm’s length for inter-company loans: The arm’s length standard for loans between related parties is found in Treas. Reg. 1.482-2(a)(2) which states that “ an arm’s length rate of interest shall be a rate of interest which was charged, or would have been charged, at the time the indebtedness arose, in independent transactions with or between unrelated parties under similar circumstances."
Factors that are listed in Treas. Reg. 1.482-2(a)(2) that should be considered in determining arm’s length interest are:
a) The principle amount and duration of the loan.
b) The security involved.
c) The credit standing of the borrower.
d) The prevailing interest rate where the loan was made.
The regulations provide further guidance in the following areas:
a) Safe harbor rules;
b) Ordering rules;
c) Determination of bona fide indebtedness;
d) Period for which interest is charged.
Transfers of intangible properties: When transfers of intangible property are made between controlled parties, the arm’s length price is often difficult to determine, in part because the property’s value derives from intellectual capital such as ideas, the outcome of research and development or creation of software.
Determination of what is arm’s length for transfer of intangible property: The regulations specify four methods to determine whether an arm’s length amount has been charged between the members of a controlled group with respect to the transfer or use of intangible property. Treas.Reg.1.482-4 (a) states that the “best method" should be used to determine the arm’s length price between related parties. Controlled parties may enter into a qualified cost sharing arrangements to share costs related to developing intangibles. They may also contribute existing intangibles for use in further development or for use in developing new and distinct intangibles.
The following general rules of Treas.Reg.1.482-7 (a) and (b) apply to qualified cost sharing arrangements:
a) Two or more controlled participants agree to share the costs of developing intangibles.
b) Costs are shared based on each participant’s share of reasonably anticipated benefits from the intangibles to be developed.
c) A “buy-in" must be paid to the participant that contributes pre-existing intangible property to the qualified cost sharing arrangement.
As with transfer pricing reports, cost-sharing agreements should be prepared by qualified experts who are knowledgeable in this area. The ideal candidate would probably be someone with decades of experience preferably with the IRS in the international taxation area. Said ideal candidate should also of course be a CPA. If examined by the IRS, the cost sharing agreement will be reviewed in detail. For further guidance refer to the Coordinated Issue Paper utilized as a guideline for the IRS personnel dated June 5th 2009.
As an expert witness Lance Wallach's side has never lost a case. People need to be careful of 419 Welfare Benefit Plans, 412i plans, Section 79 plans and Captive Insurance Plans. Most of these plans are sold by insurance agents. If you are in an abusive, listed or similar transaction plan you need to file under IRS 6707a. The participant files form 8886, and the salesmen or accountant who signs the tax returns files form 8918 if they got paid over $10,000. They are called Material Advisors and face a minimum $100,000 fine. Some plans are offshore which could involve FBAR or OVDI filings. If you have money overseas you probably need to file for IRS tax amnesty. If you want to reduce the tax we suggest that you first file and then opt out. For more information Google Lance Wallach.
The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.
Transfer Pricing FBAR International Tax Problems By Lance Wallach
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