Tax Evasion Wars: The U.S. Awakens Arthur J. Dichter STEP Bahamas September 8, 2016

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United States Response to Tax Haven Criticism Panama Papers FinCEN Geographic Targeting Orders Obama Administration Actions Other Regulatory Actions

FinCEN Geographic Targeting Orders Originally issued in Jan Required reporting of “all cash” purchases of high end real estate in two specific markets Manhattan (over $3 million) Miami-Dade County (over $1 million) Title insurance companies made to be reporters Applicable from March 1 to August 27

FinCEN Geographic Targeting Orders Expanded in July Manhattan (over $3 million) Other New York Boroughs ($1.5 million) Miami-Dade County (over $1 million) Broward/Palm Beach Counties (over $1 million) San Diego/Los Angeles/San Francisco/San Mateo/Santa Clara Counties (over $2 million) Bexar County (over $500,000) Applicable from August 28 to February 23, 2017

Obama Admin Reaction to Panama Papers New Customer Due Diligence rules for US financial institutions Regulations Subject U.S. disregarded entities to section 6038A reporting (Form 5472) Require certain foreign- owned companies to obtain a TIN Legislative proposals

Obama Admin Legislative Proposals Pass legislation to require “beneficial ownership” transparency Pass legislation to give law enforcement better anti- corruption tools Approve pending tax treaties and protocols Strengthen existing law to improve reciprocal transparency

New Customer Due Diligence Rules Collect and verify info on beneficial owners that own, control, and profit from companies accounts Amend Bank Secrecy Act regulations Identify and verify beneficial owners Understand nature and purpose of customer relationship to develop customer risk profiles Conduct ongoing monitoring to identify and report suspicious transactions Monitor and update customer risk information

Proposed Rules for Disregarded Entities Form 5472 required for foreign- owned single member US LLC Record maintenance requirements Expand definition of reportable transaction Reporting required even if the foreign owner files a US return and reports the item Requires LLC to obtain an EIN Applicable for tax years ending 12 months after finalized

PATH Act of 2015 Enacted on December 18, 2015 Trying to combat fraud Requires that ITINs not used on a US tax return at least once in the last three years be renewed Notice , issued August 4 provides guidance

PATH Act of 2015 All ITINs issued prior to 2013 will expire If not used on a return in the last three years (no return filed for 2013, 2014, or 2015) – on December 31, 2016 If used expiration will be according to a schedule provided by IRS

Other Important U.S. Reporting Developments Changes in FBAR reporting Elimination of FBAR exception for 25 or more accounts New due dates for FBARs April 15, 2017 Six month extension available Specified Foreign Financial Asset Reporting on Form 8938 applicable to entities Specified domestic entity Effective for tax years that begin after December 31, 2015

Who Is A U.S. Resident?

Resident for U.S. Income Tax Purpose U.S. Citizen Green Card Physical presence Substantial presence Election Exceptions: Closer connection Treaty-based position Days not counted

Resident for U.S. Estate and Gift Tax Purposes Domicile: means physical presence AND intent to remain indefinitely Facts and circumstances test Treaty-based position

IRS Voluntary Disclosure Program and Streamlined Filing Compliance Procedures

OVDP Statistics Since 2009, more than 50,000 taxpayers have come forward More than $7 billion in taxes, interest, and penalties Thousands of offshore-related civil audits have produced tens of millions more. Criminal charges have led to billions of dollars in fines and restitutions. Hiding Money or Income Offshore now one of the “Dirty Dozen” Tax Scams

Overview of IRS Voluntary Disclosure Programs 2014 OVDP Streamlined Filing Compliance Procedures Delinquent FBAR Submission Procedures Delinquent International Information Return Submission Procedures Filing Directly with IRS Service Centers

2014 OffshoreVoluntary Disclosure Program Most recent important changes made effective July 1, 2014 Continuation of the 2012 program – provides certainty and relief from criminal prosecution 27.5% miscellaneous Title 26 Offshore Penalty, but penalty could be 50% instead of 27.5%

2014 OVDP: 50% Penalty Beginning August 4, 2014, taxpayers subject to a 50% offshore penalty under certain circumstances Applies if at time of submission of preclearance letter: FFI at which taxpayer had an account OR a facilitator who helped taxpayer establish offshore arrangement has been publicly identified as being under investigation or as cooperating with a government investigation As of today, there are 97 “blacklisted” institutions

Requirements of 2014 OVDP Submit preclearance letter to criminal division of IRS Once precleared, submit voluntary disclosure letter to criminal division of IRS After preliminarily accepted to program: 8 years of tax and informational returns, and pay tax, interest and penalties (late file/late pay or accuracy) on tax Pay offshore penalty Submit various documents (prior returns, penalty calculation, financial account statements, foreign account or asset statement, information about entities involved, etc.) Must cooperate with IRS Certification procedure

Advantages/Disadvantages of 2014 OVDP Advantages Certainty – “no fault” program No criminal prosecution as long as cooperate Closure – Taxpayer gets a closing agreement Disadvantages Onerous filing obligation of 8 years of returns and FBARs – significant professional fees Draconian 27.5% or 50% penalty

Streamlined Program: The Basics Available to taxpayers if failure to report foreign financial assets and pay taxes was the result of non-willful conduct Non-willful conduct = Conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law U.S. Taxpayers Residing in the US – The Streamlined Domestic Offshore Procedures U.S. Taxpayers Residing outside the US – The Streamlined Foreign Offshore Procedures

Streamlined Foreign Offshore Procedures Meets applicable non-residency requirement; Failed to report income from a foreign financial asset and pay tax as required by U.S. law and may have failed to file an FBAR and/or information returns with respect to a foreign financial account; and Such failures resulted from non-willful conduct

Applicable Non-Residency Requirement Individuals who are U.S. citizens or lawful permanent residents – In any one or more of the most recent three years for which U.S. income tax return due date has passed: No U.S. abode, AND Physically outside of United States for at least 330 full days Individuals who are not U.S. citizens or lawful permanent residents – In any one or more of the most recent three years for which U.S. income tax return due date has passed: Did not meet substantial presence test

Streamlined Program: U.S. Taxpayers Living Abroad File 3 years of delinquent or amended tax returns (with applicable information returns) and pay tax and interest File 6 years of delinquent FBARs NO PENALTIES !!!

Streamlined Program: U.S. Taxpayers Living in U.S. Fails to meet the applicable non-residency test; Previously filed a U.S. income tax return (if required) for each of the most recent 3 years for which the U.S. income tax return due date has passed; Failed to report income from a foreign financial asset and pay tax as required by U.S. law and may have failed to file an FBAR and/or information returns with respect to a foreign financial account; and Such failures resulted from non-willful conduct

Streamlined Program: U.S. Taxpayers Living in U.S. File 3 years of amended tax returns (with applicable information returns) and pay tax and interest File 6 years of delinquent FBARs Penalty of 5% of the highest aggregate balance/value of the taxpayer’s foreign financial assets that are subject to the miscellaneous offshore penalty during the years in the covered tax return period and the covered FBAR period

The Miscellaneous Offshore Penalty Intended to apply to foreign financial assets that are related in any way to tax non-compliance Foreign Financial Assets include foreign financial assets not included on an FBAR, not reported on a Form 8938, or that were reported but gross income therefrom was not Financial accounts holding cash Securities or other custodial accounts Tangible assets (real estate, art, etc.) Intangible assets (patents, stock, etc.)

The Streamlined Process Income tax returns with all required information returns are submitted to the IRS in Austin, Texas with a certification of non- willful conduct signed under penalty of perjury FBARs are filed electronically Returns submitted are processed like any other return submitted to the IRS Receipt not acknowledged and no closing agreement Returns are not subject to automatic audit but may be selected for audit under the existing audit selection processes applicable to any U.S. tax return May be subject to a verification procedure for accuracy and completeness

Advantages/Disadvantages of Streamlined Procedure Advantages Few returns and lower costs Reduced penalties – possible to reduce penalty to zero No late file/late pay or accuracy penalties Disadvantages Uncertainty – the non-willful conduct standard is very subjective and not well defined No protection against criminal prosecution No closure – no closing agreement. Best answer is no answer.

Coordination of Streamlined Program with OVDP Once taxpayer makes submission under either Nonresident or Resident Streamlined Program, taxpayer may not participate in OVDP Taxpayer who submits OVDP voluntary disclosure letter may not participate in Streamlined Program

Delinquent FBAR Submission Procedures Available to taxpayers who do not need to use the OVDP or Streamlined Program, but who: Have not filed an FBAR Are not under civil or criminal investigation by IRS Have not already been contacted by IRS about FBARs FBARs must be filed electronically at FinCEN and include a statement of why submission was late No failure to file penalties imposed if qualify and proper procedures followed and if tax payer reported and paid tax on the income from the accounts reported

Delinquent International Information Return Submission Procedures Available to taxpayers who do not need to use the OVDP or Streamlined Program, but who: Have not filed one or more required international information returns Have reasonable cause for not timely filing Are not under civil or criminal investigation by IRS Have not already been contacted by IRS about the returns Delinquent returns must be attached to an amended return (other than 3520 and 3520-A) and should be filed according to instructions Must provide a statement of facts establishing reasonable cause for failure to file

Why Come Forward Voluntarily Eliminate the risk of criminal charges Avoid substantial civil penalties, including: Failure to file FBAR = greater of $100,000 or 50% for willful failure to file; up to $10,000 for non-willful Failure to file Form 8938 Failure to file Form 3520 or 3520-A Failure to file Form 5471 Become compliant with tax payment and filing obligations

Some Ways to Get Caught IRS Litigation Changes in Law Renewal of U.S. Passport Audit by Infection Entry into U.S. Ownership of U.S. assets at time of death Criminal Investigations

Better Ways to Get Caught Release of Confidential Information/Panama Papers Whistleblower Justice Department Settlements and Deferred Prosecutions OVDI “Bad Bank” List FATCA and CRS

Where Are Justice And The IRS Going Next? British Virgin Islands Cayman Islands Channel Islands Hong Kong Israel Liechtenstein Luxembourg Panama Singapore

Contact Information Arthur J. Dichter Partner Main(305) Arthur J. Dichter Director Miami (305) Bahamas (242) CW Tax Services is an affiliate of The Cantor Group