understanding fatca icatt 07-01-15

This document or presentation is not intended or written to be used, and may not be used, for the purpose of avoiding penalties that may be

imposed on the taxpayer.

Who are we?

Outline• Responsibilities of US persons in general

• Citizenship vs residency based taxation

• Pay

• Report

• Recent media coverage• Former FIFA Exec

• Former Guardian Exec

• Sovereign Management & Legal, Ltd

• What is FATCA

• Impact of FATCA –• Governments

• FFIs

• Individuals

• Governments –• Model 1

• Model 2

• FFIs• Register

• Report

• Individuals• Danger #1 – FATCA

• Danger #2 – PFICs

• Danger #3 – FBARs

• Danger #4 – Non qualified insurance policies

• Amnesty

• Q&A

Responsibilities of US persons in general- What is a US Person?• Passport holders

• Permanent residents

• Substantial presence

• Accidental Americans

• NRA spouses who make a Sec 6013g election

Responsibilities of US persons in general- What is a US Person?

Responsibilities of US persons in general- Filing Threshold

http://www.irs.gov/pub/irs-pdf/p54.pdf

Responsibilities of US persons in general- Reporting

• Other triggers –• Interest in foreign entity• FBARs• Give or receive gifts



• Pay

• Report




• What is FATCA


• FFIs

• Individuals


• Model 2


• Report





• Amnesty

• Q&A

Former FIFA Exec

• No idea whether the reports are true but online, it is being alleged…

• That the IRS and Homeland Security are looking

• If the allegations are true, it may fall under the IRSCriminal Investigation (CI) team. This unit is comprised ofapproximately 3,500 employees worldwide,approximately 2,600 of whom are special agents whoseinvestigative jurisdiction includes tax, money launderingand Bank Secrecy Act laws. The CI conviction rate islegendary. It is one of the highest in federal lawenforcement. I understand that since CI’s inception in1919 to the present, the conviction rate for Federal taxprosecutions has never fallen below 90%.

Former Guardian / UTC Exec • Undercover sting

• Picked up at MIA

• According to a November 15th article in the New YorkTimes, at the IRS, dozens of undercover agents chasesuspected tax evaders worldwide, by posing as taxpreparers, accountants, drug dealers or yacht buyers andmore, court records show.

• Interestingly, undercover agents at the I.R.S., appear tohave far more latitude than do those at many otheragencies

• I.R.S. rules say that, with prior approval, “an undercover employee or cooperating private individual may pose as an attorney, physician, clergyman or member of the news media.”

http://www.irs.gov/irm/part9/irm_09-004-008.html

Sovereign Management & Legal, Ltd• Dec 14th 2014 press release on DOJ website -

http://www.justice.gov/usao/nys/pressreleases/December14/SovereignManagementJohnDoeSummonsesPR.php

• “Court Authorizes IRS To Issue Summonses For Records Relating To U.S.Taxpayers Who Used Services Of Sovereign Management & Legal, Ltd., ToConceal Offshore Accounts, Assets, Or Entities”

• Sovereign is a multi-jurisdictional offshore services provider that offersclients, among other things, the formation and administration ofanonymous corporations and foundations in Panama as well as offshoreentities. Related services provided by Sovereign include the maintenanceand operation of offshore structures, mail forwarding, the availability ofvirtual offices, re-invoicing, and the provision of professional managerswho appoint themselves directors of the client’s entity while the clientmaintains ultimate control over the assets.

• During the IRS’s investigation of Sovereign’s conduct, one taxpayer,making a voluntary disclosure of tax non-compliance to avoidprosecution, reported that Sovereign helped the taxpayer form ananonymous corporation in Panama that the taxpayer used to controlassets without appearing to own them.

http://www.justice.gov/usao/nys/pressreleases/December14/SovereignManagementJohnDoeSummonsesPR.php

Common Thread• A recent Tax Notes Today article reports on the Criminal Fraud and Tax Controversy Conference

in Las Vegas, sponsored by the American Bar Association Section of Taxation. AjayGupta, Offshore Enforcement to Remain Top Priority in 2015, 2014 TNT 240-6 (12/13/14)-

• “[David Horton LB&I director for international compliance] warned of 'a lot more John Doesummonses' in the next 12 to 24 months, in other parts of the world and 'beyond banks.' Thefocus will be on intermediaries, he said, referring to those who promoted or facilitatedtransactions for stashing money abroad.“

• With a normal summons, the IRS seeks information about a specific taxpayer whose identity itknows. A John Doe summons allows the IRS to get the names of all taxpayers in a certain group.The IRS needs a judge to approve it, but recent IRS success may to lead to more.

• A John Doe Summons is ideal for pursuing investors in tax shelters, account holders at financialinstitutions, attendees at an event, donors of real estate, etc. After sniffing out Americantaxpayers with UBS accounts, the IRS did the same with HSBC in India. But the IRS tells its ownexaminers to use a John Doe Summons only after trying other routes. The IRS Manual says itmay be possible to obtain taxpayer identities without issuing a John Doe summons.



• Pay

• Report




• What is FATCA


• FFIs

• Individuals


• Model 2


• Report





• Amnesty

• Q&A

FATCA

• The Foreign Account Tax Compliance Act (FATCA) is codified as Chapter 4 of the Internal Revenue Code. It represents the TreasuryDepartment's efforts to prevent U.S. taxpayers who hold financial assets in non-U.S. financial institutions (foreign financialinstitutions or FFIs) and other offshore vehicles from avoiding their U.S. tax obligations.

• The intent behind the law is for foreign financial institutions (FFIs) to identify and report to the IRS U.S. persons holding assetsabroad and for certain non-financial foreign entities (NFFEs) to identify their substantial U.S. owners.

• In order to comply with the rules, FFIs are required to enter into an FFI agreement with the U.S. Treasury or comply withintergovernmental agreements (IGAs) entered into by their local jurisdictions.

• U.S. withholding agents (USWAs) must document all of their relationships with foreign entities in order to assist with theenforcement of the rules. Failure to enter into an agreement or provide required documentation will result in the imposition of a30% withholding tax on certain payments made to such customers and counter-parties.

• Failure to impose the requisite withholding under FATCA requirements could result in significant financial exposure.

• Impact on Governments, FFIs, NFFEs and US individuals



• Pay

• Report




• What is FATCA


• FFIs

• Individuals


• Model 2


• Report





• Amnesty

• Q&A

FATCA – impact on Governments

• OECD’s Tax Information Exchange Agreements –• FATCA was a rider to the 2010 HIRE Act but the OECDs model tax information exchange agreement dates back to at least 2002• According to the OECD’s website, the purpose of the model agreement is to promote international co-operation in tax matters through

exchange of information. It was developed by the OECD Global Forum Working Group on Effective Exchange of Information (“the WorkingGroup”). The Working Group consisted of representatives from OECD Member countries as well as delegates from Aruba, Bermuda, Bahrain,Cayman Islands, Cyprus, Isle of Man, Malta, Mauritius, the Netherlands Antilles, the Seychelles and San Marino.

• The Agreement grew out of the work undertaken by the OECD to address harmful tax practices. The lack of effective exchange of informationis one of the key criteria in determining harmful tax practices. The mandate of the Working Group was to develop a legal instrument that couldbe used to establish effective exchange of information. The Agreement represents the standard of effective exchange of information for thepurposes of the OECD’s initiative on harmful tax practices.

• BEPS

• Model 1 - require FFIs to report all FATCA-related information to their own governmental agencies, which would then report theFATCA-related information to the IRS. Some Model 1 IGAs are reciprocal, requiring the U.S. to provide certain information aboutresidents of the Model 1 country to the Model 1 country in exchange for the information that country provides to the U.S. An FFIcovered by a Model 1 IGA will not need to sign an FFI agreement, but it will need to register on the IRS’s FATCA Registration Portalor file Form 8957

• Model 2 - require FFIs to report information directly to the IRS. Under such IGA, FFIs will need to register with the IRS, and certainFFIs will sign a version of the FFI agreement modified to reflect the IGA.

http://www.oecd.org/tax/transparency

http://www.arthurbellcpas.com/What-are-some-of-the-key-FATCA-terms/#ffiagreement

http://www.irs.gov/Businesses/International-Businesses/Draft-Form-8957-FATCA-Registration-Process

http://www.arthurbellcpas.com/What-are-some-of-the-key-FATCA-terms/#ffiagreement

FATCA – Governments that have signed

FATCA – Agreed in Principle



• Pay

• Report




• What is FATCA


• FFIs

• Individuals


• Model 2


• Report





• Amnesty

• Q&A

FATCA – implications for FFIs

• Firstly, they must register with the IRS directly. Form 8957

• Secondly, they must take appropriate actions to know their customers. KYC/AML. IT and HR implications

• Thirdly, they must report the activity of US persons as required by local law. XML

• (Our firm can assist with these responsibilities)

What is a US Person?



• Pay

• Report




• What is FATCA


• FFIs

• Individuals


• Model 2


• Report

• Individuals• Danger #1 – Non qualified insurance policies



• Danger #4 – FATCA

• Amnesty

• Q&A

Danger #1 – Non qualified insurance policies

• Insurance policies can be treated as US qualified, US non-qualified or a PFIC

• US qualified – if you have to ask…

• PFIC – to be discussed later

• US non qualified –• If underlying fund (in which the policy invests) are only available to the fund

and not the general public

• If policy holder doesn’t have the right to select from menu of funds

• Then there should be no look-thru rule (not a PFIC)


• Section 7702(g) says the “income on the contract” must be reported as ordinaryincome.

• “Income on the contract” = increase in “net surrender value” during the taxableyear + “cost of life insurance” for the year – premiums paid during the year.

• “Net surrender value” = cash surrender value.

• “Cost of life insurance” should roughly equate to the annual insurance cost of thecontract – as opposed to the investment component.

• We add this annual increase to the tax basis of the policy (in addition to totalpremiums).

• Sickness payments should reduce this basis with any excess generating income.

• We track policy basis with increases for premiums and taxable increases in cashvalue. No loss for the years when cash value goes down.

• Everything fully disclosed in attachment to return


• Foreign life assurance or sickness and accident policies. Must paycustoms & excise tax at a rate of 1% of the premium paid per year.

• This must be reported on Form 720 on a quarterly basis.

• To be able to file Form 720 you will first require a EmployerIdentification Number . This can be obtained by completing form SS4.

• Once you have your EIN you can now complete your 720 forms

Danger #2 - PFICs

• Enacted in 1986 to limit tax deferral by US investors in off shore funds

• Previously off shore funds had an advantage over domestic funds. Notax till distribution.

• Post 1986, there is a level playing field for both domestic and offshore mutual funds. The U.S. puts the burden on the shareholder todetermine their share of the income of the investment company. Thetax code does not encourage U.S. persons to invest in mutual fundsoutside the U.S.

Danger #2 - PFICs

• To employ this punitive regime, the IRS requires shareholders of PFICsto effectively report undistributed earnings via choosing to be taxedthrough one of three possible methods-

1. Section 1291 fund,

2. Qualified Election Fund, and

3. Mark to Market election.

Danger #2 - PFICs

Danger #3 - FBARs

Danger #4 - FATCA

• FATCA stands for ‘‘Foreign Account Tax Compliance Act”

• The goal is to stop US tax evasion by –

• Requiring Foreign Financial Institutions (FFIs) and non-financial foreign entities (NFFEs) toprovide information about financial accounts held by US taxpayers or foreign entities in whichUS taxpayers hold a substantial ownership interest.

• Requiring US persons to report information about certain foreign financial accounts andoffshore assets on Form 8938 and attach it to their income tax return, if the total asset valueexceeds the appropriate reporting threshold.

• In the future, requiring domestic entities to file Form 8938 if the entity is formed or used tohold specified foreign financial assets and the total asset value exceeds the appropriatereporting threshold. Until the IRS issues such regulations, only individuals must file Form 8938.

Danger #4 - FATCA

• The Foreign Account Tax Compliance Act (FATCA) is codified as Chapter 4 of the Internal Revenue Code. It represents theTreasury Department's efforts to prevent U.S. taxpayers who hold financial assets in non-U.S. financial institutions (foreignfinancial institutions or FFIs) and other offshore vehicles from avoiding their U.S. tax obligations.

• The intent behind the law is for foreign financial institutions (FFIs) to identify and report to the IRS U.S. persons holding assetsabroad and for certain non-financial foreign entities (NFFEs) to identify their substantial U.S. owners.

• In order to comply with the rules, FFIs are required to enter into an FFI agreement with the U.S. Treasury or comply withintergovernmental agreements (IGAs) entered into by their local jurisdictions.

• U.S. withholding agents (USWAs) must document all of their relationships with foreign entities in order to assist with theenforcement of the rules. Failure to enter into an agreement or provide required documentation will result in the impositionof a 30% withholding tax on certain payments made to such customers and counter-parties.

• Failure to impose the requisite withholding under FATCA requirements could result in significant financial exposure.

Danger #4 - FATCA

Penalty - Up to $10,000 for failure to disclose and an additional $10,000 for each 30 days of non-filing after IRS notice of a failure to disclose,for a potential maximum penalty of $60,000; criminal penalties may also apply



• Pay

• Report




• What is FATCA


• FFIs

• Individuals


• Model 2


• Report

• Individuals• Danger #1 – Non qualified insurance policies



• Danger #4 – FATCA

• Amnesty

• Q&A

TAX Amnesty

• Streamlined

• OVDP 2014

TAX Amnesty

“willfulness”

• Willfulness as a “voluntary, intentional violation of a known legal duty” was“conclusively” affirmed in Cheek v. United States 498 U.S. 192 (1991).

• The two essential holdings of the Supreme Court were:1. A genuine, good faith belief that one is not violating the Federal tax law based on

a misunderstanding caused by the complexity of the tax law (e.g., the complexityof the statute itself) is a defense to a charge of "willfulness", even though thatbelief is irrational or unreasonable.

2. A belief that the Federal income tax is invalid or unconstitutional is not amisunderstanding caused by the complexity of the tax law,[16] and is not adefense to a charge of "willfulness", even if that belief is genuine and isheld in good faith

http://en.wikipedia.org/wiki/United_States_Reports

http://en.wikipedia.org/wiki/Cheek_v._United_States#cite_note-16

TAX Amnesty

• Streamlined –• No penalty for offshore

• 5% penalty for domestic

• OVDP –• 27.5%

• A 50% offshore penalty applies if either aforeign financial institution at which thetaxpayer has or had an account or afacilitator who helped the taxpayerestablish or maintain an offshorearrangement has been publicly identifiedas being under investigation or ascooperating with a governmentinvestigation.

TAX Amnesty

CIBC, Butterfield and Stanford

TAX Amnesty

U.S. Department of Justice (DOJ) and the Swiss Federal Department of Finance - http://www.ustaxprogram.com/banks/

• Category 1 - Any Swiss bank currently under formal criminal investigation

TAX Amnesty

U.S. Department of Justice (DOJ) and the Swiss Federal Department of Finance

• Category 2 –• Bank has reason to believe that it may have committed tax-related offenses under U.S. Code title 18 (the U.S. criminal code); U.S. Code title 26 (the Internal

Revenue Code); or monetary transaction offenses under Section 5314 (reporting requirements) or Section 5322 of title 31 of the U.S. Code, which governsfinancial activities in connection with an undeclared U.S.-related account. Category 2 Banks may request a nonprosecution agreement from the DOJ.Category 2 Banks also must agree to disclose information and evidence, perform certain due-diligence steps verified by an independent examiner, and pay apenalty that can range from 20% to 50% of the aggregate maximum value of their undisclosed U.S. accounts.

• Participants include Union Bancaire Privee, the Geneva-based bank used by American Jordan Belfort, according to his memoir “The Wolf of Wall Street,”

• Category 3 – Banks without undeclared U.S. clients that are applying for confirmation from the DoJ that they aren’t being investigated

• Category 4 - Swiss banks with only local clients

TAX Amnesty

• Outlook for 2015

Appendices

Appendix – FATCA vs FBAR

Appendix – Tax Rates

Appendix – Obamacare Tax

Estimated Taxes?

Fixed, Determinable, Annual, Periodical (FDAP) Income

Effectively Connected Income (ECI)

Kovell Letters

• Without such an agreement, communication between the client and the accountant would not beprotected from discovery by the IRS because there is no accountant-client privilege under federallaw. It is called a "Kovel Letter" because it is based on the case of United States v. Kovel, 296 F.2d918 (2nd Cir. 1961). Practitioners, however, should review the recent case of United States v.Adlman, 68 F.3d 1495 (2nd Cir. 1995) for limitations on the "Kovel" doctrine. The letter can beused for both civil and criminal matters.

http://www.taxlawcenter.com/g0042101.htm

http://www.taxlawcenter.com/g0042102.htm

Impact – Democrats Abroad Survey of 6500 Americans abroad

Impact – types of accounts closed

Impact – value of accounts closed

Impact – closure stateside as well

Impact – refusal to open accounts

Impact – strained relationships

Impact – issues with employment

• Further Implications of FATCA

• US based brokerage firms

• Banks / Financial Institutions

• Annual Returns / Form 8938

understanding fatca icatt 07-01-15

Documents

fatca danger

fbars danger

pfics danger

fifa exec

entities sovereign

report recent media

general filing thresholdhttp

dozens of undercover