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Foreign Bank Accounts and Assets

This publication is distributed with the understanding that the authors and publisher are not engaged in rendering legal, accounting or other professional advice and assume no liability in connection with its use. Tax laws are constantly changing and are subject to differing interpretation. In addition, the facts and circumstances in your particular situation may not be the same as those presented here. Therefore, we urge you to do additional research and ensure that you are fully informed before using the information contained in this publication. Federal law prohibits unauthorized reproduction of the material in Spidell’s Foreign Bank Accounts and Assets manual. All reproduction must be approved in writing by Spidell Publishing, Inc.®

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What the Tax Pro Needs to Know

Reporting Foreign Accounts and Assets

Presented by Robert E. McKenzie, EA, Attorney

Authored by

Robert E. McKenzie, EA, Attorney and Claudia Hill, EA, MBA

Claudia Hill, EA, MBA 20395 Pacifica Drive, Ste 100

Cupertino, CA 95014 408.446.4451 Talk www.taxmam.com

Robert E. McKenzie Arnstein & Lehr

Suite 1200 120 South Riverside Plaza

Chicago, Illinois 60606 (312) 876-7100

[email protected] http://www.mckenzielaw.com

McKenzie & Hill © 2016

*Exam must be completed within one year of the date of purchase

FOREIGN BANK ACCOUNTS AND ASSETS

Course objectives: The purpose of this course is to review the requirements for reporting worldwide income from all sources including foreign accounts, paying taxes on the income from those accounts, and paying penalties for noncompliance. Topics addressed include: FBAR reporting and penalties, types of foreign assets, comparison of Form 8938 and FBAR, passive foreign investment companies, the Offshore Voluntary Disclosure Initiative, and much more.

This course will enable you to:

• Recall when and how to file FinCEN Form 114 • Identify the appropriate penalty for willful failure to file an FBAR • Choose which assets are reportable on Form 8938 • Identify the filing threshold for gifts from foreign corporations or partnerships • Determine which of three alternative tax systems should be applied for passive foreign

investment company shareholders • Recall eligibility requirements for the streamlined Offshore Voluntary Disclosure Program

Category: Taxes Recommended CPE Hours: CPAs/PAs — 2 Tax

EAs/CRTPs — 2 Federal Tax Level: Basic Prerequisite: General knowledge of foreign reporting is required Advanced Preparation: None Expiration Date: May 2017*

i

Reporting Foreign Accounts and Assets Table of Contents

PART I ........................................................................................................ 1

Failure to report the existence of offshore accounts or pay taxes on these accounts can lead to civil and criminal penalties. ....................................................................... 1 FinCEN Form 114 Report of Foreign Bank and Financial Account (FBAR) ................. 2 Four Elements of FBAR Filing ..................................................................................... 2 FBAR Penalties ........................................................................................................... 4 For all FBAR cases, examiners must: ......................................................................... 6 Reporting presentation, Form 1040 ............................................................................. 6 Here’s where to turn for currency exchange rates: ...................................................... 7 Can An Attorney, CPA, Or An Enrolled Agent Submit An FBAR Via The BSA E-Filing System On Behalf Of A Client? ................................................................................... 7 The FBAR can be prepared online .............................................................................. 8 Or, using your Tax Preparation Software..................................................................... 9 FinCEN announced on May 8, 2015 an additional E-Filing Method for FBAR Individual Filers .......................................................................................................... 11 Delinquent FBAR Submission Procedures ................................................................ 12 Form 8938 Statement of Specified Foreign Financial Assets .................................... 12 Types of Foreign Assets and Whether They are Reportable on Form 8938 .............. 14 Comparison of Form 8938 and FBAR Requirements ................................................ 16 Form 8891, U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans – IS OBSOLETE. .......................................................................... 19 Foreign Gifts Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts.............................................................................................. 22 Penalties for Failure to File Form 3520 ...................................................................... 22 Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner (Under Section 6048(b)) ........................................................................................................ 22 Penalties .................................................................................................................... 23 Foreign Trust Reporting Provisions ........................................................................... 24 Form 8621 - Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund ......................................................................... 25 Form 926 - U. S. Transferors of Property to a Foreign Corporation ........................... 30 Special rules, Form 926 - U. S. Transferors of Property to a Foreign Corporation .... 31 Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships .. 34 Penalties .................................................................................................................... 34 Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations .............................................................................................................. 34 Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business ....................................... 34

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PART II ..................................................................................................... 35

OVDP Settlement Programs for Taxpayers with Unreported Offshore Income ......... 35 Penalties .................................................................................................................... 35 Opt Out ...................................................................................................................... 36 2012 IRS Offshore Voluntary Disclosure Initiative ..................................................... 36 Overall Penalty Structure ........................................................................................... 36 HOW To participate in the program - File Original and Amended Returns ................ 37 Additional Requirements............................................................................................ 37 Penalties .................................................................................................................... 39 Dual Citizens ............................................................................................................. 39 Should You Consider Quiet Disclosures? .................................................................. 39 Streamlined Compliance Procedures for Non-Resident U.S. Taxpayers ................... 40 2014 Changes to Offshore Programs ........................................................................ 40 IRS Makes Changes to Offshore Programs; Revisions Ease Burden and Help More Taxpayers Come into Compliance ............................................................................. 40 Streamlined Procedures Expanded ........................................................................... 41 Offshore Voluntary Disclosure Program (OVDP) Modified ........................................ 42 Streamlined Filing Compliance Procedures ............................................................... 42 U.S. Taxpayers Residing Outside the United States ................................................. 45 Description of Scope and Effect of Procedures ......................................................... 46 U.S. Taxpayers Residing in the United States ........................................................... 47 Eligibility for the Streamlined Domestic Offshore Procedures .................................... 47 Description of Scope and Effect of Procedures ......................................................... 48 Specific Instructions for the Streamlined Domestic Offshore Procedures .................. 49 Streamlined Filing Compliance Procedures for U.S. Taxpayers Residing in the United States Frequently Asked Questions and Answers ..................................................... 51 Delinquent International Information Return Submission Procedures ....................... 53 Requesting Pre-Clearance Into The OVDP ............................................................... 54 Foreign Financial Institutions or Facilitators ............................................................... 55 List of Foreign Financial Institutions or Facilitators .................................................... 55 Additional Resources ................................................................................................. 59

EXHIBITS ............................................................................................................60-80

Hill & McKenzie 1 March 2016

PART I

U.S. citizens, resident aliens and certain nonresident aliens are required to report worldwide income from all sources including foreign accounts and pay taxes on income from those accounts at their individual rates1. There are many legitimate reasons for holding offshore accounts, including convenience, investing and to facilitate international transactions. By law, U.S. taxpayers are not permitted to use offshore accounts, such as foreign bank and securities accounts as well as trusts, to avoid paying tax. In most cases, affected taxpayers need to fill out and attach Schedule B to their tax returns. Part III of Schedule B asks about the existence of foreign accounts and usually requires U.S. citizens to report the country in which each account is located. Certain taxpayers may also have to fill out and attach to their return Form 8938, Statement of Foreign Financial Assets, if the aggregate value of those assets exceeds certain thresholds that vary depending on filing status and whether the taxpayer lives abroad. Separately, taxpayers with foreign accounts whose aggregate value exceeds $10,000 any time during the year must file a Form 114, Report of Foreign Bank and Financial Accounts (FBAR) electronically through FinCEN’s BSA E-Filing System. The FBAR is not filed with a federal tax return and must be filed by June 30 each year. FAILURE TO REPORT THE EXISTENCE OF OFFSHORE ACCOUNTS OR PAY TAXES ON THESE ACCOUNTS CAN LEAD TO CIVIL AND CRIMINAL PENALTIES. Congress passed the Bank Secrecy Act in 1970 as one of the first laws to fight money laundering in the United States. On October 26, 2001, the President signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001 (Public Law 107-56). These changes were intended to provide additional tools to prevent, detect, and prosecute international money laundering and the financing of terrorism. The provisions commonly known as the Foreign Account Tax Compliance Act (FATCA) became law in March 2010.

• FATCA targets tax non-compliance by U.S. taxpayers with foreign accounts • FATCA focuses on reporting:

o By U.S. taxpayers about certain foreign financial accounts and offshore assets

1 Offshore Income and Filing Information for Taxpayers with Offshore Accounts, FS-2014-7, June 2014


o By foreign financial institutions about financial accounts held by U.S.taxpayers or foreign entities in which U.S. taxpayers hold a substantialownership interest

• The objective of FATCA is the reporting of foreign financial assets;withholding is the cost of not reporting.

FINCEN FORM 114 REPORT OF FOREIGN BANK AND FINANCIAL ACCOUNT (FBAR) Under the Bank Secrecy Act, U.S. residents or a person in and doing business in the United States must file a report with the U.S. Treasury if he or she has a financial account in a foreign country with an aggregate value exceeding $10,000 at any time during the calendar year. Willfully failing to file an FBAR report can be punished under both civil and criminal law.

Filing an FBAR is a two-part reporting process. Form 1040 Schedule B, Part III, instructs a taxpayer to indicate an interest in a financial account in a country by checking “Yes” or “No” in the appropriate box. Form 1040 then refers the taxpayer to Form 114, the FBAR, which provides that it should be used to report a financial interest in or authority over bank accounts, securities accounts, or other financial accounts in a foreign country. As a result of 2015 Congressional amendments the deadline for filing an FBAR for each calendar year is on or before due date of Form 1040 for years beginning after 2015.

FOUR ELEMENTS OF FBAR FILING2

1. “United States Persons” must file if,2. They have a financial interest in or signature authority over an account,3. That account is a Foreign Financial Account(s), and4. The aggregate value of the account(s) exceeds $10,000 at any time during the

calendar year.

“U.S. Persons” meanso U.S. citizens (no matter where they reside)o U.S. residents - IRC 7701(b)o U.S. entities – any entity created or organized in U.S. or under U.S. law.

Tax status disregarded.

“U.S. Residents” mean o “U.S. Resident” determined under IRC 7701(b)o Green Card and Substantial Presence testso Those who elect to be treated as residents under 7701(b) file only FBARs

on accounts held during the election period

2 Reporting of Foreign Financial Accounts on the Electronic FBAR, an IRS SB/SE Webinar 6/4/2014


o Tax treaty or IRC 6013(g) or (h) elections disregarded for FBAR purposes “Financial Interest” means:

o U.S. person is record owner or holds title directly o Someone else holds title for benefit of U.S. person o U.S. person is record owner or holds title indirectly

o U.S. person owns >50% of the entity that holds title o Apply to tiered entities o See Form 114 instructions for broader details

“Signature Authority” means:

o Individual(s) can control disposition of account assets o Can be in conjunction with another

o By direct communication (oral or written)

Signature authority does not mean: o Supervisory approvals o Attributed to entities

“Foreign” means

o Outside the United States, which is: o States o D.C. o Territories and Possessions o Indian lands

o Physical location of account governs “Financial” means

o Both monetary and non-monetary assets o Bank, brokerage, and investment accounts; insurance and annuity policy

cash values; and mutual funds are specifically named o Generally not real and personal property

“Account” means

o Relationship with financial institution or person acting as a financial institution

o Not assets directly held

“Aggregate Value Exceeds $10,000” o Aggregate accounts with financial interest and those with signature

authority o Aggregate accounts owned “directly” and those owned “indirectly” o Do not use family attribution of Title 26


Practice Pointer! Foreign account owners must remember that they may have to report their accounts to the government, even if the accounts do not generate any taxable income.

The FBAR is not an income tax form and should not be mailed with any income tax return. The FBAR must be filed electronically on or before June 30 of the following year; 2014 FBARs were due by June 30, 2015. Civil penalties can and are being assessed for non-compliance.

FBAR filings since 1991 have increased significantly3. In calendar year 1991, the DCC received 116,600 FBARs. In calendar year 2001, the number of FBAR forms posted to the database was 177,1514. Compliance gradually increased to 276,386 in 2009 when the first OVDI program began. Within one year it more than doubled to 594,488 and by 2011 had reached 618,1345. In 2015, FinCen received a record high 1,163,229 FBARs, up more than 8 percent from the prior year. In fact, FBAR filings have grown on average by 17 percent per year during the last five years, according to FinCen data. Much of this incredible growth in filings is attributable to awareness of the process the OVDI ignited. No small part of the increase in filings is attributable to tax professionals who reconsidered the premise that the FBAR was not a tax return, and began offering services in preparing the form.

Practice Pointer! FBARs must be electronically filed using FinCEN’s BSA E-Filing System. This is true for delinquent FBARs as well as timely filed ones.

Tax professionals will also need to prepare FinCEN 114a (Record of Authorization to Electronically File FBARs) so their clients can authorize the transmission. The form is also used for individuals who file jointly with a spouse when the spouse is not separately transmitting their own filing. The record is divided into two parts, Part I and Part II along with instructions, and is available at http://www.fincen.gov/forms/files/FBARE-FileAuth114aRecordSP.pdf FBAR PENALTIES

Violation Civil Penalties Criminal Comments

3 Segments reprinted with the author’s and publisher’s permission from The FBAR Will Now Be Known As FinCEN 114 by Claudia Hill as it appeared in the Journal of Tax Practice & Procedure, October-November 2013. 4 U.S. Treasury Department, Report to Congress in Accordance with §361(b) of the 2001 Patriot Act (April 26, 2002), pg. 6 5 Source: IRS Enterprise Computing Center – Detroit, figures as of October 1, 2009; October 1, 2010; and 3. October 1, 2011 as reported in the Financial Crimes Enforcement Network annual report for Fiscal Year 2011.


Penalties

Negligent Violation Up to $500 N/A 31 U.S.C. § 5321(a)(6)(A) 31 C.F.R. 103.57(h).

Non-Willful Violation Up to $10,000 for each negligent violation N/A 31 U.S.C. §

5321(a)(5)(B)

Pattern of Negligent Activity

In addition to penalty under § 5321(a)(6)(A) with respect to any such violation, not more than $50,000

N/A 31 U.S.C. 5321(a)(6)(B)

Willful - Failure to File FBAR or retain records of account

Up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation.

Up to $250,000 or 5 years or both

31 U.S.C. § 5321(a)(5)(C) 31 U.S.C. § 5322(a) and 31 C.F.R. § 103.59(b) for criminal. The penalty applies to all U.S. persons.

Willful - Failure to File FBAR or retain records of account while violating certain other laws


Up to $500,000 or 10 years or both

31 U.S.C. § 5322(b) and 31 C.F.R. § 103.59(c) for criminal The penalty applies to all U.S. persons.

Knowingly and Willfully Filing False FBAR


$10,000 or 5 years or both

18 U.S.C. § 1001, 31 C.F.R. § 103.59(d) for criminal. The penalty applies to all U.S. persons.

On May 13, 2015 IRS issued Interim Guidance for Report of Foreign Bank and Financial Accounts (FBAR) Penalties6 as a Memorandum for all LB&I, SB/SE, and TE/GE Employees describing implementation of procedures to improve the administration of the Service’s FBAR compliance program.

6 Document Control Number: SBSE-04-0515-0025 MEMORANDUM FOR ALL LB&I, SB/SE, AND TE/GE EMPLOYEES; Expires Date: May 13, 2016. Impacted IRMs: 4.26.16 and 4.26.17


When asserting an FBAR penalty, the burden is on the IRS to show that an FBAR violation occurred and, for willful violations, that the violation was in fact willful. The FBAR penalty provision of Title 31 establishes only maximum penalty amounts, leaving the IRS to determine the appropriate FBAR penalty amount based on the facts and circumstances of each case. The procedures in Attachment 1 were developed to ensure consistency and effectiveness in the administration of FBAR penalties. They will help ensure FBAR penalty determinations are adequately supported and penalties are asserted in a fair and consistent manner. Examiners must continue to use their best judgment when proposing FBAR penalties. They must take into account all the available facts and circumstances of a case. See IRM 4.26.16.4.7, FBAR Penalties – Examiner Discretion, concerning the use of examiner discretion when proposing FBAR penalties.

Most valuable to practitioners included with the Memo were two attachments: Procedures to Ensure Consistency and Effectiveness in the Administration of Civil FBAR Penalties and Civil FBAR Penalty Case File Checklist. FOR ALL FBAR CASES, EXAMINERS MUST:

a. Determine a recommended penalty based on the guidance in IRM 4.26.16 b. Consult with an Operating Division FBAR Coordinator c. Seek approval of the FBAR penalty from the group manager after consultation with an Operating Division FBAR Coordinator. d. Coordinate with Counsel if a penalty for a willful FBAR violation is being recommended. e. Coordinate with a Fraud Technical Advisor if there is reason to believe a criminal referral may be warranted.

REPORTING PRESENTATION, FORM 1040


HERE’S WHERE TO TURN FOR CURRENCY EXCHANGE RATES: http://www.fiscal.treasury.gov/fsreports/rpt/treasRptRateExch/historicalRates.htm

CAN AN ATTORNEY, CPA, OR AN ENROLLED AGENT SUBMIT AN FBAR VIA THE BSA E-FILING SYSTEM ON BEHALF OF A CLIENT7? Yes. An attorney, CPA, or an enrolled agent always may assist its clients in the preparation of electronic BSA forms for BSA E-Filing, including the FBAR. Consistent with FinCEN's instructions that provide for approved third-party filing of the FBAR, if an attorney, CPA, or enrolled agent has been provided documented authority (Form 114a) by the legally obligated filers (clients) to sign and submit FBARs on their behalf through the BSA E-Filing System, that attorney, CPA, or enrolled agent can do so through a single BSA E-Filing account established on the BSA E-Filing System for the attorney, CPA, or enrolled agent.

7 FBAR E-Filing FAQs V 1.0 March 28, 2014 http://bsaefiling.fincen.treas.gov/docs/FBAR_EFILING_FAQ.pdf


THE FBAR CAN BE PREPARED ONLINE8

8 Access the online program at http://bsaefiling.fincen.treas.gov/NoRegFilePDF IndividualFBAR.html


OR, USING YOUR TAX PREPARATION SOFTWARE


A helpful resources for FBAR questions is the IRS FBAR Reference Guide. Find it online at http://www.irs.gov/pub/irs-utl/IRS_FBAR_Reference_Guide.pdf Also see BSA Electronic Filing Requirements For Report of Foreign Bank and Financial Accounts (FinCEN Form 114) http://www.fincen.gov/forms/files/FBAR%20Line%20Item%20Filing%20Instructions.pdf

The client should complete Form 114a (http://www.fincen.gov/forms/files/FBARE-FileAuth114aRecordSP.pdf) designating the attorney, CPA, or enrolled agent as the filer/preparer of the client’s FBAR. The form should not be sent to FinCEN. A copy of the Form 114a should be retained by the attorney, CPA, or enrolled agent. If the client does not complete Form 114a such authority is not provided, the filings must be signed and submitted by the client. FINCEN ANNOUNCED ON MAY 8, 2015 AN ADDITIONAL E-FILING METHOD FOR FBAR INDIVIDUAL FILERS The BSA E-Filing System now provides an alternative E-Filing method for Individuals filing the Report of Foreign Bank and Financial Accounts (FBAR). Filers can now


choose between the current method of filing using an Adobe PDF or use the new online form that only requires an Internet browser to file. These options can be accessed at http://bsaefiling.fincen.treas.gov/NoRegFBARFiler.html DELINQUENT FBAR SUBMISSION PROCEDURES9 Taxpayers who do not need to use either the OVDP or the Streamlined Filing Compliance Procedures (both programs described later in this workbook) to file delinquent or amended tax returns to report and pay additional tax, but who:

• have not filed a required Report of Foreign Bank and Financial Accounts (FBAR) (FinCEN Form 114, previously Form TD F 90-22.1),

• are not under a civil examination or a criminal investigation by the IRS, and • have not already been contacted by the IRS about the delinquent FBARs should

file the delinquent FBARs according to the FBAR instructions and include a statement explaining why the FBARs are filed late.

All FBARs are required to be filed electronically at FinCen. On the cover page of the electronic form, select the reason for filing late. If you are unable to file electronically, you may contact FinCEN's Regulatory Helpline at 1-800-949-2732 or 1-703-905-3975 (if calling from outside the United States) to determine possible alternatives to electronic filing. The IRS will not impose a penalty for the failure to file the delinquent FBARs if you properly reported on your U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs and you have not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted. FBARs will not be automatically subject to audit but may be selected for audit through the existing audit selection processes that are in place for any tax or information returns. FORM 8938 STATEMENT OF SPECIFIED FOREIGN FINANCIAL ASSETS Form 8938 must be filed by taxpayers with specific types and amounts of foreign financial assets or foreign accounts. It is important for taxpayers to determine whether they are subject to this new requirement because the law imposes significant penalties for failing to comply. Form 8938 reporting is in addition to FBAR reporting. Penalties apply for failure to file accurately.

The Form 8938 filing requirement was enacted in 2010 to improve tax compliance by U.S. taxpayers with offshore financial accounts. Individuals who may have to file Form 8938 are U.S. citizens and residents, nonresidents who elect to file a joint income tax return and certain nonresidents who live in a U.S. territory. Tax year 2012 was the first

9 http://www.irs.gov/individuals/international-taxpayers/delinquent-fbar-submission-procedures


year for which IRS incorporated the form into individual 1040 filings, and it continues to evolve.

Form 8938 is required when the total value of specified foreign assets exceeds certain thresholds. For example, a married couple living in the U.S. and filing a joint tax return would not file Form 8938 unless their total specified foreign assets exceed $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.

The thresholds for taxpayers who reside abroad are higher. For example in this case, a married couple residing abroad and filing a joint return would not file Form 8938 unless the value of specified foreign assets exceeds $400,000 on the last day of the tax year or more than $600,000 at any time during the year.

Application to domestic entities: The IRS anticipates issuing regulations that will require a domestic entity to file Form 8938 if the entity is formed or used to hold specified foreign financial assets and the total asset value exceeds the appropriate reporting threshold. Until the IRS issues such regulations, only individuals must file Form 8938. For more information about domestic entity filing, see Notice 2013-10. Penalties: For the Form 8938, the penalty may be 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. For the FBAR, the penalty may be up to $10,000, if the failure to file is non-willful; if willful, however, the penalty is up to the greater of $100,000 or 50 percent of account balances; criminal penalties may also apply.


TYPES OF FOREIGN ASSETS AND WHETHER THEY ARE REPORTABLE ON FORM 893810

Types of Foreign Assets and Whether They are Reportable on Form 8938 Financial (deposit and custodial) accounts held at foreign financial institutions

Yes

Financial account held at a foreign branch of a U.S. financial institution

No

Financial account held at a U.S. branch of a foreign financial institution

No

Foreign financial account or asset for which you have signature authority

No, unless any income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the account or asset are or would be required to be reported, included, or otherwise reflected on your income tax return

Foreign stock or securities held in a financial account at a foreign financial institution

The account itself is subject to reporting, but the contents of the account do not have to be separately reported

Foreign stock or securities not held in a financial account

Yes

Foreign partnership interests Yes Indirect interests in foreign

financial assets through an entity

No

Foreign mutual funds Yes Domestic mutual fund

investing in foreign stocks and securities

No

Foreign accounts and foreign non-account investment assets held by foreign or domestic grantor trust for which you are the grantor

Yes, as to both foreign accounts and foreign non-account investment assets

Foreign-issued life insurance or annuity contract with a cash-value

Yes

Foreign hedge funds and foreign private equity funds

Yes

Foreign real estate held directly No Foreign real estate held No, but the foreign entity itself is a specified foreign

10 http://www.irs.gov/Businesses/TypesofForeignAssetsandWhetherTheyareReportableonForm-8938


through a foreign entity financial asset and its maximum value includes the value of the real estate

Foreign currency held directly No Precious Metals held directly No Personal property, held

directly, such as art, antiques, jewelry, cars and other collectibles

No

‘Social Security’- type program benefits provided by a foreign No

Taxpayers with a total value of specified foreign financial assets below a certain threshold do not have to file Form 8938. If the total value is at or below $50,000 at the end of the tax year, there is no reporting requirement for the year, unless the total value was more than $75,000 at any time during the tax year

• The threshold is higher for individuals who live outside the United States • Thresholds are different for married and single taxpayers

Practice Pointer! Taxpayers who do not have to file an income tax return for the tax year do not have to file Form 8938, regardless of the value of their specified foreign financial assets.


COMPARISON OF FORM 8938 AND FBAR REQUIREMENTS11 The new Form 8938 filing requirement does not replace or otherwise affect a taxpayer’s obligation to file FinCEN Form 114 (Report of Foreign Bank and Financial Accounts). Individuals must file each form for which they meet the relevant reporting threshold.

11 Chart updated on IRS.gov 02/10/2014 http://www.irs.gov/Businesses/Comparison-of-Form-8938-and-FBAR-Requirements


Practice Pointer: In addition to the penalty for failure to file the Form 8938, a new penalty under IRC §6662 has been added for failure to report the income attributable to an undisclosed foreign financial asset. (Treas. Regs. §1.6038D-8T(f)(1)) The penalty is 40% of the amount of the underpayment of tax. (IRC §6662(b)(7) and (g)) This penalty may be in addition to still other penalties (underpayment penalties, accuracy-related penalties, etc.). Practice Pointer: In the absence of reasonable cause, if a specified individual fails to report a single asset, the statute remains open on the entire tax return even if the taxpayer files Form 8938. It remains open until three years after the Form 8938 is corrected to include the missing asset.

FORM 8891, U.S. INFORMATION RETURN FOR BENEFICIARIES OF CERTAIN CANADIAN REGISTERED RETIREMENT PLANS – IS OBSOLETE. On October 7, 2014 with Revenue Procedure 2014-55, the IRS eliminated Form 8891, and taxpayers are no longer required to file this form for any year, past or present. The revenue procedure does not modify any other U.S. reporting requirements that may apply under the Bank Secrecy Act (BSA) and section 6038D (also known as FATCA).

Practice Pointer: Taxpayers who previously needed to file Form 8891 are likely to be subject to FBAR (Report on Foreign Bank and Financial Accounts) reporting requirements. RRSPs are considered to be financial accounts.

FATCA applies to many forms of non-US funded long-term benefit programs In addition to non-US retirement plans, FATCA may affect other forms of non-US retirement and savings programs, deferred compensation and bonus programs, as well as stock programs, cash-value life insurance benefits, and annuities.


Note: Part IV is intended to reduce taxpayer burden by avoiding duplicate entries. Even if a specified foreign financial asset is reported on a form listed above, you must still include the value of the asset in determining whether the aggregate value of your specified foreign financial assets is more than the reporting threshold that applies to you. [Can you find the error in Part IV?]


Note: There are multiple “Part V” pages, one for each of the assets requiring disclosure.


If the taxpayer is treated as an owner of any part of a foreign grantor trust, Form 8938 is used to report specified foreign financial assets held by the grantor trust. Beneficiaries of such trusts would not need to specify assets; they would use Form 3520. FOREIGN GIFTS ANNUAL RETURN TO REPORT TRANSACTIONS WITH FOREIGN TRUSTS AND RECEIPT OF CERTAIN FOREIGN GIFTS File Form 3520 if, during the current tax year, the taxpayer will treat the receipt of money or other property above certain amounts as a foreign gift or bequest. Include on Form 3520:

Gifts or bequests valued at more than $100,000 from a nonresident alien individual or foreign estate (including foreign persons related to that nonresident alien individual or foreign estate); or

Gifts valued at more than $13,258 (adjusted annually for inflation) from foreign corporations or foreign partnerships (including foreign persons related to the foreign corporations or foreign partnerships). You must aggregate gifts received from related parties. For example, if you receive $60,000 from nonresident alien A and $50,000 from nonresident alien B and you know or have reason to know they are related, you must report the gifts because the total is more than $100,000. Report them in Part IV of Form 3520. Treat gifts from foreign trusts as trust distributions you report in Part III of Form 3520.

Where to File Form 3520 Mail Form 3520 to the following address: Internal Revenue Service Center P.O. Box 409101 Ogden, Utah 84409

PENALTIES FOR FAILURE TO FILE FORM 3520 You may be penalized if you do not file your Form 3520 on time or if it is incomplete or inaccurate. Generally, the penalty is 5% of the amount of the foreign gift for each month for which the failure to report continues (not to exceed a total of 25%). FORM 3520-A, ANNUAL INFORMATION RETURN OF FOREIGN TRUST WITH A U.S. OWNER (UNDER SECTION 6048(B)) A foreign trust with at least one U.S. owner files this form annually to provide information about the trust, its U.S. beneficiaries, and any U.S. person who is treated as an owner of any portion of the foreign trust. Form 3520-A in order for the U.S. owner to satisfy its annual information reporting requirements under section 6048(b). Each U.S.


person treated as an owner of any portion of a foreign trust under sections 671 through 679 is responsible for ensuring that the foreign trust files Form 3520-A and furnishes the required annual statements to its U.S. owners and U.S. beneficiaries. The complete Form 3520-A is filed with the Internal Revenue Service Center, P.O. Box 409101, Ogden, UT 84409, by the 15th day of the 3rd month after the end of the trust's tax year. Copies of the Foreign Grantor Trust Owner Statement (page 3) and the Foreign Grantor Trust Beneficiary Statement (page 4) should be given to the U.S. owners and U.S. beneficiaries by the 15th day of the 3rd month after the end of the trust's tax year.

Practice Pointer! An extension of time to file Form 3520-A (including the statements on pages 3 and 4) may be granted. For details, see Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns. An extension to file an income tax return will not provide an extension to file Form 3520-A

Who must sign the return is determined by who is filing the return. If the return is filed by:

• An individual or fiduciary, it must be signed and dated by that individual or fiduciary.

• A partnership, it must be signed and dated by a general partner or limited liability company member.

• A corporation, it must be signed and dated by the president, vice president, treasurer, assistant treasurer, chief accounting officer, or any other corporate officer (such as a tax officer) authorized to sign.

PENALTIES The U.S. owner is subject to a penalty equal to 5% of the gross value of the portion of the trust's assets treated as owned by the U.S. person at the close of that year if the foreign trust: (a) fails to file a timely Form 3520-A or (b) does not furnish all of the information required by section 6048(b) or includes incorrect information. See section 6677(b). Additional penalties may be imposed if noncompliance continues after the IRS mails a notice of failure to comply with required reporting. See section 6677(a). Criminal penalties may be imposed under sections 7203, 7206, and 7207 for failure to file on time and for filing a false or fraudulent return.

Practice Pointer: In Rev. Rul. 2013-14, the IRS ruled that Mexican Land Trusts are not trusts for U.S. federal tax purposes; the burdensome foreign reporting requirements do not apply.


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REVIEW QUESTIONS Under the NASBA-AICPA self-study standards, self-study sponsors are required to present review questions intermittently throughout each self-study course. Additionally, feedback must be given to the course participant in the form of answers to the review questions and the reason why answers are correct or incorrect.

To obtain the maximum benefit from this course, we recommend that you complete each of the following questions, and then compare your answers with the solutions that immediately follow. These questions and related suggested solutions are not part of the final examination and will not be graded by the sponsor.

1. Details pertaining to the filing of FinCEN Form 114 are included in which of the following?

a) Foreign account owners are only required to report their accounts if they generate taxable income

b) FBARs must be filed electronically using the BSA E-Filing System c) United States citizens must file, not U.S. residents d) Form 114 must be filed if financial accounts in a foreign country have an aggregate

value of more than $7,500 at any time during the calendar year

2. Which FBAR penalty is correctly stated?

a) For a nonwillful violation, the penalty is up to $500 b) For willful failure to file an FBAR or retain records, there is no criminal penalty c) For knowingly and willfully filing a false FBAR, there is a criminal penalty of 5 years

imprisonment and/or $10,000 d) For a demonstrated pattern of negligent activity when it comes to FBAR filing, there

is a criminal penalty of up to $250,000 or 5 years or both

3. Which of the following statements is true regarding Form 8938, Statement of Specified Foreign Financial Assets?

a) Form 8938 is filed along with FinCEN Form 114 b) The filing threshold for U.S. citizens living in the U.S. are lower than for those

taxpayers living abroad c) The requirements for filing Form 8938 apply to individuals and domestic entities d) The maximum penalty for failure to disclose is $100,000

4. When comparing requirements for filing Form 8938 and FinCEN Form 114, which of the following choices is correct?

a) For the filing of Form 8938 and Form 114, the U.S. includes all U.S. territories b) For Form 8938, the filing threshold is $10,000 held in a foreign financial account at

any time during the calendar year c) For both Form 8938 and Form 114, assets must be converted to U.S. dollars using the

end of the calendar year exchange rate d) Financial accounts held at foreign financial institutions must be reported on both

Forms 8938 and 114


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5. Basics related to Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, are correctly stated in which choice?

a) Gifts valued at more than $10,000 from a nonresident alien individual or foreign estate must be reported on Form 3520

b) All gifts from foreign entities must be aggregated c) Gifts valued at more than $13,258 (adjusted for inflation annually) from foreign

corporations or partnerships (including foreign individuals related to those corporations or partnerships) must be reported on Form 3520

d) The penalty for failure to file Form 3520 is 10% of the amount of the foreign gift for each month that the failure continues, not to exceed a total of 35%


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SOLUTIONS TO REVIEW QUESTIONS

1. Details pertaining to the filing of FinCEN Form 114 are included in which of the following? (Pages 2-4)

a. Incorrect – Foreign accounts must be reported whether or not they generate taxable income

b. Correct – The FBAR is not an income tax form and should not be filed with a tax return c. Incorrect – U.S. persons include citizens, residents, and U.S. entities d. Incorrect – The aggregate value must exceed $10,000 at any time during the calendar year

2. Which FBAR penalty is correctly stated? (Page 5)

a. Incorrect – For a nonwillful violation, the penalty is up to $10,000 for each negligent violation. The $500 penalty is for a negligent violation

b. Incorrect – There is a criminal penalty of up to $250,000 or 5 years or both as well as civil penalties of up to $100,000 or 50% of the amount in the account when the violation occurred

c. Correct – In addition, there may be civil penalties of up to the greater of $100,000 or 50% of the amount that was in the account at the time the violation occurred

d. Incorrect – For a pattern of negligent activity, there are no criminal penalties, but a civil penalty of $10,000 for each negligent violation plus an additional penalty of not more than $50,000

3. Which of the following statements is true regarding Form 8938, Statement of Specified Foreign Financial Assets? (Page 13)

a. Incorrect – Form 8938 is filed along with Form 1040 b. Correct – Consider a married couple living within the U.S. and filing a joint return:

They must file Form 8938 if their total foreign assets exceed $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year. For the same couple living abroad: The filing thresholds jump to $400,000 for foreign assets on the last day of the tax year and $600,000 for assets held at any time during the year

c. Incorrect – The IRS has not issued regulations regarding domestic entities, so as of now, only individuals are required to file Form 8938

d. Incorrect – The penalty is up to $10,000 for failure to disclose plus an additional $10,000 for every 30 days of nonfiling after receiving notice up to a maximum of $60,000

4. When comparing requirements for filing Form 8938 and FinCEN Form 114, which of the following choices is correct? (Pages 16-17)

a. Incorrect – The filing requirement for Form 8938 does not include U.S. territories b. Incorrect – That is the threshold for FBAR filing. For Form 8938, the threshold is

$50,000 on the last day of the tax year or $75,000 at any time during that year c. Incorrect – Form 8938 uses the end of the taxable year exchange rate rather than the

calendar year exchange rate d. Correct – Both deposit and custodial accounts held at foreign financial institutions

are reportable


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5. Basics related to Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, are correctly stated in which choice? (Page 22)

a. Incorrect – The gifts from a nonresident alien individual or foreign estate must be valued at over $100,000; the $100,000 threshold must include amounts that must be aggregated with gifts from foreign persons related to that nonresident alien or foreign estate

b. Incorrect – Gifts from related parties must be aggregated and reported if the total aggregate is over $100,000

c. Correct – Moreover, as noted in (b), the gifts must be aggregated if they are from related parties

d. Incorrect – The penalty value is 5%, not to exceed a total of 25%


FOREIGN TRUST REPORTING PROVISIONS Previously, a U.S. person treated as the owner of any portion of a foreign trust under the grantor trust rules was only required to assure that the trust file a tax return and provide information to the IRS. Under the HIRE Act, a U.S. person who owns all or part of a foreign trust must not only assure that the trust meets its filing obligations, but must also provide a separate return containing information requested by the IRS about the trust, probably including information about trust investments. Written notice must also be provided to the IRS when any of the following reportable events occur: (1) the creation of a foreign trust by a U.S. person, (2) the transfer of any money or property to a foreign trust by a U.S. person, including a transfer due on death, and (3) the death of a citizen or resident of the U.S. if the decedent was treated as the owner of any portion of a foreign trust under the grantor trust rules or a portion of a foreign trust was included in the decedent's gross estate. The persons responsible for reporting these events include (a) the grantor in the case of the creation of an inter vivos trust, (b) the transferor in the case of a reportable event that is the transfer of any money to a foreign trust by a U.S. person (other than due to death), and (c) the executor of the decedent's estate in other cases. The new law includes a $10,000 minimum penalty for each failure to report a foreign trust transaction. The maximum penalty for failure to report a transfer to or distribution from a foreign trust is 35%, which can be increased by delinquency fees in $10,000 increments.

For example, under the grantor trust rules, a U.S. person who transfers property to a foreign trust is treated as the owner of the portion of the trust comprising the transferred property for any tax year in which there is a U.S. beneficiary of any portion of the trust. The IRS may automatically treat a foreign trust as having a U.S. beneficiary unless the transferor submits requested information about the transfer to the IRS, and demonstrates to the satisfaction of the IRS that under the terms of the trust, no part of the trust's income or corpus may be paid or accumulated during the tax year to or for the benefit of a U.S. person. Loans made to U.S. persons at below-market rate are deemed to be payments of the trust income or corpus for the benefit of a U.S. person; and if the trust is terminated at any time during the tax year, no part of the income or corpus could be paid to or for the benefit of a U.S. person.

If the foreign trust is deemed to have a U.S. beneficiary, the transferor must submit a tax return to the IRS including any additional information requested by the IRS. Civil penalties starting at $10,000 will be imposed if any tax return required isn't filed on time, doesn't contain all the information required, or includes incorrect information. The penalty now is the greater of $10,000 or 35% of the gross reportable amount, and if the failure to file continues for more than 90 days after receipt of a notice of failure to file, an additional penalty of $10,000 for each 30 day period can be imposed. These new penalty amounts are effective immediately and they apply to all returns due in 2010.


Observation: Under the cost recovery provisions of the HIRE Act (P.L. 111-147), the IRS was given significantly enhanced power to fight offshore tax evasion. With respect to offshore trusts, the IRS now requires far more information about these entities than ever before and has authority to impose more severe penalties on deliberate and inadvertent failures to comply with reporting rules. FORM 8621 - INFORMATION RETURN BY A SHAREHOLDER OF A PASSIVE FOREIGN INVESTMENT COMPANY OR QUALIFIED ELECTING FUND On December 30, 2013, the Treasury Department and IRS issued regulations under Internal Revenue Code (IRC) Section 1298(f) requiring certain U.S. shareholders of passive foreign investment companies (PFIC) to disclose their PFIC investments on IRS Form 8621 for tax years ending on or after December 31, 2013. Calendar-year taxpayers will need to consider the revised Form 8621 filing requirements for their 2013 federal income tax return. Potentially severe penalties apply for failure to comply with reporting requirements. Enacted under the Tax Reform Act of 1986, the PFIC rules are designed to level the playing field between U.S. investors who invest in passive assets through offshore hedge and mutual funds and those who invest in similar assets through domestic hedge and mutual funds. Prior to the enactment of the PFIC rules, an investor in an offshore hedge or mutual fund could defer U.S. taxation until earnings were distributed or when the investment was sold, at which time the gains would be treated as capital gains. On the other hand, income earned by a domestic mutual fund is taxed in the U.S. either at the U.S. shareholder level if the income is distributed to the shareholders or at the fund level if income is not distributed. A foreign corporation is a PFIC if 75% or more of its gross income for the tax year is passive income or 50% or more of the average assets held during the tax year produce passive income or are held for the production of passive income. The U.S. federal taxation of PFIC shareholders is based on rules for excess distributions, qualified electing funds (“QEFs”) and the mark-to-market election. A special tax and interest charge apply to a U.S. shareholder of a PFIC who receives excess distributions or recognizes gain from the disposition of PFIC stock. An excess distribution is the part of the PFIC distribution received in the current tax year that is greater than 125% of the average distributions received during the preceding three tax years. A U.S. shareholder of a PFIC who elects QEF treatment is required to include in income each year the proportionate share of earnings and profits of the PFIC. The mark-to-market election allows the U.S. shareholder of a PFIC to include in income each year the excess of the fair market value over the shareholder’s adjusted basis of the PFIC stock. The controlled foreign corporation (“CFC”) rules under Subpart F generally control with respect to a U.S. shareholder to the extent that a foreign corporation is both a CFC and a PFIC.

Practice Pointer! The new PFIC rules provide that a U.S. shareholder of a PFIC is any person that owns stock of a PFIC directly or indirectly. An indirect


shareholder is a U.S. person that owns stock of a PFIC indirectly under certain attribution rules. Stock ownership of a PFIC is attributed to a U.S. person through interests held in C corporations, S corporations, partnerships, estates and trusts.

Practice Pointer! A non-US corporation is a PFIC if (1) at least 75 percent of its gross income is passive income, or (2) at least 50 percent of its assets (generally an FMV test) produce or are held for the production of passive income. For example, a Canadian mutual fund may be treated as a PFIC. A PFIC shareholder who is a US citizen or is otherwise subject to tax as a US resident (a US PFIC shareholder) must comply with the PFIC regime tax and information reporting requirements.

As indicated above, the PFIC tax regime includes three alternative tax systems for PFIC shareholders: (1) the excess distribution rules; (2) the qualified electing fund (QEF) rules; and (3) the mark-to-market (MTM) rules.

(1) Under the excess distribution rules, a US PFIC shareholder is generally taxable on receipt of an excess distribution: the total amount received in the year exceeds 125 percent of the actual average distribution to the shareholder in the preceding three years. An excess distribution includes a gain on the sale of PFIC stock. An excess distribution is taxed at the highest ordinary income tax rates for individuals, and interest is based on the allocation of the excess distribution to prior years. (2) The QEF rules may mitigate the harsh consequences of the PFIC regime if a US PFIC shareholder timely elects to include in gross income each year his pro rata share of the PFIC’s ordinary income and capital gain. (3) A US PFIC shareholder may be able to elect to include MTM amounts in income and avoid the excess distribution rules.

The Hiring Incentives to Restore Employment Act of 2010 (the HIRE Act) added IRC §1298(f) effective March 18, 2010. Section 1298(f) is a relatively short provision simply stating that a U.S. shareholder of a PFIC must file an annual report unless the Treasury Secretary grants an exception. The HIRE Act also amended IRC §6501(c)(8) to indefinitely suspend the statute of limitations with respect to a taxpayer’s entire tax return for failure to file certain required foreign transfer and foreign asset forms, including Form 8621 under §1298(f), until the information required to be reported is provided to the IRS. If the failure to file is due to reasonable cause and not willful neglect, the statute of limitations period only is suspended with respect to the item or items related to the failure to file.


Practice Pointer! A publicly traded partnership is any partnership an interest in which is regularly traded on an established securities market regardless of the number of its partners. Because they can be purchased and readily traded, some clients may not even realize that what they have purchased carries a lot of tax disclosure complexity.

Brookfield Property Partners Limited 73 Front Street, Fifth Floor Hamilton, HM 12, Bermuda

Dear Unitholder

Enclosed is your 2014 Brookfield Property Partners L.P. U.S. tax package. This package contains important information needed to complete your 2014 U.S. federal and state tax returns, as applicable. All U.S. citizens should receive a U.S. Tax Package. Non U.S. resident unitholders may not require the U.S. tax package. It is important that you review the accuracy and completeness of the “Ownership Schedule” included in the U.S. tax package as it is utilized in preparing the U.S. tax forms. Please contact us at 1-855-521-8156 if you believe the information is incomplete or incorrect. The contents of the U.S. Tax Package are as follows:

1. Schedule K-1 (Form 1065) 2. PFIC Statement 3. Ownership Schedule 4. U.S. Sales Schedule, if applicable 5. Form 926 Information 6. U.S. Frequently Asked Questions 7. Partner s Instruction for Schedule K-1 (Form 1065)

Unless otherwise noted, the distributive share of all items included on your Schedule K-1 are components of net investment income as defined in Treas. Reg. 1.1411-4 and may be subject to the net investment income tax pursuant to IRC Section 1411. The enclosed general information is provided for general guidance, and is not intended to be, nor should it be construed as, the basis of tax advice. The information discussed in this package and reflected on the schedules provided to you is based on existing U.S. federal and state laws and regulations as interpreted by the General Partner, Brookfield Property Partners Limited. Before undertaking any tax filing, you should refer to the appropriate U.S. federal and state laws and regulations and consult your personal tax advisor. If you have any questions regarding this package, please call toll free 1-855-521-8156 or visit our website at www.taxpackagesupport.com/BPY.

Sincerely,


FORM 926 - U. S. TRANSFERORS OF PROPERTY TO A FOREIGN CORPORATION U.S. persons, domestic corporations or domestic estates or trusts must file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation, to report any exchanges or transfers of property described in section 6038B(a)(1)(A) to a foreign corporation. The U.S. transferor must file the Form 926 - and the additional information required under Regulations section 1.6038B-1(c) and Temporary Regulations sections 1. 6038B-1T(c) (1) through (5) and 1.6038B-1T(d) - with their income tax return for the tax year that includes the date of the transfer.


Taxpayers who overlook filing this form when applicable could be subject to a penalty for failure to file equaling 10% of the fair market value of the property at the time of the exchange/transfer, if the taxpayer fails to comply with the filing requirement. The penalty will not apply if the failure to comply is due to reasonable cause and not willful neglect. The penalty is limited to $100,000 unless the failure to comply was due to intentional disregard. Moreover, the period of limitations for assessment of tax upon the exchange/transfer of that property is extended to the date that is 3 years after the date on which the information required to be reported is provided. SPECIAL RULES, FORM 926 - U. S. TRANSFERORS OF PROPERTY TO A FOREIGN CORPORATION Transfers by a partnership. If the transferor is a partnership (domestic or foreign), the domestic partners of the partnership, not the partnership itself, are required to comply with section 6038B and file Form 926. Each domestic partner is treated as a transferor of its proportionate share of the property. Transfers by spouses. Spouses may file Form 926 jointly, but only if they file a joint income tax return. Transfers of cash. A U.S. person that transfers cash to a foreign corporation must report the transfer on Form 926 if (a) immediately after the transfer the person holds directly or indirectly at least 10% of the total voting power or the total value of the foreign corporation or (b) the amount of cash transferred by the person to the foreign corporation during the 12-month period ending on the date of the transfer exceeds $100,000. See Regulations section 1.6038B-1(b)(3) Specific Instructions Important: Form 926 must be in English. All amounts must be stated in U.S. dollars. If the information required in a given section exceeds the space provided within that section, do not write “see attached” in the section and then attach all of the information on additional sheets. Instead, complete all entry spaces in the section and attach the remaining information on additional sheets. The additional sheets must conform with the IRS version of that section.

Practice Pointer! Hedge funds often include offshore entities, especially foreign corporations, in their structures to accommodate foreign investors and domestic tax-exempt entities. Preparers need to be watchful for the supporting schedules found buried behind Forms K-1 and carefully review whether their taxpayer meets the filing requirement for this disclosure form based on their investment in the entity.

Transactions that result in a U.S. Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations, filing requirement may also give rise to a Form 926 filing requirement.


FORM 8865, RETURN OF U.S. PERSONS WITH RESPECT TO CERTAIN FOREIGN PARTNERSHIPS A partnership formed in a foreign country that is controlled by U.S. partners is required to file tax Form 8865. Control means that five or fewer U.S. persons who each own a 10% or greater interest in the partnership also own (in the aggregate) more than 50% of the partnership interests. A US person who is a partner in a foreign partnership (or an entity electing to be taxed as a partnership) is required to file Form 8865 to report the income and financial position of the partnership and to report certain transactions between the partner and the partnership. The form is required to be filed with the partner's tax return. PENALTIES A U.S. controlled foreign partnership or a 10% U.S. partner of a U.S. controlled foreign partnership may be subject to a penalty of $10,000 per year for each partnership return that is not filed. A 10% partner who makes a contribution of property to a foreign partnership and does not disclose the transfer is subject to a penalty of 10% of the amount transferred up to $100,000. FORM 5471, INFORMATION RETURN OF U.S. PERSONS WITH RESPECT TO CERTAIN FOREIGN CORPORATIONS Certain U.S. citizens and residents who are officers, directors, or shareholders in certain foreign corporations file this form and schedules to satisfy the reporting requirements of sections 6038 and 6046, and the related regulations. If you, as a US Citizen own 10% or more of a foreign corporation (a corporation organized outside of the USA) you are obligated to file Form 5471 each year with your personal tax return (or your business corporation or LLC tax return if that is the owner of the foreign corporation). On this form the taxpayer or entity must report the ownership information and other data. It also includes a balance sheet for the corporation and income and expense sheet for the current year for the corporation. FORM 5472, INFORMATION RETURN OF A 25% FOREIGN-OWNED U.S. CORPORATION OR A FOREIGN CORPORATION ENGAGED IN A U.S. TRADE OR BUSINESS Form 5472 must be filed by foreign-owned U.S. corporations and foreign corporations with U.S. trades or businesses under certain circumstances. A taxpayer must attach to its income tax return a separate Form 5472 for each related party (foreign or domestic) with which the taxpayer engaged in certain transactions during the taxable year. For example, a taxpayer must state on Form 5472 whether it imported goods from a related party and, if so, whether the basis or inventory cost of the imported goods was greater than their customs value. Corporations file this form to provide information required


under sections 6038A and 6038C when reportable transactions occur with a foreign or domestic related party. The penalties for failing to file these forms are severe, even though no tax may be due. There is a penalty of $10,000 for each year for failing to file the form. The penalties may be waived by the IRS on a showing of reasonable cause for failing to file the form. If the taxpayer is notified by the IRS of a duty to file, the penalty is $10,000 per month up to a maximum of $50,000. There are additional penalties that are described in the instructions to the form. PART II OVDP SETTLEMENT PROGRAMS FOR TAXPAYERS WITH UNREPORTED OFFSHORE INCOME On March 26, 2009 IRS Commissioner Doug Shulman announced what was in effect a settlement offer for those that voluntarily and timely disclose unreported offshore income. Those meeting the terms of the offer had to pay back-taxes and interest for six years, and pay either an accuracy or delinquency penalty on all six years. They also paid a penalty of 20% of the amount in the foreign bank accounts in the year with the highest aggregate account or asset value. In other words, 20% of the highest asset value of an account anytime in the past six years. However, those who came forward on a timely basis would not face criminal prosecution. This offer was only open until 10-31-09. Over 16,000 taxpayers came forward during the program. On February 8, 2011, announced a new 2011 Voluntary Disclosure Initiative (OVDI) for taxpayers to disclose their unreported offshore accounts. To participate in the OVDI, taxpayers were required to file or amend their tax individual returns and Report of Foreign Bank and Financial Accounts (FBAR) and pay all delinquent taxes, interest and penalties by September 9, 2011. The initiative covered tax years 2003 through 2010. In exchange for participating in the OVDI, taxpayers with undisclosed offshore accounts avoided criminal prosecution for their unpaid taxes and were subject to significantly reduced penalties. [Generally, the civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign account per violation. See 31 U.S.C. § 5321(a)(5)] PENALTIES Under the 2011 OVDI, taxpayers were subject to a 25 percent penalty on the highest aggregate account balance on their undisclosed account(s) between the 2003 and 2010. If the value of the undisclosed account(s) was less than $75,000 at all times during the tax years in question, the penalty was reduced to 12.5 percent. Moreover, in limited situations, a penalty of 5% may be imposed.


At the time, IRS Commissioner Shulman described the 2011 OVDI as “the last, best chance for people to get back into the system.” The OVDI was open to taxpayers, including individuals, corporations, partnerships and trusts. Taxpayers under examination or under criminal investigation, however, were ineligible to participate in the program. OPT OUT In June 2011 the IRS announced changes to the program that allowed taxpayers to opt out of the penalty regime after they had made a disclosure. IRS suggested those who opted out and convinced the IRS that their reporting failures were not willful would be given lower penalties. If a taxpayer opts out and the IRS finds that they were willful, they will face higher penalties of 50% of the highest account balance. Taxpayers should only opt out if they believe there are compelling facts to support a finding that they were not willful.

2011 RESULTS: the 2011 program generated over 12,000 voluntary disclosures. Up to that point, taxpayers who came forward made 30,000 voluntary disclosures. IRS was pleased. This program ended September 9, 2011.

2012 IRS OFFSHORE VOLUNTARY DISCLOSURE INITIATIVE On January 9, 2012 the Internal Revenue Service reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes and announced the collection of more than $4.4 billion so far from the two previous international programs. The third offshore program came as the IRS continued working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced. The program is similar to the 2011 program in many ways, but with a few key differences. Unlike prior programs, there is no set deadline for people to apply. However, the terms of the program could change at any time going forward. For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers – or decide to end the program entirely at any point. OVERALL PENALTY STRUCTURE The overall penalty structure for the 2012 ongoing program is the same for 2011, except for taxpayers in the highest penalty category. For the new program, the penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full


tax years prior to the disclosure. That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011. HOW TO PARTICIPATE IN THE PROGRAM - FILE ORIGINAL AND AMENDED RETURNS Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties. ADDITIONAL REQUIREMENTS As a condition to being accepted into the 2012 OVDP, applicants must provide the IRS the following for those tax years covered by the voluntary disclosure

• Copies of previously filed original (and, if applicable, previously filed amended) federal income tax returns for tax years covered by the voluntary disclosure.

• Complete and accurate amended federal income tax returns (for individuals,

Form 1040X, or original Form 1040 if delinquent) for all tax years covered by the voluntary disclosure, with applicable schedules detailing the amount and type of previously unreported income from the account or entity (e.g., Schedule B for interest and dividends, Schedule D for capital gains and losses, Schedule E for income from partnerships, S corporations, estates or trusts).

• Copy of taxpayer’s completed and signed Offshore Voluntary Disclosures Letter.

• A check made out to the U.S. Treasury. The check must include the amount of

tax, interest, and accuracy-related penalty under IRC § 6662(a), and, if applicable, the failure to file and failure to pay penalties under IRC § 6651(a) (the suspension of interest provisions of IRC § 6404(g) do not apply to interest due in this initiative). If you cannot pay the total amount of tax, interest, and penalties as described above, submit your proposed payment arrangement and a completed Collection Information Statement ( Form 433-A, Collection Information Statement for Wage Earners and Self-employed Individuals, or Form 433-B, Collection Information Statement for Businesses, as appropriate).

• Completed Foreign Account or Asset Statement.

• Completed penalty computation worksheet showing the applicant’s determination

of the aggregate highest account balance of his/her undisclosed offshore accounts, fair market value of foreign assets, and penalty computation signed by the applicant and the applicant’s representative if the applicant is represented.


• Properly completed and signed agreements to extend the period of time to assess tax (including tax penalties) and to assess FBAR penalties.

• For those applicants disclosing offshore financial accounts with an aggregate

highest account balance in any year of $1 million or more completed Foreign Financial Institution Statements as appropriate.

• Complete and accurate Form 114, Report of Foreign Bank and Financial

Accounts, for foreign accounts maintained during calendar years covered by the voluntary disclosure and/or copies of previously filed FBARs.

• For those applicants disclosing offshore financial accounts with an aggregate

highest account balance in any year of $500,000 or more: Copies of offshore financial account statements reflecting all account activity for each of the tax years covered by your voluntary disclosure. Explain any differences between the amounts reported on the account statements and the tax returns.

• For those applicants disclosing offshore financial accounts with an aggregate highest account balance of less than $500,000: copies of offshore financial account statements reflecting all account activity for each of the tax years covered by your voluntary disclosure must be available upon request.

• A statement identifying all offshore entities for the tax years covered by the

voluntary disclosure, whether held directly or indirectly, and your ownership or control share of such entities.

• When accounts or assets were held in the name of a foreign entity, complete and

accurate amended (or original, if delinquent) information returns required to be filed, for all tax years covered by the voluntary disclosure. If the applicant is requesting that the Service waive the information reporting requirement, the applicant must submit a completed and signed Statement on Dissolved Entities.

• If the applicant is a decedent’s estate, or is an individual who participated in the

failure to report the foreign account, foreign asset, or foreign entity in a required gift or estate tax return, either as executor or advisor, provide complete and accurate amended estate or gift tax returns (original estate or gift tax returns, if not previously filed) for tax years covered by the voluntary disclosure necessary to correct the underreporting of assets held in or transferred through undisclosed foreign accounts or foreign entities.

• Returns involving Passive Foreign Investment Company (PFIC) issues. A

statement whether the amended returns involve PFIC issues during the tax years covered by the 2012 OVDP period, and if so, whether the applicant chooses to elect the alternative to the statutory PFIC computation that resolves PFIC issues on a basis that is consistent with the mark to market (MTM) methodology


authorized in IRC § 1296 but does not require complete reconstruction of historical data.

PENALTIES Participants face a 27.5 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty. Smaller offshore accounts will face a 12.5 percent penalty. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the new OVDP will qualify for this lower rate. As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined. DUAL CITIZENS The IRS recognizes that its success in offshore enforcement and in the disclosure programs has raised awareness related to tax filing obligations. This includes awareness by dual citizens and others who may be delinquent in filing, but owe no U.S. tax. The IRS is currently developing procedures by which these taxpayers may come into compliance with U.S. tax law. The IRS is also committed to educating all taxpayers so that they understand their U.S. tax responsibilities.

Practice Pointer: Non-attorney practitioners must be especially careful in dealing with clients on these matters. There is no advisor-client privilege under IRC 7525 when dealing with a criminal matter. Before choosing to join the program a taxpayer should first consult an attorney who is experienced in the nuances of international voluntary disclosure rules.

SHOULD YOU CONSIDER QUIET DISCLOSURES? Taxpayers that had made “quiet disclosures” by filing amended returns and paying related tax and interest for previously unreported offshore income without otherwise notifying the IRS were encouraged to participate in the OVDI. Taxpayers that make quiet disclosures without seeking the protection of the OVDI run the risk of being examined and potentially criminally prosecuted for all applicable years. The Government Accountability office issued a report in 2013 critical of the IRS effort to find quiet disclosers and the IRS has stepped up efforts to discover those who tried to file without alerting the IRS.


STREAMLINED COMPLIANCE PROCEDURES FOR NON-RESIDENT U.S. TAXPAYERS12 The IRS was aware that some U.S. taxpayers living abroad have failed to timely file U.S. federal income tax returns or Reports of Foreign Bank and Financial Accounts (FBARs), Form 114. Some of these taxpayers are more recently becoming aware of their filing obligations and seek to come into compliance with the U. S. laws. In 2012 the Service announced a new procedure for current non-residents including, but not limited to, dual citizens who have not filed U.S. income tax and information returns to file their delinquent returns. The 2012 streamlined procedure went into effect on Sept. 1, 2012. It has since been superceded by a much more inclusive program which is described in succeeding paragraphs.

2014 CHANGES TO OFFSHORE PROGRAMS In June 2014, the IRS announced major changes in the 2012 offshore account compliance programs, providing new options to help taxpayers residing in the United States and overseas. The changes are anticipated to provide thousands of people a new avenue to come back into compliance with their tax obligations. And with expansion of the streamlined procedures for non-willful taxpayers, the IRS will also adjusted the terms for taxpayers participating in the OVDP whose conduct may reflect willful non-compliance. The changes modify the OVDP program to make it suited for taxpayers seeking relief from potential criminal prosecution. All told, the three voluntary programs have resulted in more than 45,000 voluntary disclosures from individuals who have paid about $6.5 billion in back taxes, interest and penalties. IRS MAKES CHANGES TO OFFSHORE PROGRAMS; REVISIONS EASE BURDEN AND HELP MORE TAXPAYERS COME INTO COMPLIANCE IR-2014-73, June 18, 201413 WASHINGTON — The Internal Revenue Service announced today major changes in its offshore voluntary compliance programs, providing new options to help both taxpayers residing overseas and those residing in the United States. The changes are anticipated 12 Instructions for New Streamlined Filing Compliance Procedures for Non-Resident, Non-Filer U.S. Taxpayers http://www.irs.gov/uac/Instructions-for-New-Streamlined-Filing-Compliance-Procedures-for-Non-Resident-Non-Filer-US-Taxpayers

13http://www.irs.gov/uac/Newsroom/IRS-Makes-Changes-to-Offshore-Programs;-Revisions-Ease-Burden-and-Help-More-Taxpayers-Come-into-Compliance


to provide thousands of people a new avenue to come into compliance with their U.S. tax obligations. The changes include an expansion of the streamlined filing compliance procedures announced in 2012 and important modifications to the 2012 Offshore Voluntary Disclosure Program (OVDP). The expanded streamlined procedures are intended for U.S. taxpayers whose failure to disclose their offshore assets was non-willful. Balanced against the modified programs is the government’s ongoing effort to combat the misuse of offshore assets. The IRS, working closely with the U.S. Department of Justice, continues to investigate foreign financial institutions that may have assisted U.S. taxpayers in avoiding their tax filing and payment obligations. In addition, on July 1, 2014 the new information reporting regime resulting from the Foreign Account Tax Compliance Act (FATCA) went into effect. Thousands of foreign financial institutions will begin to report to the IRS the foreign accounts held by U.S. persons. “Through our enforcement efforts and implementation of FATCA, taxpayers are more aware of their obligations, and we believe want to come into compliance,” Koskinen said. “In this rapidly changing environment, we listened to feedback from the tax community as well as the National Taxpayer Advocate about our voluntary programs. We have made important adjustments to provide opportunities for all U.S. taxpayers to come in, including those who are not willfully hiding assets.” STREAMLINED PROCEDURES EXPANDED The changes announced make key expansions in the streamlined procedures to accommodate a wider group of U.S. taxpayers who have unreported foreign financial accounts. The original streamlined procedures announced in 2012 were available only to non-resident, non-filers. Taxpayer submissions were subject to different degrees of review based on the amount of the tax due and the taxpayer’s response to a “risk” questionnaire. The expanded streamlined procedures are available to a wider population of U.S. taxpayers living outside the country and, for the first time, to certain U.S. taxpayers residing in the United States. The changes include:

• Eliminating a requirement that the taxpayer have $1,500 or less of unpaid tax per year;

• Eliminating the required risk questionnaire; • Requiring the taxpayer to certify that previous failures to comply were due to non-

willful conduct.

For eligible U.S. taxpayers residing outside the United States, all penalties will be waived. For eligible U.S. taxpayers residing in the United States, the only penalty will be


a miscellaneous offshore penalty equal to 5 percent of the foreign financial assets that gave rise to the tax compliance issue. OFFSHORE VOLUNTARY DISCLOSURE PROGRAM (OVDP) MODIFIED The changes announced also make important modifications to the OVDP, including:

• Requiring additional information from taxpayers applying to the program; • Eliminating the existing reduced penalty percentage for certain non-willful

taxpayers in light of the expansion of the streamlined procedures; • Requiring taxpayers to submit all account statements and pay the offshore

penalty at the time of the OVDP application; • Enabling taxpayers to submit voluminous records electronically rather than on

paper; • Increasing the offshore penalty percentage (from 27.5% to 50%) if, before the

taxpayer’s OVDP pre-clearance request is submitted, it becomes public that a financial institution where the taxpayer holds an account or another party facilitating the taxpayer’s offshore arrangement is under investigation by the IRS or Department of Justice.

STREAMLINED FILING COMPLIANCE PROCEDURES14 Purpose of the streamlined procedures: The streamlined filing compliance procedures described below are available to taxpayers certifying that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part. The streamlined procedures are designed to provide to taxpayers in such situations (1) a streamlined procedure for filing amended or delinquent returns and (2) terms for resolving their tax and penalty obligations. These procedures will be available for an indefinite period until otherwise announced. As reflected below, the streamlined filing procedures that were first offered on September 1, 2012 have been expanded and modified to accommodate a broader group of U.S. taxpayers. Major changes to the streamlined procedures include:

(1) extension of eligibility to U.S. taxpayers residing in the United States, (2) elimination of the $1,500 tax threshold, and (3) elimination of the risk assessment process associated with the streamlined filing compliance procedure announced in 2012.

General eligibility for the streamlined procedures: The modified streamlined filing compliance procedures are designed for only individual taxpayers, including estates of individual taxpayers. The streamlined procedures are available to both U.S. individual taxpayers residing outside the United States and U.S. individual taxpayers residing in the United States. Descriptions of the specific eligibility requirements for the streamlined 14 http://www.irs.gov/Individuals/International-Taxpayers/Streamlined-Filing-Compliance-Procedures


procedures for both non-U.S. residents (the “Streamlined Foreign Offshore Procedures”) and U.S. residents (the “Streamlined Domestic Offshore Procedures”) are set forth below. Taxpayers using either the Streamlined Foreign Offshore Procedures or the Streamlined Domestic Offshore Procedures will be required to certify, in accordance with the specific instructions set forth below, that the failure to report all income, pay all tax, and submit all required information returns, including FBARs (FinCEN Form 114, previously Form TD F 90-22.1), was due to non-willful conduct.

Observation: Non-willful conduct is 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.

If the IRS has initiated a civil examination of a taxpayer’s returns for any taxable year, regardless of whether the examination relates to undisclosed foreign financial assets, the taxpayer will not be eligible to use the streamlined procedures. Taxpayers under examination may consult with their agent. Similarly, a taxpayer under criminal investigation by IRS Criminal Investigation is also ineligible to use the streamlined procedures. Taxpayers eligible to use the streamlined procedures who have previously filed delinquent or amended returns in an attempt to address U.S. tax and information reporting obligations with respect to foreign financial assets (so-called “quiet disclosures” made outside of the OVDP or its predecessor programs) may still use the streamlined procedures by following the instructions set forth below. However, any penalty assessments previously made with respect to those filings will not be abated. All tax returns submitted under the streamlined procedures must have a valid Taxpayer Identification Number (TIN). For U.S. citizens, resident aliens, and certain other individuals, the proper TIN is a valid Social Security Number (SSN). For individuals who are not eligible for an SSN, an Individual Taxpayer Identification Number (ITIN) is a valid TIN. Tax returns submitted without a valid SSN or ITIN will not be processed under the streamlined procedures. However, for taxpayers who are ineligible for an SSN but do not have an ITIN, a submission may be made under the streamlined procedures if accompanied by a complete ITIN application. General treatment under the streamlined procedures: Tax returns submitted under either the Streamlined Foreign Offshore Procedures or the Streamlined Domestic Offshore Procedures will be processed like any other return submitted to the IRS. Consequently, receipt of the returns will not be acknowledged by the IRS and the streamlined filing process will not culminate in the signing of a closing agreement with the IRS.


Returns submitted under either the Streamlined Foreign Offshore Procedures or the Streamlined Domestic Offshore Procedures will not be subject to IRS audit automatically, but they may be selected for audit under the existing audit selection processes applicable to any U.S. tax return and may also be subject to verification procedures in that the accuracy and completeness of submissions may be checked against information received from banks, financial advisors, and other sources. Thus, returns submitted under the streamlined procedures may be subject to IRS examination, additional civil penalties, and even criminal liability, if appropriate.

Observation: OVDP or streamlined procedures?

Taxpayers who are concerned that their failure to report income, pay tax, and submit required information returns was due to willful conduct and who therefore seek assurance that they will not be subject to criminal liability and/or substantial monetary penalties should consider participating the Offshore Voluntary Disclosure Program and should consult with their professional or legal advisers.

After a taxpayer has completed the streamlined filing compliance procedures, he or she will be expected to comply with U.S. law for all future years and file returns according to regular filing procedures. Coordination with treatment under OVDP: Once a taxpayer makes a submission under either the Streamlined Foreign Offshore Procedures or the Streamlined Domestic Offshore Procedures, the taxpayer may not participate in OVDP. Similarly, a taxpayer who submits an OVDP voluntary disclosure letter pursuant to OVDP FAQ 24 on or after July 1, 2014, is not eligible to participate in the streamlined procedures. A taxpayer eligible for treatment under the streamlined procedures who submits, or has submitted, a voluntary disclosure letter under the OVDP (or any predecessor offshore voluntary disclosure program) prior to July 1, 2014, but who does not yet have a fully executed OVDP closing agreement, may request treatment under the applicable penalty terms available under the streamlined procedures. A taxpayer seeking such treatment does not need to opt out of OVDP, but will be required to certify, in accordance with the instructions set forth below, that the failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-willful conduct. As part of the OVDP process, the IRS will consider this request in light of all the facts and circumstances of the taxpayer’s case and will determine whether or not to incorporate the streamlined penalty terms in the OVDP closing agreement.


U.S. TAXPAYERS RESIDING OUTSIDE THE UNITED STATES15 The following streamlined procedures are referred to as the Streamlined Foreign Offshore Procedures. Eligibility for the Streamlined Foreign Offshore Procedures In addition to having to meet the general eligibility criteria described above, individual U.S. taxpayers, or estates of individual U.S. taxpayers, seeking to use the Streamlined Foreign Offshore Procedures described in this section must: (1) meet the applicable non-residency requirement described below (for joint return filers, both spouses must meet the applicable non-residency requirement described below) and (2) have failed to report the income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR (FinCEN Form 114, previously Form TD F 90-22.1) with respect to a foreign financial account, and such failures resulted from non-willful conduct. Non-willful conduct is 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. For information on the meaning of foreign financial asset, see the instructions for FinCEN Form 114, which may be found at FinCen and the instructions for Form 8938, which may be found at Instructions for Form 8938. Non-residency requirement applicable to individuals who are U.S. citizens or lawful permanent residents (i.e., “green card holders”): Individual U.S. citizens or lawful permanent residents, or estates of U.S. citizens or lawful permanent residents, meet the applicable non-residency requirement if, in any one or more of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) has passed, the individual did not have a U.S. abode and the individual was physically outside the United States for at least 330 full days. Under IRC section 911 and its regulations, which apply for purposes of these procedures, neither temporary presence of the individual in the United States nor maintenance of a dwelling in the United States by an individual necessarily mean that the individual’s abode is in the United States. For more information on the meaning of “abode,” see IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.

Example 1: Mr. W was born in the United States but moved to Germany with his parents when he was five years old, lived there ever since, and does not have a U.S. abode. Mr. W meets the non-residency requirement applicable to individuals who are U.S. citizens or lawful permanent residents. Example 2: Assume the same facts as Example 1, except that Mr. W moved to the United States and acquired a U.S. abode in 2012. The most recent 3 years for which Mr. W’s U.S. tax return due date (or properly applied for extended due

15 http://www.irs.gov/Individuals/International-Taxpayers/U-S-Taxpayers-Residing-Outside-the-United-States


date) has passed are 2013, 2012, and 2011. Mr. W meets the non-residency requirement applicable to individuals who are U.S. citizens or lawful permanent residents.

Non-residency requirement applicable to individuals who are not U.S. citizens or lawful permanent residents: Individuals who are not U.S. citizens or lawful permanent residents, or estates of individuals who were not U.S. citizens or lawful permanent residents, meet the applicable non-residency requirement if, in any one or more of the last three years for which the U.S. tax return due date (or properly applied for extended due date) has passed, the individual did not meet the substantial presence test of IRC section 7701(b)(3). For more information on the substantial presence test, see IRS Publication 519, U.S. Tax Guide for Aliens.

Example 3: Ms. X is not a U.S. citizen or lawful permanent resident, was born in France, and resided in France until May 1, 2012, when her employer transferred her to the United States. Ms. X was physically present in the U.S. for more than 183 days in both 2012 and 2013. The most recent 3 years for which Ms. X’s U.S. tax return due date (or properly applied for extended due date) has passed are 2013, 2012, and 2011. While Ms. X met the substantial presence test for 2012 and 2013, she did not meet the substantial presence test for 2011. Ms. X meets the non-residency requirement applicable to individuals who are not U.S. citizens or lawful permanent residents.

DESCRIPTION OF SCOPE AND EFFECT OF PROCEDURES16 U.S. taxpayers (U.S. citizens, lawful permanent residents, and those meeting the substantial presence test of IRC section 7701(b)(3)) eligible to use the Streamlined Foreign Offshore Procedures must (1) for each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed, file delinquent or amended tax returns, together with all required information returns (e.g., Forms 3520, 5471, and 8938) and (2) for each of the most recent 6 years for which the FBAR due date has passed, file any delinquent FBARs (FinCEN Form 114, previously Form TD F 90-22.1). The full amount of the tax and interest due in connection with these filings must be remitted with the delinquent or amended returns. A taxpayer who is eligible to use these Streamlined Foreign Offshore Procedures and who complies with all of the instructions outlined below will not be subject to failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, or FBAR penalties. Even if returns properly filed under these procedures are subsequently selected for audit under existing audit selection processes, the taxpayer will not be subject to failure-to-file and failure-to-pay penalties or accuracy-related penalties with respect to amounts reported on those returns, or to information return penalties or FBAR penalties, unless the examination results in a determination that the original tax noncompliance was fraudulent and/or that the FBAR violation was willful. Any previously assessed penalties with respect to those years, however, will not be 16 http://www.irs.gov/Individuals/International-Taxpayers/U-S-Taxpayers-Residing-in-the-United-States


abated. Further, as with any U.S. tax return filed in the normal course, if the IRS determines an additional tax deficiency for a return submitted under these procedures, the IRS may assert applicable additions to tax and penalties relating to that additional deficiency. For returns filed under these procedures, retroactive relief will be provided for failure to timely elect income deferral on certain retirement and savings plans where deferral is permitted by the applicable treaty. The proper deferral elections with respect to such plans must be made with the submission. See the instructions below for the information required to be submitted to make such elections. Transition rules for taxpayers who made submissions under the 2012 Streamlined Filing Compliance Procedures for Non-Resident, Non-Filer U.S. Taxpayers: The risk assessment process associated with the 2012 Streamlined Filing Compliance Procedures for Non-Resident, Non-Filer U.S. Taxpayers has been eliminated for all streamlined filers. A taxpayer who has initiated participation in the 2012 Streamlined Filing Compliance Procedures prior to July 1, 2014, and has not already been notified of a high or low risk determination will not receive correspondence related to their risk determination and the returns will be processed without regard to that risk assessment. Specific Instructions for the Streamlined Foreign Offshore Procedures17 can be found on the IRS website at the link shown in this footnote. U.S. TAXPAYERS RESIDING IN THE UNITED STATES18 The following streamlined procedures are referred to as the Streamlined Domestic Offshore procedures. ELIGIBILITY FOR THE STREAMLINED DOMESTIC OFFSHORE PROCEDURES In addition to having to meet the general eligibility criteria described above, individual U.S. taxpayers, or estates of individual U.S. taxpayers, seeking to use the Streamlined Domestic Offshore Procedures described in this section must: (1) fail to meet the applicable non-residency requirement described in section 2.A. above (for joint return filers, one or both of the spouses must fail to meet the applicable non-residency requirement described in 2.A. above); (2) have previously filed a U.S. tax return (if required) for each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed; (3) have failed to report gross income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR (FinCEN Form 114, previously Form TD F 90-22.1) and/or one or more international information returns (e.g., Forms 3520, 3520-A, 5471, 5472,

17 http://www.irs.gov/Individuals/International-Taxpayers/U-S-Taxpayers-Residing-Outside-the-United-States 18 http://www.irs.gov/Individuals/International-Taxpayers/U-S-Taxpayers-Residing-in-the-United-States


8938, 926, and 8621) with respect to the foreign financial asset, and (4) such failures resulted from non-willful conduct. Non-willful conduct is 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. For information on the meaning of foreign financial asset, see the instructions for FinCEN Form 114 and the instructions for Form 8938. DESCRIPTION OF SCOPE AND EFFECT OF PROCEDURES U.S. taxpayers (U.S. citizens, lawful permanent residents, and those meeting the substantial presence test of IRC section 7701(b)(3)) eligible to use the Streamlined Domestic Offshore Procedures must (1) for each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed (the “covered tax return period”), file amended tax returns, together with all required information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621), (2) for each of the most recent 6 years for which the FBAR due date has passed (the “covered FBAR period”), file any delinquent FBARs (FinCEN Form 114, previously Form TD F 90-22.1), and (3) pay a Title 26 miscellaneous offshore penalty. The full amount of the tax, interest, and miscellaneous offshore penalty due in connection with these filings should be remitted with the amended tax returns. The Title 26 miscellaneous offshore penalty is equal to 5 percent 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. For this purpose, the highest aggregate balance/value is determined by aggregating the year-end account balances and year-end asset values of all the foreign financial assets subject to the miscellaneous offshore penalty for each of the years in the covered tax return period and the covered FBAR period and selecting the highest aggregate balance/value from among those years. A foreign financial asset is subject to the 5-percent miscellaneous offshore penalty in a given year in the covered FBAR period if the asset should have been, but was not, reported on an FBAR (FinCEN Form 114) for that year. A foreign financial asset is subject to the 5-percent miscellaneous offshore penalty in a given year in the covered tax return period if the asset should have been, but was not, reported on a Form 8938 for that year. A foreign financial asset is also subject to the 5-percent miscellaneous offshore penalty in a given year in the covered tax return period if the asset was properly reported for that year, but gross income in respect of the asset was not reported in that year. For information on the meaning of foreign financial asset, see the instructions for FinCEN Form 114 and the instructions for Form 8938. For example, foreign financial assets may include:

1. Financial accounts held at foreign financial institutions; 2. Financial accounts held at a foreign branch of a U.S. financial institution;


3. Foreign stock or securities not held in a financial account; 4. Foreign mutual funds; and 5. Foreign hedge funds and foreign private equity funds.

A taxpayer who is eligible to use these Streamlined Domestic Offshore Procedures and who complies with all of the instructions below will be subject only to the Title 26 miscellaneous offshore penalty and will not be subject to accuracy-related penalties, information return penalties, or FBAR penalties. Even if returns properly filed under these procedures are subsequently selected for audit under existing audit selection processes, the taxpayer will not be subject to accuracy-related penalties with respect to amounts reported on those returns, or to information return penalties or FBAR penalties, unless the examination results in a determination that the original return was fraudulent and/or that the FBAR violation was willful. Any previously assessed penalties with respect to those years, however, will not be abated. Further, as with any U.S. tax return filed in the normal course, if the IRS determines an additional tax deficiency for a return submitted under these procedures, the IRS may assert applicable additions to tax and penalties relating to that additional deficiency. For returns filed under these procedures, retroactive relief will be provided for failure to timely elect income deferral on certain retirement and savings plans where deferral is permitted by the applicable treaty. The proper deferral elections with respect to such plans must be made with the submission. See the instructions below for the information required to be submitted with such requests. SPECIFIC INSTRUCTIONS FOR THE STREAMLINED DOMESTIC OFFSHORE PROCEDURES Failure to follow these instructions or to submit the items described below will result in returns being processed in the normal course without the benefit of the favorable terms of these procedures.

1. For each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed, submit a complete and accurate amended tax return using Form 1040X, Amended U.S. Individual Income Tax Return, together with any required information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621) even if these information returns would normally not be submitted with the Form 1040 had the taxpayer filed a complete and accurate original return. You may not file delinquent income tax returns (including Form 1040, U.S. Individual Income Tax Return) using these procedures.

2. Include at the top of the first page of each amended tax return "Streamlined Domestic Offshore" written in red to indicate that the returns are being submitted under these procedures. This is critical to ensure that your returns are processed through these special procedures.


3. Complete and sign a statement on the Certification by U.S. Person Residing in

the U.S. certifying: (1) that you are eligible for the Streamlined Domestic Offshore Procedures; (2) that all required FBARs have now been filed (see instruction 9 below); (3) that the failure to report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non-willful conduct; and (4) that the miscellaneous offshore penalty amount is accurate (see instruction 5 below). You must maintain your foreign financial asset information supporting the self-certified miscellaneous offshore penalty computation and be prepared to provide it upon request. You must submit an original signed statement and attach copies of the statement to each tax return and information return being submitted through these procedures. You should not attach copies of the statement to FBARs. Failure to submit this statement, or submission of an incomplete or otherwise deficient statement, will result in returns being processed in the normal course without the benefit of the favorable terms of these procedures.

4. Submit payment of all tax due as reflected on the tax returns and all applicable statutory interest with respect to each of the late payment amounts. Your taxpayer identification number must be included on your check. You may receive a balance due notice or a refund if the tax or interest is not calculated correctly.

5. Submit payment of the Title 26 miscellaneous offshore penalty as defined above.

6. If you seek relief for failure to timely elect deferral of income from certain retirement or savings plans where deferral is permitted by an applicable treaty, submit:

• a statement requesting an extension of time to make an election to defer income tax and identifying the applicable treaty provision;

• a dated statement signed by you under penalties of perjury describing: • the events that led to the failure to make the election, • the events that led to the discovery of the failure, and • if you relied on a professional advisor, the nature of the advisor’s

engagement and responsibilities; and • for relevant Canadian plans, a Form 8891 for each tax year and each plan

and a description of the type of plan covered by the submission.

7. The documents listed above, together with the payments described above, must be sent in paper form (electronic submissions will not be accepted) to: Internal Revenue Service 3651 South I-H 35Stop 6063 AUSC Attn: Streamlined Domestic Offshore Austin, TX 78741


This address may only be used for returns filed under these procedures. For all future filings, you must file according to regular filing procedures.

8. For each of the most recent 6 years for which the FBAR due date has passed, file delinquent FBARs according to the FBAR instructions and include a statement explaining that the FBARs are being filed as part of the Streamlined Filing Compliance Procedures. You are required to file these delinquent FBARs electronically at FinCen. On the cover page of the electronic form, select “Other” as the reason for filing late. An explanation box will appear. In the explanation box, enter “Streamlined Filing Compliance Procedures.” If you are unable to file electronically, you may contact FinCEN's Regulatory Helpline at 1-800-949-2732 or 1-703-905-3975 (if calling from outside the United States) to determine possible alternatives to electronic filing.

STREAMLINED FILING COMPLIANCE PROCEDURES FOR U.S. TAXPAYERS RESIDING IN THE UNITED STATES FREQUENTLY ASKED QUESTIONS AND ANSWERS19

Effective for Streamlined Submissions Made On or After July 1, 2014

# Questions Answers

Q1. Is the 5-percent penalty for Streamlined Domestic Offshore filers intended to reach foreign financial assets in which the taxpayer has no personal financial interest or only a partial interest?

No. Read literally, the third paragraph of the description of the scope of the Streamlined Domestic Offshore Procedures says that the penalty applies to all reportable but unreported foreign financial assets. However, the penalty is not intended to reach assets in which the taxpayer had no financial interest, such as an employer’s account over which the taxpayer had only signature authority, or portions of assets in which the taxpayer had no personal financial interest. In order to address questions left open by the brief definition of assets in the penalty base in the Streamlined Domestic Offshore Procedures the Service will apply the principles announced in OVDP FAQs 31 through 33, 35.1, and 38 through 41.

Q2. I am a U.S. resident making a Streamlined Domestic Offshore submission. In addition to foreign financial accounts and assets, I own an income producing rental property in a foreign jurisdiction that is not reportable on FBAR or Form 8938. Is the real estate included in the Streamlined Domestic Offshore penalty base?

No. Any asset (tax compliant or non-compliant) that was not the kind of asset reportable on either FBAR or Form 8938 is not included in the penalty base for the Streamlined Domestic Offshore Procedures.

Q3. The Streamlined Domestic Offshore Procedures provide that foreign financial assets subject to

No. The instruction referred to was designed to eliminate the burden of duplicate reporting and

19 http://www.irs.gov/Individuals/International-Taxpayers/Streamlined-Filing-Compliance-Procedures-for-U-S-Taxpayers-Residing-in-the-United-States-Frequently-Asked-Questions-and-Answers


the 5-percent penalty include assets that should have been, but were not, reported on Form 8938. The instructions for Form 8938 provide that any assets reported on timely filed Forms 3520 or 5471 need not be reported on Form 8938 for the same tax year. Are assets I report on delinquent Forms 3520 or 5471 excluded from the 5-percent penalty base?

does not affect the definition of “foreign financial asset.” All assets that meet the definition of “foreign financial asset” in the instructions for Form 8938 and not reported on that form should be included in the 5-percent penalty base, unless the taxpayer reported them on timely filed Forms 3520 or 5471.

Q4. I am a U.S. resident making a Streamlined Domestic Offshore submission. I am the 100-percent owner of an incorporated business with various assets, including financial accounts. Does the 5-percent penalty base include the stock in the corporation or just the underlying financial accounts?

The penalty base includes the stock in the corporation (and not the underlying financial accounts) unless it is a disregarded entity for federal income tax purposes. Under the instructions for Form 8938, stock in a foreign corporation is a specified foreign financial asset. Whether the stock in the foreign corporation or the underlying foreign financial accounts are reportable on Form 8938, and therefore are included in the penalty base, depends on whether the corporation is a disregarded entity. If it is, the instructions require the reporting of the underlying foreign financial accounts, which would then be included in the penalty base. However, if the corporation is not a disregarded entity, then the instructions provide that the taxpayer is not considered the owner of the underlying assets solely as a result of the taxpayer’s status as a shareholder. The same principle would apply to assets that are held in a foreign partnership or trust.

Q5. How should I value stock in a foreign corporation that is included in the 5-percent penalty base for Streamlined Domestic Offshore filers?

Any reasonable method of valuing the stock, such as using the balance sheet on the Form 5471, for purposes of calculating the 5-percent penalty. No valuation discounts may be taken on foreign financial assets subject to the 5-percent penalty. The principles in 2014 OVDP FAQ 35.1 are applied to Streamlined Domestic Offshore submissions.

Q6. How do I calculate the 5-percent penalty for Streamlined Domestic Offshore filers?

Begin the computation by identifying the assets included in the penalty base for each of the last six years. These assets include: • For each of the six years in the covered

FBAR period, all foreign financial accounts (as defined in the instructions for FinCEN Form 114) in which the taxpayer has a personal financial interest that should have been, but were not reported, on an FBAR;

• For each of the three years in the covered tax return period, all foreign financial assets (as defined in the instructions for Form 8938) in which the taxpayer has a personal financial interest that should have been, but were not, reported on Form 8938.

• For each of the three years in the covered tax return period, all foreign financial


accounts/assets (as defined in the instructions for FinCEN Form 114 or IRS Form 8938) for which gross income was not reported for that year.

Once the assets in the penalty base have been identified for each year, enter the value of the taxpayer’s personal financial interest in each asset as of December 31 of the applicable year on the Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures (Form 14654). For any year in which a foreign financial account was FBAR compliant and (for the most recent three years) in which a foreign financial asset was both Form 8938 and Form 1040 compliant, the amount entered on the form will be zero. Once the asset values have been entered on the form, add up the totals for each year and select the highest aggregate amount as the base for the 5-percent penalty.

Q7. I am a U.S. resident who filed compliant tax returns (including Forms 8938) and FBARs for the most recent three years for which tax returns were due. However, I failed to properly report a foreign financial asset in years prior to that and did not make a voluntary disclosure. I am otherwise eligible to make a Streamlined Domestic Offshore submission. May I make a streamlined submission and, if so, how is the 5 percent penalty calculated?

You may make a streamlined submission. Because the most recent three years are fully compliant, there will be no assets in the penalty base for those years. Follow the procedure in answer 6 above for the three years prior to that to calculate the aggregate year-end account balances and year-end asset values for each of those three years. The penalty is 5 percent of the highest aggregate amount. When making your submission, attach the certification to a Form 1040X for only the most recent tax year for which you filed an income tax return showing a zero change in tax. Please write “Streamlined Domestic Offshore” in red ink at the top of the Form 1040X.

DELINQUENT INTERNATIONAL INFORMATION RETURN SUBMISSION PROCEDURES20 Taxpayers who do not need to use the OVDP (described in section 1 above) or the Streamlined Filing Compliance Procedures (set forth in section 2 above) to file delinquent or amended tax returns to report and pay additional tax, but who:

• have not filed one or more required international information returns, • have reasonable cause for not timely filing the information returns, • are not under a civil examination or a criminal investigation by the IRS, and

20 http://www.irs.gov/Individuals/International-Taxpayers/Delinquent-International-Information-Return-Submission-Procedures


• have not already been contacted by the IRS about the delinquent information returns…

should file the delinquent information returns with a statement of all facts establishing reasonable cause for the failure to file. As part of the reasonable cause statement, taxpayers must also certify that any entity for which the information returns are being filed was not engaged in tax evasion. If a reasonable cause statement is not attached to each delinquent information return filed, penalties may be assessed in accordance with existing procedures. All delinquent international information returns other than Forms 3520 and 3520-A should be attached to an amended return and filed according to the applicable instructions for the amended return. All delinquent Forms 3520 and 3520-A should be filed according to the applicable instructions for those forms. A reasonable cause statement must be attached to each delinquent information return filed for which reasonable cause is being requested. Information returns filed with amended returns will not be automatically subject to audit but may be selected for audit through the existing audit selection processes that are in place for any tax or information returns.

REQUESTING PRE-CLEARANCE INTO THE OVDP21 For the OVDP, pre-clearance may be requested as follows: 1. Taxpayers or representatives send a facsimile to the IRS – Criminal Investigation

Lead Development Center (LDC) with: (a) Applicant identifying information including complete names, dates of birth (if applicable), tax identification numbers, addresses, and telephone numbers. (b) Identifying information of all financial institutions at which undisclosed OVDP assets (see FAQ 35) were held. Identifying information for financial institutions includes complete names (including all DBAs and pseudonyms), addresses, and telephone numbers. (c) Identifying information of all foreign and domestic entities (e.g., corporations, partnerships, limited liability companies, trusts, foundations) through which the undisclosed OVDP assets (see FAQ 35) were held by the taxpayer seeking to participate in the OVDP; this does not include any entities traded on a public stock exchange. Information must be provided for both current and dissolved entities. Identifying information for entities includes complete names (including all DBAs and pseudonyms), employer identification numbers (if applicable), addresses, and the jurisdiction in which the entities were organized.

21 Question 23, OVDP FAQs http://www.irs.gov/Individuals/International-Taxpayers/Offshore-Voluntary-Disclosure-Program-Frequently-Asked-Questions-and-Answers-2012-Revised


(d) Executed power of attorney forms (if represented).

The LDC fax number to request preclearance before making an offshore voluntary disclosure is (267) 941-1115. In the case of jointly filed returns, if each spouse intends to apply for OVDP, each spouse should request preclearance. The LDC fax number to request preclearance before making an offshore voluntary disclosure is (267) 941-1115. In the case of jointly filed returns, if each spouse intends to apply for OVDP, each spouse should request preclearance.

Criminal Investigation will notify taxpayers or their representatives via fax whether or not they are eligible to make an offshore voluntary disclosure. It may take up to 30 days for Criminal Investigation to notify taxpayers or their representatives of the decision.

Preclearance does not guarantee a taxpayer acceptance into the OVDP. Taxpayers pre-cleared for OVDP must follow the steps outlined below (FAQ 24) within 45 days from receipt of the fax notification to make an offshore voluntary disclosure. Taxpayers must truthfully, timely, and completely comply with all provisions of the OVDP. Taxpayers or representatives with questions regarding preclearance may call the IRS-CI OVDP Hotline at (267) 941-1607. For all other offshore voluntary disclosure questions call the IRS OVDP Hotline at (267) 941-0020. Information on How to Make an Offshore Voluntary Disclosure is available on the IRS website at http://www.irs.gov/pub/irs-utl/OVDIntakeLtr.pdf In addition to the letter, an eight page Offshore Voluntary Disclosure Letter Attachment must be included with the request. Taxpayers participating in the OVDP are required to submit the attachment to the Offshore Voluntary Disclosure letter available at http://www.irs.gov/pub/irs-utl/OVDIntakeLtrAttach.pdf FOREIGN FINANCIAL INSTITUTIONS OR FACILITATORS22 What if the government is investigating the foreign financial institution where I hold my account or another facilitator who assisted in establishing or maintain my offshore arrangement?23 LIST OF FOREIGN FINANCIAL INSTITUTIONS OR FACILITATORS Beginning on August 4, 2014, any taxpayer who has an undisclosed foreign financial account will be subject to a 50-percent miscellaneous offshore penalty if, at the time of 22 http://www.irs.gov/Businesses/International-Businesses/Foreign-Financial-Institutions-or-Facilitators 23 FAQ 7.2 OVDP FAQs http://www.irs.gov/Individuals/International-Taxpayers/Offshore-Volunary-Disclosure-Program-Frequently-Asked-Questions-and-Answers-2012-Revised


submitting the preclearance letter to IRS Criminal Investigation: an event has already occurred that constitutes a public disclosure that either

(a) the foreign financial institution where the account is held, or another facilitator who assisted in establishing or maintaining the taxpayer’s offshore arrangement, is or has been under investigation by the IRS or the Department of Justice in connection with accounts that are beneficially owned by a U.S. person; (b) the foreign financial institution or other facilitator is cooperating with the IRS or the Department of Justice in connection with accounts that are beneficially owned by a U.S. person or (c) the foreign financial institution or other facilitator has been identified in a court- approved issuance of a summons seeking information about U.S. taxpayers who may hold financial accounts (a “John Doe summons”) at the foreign financial institution or have accounts established or maintained by the facilitator.

Examples of a public disclosure include, without limitation: a public filing in a judicial proceeding by any party or judicial officer; or public disclosure by the Department of Justice regarding a Deferred Prosecution Agreement or Non-Prosecution Agreement with a financial institution or other facilitator. As of March 28, 2016 the list of foreign financial institutions or facilitators meeting this criteria included:24 Foreign Financial Institutions or Facilitators

1. UBS AG 2. Credit Suisse AG, Credit Suisse Fides, and Clariden Leu Ltd. 3. Wegelin & Co. 4. Liechtensteinische Landesbank AG 5. Zurcher Kantonalbank 6. Swisspartners Investment Network AG, swisspartners Wealth Management AG,

Swisspartners Insurance Company SPC Ltd., and swisspartners Versicherung AG 7. CIBC FirstCaribbean International Bank Limited, its predecessors, subsidiaries, and

affiliates 8. Stanford International Bank, Ltd., Stanford Group Company, and Stanford Trust

Company, Ltd. 9. The Hong Kong and Shanghai Banking Corporation Limited in India (HSBC India) 10. The Bank of N.T. Butterfield & Son Limited (also known as Butterfield Bank and Bank of

Butterfield), its predecessors, subsidiaries, and affiliates 11. Sovereign Management & Legal, Ltd., its predecessors, subsidiaries, and affiliates

(effective 12/19/14) 12. Bank Leumi le-Israel B.M., The Bank Leumi le-Israel Trust Company Ltd, Bank Leumi

(Luxembourg) S.A., Leumi Private Bank S.A., and Bank Leumi USA (effective 12/22/14) 13. BSI SA (effective 3/30/15)

24 http://www.irs.gov/Businesses/International-Businesses/Foreign-Financial-Institutions-or-Facilitators This list is continually updated; refer to online version prior to guidance to client.


14. Vadian Bank AG (effective 5/8/15) 15. Finter Bank Zurich AG (effective 5/15/15) 16. Societe Generale Private Banking (Lugano-Svizzera) SA (effective 5/28/15) 17. MediBank AG (effective 5/28/15) 18. LBBW (Schweiz) AG (effective 5/28/15) 19. Scobag Privatbank AG (effective 5/28/15) 20. Rothschild Bank AG (effective 6/3/15) 21. Banca Credinvest SA (effective 6/3/15) 22. Societe Generale Private Banking (Suisse) SA (effective 6/9/15) 23. Berner Kantonalbank AG (effective 6/9/15) 24. Bank Linth LLB AG (effective 6/19/15) 25. Bank Sparhafen Zurich AG (effective 6/19/15) 26. Ersparniskasse Schaffhausen AG (effective 6/26/15) 27. Privatbank Von Graffenried AG (effective 7/2/15) 28. Banque Pasche SA (effective 7/9/15) 29. ARVEST Privatbank AG (effective 7/9/15) 30. Mercantil Bank (Schweiz) AG (effective 7/16/15) 31. Banque Cantonale Neuchateloise (effective 7/16/15) 32. Nidwaldner Kantonalbank (effective 7/16/15) 33. SB Saanen Bank AG (effective 7/23/15) 34. Privatbank Bellerive AG (effective 7/23/15) 35. PKB Privatbank AG (effective 7/30/15) 36. Falcon Private Bank AG (effective 7/30/15) 37. Credito Privato Commerciale in liquidazione SA (effective 7/30/15) 38. Bank EKI Genossenschaft (effective 8/3/15) 39. Privatbank Reichmuth & Co. (effective 8/6/15) 40. Banque Cantonale du Jura SA (effective 8/6/15) 41. Banca Intermobiliare di Investimenti e Gestioni (Suisse) SA (effective 8/6/15) 42. bank zweiplus ag (effective 8/20/15) 43. Banca dello Stato del Cantone Ticino (effective 8/20/15) 44. Hypothekarbank Lenzburg AG (effective 8/27/15) 45. Schroder & Co. Bank AG (effective 9/3/15) 46. Valiant Bank AG (effective 9/10/15) 47. Bank La Roche & Co AG (effective 9/15/15) 48. Belize Bank International Limited, Belize Bank Limited, Belize Corporate Services

Limited, their predecessors, subsidiaries, and affiliates (effective 9/16/15) 49. St. Galler Kantonalbank AG (effective 9/17/15) 50. E. Gutzwiller & Cie, Banquiers (effective 9/17/15) 51. Migros Bank AG (effective 9/25/15) 52. Graubundner Katonalbank (effective 9/25/15) 53. BHF-Bank (Schweiz) AG (effective 10/1/15) 54. Finacor SA (effective 10/6/15) 55. Schaffhauser Kantonalbank (effective 10/8/15) 56. BBVA Suiza S.A. (effective 10/16/15) 57. Piguet Galland & Cie SA (effective 10/23/15) 58. Luzerner Kantonalbank AG (effective 10/29/15) 59. Habib Bank AG Zurich (effective 10/29/15) 60. Banque Heritage SA (effective 10/29/15) 61. Hyposwiss Private Bank Genève S.A. (effective 10/29/15) 62. Banque Bonhôte & Cie SA (effective 11/3/15) 63. Banque Internationale a Luxembourg (Suisse) SA (effective 11/12/15)


64. Zuger Kantonalbank (effective 11/12/15) 65. Standard Chartered Bank (Switzerland) SA, en liquidation (effective 11/13/15) 66. Maerki Baumann & Co. AG (effective 11/17/15) 67. BNP Paribas (Suisse) SA (effective 11/19/15) 68. KBL (Switzerland) Ltd. (effective 11/19/15) 69. Bank CIC (Switzerland) Ltd. (effective 11/19/15) 70. Privatbank IHAG Zürich AG (effective 11/24/15) 71. Deutsche Bank (Suisse) SA (effective 11/24/15) 72. EFG Bank AG (effective 12/3/15) 73. EFG Bank European Financial Group SA, Geneva (effective 12/3/15) 74. Aargauische Kantonalbank (effective 12/8/15) 75. Cornèr Banca SA (effective 12/10/15) 76. Bank Coop AG (effective 12/10/15) 77. Crédit Agricole (Suisse) SA (effective 12/15/15) 78. Dreyfus Sons & Co Ltd, Banquiers (effective 12/15/15) 79. Baumann & Cie, Banquiers (effective 12/15/15) 80. Bordier & Cie Switzerland (effective 12/17/15) 81. PBZ Verwaltungs AG (effective 12/17/15) 82. PostFinance AG (effective 12/17/15) 83. Edmond de Rothschild (Suisse) SA (effective 12/18/15) 84. Edmond de Rothschild (Lugano) SA (effective 12/18/15) 85. Bank J. Safra Sarasin AG (effective 12/23/15) 86. Coutts & Co Ltd (effective 12/23/15) 87. Gonet & Cie (effective 12/23/15) 88. Banque Cantonal du Valais (effective 12/23/15) 89. Banque Cantonale Vaudoise (effective 12/23/15) 90. Bank Lombard Odier & Co Ltd (effective 12/31/15) 91. DZ Privatbank (Schweiz) AG (effective 12/31/15) 92. Union Bancaire Privée , USP SA (effective 1/6/16) 93. PHZ Privat - und Handelsbank Zürich AG reorganized as Leodan Privatbank AG

(effective 1/25/16) 94. Hyposwiss Privatbank AG reorganized as HSZH Verwaltungs AG (effective 1/27/16) 95. Bank Julius Baer & Co., Ltd (effective 2/4/16) 96. Cayman National Securities Ltd. (effective 3/9/16) 97. Cayman National Trust Co. Ltd. (effective 3/9/16) 98.

NOTE: Banks are being added frequently; consult the website for most recent listing.


ADDITIONAL RESOURCES FBAR Help25 Call FBAR hotline at 866-270-0733, toll free, or 313-234-6146 (toll for callers outside the U.S.), option 2.. E-mail [email protected] or Call the BSA E-Filing Help Desk at 866-346-9478 or e-mail [email protected] . Contact FinCEN’s Regulatory Helpline at 800-949-2732 toll free, or 703-905-3975 (toll for callers outside the U.S.) for questions regarding BSA regulations, or to discuss acceptable alternatives to electronic filing. AICPA Resources Page for FBAR and FATCA http://www.aicpa.org/InterestAreas/Tax/Resources/International/Pages/FBARResources.aspx Reporting Foreign Financial Assets Under Titles 26 and 31: FATCA and FBAR (March 27, 2014) http://www.fas.org/sgp/crs/misc/R43444.pdf A publication of the Congressional Research Service http://www.forbes.com/sites/irswatch/2015/06/09/new-irs-guidance-limits-fbar-penalties/ The IRS Watch section of Forbes.com maintains current information about offshore compliance issues. Founded in 1978, American Citizens Abroad, Inc. (ACA, Inc.) is a non-profit, non-partisan, volunteer association whose mission is to defend the rights of Americans living overseas. Position: Eliminate citizenship-based taxation and replace it with residence-based taxation:RBT Proposal. This proposal would tax Americans overseas on the basis of residency therefore no taxation on income earned outside the United States. https://www.americansabroad.org/ IRS has created an International Taxpayers resource page, http://www.irs.gov/Individuals/International-Taxpayers Newly added to the IRS website, Tax Trails - Am I Required to File a U.S. Individual Income Tax Return (for U.S. Citizens/Resident Aliens Living Abroad and Nonresident Aliens)? http://www.irs.gov/Individuals/Tax-Trails-Am-I-Required-to-File-a-U.S.-Individual-Income-Tax-Return--for-U.S.-Citizens-Resident-Aliens-Living-Abroad-and-Nonresident-Aliens Tax-Consequences-for-US-Citizens-and-other-US-Persons-Living-in-Canada by BDO http://www.bdo.ca/en/Library/Services/Tax/Documents/Tax-Bulletins/Tax-Consequences-for-US-Citizens-and-other-US-Persons-Living-in-Canada.pdf

25 Reporting of Foreign Financial Accounts on the Electronic FBAR, an IRS SB/SE Webinar 6/4/2014

Exhibits


2012 Offshore Voluntary Disclosure Program26 The IRS Offshore Voluntary Disclosure Program is working with taxpayers whose penalties may be reduced. The IRS began an open-ended OVDP in January 2012 because of strong interest in the 2009 and 2011 programs. The IRS may end the 2012 program at any time in the future.

The IRS is offering taxpayers with undisclosed income from offshore accounts another opportunity to get current with their tax returns. The 2012 OVDP has a higher penalty rate than the previous programs, but offers clear benefits to encourage taxpayers to disclose foreign accounts now rather than risk detection by the IRS and possible criminal prosecution.

This is a continuation of the program's modified terms introduced in 2012. For purposes of referring to this modified program, it may be referred to as the 2014 OVDP. The modifications are effective on July 1, 2014.

In addition to the OVDP, we offer additional options available to U.S. taxpayers with undisclosed foreign financial assets.

Forms you may need to prepare your submission • Form 114, Report of Foreign Bank and Financial Accounts (FBAR) • Form 433A, Collection Information Statement for Wage Earners and Self-Employed

Individuals • Form 433B, Collection Information Statement for Businesses • Form 872, Consent to Extend the Time to Assess Tax • Power of Attorney Form for the Offshore Voluntary Disclosure Initiative

Documents you need to review and/or complete • Complete Form 14452, Foreign Account or Asset Statement. • Review your Offshore Voluntary Disclosure Letter and Attachment. • Evaluate and sign the Consent to Extend the Time to Assess Civil Penalties Provided by

31 U.S.C. 5321 for FBAR Violations. • Follow the Instructions for Completing Consents

Want more background? Read our news releases and fact sheets • IR-2014-73, IRS Makes Changes to Offshore Programs; Revisions Ease Burden and

Help More Taxpayers Come into Compliance • FS-2014-7, Offshore Income and Filing Information for Taxpayers with Offshore

Accounts • FS-2014-6, IRS Offshore Voluntary Disclosure Efforts Produce $6.5 Billion; 45,000

Taxpayers Participate • More ...

Prior OVDP programs • 2011 Offshore Voluntary Disclosure Initiative • 2009 Offshore Voluntary Disclosure Program

26 http://www.irs.gov/uac/2012-Offshore-Voluntary-Disclosure-Program Page Last Reviewed or Updated: 22-Dec-2014


Frequently Asked Questions Foreign Bank and Financial Accounts Reporting Foreign Financial Accounts on the Electronic FBAR by Rod Lundquist, Senior Policy Analyst Small Business/Self-Employed June 4, 2014

1. How do I file an amended FBAR? • Check the “Amended” box in the upper right-hand corner of the FBAR on

page 2 • Complete the entire Form 114 with the corrected information • Explain the reason for amending on page 1 of the form

2. Do I need to file an FBAR for my infant son who is a U.S. citizen and has

foreign financial accounts, but is not required to file a tax return? Yes. There are no age limitations on FBAR filing. An FBAR should be filed on behalf of your son if he has reportable foreign financial accounts. Remember - tax filing status is not a consideration for FBAR.

3. An individual has the power to direct how an account is invested, but

cannot make dispositions from the account. Is that individual required to file the FBAR?

No. The FBAR is not required because the person who cannot make dispositions from an account is not considered to have signature authority over the account.

4. Is the FBAR required by a U.S. resident with power of attorney over his parents’ reportable financial accounts in Canada, even when that authority has never been exercised?

Yes. The person holding power of attorney is a U.S. person who is required to file FBARs on the reportable accounts, as long as the authorization remains in force. Whether that authority has ever been exercised is not relevant to the FBAR filing requirement.

5. Are Canadian RRSP and TFSA accounts reportable on the FBAR? Are accounts administered by Mexico’s AFORE?

Yes. Even though they are similar to the U.S. IRA and Roth IRA, the exemption provided in the new regulations for IRAs is for U.S. accounts. It does not extend to similar foreign accounts. In general, foreign defined contribution retirement accounts are reportable on the FBAR.

6. Is an account holding certificates representing an interest in gold bullion considered a reportable account?

Yes. An account with a financial institution, located in a foreign country, is a reportable account, whether the account holds cash or non-monetary assets.


Form 8938 Statement of Specified Foreign Financial Assets (From instructions to Form 8938) I am not married and do not live abroad. I sold my only specified foreign financial asset on October 15, when its value was $125,000. You have to file Form 8938. You satisfy the reporting threshold even though you do not hold any specified foreign financial assets on the last day of the tax year because you did own specified foreign financial assets of more than $75,000 at any time during the tax year. I am not married and do not live abroad. An unrelated U.S. resident and I jointly own a specified foreign financial asset valued at $60,000. You each have to file Form 8938. You each satisfy the reporting threshold of more than $50,000 on the last day of the tax year. I am not married and do not live abroad. I own an entity disregarded for tax purposes, which owns one specified foreign financial asset valued at $30,000. In addition, I own a specified foreign financial asset valued at $25,000. You have to file Form 8938. You own both the specified foreign financial asset owned by the disregarded entity and the specified foreign financial asset you own directly, for a total value of $55,000. You satisfy the reporting threshold of more than $50,000 on the last day of the tax year. My spouse and I do not live abroad and file a joint income tax return. We jointly own a single specified foreign financial asset valued at $60,000. You and your spouse do not have to file Form 8938. You do not satisfy the reporting threshold of more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year. My spouse and I do not live abroad, file a joint income tax return, and jointly and individually own specified foreign financial assets. On the last day of the tax year, my spouse and I jointly own a specified foreign financial asset with a value of $90,000. My spouse has a separate interest in a specified foreign financial asset with a value of $10,000. I have a separate interest in a specified foreign financial asset with a value of $1,000. You and your spouse have to file a combined Form 8938. You and your spouse have an interest in specified foreign financial assets in the amount of $101,000 on the last day of the tax year. This is the entire value of the specified foreign financial asset that you jointly own, $90,000, plus the value of the asset that your spouse separately owns, $10,000, plus the value of the asset that you separately own, $1,000. You and your


spouse satisfy the reporting threshold of more than $100,000 on the last day of the tax year. My spouse and I do not live abroad, file separate income tax returns, and jointly own a specified foreign financial asset valued at $60,000 for the entire year. Neither you nor your spouse has to file Form 8938. You each use one-half of the value of the asset, $30,000, to determine the total value of specified foreign financial assets that you each own. Neither of you satisfies the reporting threshold of more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. My spouse and I file separate income tax returns, jointly and individually own specified foreign financial assets, and do not live abroad. On the last day of the tax year, my spouse and I jointly own a specified foreign financial asset with a value of $90,000. My spouse has a separate interest in a specified foreign financial asset with a value of $10,000. I have a separate interest in a specified foreign financial asset with a value of $1,000. You do not have to file Form 8938 but your spouse does. Your spouse has an interest in specified foreign financial assets in the amount of $55,000 on the last day of the tax year. This is one-half of the value of the asset that you jointly own, $45,000, plus the entire value of the asset that your spouse separately owns, $10,000. You have an interest in specified foreign financial assets in the amount of $46,000 on the last day of the tax year. This is one-half of the value of the asset that you jointly own, $45,000, plus the entire value of the asset that you separately own, $1,000. Your spouse satisfies the reporting threshold of more than $50,000 on the last day of the tax year. You do not satisfy the reporting threshold of more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. My spouse and I are U.S. citizens but live abroad for the entire tax year and file a joint income tax return. The total value of our combined specified foreign financial assets on any day of the tax year is $150,000. You and your spouse do not have to file Form 8938. You do not satisfy the reporting threshold of more than $400,000 on the last day of the tax year or more than $600,000 at any time during the tax year for married individuals who live abroad and file a joint income tax return. My spouse and I live abroad and file separate income tax returns. My spouse is not a specified individual. On the last day of the tax year, my spouse and I jointly own a specified foreign financial asset with a value of $150,000. My spouse has a separate interest in a specified foreign financial asset with a value of $10,000. I have a separate interest in a specified foreign financial asset with a value of $60,000.


You have to file Form 8938 but your spouse, who is not a specified individual, does not. You have an interest in specified foreign financial assets in the amount of $210,000 on the last day of the tax year. This is the entire value of the asset that you jointly own, $150,000, plus the entire value of the asset that you separately own, $60,000. You satisfy the reporting threshold for a married individual living abroad and filing a separate return of more than $200,000 on the last day of the tax year. [How does one value] interests in foreign estates, foreign pension plans, and foreign deferred compensation plans. If you have an interest in a foreign estate, foreign pension plan, or foreign deferred compensation plan, the maximum value of your interest is the fair market value of your beneficial interest in the assets of the estate, pension plan, or deferred compensation plan as of the last day of the tax year. If you do not know or have reason know based on readily accessible information the fair market value as of the last day of the tax year, the maximum value is the fair market value, determined as of the last day of the tax year, of the cash and other property distributed during the tax year to you as a beneficiary or participant. If you received no distributions during the tax year and do not know or have reason to know based on readily accessible information the fair market value of your interest as of the last day of the tax year, use a value of zero as the maximum value of the asset. Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers27 (Posted 06/26/2012) 16. Some taxpayers have made quiet disclosures by filing amended returns. Will the IRS audit these taxpayers? If so, will they be eligible for the 27.5 percent offshore penalty? Is the IRS really going to prosecute someone who filed an amended return and correctly reported all their income? The IRS is reviewing amended returns and could select any amended return for examination. The IRS has identified, and will continue to identify, amended tax returns reporting increases in income. The IRS will closely review these returns to determine whether enforcement action is appropriate. If a return is selected for examination, the 27.5 percent offshore penalty would not be available. When criminal behavior is evident and the disclosure does not meet the requirements of a voluntary disclosure under IRM 9.5.11.9, the IRS may recommend criminal prosecution to the Department of Justice. 17. I have properly reported all my taxable income but I only recently learned that I should have been filing FBARs in prior years to report my personal foreign bank account or to report the fact that I have signature authority over bank accounts

27 http://www.irs.gov/Individuals/International-Taxpayers/Offshore-Voluntary-Disclosure-Program-Frequently-Asked-Questions-and-Answers


owned by my employer. May I come forward under this new program to correct this? The purpose for the voluntary disclosure practice is to provide a way for taxpayers who did not report taxable income in the past to come forward voluntarily and resolve their tax matters. Thus, if you reported, and paid tax on, all taxable income but did not file FBARs, do not use the voluntary disclosure process. For taxpayers who reported, and paid tax on, all their taxable income for prior years but did not file FBARs, you should file the delinquent FBARs according to the FBAR instructions and include a statement explaining why the FBARs are filed late. Through June 30, 2013, you may file electronically or by sending paper forms to Department of Treasury, Post Office Box 32621, Detroit, MI 48232-0621. After June 30, 2013, you must file electronically. If you are unable to file electronically, you may contact FinCEN's Regulatory Helpline at 1-800-949-2732 or (if calling from outside the United States) 1-703-905-3975 to determine possible alternatives for timely reporting. The IRS will not impose a penalty for the failure to file the delinquent FBARs if there are no underreported tax liabilities and you have not previously been contacted regarding an income tax examination or a request for delinquent returns. Non-resident taxpayers should also review the Filing Compliance Procedures for Non-Resident U.S. Taxpayers if they do not qualify for the procedures described in this FAQ. NOTE: Taxpayers filing FBARs electronically do not currently have the technological ability to include a statement explaining why the FBARs are filed late. Until such time that they have the ability, it is sufficient to file the FBARs electronically, retain the statement, and submit the statement to the Service upon request. 18. Question 17 states that a taxpayer who only failed to file an FBAR should not use this process. What about a taxpayer who only has delinquent Form 5471s or Form 3520s but no tax due? Does that taxpayer fall outside this voluntary disclosure process? A taxpayer who has failed to file tax information returns, such as Form 5471 for controlled foreign corporations (CFCs) or Form 3520 for foreign trusts but who has reported, and paid tax on, all their taxable income with respect to all transactions related to the CFCs or foreign trusts, should file delinquent information returns with the appropriate service center according to the instructions for the form and attach a statement explaining why the information returns are filed late. (The Form 5471 should be submitted with an amended return showing no change to income or tax liability.) Include at the top of the first page of each information return "OVDI - FAQ #18" to indicate that the returns are being submitted under this procedure. This is very important to ensure your returns are processed through this procedure. The IRS will not impose a penalty for the failure to file the delinquent Forms 5471 and 3520 if there are no underreported tax liabilities and you have not previously been contacted regarding an income tax examination or a request for delinquent returns.


Non-resident taxpayers should also review the New Filing Compliance Procedures for Non-Resident U.S. Taxpayers if they do not qualify for the procedures described in this FAQ. 47. I have a client who may be eligible to make a voluntary disclosure. What are my responsibilities to my client under Circular 230? The IRS anticipates that taxpayers will seek qualified tax and legal advice and representation in connection with considering and making a voluntary disclosure. If a taxpayer seeks the advice of a tax practitioner, the practitioner must exercise due diligence in determining the correctness of any oral or written representations made to the client about the program and the implications for that taxpayer of going forward. If the taxpayer decides to proceed with the disclosure, the practitioner must exercise due diligence in determining the correctness of any oral or written representations that the practitioner makes during the representation to the Department of the Treasury; and must avoid giving, or participating in giving, false or misleading information to the Department of the Treasury or giving a false or misleading opinion to the taxpayer. If the taxpayer decides not to make the voluntary disclosure despite the taxpayer’s noncompliance with United States tax laws, Circular 230 requires the practitioner to advise the client of the fact of the client’s noncompliance and the consequences of the client’s noncompliance. A practitioner whose client declines to make full disclosure of the existence of, or any taxable income from, a foreign financial account during a taxable year, may not prepare the client's income tax return for that year without being in violation of Circular 230.


Taxpayer Name: Bruce and Nancy Offshore Last Four Digits of Taxpayer Identification Number: 9999 and 9998 Foreign Financial Institution Name: Bank of Butterfield, Grand Cayman Account Number: 01-101

ATTACHMENT TO OFFSHORE VOLUNTARY DISCLOSURES LETTER

Please ensure all pages of the attachment include your name the last four digits of your taxpayer identification number,

the name of the foreign financial institution, and the account number for which you are responding.

For each foreign financial account of which you have control or are a beneficial owner, provide the following information:

1. Name of the foreign financial institution. Bank of Butterfield, Grand Cayman

2. Country, including address, where the account was established. o If different, country, including address, where the account is currently

located. Grand Cayman Island P.O. Box 705 Grand Cayman Island KY1-1107

3. Date the account was opened. 20 to 25 years ago

4. Is the account still open?

Yes No If no, when was the account closed?

5. Identify the individual(s) and/or organization(s) (e.g., banks, independent

financial advisors, trust or corporate service providers) who advised or assisted you in opening and using/maintaining the account.

o Names: None


o Explain all communications you had regarding the opening and

use/maintenance of the account. Identify the individuals (whether affiliated with the foreign financial institution or independent from the financial institution), dates, and form (e.g., face-to-face meeting, phone, email, fax, etc.) of the communication.

General banking relationship.

Did you hold any meetings or receive any phone calls, faxes, emails, or any other communications from these individuals to you in the U.S.?

Yes No If yes, where?

o Are any of the individuals a business person (advisor), accountant, attorney, or return preparer in the U.S.?

Yes No

If yes, identify which organization(s)

6. What documentation was received by or shown to you regarding opening and maintenance of the account (e.g., account statements, account opening documents, etc.)? Account statements.

Did you retain any of the documents?

Yes No

o If yes, identify the documents retained. Monthly statements.

o If no, explain why you did not retain them.

7. Were you able to make deposits to or withdrawals from your account through the

use of a U.S. domestic branch office of the foreign financial institution?

Yes No


8. Did you make deposits (beyond the initial opening deposit) or withdrawals from

the account?

Yes No

If yes, respond to the following:

o How did you make a deposit or withdrawal (e.g., in person, computer, phone, use of third-party, etc.)? In person.

o What form did the deposits or withdrawals take (e.g., cash, check, wire, traveler’s check, etc.)? Check.

o What documents did you receive when a deposit or withdrawal was made

(e.g., receipt, debit memo, credit memo, etc.)? Receipt.

9. Were you able to access funds in your offshore account by the use of wire transfers made into the U.S.?

Yes No 10. Were you able to access funds in your offshore account through the use of a

debit or credit card?

Yes No

11. Are there other individuals affiliated with the account?

Yes No

If yes, identify each person affiliated with the account, including the nature of their relationship to the account (e.g., owner, beneficial owner, power of attorney, etc.).

12. Is an entity affiliated with the account?

Yes No

If yes, respond to the following for each entity:

o Identify the entity, including the nature of its relationship to the account (e.g., nominee owner, beneficial owner, power of attorney, parent entity of corporate account holder, etc.). N/A

o Identify the entity’s formal structure (e.g., corporation, foundation, trust, etc.). N/A


o Identify the country where the entity was organized.

o Identify the individual(s) and/or organization(s) (e.g., the foreign bank, an

outside professional, etc.) who suggested forming the entity and who formed the entity.

o Identify the individual(s) or organization(s) that managed the entity.

o Is the entity still in existence?

Yes No

o Was a business person (advisor), accountant, attorney, or return preparer

in the U.S. involved in setting up the entity or in advising its use? Yes No

If yes, identify the individual(s).

o Was a U.S. bank, brokerage firm or other financial services company involved in setting up the entity or in advising its use?

Yes No If yes, identify the bank, firm, or company.


13. With respect to communications you had about your foreign financial account,

provide the following:

o Did a representative of the foreign financial institution or advisor visit you in the United States regarding the offshore account?

Yes No

o Did a representative of the foreign financial institution or advisor suggest to you the use of offshore accounts, offshore investments, offshore entities, or particular foreign countries as a way of avoiding the disclosure of your ownership of the account or avoiding taxes?

Yes No

o Did a representative of the foreign financial institution or advisor suggest to you the use of practices, such as holding mail at the institution, using prepaid phone cards, using credit or debit cards, communicating via fax or email, bank storage of account documentation, or conducting face-to-face-meetings, to avoid the disclosure of your ownership of the account?

Yes No

o Did a representative of the foreign financial institution, one of its U.S.

subsidiaries, or advisor provide services in the U.S. related to offshore accounts (e.g., facilitating opening accounts, reviewing account activity, forwarding account statements, providing investment and/or tax advice, etc.)?

Yes No

o Did a representative of the foreign financial institution or advisor suggest you meet in a jurisdiction outside the U.S. and other than where the institution is located?

Yes No

o Did a representative of the foreign financial institution or advisor suggest you either not file a voluntary disclosure with the IRS or repatriate the foreign funds into the U.S.?

Yes No o Did an advisor or other person attempt to influence you to move funds

from one foreign financial institution to another or from one foreign country to another?

Yes No


Robert E. McKenzie 312.876.6927 [email protected]

August 2, 2015

VIA CERTIFIED MAIL, RETURN RECEIPT REQUESTED 7014 1200 0001 0809 Internal Revenue Service Voluntary Disclosure Coordinator 1-D04-100 2970 Market Street Philadelphia, PA 19104 Re: Taxpayer Name: Bruce Michael Offshore Tax Identification Number: 999-99-9999 Taxpayer Date of Birth: 12-29-1945 Taxpayer Address: P.O. Box 1039, Grand Cayman KY1-1102

Cayman Islands Taxpayer Name: Nancy Ann Offshore Tax Identification Number: 999-99-9998 Taxpayer Date of Birth: 2-19-1946 Taxpayer Address: P.O. Box 1039, Grand Cayman KY1-1102

Cayman Islands Dear Voluntary Disclosure Coordinator: To assist in a timely determination of my client’s acceptance into the Voluntary Disclosure Program, (for Voluntary Disclosures involving offshore accounts) I have addressed all of the following items: 1. Please include:

o Complete name: Bruce Michael Offshore o Social Security Number: 999-99-9999 o Date of Birth: 12-29-1945


o Address: P.O. Box 1039, Grand Cayman KY1-1102, Cayman Islands o Passport Number (and Country): o Current Occupation: Taxpayer o Complete name: Nancy Ann Offshore o Social Security Number: 999-99-9998 o Date of Birth: 2-19-1946 o Address: P.O. Box 1039, Grand Cayman KY1-1102, Cayman Islands o Passport Number (and Country): o Current Occupation: Taxpayer

2. Taxpayer Representative and his/her contact information.

Robert E. McKenzie JD ARNSTEIN & LEHR LLP 120 South Riverside Plaza Suite 1200 Chicago, Illinois 60606-3910 Phone: 312.876.6927 Fax: 312.876.7318 E-mail: [email protected]

3. Type of Voluntary Disclosure

Offshore Only Offshore and Domestic 4. Identify the source of the funds. All funds from legal source business income. 5. Have any of the offshore accounts you are disclosing been identified by the IRS as

ineligible for this program? Yes No 6. Has anyone, including a foreign government or a foreign financial institution, advised

your client that his/her offshore account records, which are the subject of this voluntary disclosure, were susceptible to being turned over to the US Government pursuant to an official request?

Yes No

o If yes, did anyone on your behalf submit documents in opposition?


Yes No

o If yes, were copies of those documents provided to the attorney General of the United States as required by 18 USC § 3506?

Yes No 7. Disclose if your client or any related entities are currently under audit or criminal

investigation by the Internal Revenue Service or any other law enforcement authority.

o Has the IRS notified your clients that it intends to commence an examination or investigation?

Yes No

o Are your clients under criminal investigation by any law enforcement authority?

Yes No If yes, please explain. 8. Does your clients believe that the IRS has obtained information concerning their tax

liability? Yes No If yes, please specify. 9. Please check the box to estimate the annual range of the highest aggregate value of the

offshore accounts.

Tax Tax Tax Tax Tax Tax Tax Tax Highest Aggregate Year Year Year Year Year Year Year Year

Account/Asset Value 2006 2007 2008 2009 2010 2011 2012 2013

$0 to $100,000 $100,000 to $1,000,000 $1,000,000 to $2,500,000 $2,500,000 to $10,000,000 $10,000,000 to $100,000,000 Greater than $100,000,000


10. Please check the box to estimate the range of potential total unreported income from the

offshore account(s) during each disclosure period.

Tax Tax Tax Tax Tax Tax Tax Tax Estimated Total Year Year Year Year Year Year Year Year

Unreported Income 2006 2007 2008 2009 2010 2011 2012 2013

$0 to $100,000 $100,000 to $1,000,000 $1,000,000 to $2,500,000 $2,500,000 to $10,000,000 Greater than $10,000,000

For each foreign financial account of which your clients have control or are beneficial owners, complete the attached form entitled “Attachment to Offshore Voluntary Disclosures letter.” Please ensure all pages of the attachment include name, the last four digits of taxpayer identification number, the name of the foreign financial institution, and the account number for which you are responding. By signing this document, I certify that I am willing to continue to cooperate with the Internal Revenue Service, including in assessing my income tax liabilities and making good faith arrangements to pay all taxes, interest, and penalties associated with this voluntary disclosure. Under penalties of perjury, I declare that I have examined this document, all attachments and accompanying statements, and to the best of my knowledge and belief, they are true, correct, and complete. Bruce Michael Offshore Signature of Taxpayer Print Name Date Nancy Ann Offshore Signature of Taxpayer Print Name Date

Very truly yours, Robert E. McKenzie


FATCA - Archive

The following jurisdictions are treated as having an intergovernmental agreement in effect (scroll down for a list of jurisdictions with agreements in substance):

Jurisdictions that have signed agreements:

Model 1 IGA • Australia (4-28-2014)

• Bahamas (11-3-2014)

• Barbados (11-17-2014)

• Belarus (3-18-2015)

• Belgium (4-23-2014)

• Brazil (9-23-2014)

• British Virgin Islands (6-30-2014)

• Bulgaria (12-5-2014)

• Cambodia (9-14-2015)

• Canada (2-5-2014)

• Cayman Islands (11-29-2013)

• Colombia (5-20-2015)

• Costa Rica (11-26-2013)

• Croatia (3-20-2015)

• Curaçao (12-16-2014)

• Cyprus (12-2-2014)

• Czech Republic (8-4-2014)

• Denmark (11-19-2012)

• Estonia (4-11-2014)

• Finland (3-5-2014)

• France (11-14-2013)

• Georgia (7-10-2015)

• Germany (5-31-2013)


• Gibraltar (5-8-2014)

• Guernsey (12-13-2013)

• Holy See (6-10-2015)

• Honduras (3-31-2014)

• Hungary (2-4-2014)

• Iceland (5-26-2015)

• India (7-9-2015)

• Ireland (1-23-2013)

• Isle of Man (12-13-2013)

• Israel (6-30-2014)

• Italy (1-10-2014)

• Jamaica (5-1-2014)

• Jersey (12-13-2013)

• Kosovo (2-26-2015)

• Kuwait (4-29-2015)

• Latvia (6-27-2014)

• Liechtenstein (5-19-2014)

• Lithuania (8-26-2014)

• Luxembourg (3-28-2014)

• Malta (12-16-2013)

• Mauritius (12-27-2013)

• Mexico (4-9-2014)

• Montserrat (9-8-2015)

• Netherlands (12-18-2013)

• New Zealand (6-12-2014)

• Norway (4-15-2013)

• Philippines (7-13-2015)

• Poland (10-7-2014)


• Portugal (8-6-2015)

• Qatar (1-7-2015)

• Romania (5-28-2015)

• St. Kitts and Nevis (8-31-2015)

• St. Vincent and the Grenadines (8-18-2015)

• Singapore (12-9-2014)

• Slovak Republic (7-31-2015)

• Slovenia (6-2-2014)

• Spain (5-14-2013)

• South Africa (6-9-2014)

• South Korea (6-10-2015)

• Sweden (8-8-2014)

• Turkey (7-29-2015)

• Turks and Caicos Islands (12-1-2014)

• United Arab Emirates (6-17-2015)

• United Kingdom (9-12-2012)

• Uzbekistan (4-3-2015)

Model 2 IGA • Austria (4-29-2014)

• Bermuda (12-19-2013)

• Chile (3-5-2014)

• Hong Kong (11-13-2014)

• Japan (6-11-2013)

• Moldova (11-26-2014)

• Switzerland (2-14-2013)


Jurisdictions that have reached agreements in substance as of June 30, 2014 and have consented to being included on this list (beginning on the date indicated in parenthesis): Model 1 IGA

• Algeria (6-30-2014)

• Anguilla (6-30-2014)

• Antigua and Barbuda (6-3-2014)

• Azerbaijan (5-16-2014)

• Bahrain (6-30-2014)

• Cabo Verde (6-30-2014)

• China (6-26-2014)

• Dominica (6-19-2014)

• Dominican Republic (6-30-2014)

• Greenland (6-29-2014)

• Grenada (6-16-2014)

• Guyana (6-24-2014)

• Haiti (6-30-2014)

• Indonesia (5-4-2014)

• Malaysia (6-30-2014)

• Montenegro (6-30-2014)

• Panama (5-1-2014)

• Peru (5-1-2014)

• St. Lucia (6-12-2014)

• Saudi Arabia (6-24-2014)

• Serbia (6-30-2014)

• Seychelles (5-28-2014)

• Thailand (6-24-2014)

• Turkmenistan (6-3-2014)

• Ukraine (6-26-2014)


Model 2 IGA

• Armenia (5-8-2014)

• Iraq (6-30-2014)

• Nicaragua (6-30-2014)

• Paraguay (6-6-2014)

• San Marino (6-30-2014)

• Taiwan (6-23-2014)*

*Consistent with the Taiwan Relations Act, the parties to the agreement would be the American Institute in Taiwan and the Taipei Economic and Cultural Representative Office in the United States.

Jurisdictions that have reached agreements in substance as of November 30, 2014 and have consented to being included on this list (beginning on the date indicated in parenthesis): Model 1 IGA

• Angola (11-30-2014)

• Greece (11-30-2014)

• Kazakhstan (11-30-2014)

• Trinidad and Tobago (11-30-2014)

• Tunisia (11-30-2014)

Model 2 IGA • Macao (11-30-2014)

Claudia Hill appreciates the resources made available to her through CCH IntelliConnect Online research services (© Wolters Kluwer), and reproduction rights for articles appearing in the

Journal of Tax Practice & Procedure, a WoltersKluwer publication for which she is Editor-in-Chief.

For a variety of blog posts on foreign tax compliance issues visit http://www.forbes.com/sites/irswatch/

Portions Reprinted from "REPRESENTING THE AUDITED TAXPAYER BEFORE THE IRS"

AND REPRESENTATION BEFORE THE COLLECTION DIVISION OF

THE IRS By Robert E. McKenzie

With Permission from Thomson Reuters Rochester, NY

All Rights Reserved Copyright 2016

113110348.1


Spidell Publishing, Inc.® A ©2016

REVIEW QUESTIONS Under the NASBA-AICPA self-study standards, self-study sponsors are required to present review questions intermittently throughout each self-study course. Additionally, feedback must be given to the course participant in the form of answers to the review questions and the reason why answers are correct or incorrect.

To obtain the maximum benefit from this course, we recommend that you complete each of the following questions, and then compare your answers with the solutions that immediately follow. These questions and related suggested solutions are not part of the final examination and will not be graded by the sponsor.

6. What is true of passive foreign investment companies (PFICs)?

a) A U.S. shareholder who elects to have their PFIC treated as a qualified electing fund may choose to include their pro rata share of earnings from their PFIC in their income each year

b) By making a mark-to-market election, a PFIC shareholder includes annually in gross income the excess of the fair market value over the shareholder’s adjusted basis in the PFIC stock

c) Under the rules for excess distribution, a U.S. PFIC shareholder is taxable if the total amount of distributions received during the year is greater than 150% of the actual average distribution to the shareholder during the prior three years

d) A Canadian mutual fund cannot be treated as a passive foreign investment company

7. What is a specific rule when filing Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation?

a) If the transferor is a domestic or foreign partnership, the partnership must file Form 926 b) Spouses may file Form 926 jointly irrespective of whether they file a joint income tax return c) If information required to be provided in specific sections of Form 926 exceeds the

space that is provided on the form, write “see attached” in that section and attach a separate sheet with the necessary information

d) A U.S. individual that transfers cash to a foreign corporation must file Form 926 if the amount transferred during the 12-month period ending on the date of transfer is in excess of $100,000

8. Details of the Offshore Voluntary Disclosure Initiative (OVDI) are correctly stated in which one of the following?

a) The current program is the third offshore program initiated by the IRS, but it will end in 2017

b) The IRS has determined that the current terms of the program will not change but will remain in effect indefinitely

c) Under the current program, individuals who make a voluntary disclosure must pay a 27.5% penalty based on the highest aggregate balance in foreign bank accounts or foreign asset values during the eight full tax years prior to the disclosure

d) The current OVDI program is the same as the one that was initiated in 2011


Spidell Publishing, Inc.® B ©2016

9. 2014 modifications to the Offshore Voluntary Disclosure Program (OVDP) are correctly stated in which choice below?

a) The offshore penalty percentage has been increased from 27.5% to 35% if a taxpayer fails to disclose that they hold an offshore account and that information becomes public prior to the taxpayer’s OVDP preclearance submission

b) Taxpayers do not need to pay the offshore penalty when the OVDP application is submitted c) Taxpayers can now submit records electronically d) Overall, the penalties for nonwillful compliance have been increased

10. Specific, correct instructions for submitting items for the Streamlined Domestic Offshore Procedures include which of the following?

a) Include payment for the Title 26 miscellaneous offshore penalty b) Submit a complete and accurate amended or delinquent tax return for each of the

most recent three years c) Write in black ink at the top of the first page of each amended tax return:

Streamlined Domestic Offshore, which will indicate that the return is being submitted under the streamlined procedures

d) File delinquent FBARs for each of the most recent five years


Spidell Publishing, Inc.® C ©2016

SOLUTIONS TO REVIEW QUESTIONS

6. What is true of passive foreign investment companies (PFICs)? (Pages 25-26)

a. Incorrect – Once the election is made, the shareholder is required to include their proportionate share of earnings in their income

b. Correct – The election is used to avoid the excess distribution rules c. Incorrect – The total amount of distributions must exceed 125% of the previous three

years’ average distribution to the shareholder d. Incorrect – A non-U.S. corporation is a PFIC if at least 75% of its gross income is

passive or at least 50% of its assets are held for the production of passive income. Under these guidelines, a Canadian mutual fund can be treated as a PFIC

7. What is a specific rule when filing Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation? (Page 31)

a. Incorrect – It is each partner, not the partnership, who must file. Each domestic partner is considered a transferor of their pro rata share

b. Incorrect – Spouses may file Form 925 jointly only if they filed a joint income tax return c. Incorrect – You are to use the space provided to its fullest extent and attach an

additional sheet only for the remaining information d. Correct – The transfer must also be reported if immediately following the transfer,

the individual holds directly or indirectly a minimum of 10% of the total voting power or total value of the foreign corporation

8. Details of the Offshore Voluntary Disclosure Initiative (OVDI) are correctly stated in which one of the following? (Page 36)

a. Incorrect – The IRS has not put an end date on how long this program will last, although they could end it at any time

b. Incorrect – The IRS is free to raise penalties at any time for any or all taxpayers and may also terminate the program

c. Correct – This is true and represents an increase from the 2011 program d. Incorrect – There are differences in the two programs, e.g., the highest penalty

category for 2011 was 25% instead of the current 27.5%. Also, unlike under past programs, there is currently no set deadline for taxpayers to apply


Spidell Publishing, Inc.® D ©2016

9. 2014 modifications to the Offshore Voluntary Disclosure Program (OVDP) are correctly stated in which choice below? (Page 42)

a. Incorrect – The penalty under this circumstance has been increased to 50%. It will also be imposed if another party facilitating the taxpayer’s offshore arrangement comes under the investigation of the IRS or the DOJ public prior to the taxpayer’s OVDP preclearance submission

b. Incorrect – Taxpayers must submit all account statements and pay the penalty at the time of their application to the program

c. Correct – Prior to the modification, taxpayers were required to submit paper records d. Incorrect – With the expansion of the streamlined procedures, existing reduced

penalty percentages for specific nonwillful taxpayers have been eliminated

10. Specific, correct instructions for submitting items for the Streamlined Domestic Offshore Procedures include which of the following? (Pages 49-50)

a. Correct – Payment for all tax due as reflected on the tax returns, including interest, is also required. The taxpayer must pay the Title 26 miscellaneous offshore penalty but is not subject to accuracy-related penalties, information return penalties, or FBAR penalties

b. Incorrect – Delinquent income tax returns cannot be filed using these streamlined procedures

c. Incorrect – The instructions are explicit and state that Streamlined Domestic Offshore must be written in red in order to ensure that the returns are correctly processed using the streamlined procedures

d. Incorrect – Delinquent FBARs must be filed through FinCEN for each of the most recent six years for which the due date has passed

GLOSSARY

Accrual: a basis of accounting whereby revenues are recorded when earned and expenses are recorded as incurred

Achieving a Better Life Experience (ABLE) Act: a tax-advantaged savings plan for disabled individuals similar to IRC §529 Qualified Tuition Plans (QTPs)

Acquisition indebtedness: the principal indebtedness incurred when buying, building, or substantially improving an individual’s qualified residence. Qualified residence interest is deductible as acquisition indebtedness subject to a limit on such indebtedness of $1 million

ACRS: the accelerated cost recovery system, a method of depreciation based on recovery periods determined by the IRS rather than useful life. ACRS was replaced by MACRS for property placed in service after 1986

Additional Child Tax Credit: available to families with at least three qualifying children. This credit reimburses taxpayers for the nonrefundable portion of the Child Tax Credit. Taxpayers who exclude from gross income any foreign-earned income or foreign housing costs under IRC §191 may not claim the Additional Child Tax Credit after December 31, 2014

Adjusted gross income (AGI): income calculated from an individual’s gross income (all income earned in the tax year) and used to determine what amount is taxable. The modifications to gross income are all above-the-line deductions and include, but are not limited to, medical expenses, unreimbursed business expenses, retirement plan contributions, alimony, and loss from the sale or exchange of property

Alternative minimum tax (AMT): an income tax that ensures that individuals and corporations that benefit from various exclusions, credits, and deductions will pay at least some tax. The AMT is assessed on an adjusted amount of taxable income above a specified threshold

Annual Filing Season Program (AFSP): a program aimed at recognizing the efforts of noncredentialed tax return preparers. By completing 18 hours of continuing education, including a 6-hour federal tax law refresher, the participants are included in a public database of return preparers on the IRS website

Applicable large employer (ALE): an employer that has employed a minimum of 50 full-time employees on business days during the prior calendar year

Basis: the amount of an individual’s capital investment in property for tax purposes, which includes sales tax and other expenses. If property is acquired in other ways, e.g., by gift or inheritance, other rules apply when determining basis. Specifically, basis for property acquired from a decedent is the fair market value at date of death (unless it is income in respect of a decedent)

Benchmark plan: for purposes of the PTC, the second lowest cost available silver plan among the silver plans offered by insurance companies that participate in the health care exchange pool

Bonus depreciation: an added amount of deductible depreciation above what is usually available that is taken in the first year that an item is placed in service. It is offered in addition to the maximum IRC §179 expense limits

BIG tax: built-in gains tax that is imposed when a C corporation elects S corporation status. The imposition of the tax prevents the S corporation election from being used to evade the consequences of a C corporation taxable liquidation

BSA E-filing System: supports electronic filing of Bank Secrecy Act forms such as FinCEN 114 for FBAR reporting

Cadillac tax: an excise tax on high cost employer-sponsored health coverage based on any excess benefit provided by an employer to an employee with respect to employer-sponsored health coverage. The excess benefit is determined monthly and is taxed at 40%

Cafeteria plan: a reimbursement plan meeting the requirements of IRC §125 whereby participants can receive specific benefits on a pretax basis. Participants must be allowed to choose among at least one taxable benefit (e.g., cash) and one qualified benefit that is excludable from gross income (e.g., health care benefits)

Cancellation of debt (COD): occurs when a creditor cancels, forgives, or discharges a debt. The amount forgiven is considered income to the debtor and must be reported and taxed as ordinary income unless an exclusion or exception applies

Capitalize: a method in accounting whereby a cost is recorded as an asset, not an expense. In this way, companies can acquire assets with a long lifespan and spread out the cost over an extended period of time

Carryback: the application of a deduction or credit from a current tax year to a prior tax year in order to reduce tax liability in the previous year

Carryforward: the act of applying a loss or credit from a current year to profits in future years to reduce tax liability

Cash basis: an accounting method whereby revenues are recorded when the cash is received, and expenses are recorded when cash is paid out

Cost of goods sold (COGS): the accumulated total of all costs that can be attributed to the creation and production of goods sold

Courtesy disconnect: a term used when the IRS hangs up on a taxpayer because they are overloaded with incoming calls

CUSIP number: an identification number assigned by the Committee on Uniform Securities Identification Procedures to all U.S. and Canadian registered stocks and U.S. government and municipal bonds

Deceased spouse unused exclusion (DSUE): the amount of the first deceased spouse’s unused estate tax exclusion that is used to compute the exclusion amount for the surviving spouse who has elected portability

De minimis: as it pertains to accounting, a benefit or expense that is so small, accounting for it becomes unreasonable or impractical

De minimis safe harbor election: allows taxpayers to write off or expense certain tangible personal property items that would otherwise have to be capitalized and depreciated over several years. Taxpayers can expense purchases of items costing up to $500, or $5,000 for those with an applicable financial statement

Depreciation: an annual allowance that reflects the reduction in the value of an asset due to wear and tear, deterioration, or obsolescence, resulting in an income tax deduction in order to recover the costs or other basis of specific property

Disregarded entity: a business entity which is considered to be an undivided part of the owner of the entity for federal tax purposes. The owner files Schedule C with their personal income tax return like a sole proprietorship. Absent the election for an LLC to be treated as a corporation, the default classification for a single-member LLC is disregarded entity

Donor advised fund: a philanthropic vehicle administered by a public charity for the purpose of managing charitable donations from individuals, families, or organizations. The donor surrenders ownership of what is donated to the fund but may advise on how the account should be invested

Earned income: any income received from active participation in a trade or business, which may include wages, salary, commissions, bonuses, and tips.

Equitable owner: ownership by someone who does not have legal title. Whether or not someone is an equitable owner is determined on a case-by-case basis under state law

Exemption Certificate Number (ECN): a number that is provided by the Marketplace when an individual qualifies for a health insurance exemption. It is unique to the individual and must be used when filing federal taxes to identify the years the individual did not have health insurance coverage

Excise tax: a tax paid when a purchase is made on a specific product or service. The tax may be hidden in the price of the goods or activities sold

FATCA: Foreign Account Tax Compliance Act under which a U.S. taxpayer holding an interest in a specified foreign financial asset must attach to his or her income tax return Form 8938, Statement of Foreign Financial Assets, for each asset if the aggregate value of all the individual’s specified foreign financial assets exceeds specific dollar thresholds

FBAR: Report of Foreign Bank and Financial Accounts, filed on FinCEN Form 114, used to report an interest in or signature authority over a foreign financial account including, but not limited to, a bank or brokerage account, mutual fund, or trust. The filing due date has been moved from June 30 to April 15 for taxable years beginning after December 31, 2015

FICA: The Federal Insurance Contributions Act which imposes a tax on employees and employers to fund its two components: Medicare and Old Age, Survivor, and Disability Insurance (OASDI)

Flexible Spending Account (FSA): a special account where individuals can put pretax dollars from their paychecks to use for certain out-of-pocket health care expenses, including copayments and deductibles. FSAs are available through job-based health plans where employers can also make contributions. The funds cannot be used to pay for insurance premiums

Full-time equivalent (FTE) employees: used for the purpose of determining if the shared responsibility provisions apply to an employer. To arrive at the correct number of FTEs for a month, count the aggregate hours of service worked by non-full-time employees for each month (cannot exceed 120 hours of service for any single employee) and divide the aggregate hours by 120

General partner: a managing partner in a partnership who actively participates in the day-to-day running of the business. General partners have unlimited liability and are able to make decisions on behalf of the business without the knowledge or consent of the other partners

Head of household: a filing status that provides a lower tax rate and a higher deduction than either the single or married/RDP filing separately status. To qualify, the taxpayer must be unmarried or considered unmarried at the end of the tax year, must have a qualifying child or qualifying relative living with them for more than half of the year, and must pay more than half of the cost of maintaining their home

Health reimbursement plan: an employer-funded health benefit plan that can reimburse employees for their insurance premiums. A health reimbursement plan is not health insurance but rather a means of providing employees with a tax-advantaged benefit because the employer sets aside pretax dollars from which employees can pay for their health care expenses

Hobby loss: a loss that is nondeductible and is a result of participating in an activity for pleasure, not profit. A hobby loss is not a business loss; however, if an activity is profitable for three years out of five consecutive years, it can be treated as a business in the years that a loss was realized. Under the hobby loss rules, taxpayers must show that they have engaged in the activity with an objective of making a profit in order to be entitled to take any deductions for ordinary and necessary expenses

Income in respect of a decedent (IRD): income to which a decedent was entitled but did not receive prior to his or her death that is taxable to the recipient or the estate

Individual shared responsibility payment: a fee or penalty for not having minimum essential health insurance coverage unless an exemption applies. U.S. citizens and legal residents must maintain qualifying coverage for themselves and their dependents

IRC §1031 exchange: provides an exception to taxation on gain upon the sale of business or investment property, allowing taxpayers to postpone paying taxes if the proceeds of the sale are reinvested in similar property in a qualifying like-kind exchange

Kiddie tax: a special tax on a person under age 17 who has earned income above an annually determined threshold. Income above the threshold is taxed at the parent’s or guardian’s rate. The tax deters shifting income to children in hopes of paying tax at the child’s lower tax rate

Like-kind exchange: a transaction or series of transactions that allows for the reciprocal transfer of property without generating a current tax liability when the first asset is sold

Limited partner: a partner who typically does not have management responsibility in a partnership in which he or she has invested. Limited partners are not material participants in the partnership, do not receive dividends, and are generally not responsible for its debts

Marketplace: a resource where individuals can review their health care options and enroll in coverage; also known as the health care exchange

Medical savings account (MSA): a plans that combines high-deductible medical insurance with a tax-deferred savings account that employers can offer to their employees as part of a benefits plan. Individuals pay for health care costs from this account up to the amount of their deductible. Unused funds can be rolled over to the following year, or if withdrawn, the funds become taxable income

Medicare: a national insurance program administered by the U.S. government for persons aged 65 and over who have worked and paid into the system. It also provides health insurance to individuals with disabilities who are under age 65 and to persons with end stage renal disease or amyotrophic lateral sclerosis (Lou Gehrig’s disease)

Minimum essential coverage (MEC): the minimum health care coverage required to avoid paying a penalty for not having insurance under the Affordable Care Act unless an exemption applies

MACRS: the Modified Accelerated Cost Recovery System, a method of depreciation whereby taxpayers can recover basis in tangible property over an identified life through annual tax deductions, allowing for larger deductions in the early years of an asset’s life and lower deductions in later years. MACRS replaced the accelerated cost recovery system (ACRS) for property placed in service post 1986

Modified adjusted gross income (MAGI): like adjusted gross income but with certain adjustments that were previously subtracted from income added back in. For example, alimony payments, IRA contributions, and tuition-related costs that may have been deducted when calculating AGI must be added back to compute MAGI

myRA: a retirement account for individuals (My Retirement Account) where the balance never goes down and there are no maintenance fees

Nanny tax: a federal tax that is required to be paid by individuals who hire household workers (maid, babysitter, gardener, etc.) and pay them, in total, above a threshold amount for the tax year. It is not applicable for services performed by the taxpayer’s parent, spouse, or if a babysitter is under age 18 and not primarily working in household employment

Net investment income tax (NIIT): a 3.8% Medicare surtax on certain net investment income of individuals, estates, and trusts that have income above a statutory threshold amount. A child’s income is included in the parent’s computation of NIIT

Nonrecourse debt: a loan that is secured usually by property as collateral whereby if the borrower defaults, the issuer of the loan can only seize the collateral. The borrower is not personally liable for the loan

Nonqualifying stock option (NQSO): stock options that don’t qualify for the same special treatment as incentive stock options that deliver a tax benefit to employees by being taxed at the capital gains tax rate. When an NQSO is exercised, it will result in more taxable income to the employee based on the difference between the grant price and the price on the date of exercise

Net operating loss (NOL): a period when a company’s allowable tax deductions are more than the company’s taxable income with negative taxable income as a result. The loss may be carried back against income in prior years or carried forward as a deduction against future income

Partial asset disposition: the ability to retire, replace, or dispose of part of an asset (like the roof of a building) whereby companies can claim an immediate loss and realize an immediate tax deduction

Passive Foreign Investment Company (PFIC): a foreign corporation where at least 75% of the corporation’s income is from passive activities, such as investments, or at least 50% of the company’s assets for its taxable year are from assets used in the production of passive income, such as investments that generate interest, dividends, or capital gains

Passive income: earnings from enterprises in which an individual does not materially participate, e.g., rental income, limited partnership income

Passthrough entity: an entity such as a sole proprietorship, partnership, LLC, or S corporation where the entity itself is not subject to income tax, but instead the proportionate share of revenues and losses is passed through to the owners and/or investors to be taxed

Portability election: an election by which a deceased spouse’s unused exclusion (DSUE) amount is available to apply to the surviving spouse’s ensuing transfers during life and at death

Power of attorney: a legal document that authorizes an individual to act on someone else’s behalf in legal and private matters. A “durable” power of attorney for medical care and finances is used if an individual becomes mentally incapacitated

Premium Tax Credit: a refundable credit that is advanced to eligible individuals of low or moderate income to assist them in purchasing health care through a health care exchange, also known as the Marketplace

Promissory note: a promise to pay contained in a signed document

Pro rata: a method assigning a certain amount as it relates to its share of the whole; a proportionate allocation

Protective claim for refund: either a formal claim or an amended return for a refund that is contingent on future events and may not be ascertainable until after the time period for a claim for refund runs out

Provider: the organization that pays the medical bills. For insured health care plans, it is the insurance company; for a self-insured plan, it is the employer

Publicly traded partnership: a limited partnership with two or more co-owners that is regularly traded on an established securities market without regard to the number of partners

Pump and dump: a fraudulent scheme whereby investors are encouraged to buy shares in a company to artificially drive the price up, then selling one’s own shares while the price is high

Qualified tuition plan: also known as a §529 plan, the program allows taxpayers to prepay or contribute to an account set up to pay a student’s qualified education expenses at an eligible educational institution

Recourse debt: a loan for which the borrower is personally liable. With recourse debt, the lender can take the collateral and pursue the borrower’s other assets to satisfy any remaining debt

Refundable credit: a tax credit that is not limited by a person’s tax liability. Even with no taxes owed, the credit applies

Required minimum distribution (RMD): the minimum amount a taxpayer must withdraw from his or her retirement account every year by April 1 following the year the individual reaches age 70 ½ . This includes withdrawals from an IRA, SEP IRA, SIMPLE IRA or other retirement plan account. Roth IRAs do not require withdrawals until the death of the owner. Penalties apply if RMD is not taken

Restricted stock units: taxed differently than stock options in that they are taxed at the time they are vested, not at the time of sale. Upon vesting, they are categorized as income, and a portion of the shares will be withheld to cover income taxes

Revocable transfer on death (TOD) deed: transfers real property to a beneficiary who acquires title to the property upon the death of the owner without going through probate. The owner does not make a completed gift for purposes of the gift tax because the deed does not create a present interest in the named beneficiary

Roth IRA: a retirement account whose tax treatment is different from a traditional IRA. Although contribution limits are the same as for traditional IRAs, contributions are not tax deductible; however, there is no ordinary income tax upon withdrawal

Safe harbor: a provision in the Tax Code which sets out terms and conditions that if complied with will assure a specific tax result that is typically a simpler method of determining a tax consequence

Session of play: the approach to determine a wagering gain or loss for certain slot machine play. Per an IRS memorandum, it is determined based on the activity that occurs between the time a gambler enters and leaves a casino or when a gambler purchases and then redeems tokens

Severe cognitive impairment: loss or deterioration in intellectual capacity that is (a) comparable to Alzheimer’s disease and similar forms of irreversible dementia, and (b) measured by clinical evidence

Shared policy allocation: an allocation that must be performed when there are two or more individuals included on Form 1095-A that are not on the same tax return for that year. The allocation distributes dollar items between the owner of the policy and the tax return where those individuals named on Form 1095-A appear

Sharing economy: community-based online sharing of access to goods and services

SHOP exchange: the Marketplace exchange for the Small Business Health Options Program where a small employer can get lower costs on group plans and claim tax credits. For 2015, employers with fewer than 50 full-time equivalent employees can use the SHOP exchange. For 2016, SHOP is available for employers with 100 or fewer employees

SIMPLE retirement plan: a savings incentive match plan that allows employees and small employers to contribute to a traditional IRA. An eligible employer must have employed 100 or fewer employees who earned a minimum of $5,000 during the previous year. An eligible employee is one who received at least $5,000 as compensation during any two years prior to the current calendar

year and who is reasonably expected to receive at least $5,000 in the current calendar year. Employers cannot maintain any other qualified plan

SEP IRA: Simplified Employee Pension plan that allows self-employed individuals and small employers to contribute to retirement plans on behalf of themselves and their employees without the complexities of a qualified plan. All contributions are funded by the employer. Withdrawals are taxed as ordinary income

Small employer health insurance credit: a credit for employers with no more than 25 full-time equivalent employees and average annual wages no greater than $50,000 per employee per year

Sponsor: the individual who arranges health care coverage. In the case of an employer, the employer is the sponsor

Step transaction doctrine: a doctrine that states that interrelated but formally separate steps in an integrated transaction are not to be considered independent of one another, resulting in federal tax liability being based on the entire transaction

Substantial improvement: an improvement that adds to the value of a home, prolongs a home’s useful life, or adapts a home to a new use

Substantial supervision: continual supervision by another person that is necessary to protect the individual from threats to his or her safety, such as may result from wandering

Transient Occupancy Tax (TOT): imposed on an accommodation, such as a hotel, inn, house, motel, or other lodging, that is rented for 30 days or less

TRICARE: the health program of the United States Department of Defense Military Health System

Unrelated business income (UBI): income derived from regular business activities that are unrelated to an exempt organization’s purposes

Addendum: California Glossary

Anti-deficiency provision: enacted under Code of Civ. Proc. §580e, a statute that prohibits lenders from suing borrowers for any difference between what is owed on a mortgage and the price of a house upon foreclosure

Cost-sharing arrangement (CSA): an arrangement by which controlled participants share the costs and risks of developing cost-shared intangibles in proportion to their reasonably anticipated benefits (RAB) shares. Payments received from controlled participants in a CSA for development costs are essentially cost reimbursements and are not considered gross receipts includable in the California apportionment sales factor

Domicile: a legal term that does not have the same meaning as “residence” in California. For tax purposes, domicile is the place where an individual voluntarily establishes his/her true permanent home and principal establishment, and to which place that individual has the intention of returning

whenever absent. Per 18 Cal. Code Regs. §17014(c), an individual can only have one domicile at any one time

Earned income: any income received from active participation in a trade or business, which may include wages, salary, commissions, bonuses, and tips. California does not include self-employment income in the definition of earned income for purposes of the Earned Income Tax Credit

Greenway easement: an authorized easement that may be granted to a public agency, a California Native American tribe, or a nonprofit corporation dedicated to land preservation, protection, or enhancement. A greenway is a separate path for bikes and pedestrians that must be located within 400 yards of an urban waterway where access to the property has been granted through an agreement with a property owner

Mandatory e-pay: a law that requires individuals to make all future payments electronically once they have made an estimated tax or extension payment over $20,000, whether by check or electronically, for tax years beginning on or after January 1, 2009, or if they have filed an original return with over $80,000 in tax liability for those same tax years

MyFTB: online access to tax account information and online services for individuals, business representatives, and tax preparers who must re-register online beginning January 4, 2016, for enhanced services

POA Wizard: the online method of access when working with the FTB in setting up a Power of Attorney. The FTB will not accept a POA by mail or fax

Registered Domestic Partnership: a legal relationship for same-sex couples or opposite sex couples when one partner is over age 62, established by filing either a Declaration of Domestic Partnership or a Confidential Declaration of Domestic Partnership with the California Secretary of State. In California, domestic partners receive the same benefits and protections as married couples. Beginning on or after January 1, 2007, domestic partners must use the same filing status as married couples

Resident: a person who is in California for other than a temporary or transitory purpose or who is domiciled in California, but who is outside California for a temporary or transitory purpose

Taxpayers’ Rights Advocate: a service to help taxpayers resolve their tax problems if they have been unable to do so through normal channels, which is independent of the FTB’s Audit and Collections departments. The Advocate’s authority extends to the following situations: erroneous action or inaction by the FTB in processing documents filed or payments made; unreasonable delay caused by the FTB; or erroneous written advice that doesn’t qualify for relief under the Chief Counsel’s authority. The BOE also has a Taxpayer Advocate whose authority is extended to cover all BOE-administered taxes and fees, not just sales and use taxes

Web Pay: an online application for making an electronic payment directly from an individual’s bank account for the payment of personal and business income taxes

INDEX

A

American Citizens Abroad, Inc. ..................... 59

B

Bank Secrecy Act ...................................... 1, 2, 19

D

Dual Citizens .................................................... 39

F

FATCA ...................................... 1, 2, 19, 41, 59, 76 FBAR 1- 8, 11-13, 16, 19, 35, 38, 45- 52, 59-61, 65 FinCEN 114a ....................................................... 4 Foreign Partnerships ....................................... 34 Form 1040X ............................................37, 49, 53 Form 3520 ...............................................22, 23, 65 Form 5471 ......................................... 31, 34, 52, 65 Form 5472 .......................................................... 34 Form 8621 ..................................................... 25-26 Form 8865 .......................................................... 34 Form 8938 ... 1, 12-16, 19, 22, 45, 48, 51-52, 62-64 Form 926 ....................................................... 28-31

H

HIRE Act ..................................................... 24- 26

I

IRC section 7701(b)(3) ................................. 46-48

N

Non-residency .............................................. 45-46

O

Offshore assets .............................................. 1, 41 OVDP ................................... 12, 35-44, 51-55, 60

P

Penalties .................... 4-6, 12-13, 22-23, 34-39, 60 PFIC ......................................................... 25-28, 38

Q

Quiet disclosures .................................. 39, 43, 64

S

Streamlined procedures .............................. 40-47

T

Types of Foreign Assets ................................... 14

U

U.S. Taxpayers Residing in the United States .. 47, 51

FOREIGN BANK ACCOUNTS AND ASSETS Course description and study guide

Course objectives: The purpose of this course is to review the requirements for reporting worldwide income from all sources including foreign accounts, paying taxes on the income from those accounts, and paying penalties for noncompliance. Topics addressed include: FBAR reporting and penalties, types of foreign assets, comparison of Form 8938 and FBAR, passive foreign investment companies, the Offshore Voluntary Disclosure Initiative, and much more. Completion deadline and exam: This course, including the examination, must be completed within one year of the date of purchase. In addition, unless otherwise indicated, no correct or incorrect feedback for any exam question will be provided. Category: Taxes Recommended CPE Hours: CPAs/PAs — 2 Tax

EAs – 2 Federal Tax CRTPs — 2 Federal Tax

Level: Basic Prerequisite: General knowledge of foreign reporting is required Advanced Preparation: None Course qualification: Qualifies for QAS and NASBA Registry CPE credit based on a 50-minute per CPE hour measurement CPE sponsor information: Spidell Publishing, Inc. (Registry ID: 104931) Expiration Date: May 2017* *Exam must be completed within one year of the date of purchase

Learning assignment and objectives

As a result of studying the assigned materials, you should be able to meet the objectives listed below. Assignment: At the start of the materials, participants should identify the following topics for study:

• Types of foreign assets • FBAR penalties • Streamlined procedures

Learning Objectives: This course will enable you to:

• Recall when and how to file FinCEN Form 114 • Identify the appropriate penalty for willful failure to file an FBAR • Choose which assets are reportable on Form 8938 • Identify the filing threshold for gifts from foreign corporations or partnerships • Determine which of three alternative tax systems should be applied for passive foreign

investment company shareholders • Recall eligibility requirements for the streamlined Offshore Voluntary Disclosure Program

After studying the materials, please answer exam questions 1-10.

P. O. Box 61044 • Anaheim, California 92803-6144 • e-Mail: [email protected] Phone: (714) 776-7850 • Fax: (714) 776-9906 • Web site: http://www.caltax.com

Course Evaluation for Spidell Publishing, Inc. Program title: ___________________________________________

If applicable, program instructor: ____________________________

Program date: ______________ Participant name (optional): _____________________

Instructions: Please comment on all of the following evaluation points for this program and assign a number grade, using a 1-5 scale, with 5 as the highest rating.

1. Were the stated learning objectives met? ______________

2. If applicable, were prerequisite requirements appropriate and sufficient? ______________

3. Were the program materials accurate? ______________

4. Were program materials relevant, and did they contribute to the achievement of the learning objectives? ______________

5. Was the time allotted to the learning activity appropriate? ______________

6. If applicable, were the individual instructors knowledgeable and effective? _____________

7. Were the facilities and/or technological equipment appropriate? ______________

8. Were the handout and/or advanced preparation materials satisfactory? ______________

9. Were the audio and visual materials effective? ______________

IRS Course Number (if applicable): CRA7E-T-00216-16-S

TTP (CTEC) Course Number (if applicable): 1019-CE-0665

Date course completed: ______________

Number of hours it took to complete the course: ______________

P. O. Box 61044 • Anaheim, California 92803-6144 • e-Mail: [email protected] Phone: (714) 776-7850 • Fax: (714) 776-9906 • Web site: http://www.caltax.com

Examination for Spidell’s Foreign Bank Accounts and Assets

PLEASE: Place the correct response for each question on the attached answer sheet and retain this examination for your records. If you purchased the online version, or would like to complete your exam online, please log-in to your SpidellCPE online account to submit your answers to the exam. 70% or more (7 of 10) correct responses are necessary to receive credit for this course. This course must be completed within one year of the date of purchase.

Final Exam Questions

1. What is true about FBAR filing? a) For years beginning after 2014, Form 114

must be filed by June 30 b) The FBAR must be filed with a federal tax

return c) Willfully failing to file an FBAR report is a

civil, not a criminal, offense d) In the case of a foreign financial account,

financial means monetary and nonmonetary assets

2. Which one of the following may not submit an FBAR on behalf of a client? a) CPA b) Attorney c) Enrolled agent d) All of the above may submit

3. Which type of foreign asset is reportable on Form 8938, Statement of Specified Foreign Financial Assets? a) Foreign partnership interests b) A financial account held at a foreign branch

of a U.S. financial institution c) Indirect interests in foreign financial assets

through an entity d) A financial account held at a U.S. branch of

a foreign financial institution

4. Reportable foreign assets for FinCEN Form 114 include all but which one of the following?

a) Foreign mutual funds b) Foreign hedge funds and foreign private

equity funds c) Financial accounts held at a foreign branch

of a U.S. financial institution d) Foreign-issued life insurance or an annuity

contract with cash value

5. A foreign corporation is considered a passive foreign investment company if _________or more of its gross income for the tax year is passive income or if _________or more of the average assets held during the tax year produce passive income or are held for the production of passive income.

a) 50%;50% b) 51%;75% c) 75%;35% d) 75%;50%

6. A U.S. citizen who owns _________or more of a foreign corporation is required to file Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, every year with a personal income tax return, or business return if that business is the owner of the foreign corporation.

a) 25% b) 15% c) 10% d) 50%

SPIDELL’S FOREIGN BANK ACCOUNTS AND ASSETS EXAMINATION PAGE 2 OF 2

7. As a condition of acceptance into the Offshore Voluntary Disclosure Program, what should applicants provide to the IRS?

a) A statement that identifies any offshore entity which is directly (not indirectly) held by the applicant during the tax years covered by the disclosure

b) Completed foreign financial institutions statements for applicants who are disclosing foreign financial accounts with an aggregate highest balance in any year of $1 million or more

c) For applicants with an aggregate highest account balance under $500,000, copies of all offshore financial account statements with an explanation of the differences between the statements and the tax returns

d) No payment should be provided until acceptance in the program is confirmed

8. In 2014, the IRS revised their offshore programs to help more taxpayers come into compliance. What is true of these revisions?

a) There is no longer a requirement that the taxpayer have $1,500 or less of unpaid tax per year

b) There is now a required risk questionnaire c) Taxpayers no longer need to certify that

their past compliance failures were due to nonwillful conduct

d) For eligible U.S. taxpayers residing outside the U.S., there is only a miscellaneous offshore penalty of 5% of the foreign financial assets that gave rise to the compliance issue

9. Who is not eligible for the streamlined Offshore Voluntary Disclosure Program procedures?

a) Estates of individual taxpayers b) U.S. individual taxpayers residing outside

the U.S. c) A taxpayer whose return for any taxable

year is under a civil examination d) A non-U.S. resident

10. In order to be eligible for the Streamlined Foreign Offshore Procedures, there are numerous criteria, one of which is accurately stated in which choice below?

a) Individuals may have a U.S. abode b) Individuals must be physically outside the

U.S. for at least 330 days in any one or more of the most recent past three years for which the U.S. tax return due date has passed

c) If an individual maintains a dwelling in the U.S., their abode is considered to be in the U.S.

d) The nonresidency requirement for the streamlined procedures is only applicable to U.S. citizens