IRS Emphasizing Transparency in Offshore Investment - Report from the ABA Section of Taxation Winter Meeting

February 23, 2012

CFJ partner Bill Davis reports below on the ABA Section of Taxation Winter Meeting in San Diego that was held on February 16-17, 2012 .  The theme of the meeting this year was the continued emphasis on the transparency of the offshore investment world to the IRS.  


I heard at least four separate presentations on the Foreign Account Tax Compliance Act (“FATCA”).   Enacted as part of the HIRE Act in 2010, FATCA creates an entirely new reporting and withholding regime for a broad category of US payments.  Clearly the message is the far-reaching of FATCA across borders and across industries.  The FATCA reporting rules are in addition to the Foreign Financial Account Reporting Requirement (“FBAR”) and are designed to address US tax noncompliance by providing transparency with respect to assets and investments held offshore by U.S. Taxpayers.  FATCA intends to provide increased reporting by both foreign payors and US individuals and entities with foreign accounts.  It is designed to identify foreign accounts and is not designed to collect tax, but the “hammer” is a new 30% withholding tax on offshore income on financial accounts that are not reported. 

The FATCA rules that will be set out in more than 100 pages of Regulations to be issued by the IRS soon will define reporting requirements by offshore banks, investment advisors, life insurance companies, annuity companies, and other financial institutions.  I will provide separate more detailed information about the FATCA regulations as I learn more.

Wegelin & Co. – Swiss Bank

There was a great deal of discussion at the ABA Meeting about the indictment last week of the St. Gallen-based private Swiss Bank, Wegelin & Company founded in 1741 and three senior bank officials who decided to capture the illegal US depositor business that fled UBS after UBS got in trouble with the IRS. The US charged the Wegelin Bank defendants with conspiracy to defraud, tax evasion, tax perjury and money laundering in connection with hiding financial accounts of more than $1.2 billion in secret accounts for US depositors. Prosecutors said that from 2002 to 2011, more than 100 American taxpayers conspired with the defendants and others to hide accounts from the IRS.   The BIG NEWS about the indictment is that it provides for forfeiture of assets as part of the money laundering charge, including transferee liability.  In other words, the IRS is going to “follow the money” and seek forfeitures up and down the line.

OVDI Audits

There were sessions on the reporting requirements of US individuals and US entities having foreign investment accounts.  The IRS announced the third Offshore Voluntary Disclosure Initiative program available to US citizens and green card holders with unreported foreign accounts and announced that the IRS is beginning to audit the 30,000 taxpayers who filed disclosure packages under the first two Offshore Voluntary Disclosure Initiatives.  The IRS believes there are more than 500,000 more individuals and entities that have not properly disclosed their foreign accounts and in most cases, have not reported income on foreign earned income.  The IRS will seek civil, and even criminal, penalties as they discover non-reported foreign accounts and non-reported foreign income.

USVI Audits

For the first time in probably seven years, there was no mention at the meeting of the continuing Virgin Islands’ Tax Dispute, except that IRS Appeals has developed new guidance for settling assessments against USVI taxpayers.  The IRS would like to settle these cases, and the Appeals Officers now can take into consideration the “hazards of litigation”, including the question of the three year statute of limitations in trying to reach a settlement with the VI taxpayers.  Two federal courts have allowed the Virgin Islands’ Government to intervene in current cases to enforce the three year statute of limitations on behalf of USVI taxpayers.  The emphasis by the Government of the Virgin Islands is that the IRS has changed the statute of limitation policy for Virgin Islands’ taxpayers three times during the past few years, which the USVI government believes has hurt business development in the territory and has challenged the territorial governments’ autonomy.  Maybe there is some hope in finalizing the USVI audits in favor of the USVI taxpayers under audits and assessments.

Other topics

Other topics discussed during the San Diego meeting included an update on the IRS collection procedures, the vigerous imposition of civil and criminal tax penalties on collection matters and audits, particularly payroll tax audits, and the emphasis on timely tax reporting.  In addition, there were sessions about the expected increase in capital gain rates, the new capital gains reporting forms, and the expected decrease in the top income tax rates for corporations, but the elimination of dozens of popular deductions.

2012 Estate Planning

On the estate planning front, there was a great deal of discussion on the need for taxpayers to take advantage of certain estate planning opportunities in 2012 that are certain to go away at the end of this year.  For example, an individual can gift up to $5,000,000 as a lifetime exclusion from federal estate taxes in 2012, and everyone at the meeting agreed that the $5,000,000 gifting opportunity will be repealed to provide a maximum $1,000,000 tax free gift or less after 2012.  This would mean an increase in estate taxes of $2,000,000 to a taxable estate if $4,000,000 is includable in a taxable estate after year 2012 that could have been gifted to family members or others tax free in 2012.

This is just a quick summary of what was discussed at the ABA Tax Section meeting.  Please contact Bill Davis at if you would like to have more information or have questions about any topic in this report.