A new Internal Revenue Service ruling greatly reduces offshore voluntary disclosure procedure for Americans with un-reported foreign bank accounts. New IRS Announcement can be found here: http://www.irs.gov/Individuals/International-Taxpayers/Streamlined-Filing-Compliance-Procedures

U.S. Taxpayers Residing in the United States

• The following streamlined procedures are referred to as the Streamlined Domestic Offshore procedures and can be found here: http://www.irs.gov/Individuals/International-Taxpayers/U-S-Taxpayers-Residing-in-the-United-States

U.S. Taxpayers Residing Outside the United States

• The following streamlined procedures are referred to as the Streamlined Foreign Offshore Procedures and can be found here: http://www.irs.gov/Individuals/International-Taxpayers/U-S-Taxpayers-Residing-Outside-the-United-States

These new IRS modifications are very significant.

It is absolutely critical to contact Richard S. Lehman tax attorney today - to understand these important changes. Be knowledgeable and know your legal rights. Contact us today.

Until the mid 1980s Foreign Investors who were well advised never paid any U.S. federal income tax or capital gains tax.

Until that time the U.S. had a treaty with the Netherlands Antilles by virtue of that country’s relationship with the Netherlands. The treaty permitted certain deductions and elections that legally led to minimum taxation of Foreign Investors of real estate. This was all corrected during the Reagan administration in the 1980s and that produced the present taxation pattern that governs Foreign Investors in U.S. real state.

A new section was added to the Internal Revenue laws, Code Section 897, that carved out a unique set of tax rules that apply only to real estate income.

That taxation pattern attempted to make sure that a Foreign Investor paid at least one U.S. tax on operating income and one tax on capital gain.

However, what seemed simple became an entire body of tax law, and because of the complexities of U.S. tax laws; it is often possible for a Foreign Investor to pay no tax on income that is essentially derived from real estate profits or to pay significant double taxes and even more.

Most U.S. taxpayers are now aware of all of the new requirements for U.S. Information Returns that will alert the Internal Revenue Service to the amounts and nature of most foreign assets and foreign bank deposits owned by U.S. taxpayers. An Information Return is not a tax return. It simply notifies the Internal Revenue Service of foreign assets; both individual and corporate.

However, the failure to file information returns and disclose various foreign assets to the Internal Revenue Service can result in very severe and expensive tax penalties for U.S. taxpayers.

In order to avoid these significant penalties, the Information Returns must be timely filed. For those U.S. taxpayers who have not timely filed the proper U.S. tax returns and/or the proper U.S. Information Returns; the Internal Revenue Service has provided an Overseas Voluntary Disclosure Initiative (“OVDI” or “Amnesty Program”). This permits U.S. taxpayers with foreign bank deposits and other assets that have not been disclosed and/or taxed to pay their taxes for prior years and avoid serious penalties.

Under this “Amnesty Program”, United States taxpayers may voluntarily disclose their unreported offshore assets without being subject to any criminal liability and limiting the U.S. taxes and civil penalties that could be applied.

However, if the I.R.S. is investigating a Taxpayer, it is too late for the Taxpayer to enter the Amnesty Program.

This Amnesty Program can be expensive and includes a high penalty on unreported bank deposits. The Taxpayer must pay the proper tax on all U.S. unreported income for the last eight years and pay a 20% accuracy penalty for unreported taxes plus interest.

Reduction of Penalties – The “Opt Out” Program

Under certain circumstances the penalties may be reduced. If this is the case, the Taxpayers that have been permitted to enter Amnesty Program, may “Opt Out” of the Amnesty Program if they believe lower penalties should be applied under the Taxpayer’s special circumstances.

If you have additional questions, contact Richard S. Lehman

We are having success in getting penalties eliminated or reduced.

I want to make you aware of the best guidance that one can get regarding the new IRS open-ended Amnesty program. These questions from the IRS deal with the Amnesty program. They will be very helpful.

EXAMPLE:

Questions 17 in the IRS question which does say if you have no taxable income and you’ve paid all your taxes on your taxable income, there’s not going to be the substantial FBAR penalty violation that comes with a willful FBAR violation. That being the case, with no taxes due, you don’t need to be in the amnesty program. What we had found is people have gone in the amnesty program, and then because of either loss, carry-forwards, or foreign tax credits on foreign income or whatever may arise in these individuals’ situations, that at times even though there’s been foreign bank deposit investment income not reported, we have been able to show that there has been no taxable income. So that’s one area where there is some deviation if it’s handled in a sophisticated way.

We’ve had success in that area too, at looking carefully at whether there has been a willful violation in the past of the failure to file the FBAR. We take a very, very careful look at everyone who joins the amnesty program, not just to provide a really excellent product which is the key to the amnesty program but also it’s important to know that we take a look to make sure that we’re not paying more than any taxpayer should be paying under the amnesty program.

There are procedures, there’s very good guidance on how the procedures need to be followed and what procedures need to be followed, and procedures on how to expand for an institution to make sure that all of its branches are covered without doing the extra work.

If you need help with the new IRS open-ended Amnesty or any of the new IRS laws we can help.

Please fill out the form below and you will be contacted.

by Richard S. Lehman, Esq., Tax Attorney

New tax importance is being given to a 72 year old tax deduction that has come of age with the baby boomers. This is a “theft loss” deduction that allows taxpayers to take advantage of financial losses that have resulted from certain financial frauds. This has become a major issue in light of the multibillion dollar Ponzi Schemes and similar frauds that are discovered on a daily basis.

The baby boomers will age and the fear will grow that they will outlive their remaining financial resources. After an internet bust, a real estate bust, a Wall Street giveaway, a worldwide recession and bankers now borrowing money at less than one percent while the boomers are paying 25% on their credit cards, the boomers are now prime targets for Ponzi Schemes. With that entire group seeking alternative investments to make sure that whatever they have will last; financial frauds, especially Ponzi Schemes will surely grow as the baby boomers reach their peak. Over 70 million people will be looking for the same high rates that will not exist.

In almost every case, the victims of Ponzi Schemes and similar financial frauds, will have more of the money they lost returned to them in the form of tax refunds for qualified theft losses than they will ever receive as a result of the litigation that typically follows the Ponzi Scheme debacle.

It is vitally important to know how the tax law works when it comes to these kinds of financial losses. For many, it may be the difference between receiving 50% of your Ponzi loss back in real dollars resulting from tax refunds or it may be less than 10% when it is not handled properly.

Just think about who benefits the most in a Ponzi Scheme. The victims go broke, the promoters go broke and to jail and the Internal Revenue Service wins.

One simplistic but extreme EXAMPLE to make the point.

Assume that there is $10 Billion in Ponzi Scheme losses in 2011 in states that have a city and state tax together with the Federal tax that is nearing 50%. Assume that income and principal lost in the Ponzi Scheme was taxed at that 50% rate when it was reported in the past. This results in taxes paid in the past on that lost wealth of $5.0 Billion dollars.

Assume these Ponzi losses are deducted in 2011 and used against income for the years 2008 through 2010 as loss carry backs from the theft loss deduction.

This will mean that the loss from the total investments of income and principal that have been taxed at the highest brackets will be carried back and applied against all of the income in a particular year, not just income taxed at the highest bracket. To a large extent these losses will offset income in each prior year that was earned at lower rates. Income and principal taxed at 50% might be applied to reduce taxes on income that was taxed at only 20%.

If it is assumed that the refund paid on the $5 Billion in taxes paid was based at an average 20% tax rate, (20% x $10 Billion), the refunds paid to the taxpayer would only total ($2 Billion). In this case the I.R.S. will make $3 Billion ($5 Billion in tax - $2 Billion in refunds) on a failed investment scheme. Furthermore, the I.R.S. will have kept the $5 Billion in tax revenue for years without paying interest.

The deduction allowed by the Internal Revenue Service known as the “theft loss” deduction has been in the law since the year 1939. However, after all that time it was not until the year 2009 that the law governing this deduction was clarified as to many of the important legal concepts that applied to victims of a Ponzi Scheme theft loss.

This changed dramatically in the year 2009 with the Bernard Madoff Ponzi scandal. In that year with the Internal Revenue Service expecting tens of thousands of claims for refund, (all based on unsettled legal theories that could be interpreted in many ways), the I.R.S. took it upon itself to clarify the law governing the deduction for financial theft loss on Ponzi like frauds.

The Internal Revenue Service did this with two separate documents. It issued Revenue Ruling 2009-9. This explained in detail the Internal Revenue Service’s legal position on each and every one of the critical requirements that would support a deduction for a theft loss. It confirmed that the theft loss is a valuable deduction. The taxpayer is able to take full advantage of loss carry back and loss carry forward rules and avoid various percentage limitations found in certain deductions in the Code. In short, a Ponzi Scheme theft loss is a 100% ordinary loss deduction for all of the loss that is not recovered from third parties and the perpetrator.

However, it is a deduction that must meet certain standards. First, the Ponzi Scheme must qualify as a theft under state law. Next, there are rules to distinguish a theft loss from a market loss. Finally, there are many limitations on exactly how much of the theft loss can be claimed in the year it is deductible. This is because many taxpayers do not know what they may recover from third parties in the year they should take the deduction. These rules have been made a lot clearer by the Revenue Ruling and by a second I.R.S. document.

Due to the extent of the Madoff scandal, the Internal Revenue Service published a second document to greatly aid in the administrative burden of dealing with all of the claims for refund and amended tax returns that would result from Madoff alone. Little did the IRS know that this was the start of the uncovering of hundreds of Ponzi Schemes since Madoff that continue to self destruct over the years.

The IRS in a document known as Revenue Procedure 2009-20 drafted guidelines known as a “Safe Harbor” for Ponzi Scheme victims. A Safe Harbor in IRS language means that a taxpayer whose loss meets certain specific parameters will be treated expeditiously and with administrative ease.

In practical terms, it means that the IRS will agree to an administratively easy process in refunding a victims’ money so long as the victim meets a standard that the IRS already knows would be acceptable to the courts. Put another way, many Ponzi Schemes may not fit the Safe Harbor. However, for those that do not meet the Safe Harbor requirements, the theft loss deduction is still available. Each of these cases will need their own individual attention in proving the validity of the deduction.

Using the Safe Harbor

The Safe Harbor offer will most likely be the method of choice, if it is available for the taxpayer. This article will take a quick review of what the taxpayer needs to do to be able to claim a Safe Harbor theft loss deduction from a Ponzi scheme.

The Taxpayers need to keep in mind the theft loss deduction may be available even if it does not fit in this “Safe Harbor”.

Essentially the Safe Harbor establishes criteria that must be met if the financial fraud will be treated as a Ponzi scheme. It provides a determination of the appropriate year within which to deduct the Ponzi scheme theft loss. It also provides an efficient procedure for determining exactly how much of the theft loss deduction may be taken in the year of deduction in which it is discovered by the taxpayer.

The Safe Harbor permits the taxpayer to deduct 95% of all losses unrecovered from third parties in the year of the deduction if the taxpayer’s only source of recovery is the estate of the perpetrator. This is almost always being handled by a trustee in bankruptcy. In the event the taxpayer also has the potential to recover through litigation against other third parties, the taxpayer is entitled to claim a deduction of 75% for their total unrecovered in the year of discovery. Eventually the taxpayer can deduct all 100% of the unrecovered loss.

However, if one is going to qualify for the Safe Harbor, there is one strict requirement that must be met. The IRS does not want to have to analyze each fraud to determine if the loss is from a genuine “theft” for tax purposes. Therefore to qualify, the perpetrator of the Scheme must meet a standard that assures a theft has been committed. That standard is as follows:

Qualified Loss. A qualified loss is a loss resulting from a specified fraudulent arrangement in which, as a result of the conduct that caused the loss –

(1) The lead figure (or one of the lead figures, if more than one) was charged by indictment or information (not withdrawn or dismissed) under state or federal law with the commission of fraud, embezzlement or a similar crime that, if proven, would meet the definition of theft for purposes of § 165 of the Internal Revenue Code and § 1.165-8(d) of the Income Tax Regulations, under the law of the jurisdiction in which the theft occurred; or

(2) the lead figure was the subject of a state or federal criminal complaint (not withdrawn or dismissed) alleging the commission of a [theft], and either – (a) The complaint alleged an admission by the lead figure, or the execution of an affidavit by that person admitting the crime; or (b) A receiver or trustee was appointed with respect to the arrangement or assets of the arrangement were frozen.

In the event the perpetrator does not meet this strict definition of a theft, then the Ponzi victim is going to have to rely on claiming the theft loss deduction on their tax return without the advantage of the Safe Harbor. They will have to meet the requirement of proving that all of the elements of the theft loss deduction have been met. In the event the Safe Harbor is not available, this task of claiming the rightful amount of the theft loss as a deduction is not as daunting as it may seem. Because the Internal Revenue Service has now clarified the law in this area, there is good guidance for taxpayers on how to meet all the requirements of the Ponzi Scheme theft loss.

Taxpayers who do not fit into the Safe Harbor are going to have to prove that even though they are seeking recovery from trustees and third parties, that they would be entitled to the same percentage of deduction as granted under the Safe Harbor.

On the other hand, the Safe Harbor requires that the taxpayer waive many rights that could lead to a more valuable recovery then that granted under the Safe Harbor under certain circumstances. Therefore, the Safe Harbor should not be elected without the benefit of qualified advice.

Value can be lost without good professional advice.

Richard S. Lehman, Esq.
TAX ATTORNEY
www.LehmanTaxLaw.com
1166 West Newport Center Drive, Suite 100
Deerfield Beach, FL 33442
Tel: 954-419-9191 (Broward)
Tel: 561-368-1113 (Palm Beach)
Fax: 954-719-2428

Press the play button to listen to Richard Lehman’s Attorney Profile.

Richard S. Lehman, has been dealing with the federal tax law for more than three decades. Mr. Lehman is a graduate of Georgetown Law School and obtained his Master’s degree in taxation from New York University. He has served as a law clerk to the Honorable William M. Fay, U.S. Tax Court and as Senior Attorney, Interpretative Division, Chief Counsel’s Office, Internal Revenue Service, Washington D.C.

Mr. Lehman has also created these websites to help United States Taxpayers better understand their options.

NEW - Just Launched
United States Taxation Seminars
These seminars are free to everyone and contain vital information for individual taxpayers, corporations and professionals in the domestic and international areas of tax law. These seminars also offer 5.5 hours Continuing Education Credits available to attorneys, accountants and other professionals, for free.

Ponzi Scheme Tax Loss
A gathering point for tax matters relating to ponzi scheme tax losses.

Foreign Investors Taxation of United States Real Estate
Tax planning for foreign investors investing in U.S. real estate, and is translated in many languages.

United States Taxation of Foreign Investors
This web site provide the foreign investor, both corporate and individual, with a basic introduction to the tax laws of the United States as they apply to that foreign investor.

Pre Immigration Income Tax
Tax planning for the non-resident alien who is immigrating to the U.S.

Settling with the IRS
In hard times, Americans with tax liabilities may be able to make their best settlements.

1. Gurudeo “Buddy” Persaud

Ponzi Scheme Information

• Orlando broker
• astrology-based investment methods
• reportedly told his clients that he would be investing their money in debt, stock, futures, and real estate markets. In reality, he has subscribed to the idea that gravitational forces affect human behavior and, in turn, the stock market
• worked with at least 14 investors between July 2007 and January 2010 and according to the SEC complaint, he told them that the fund was risk-free.
• he misappropriated around $415,000 — nearly half of the investment money — for his own personal use. The claim goes on to say that Persaud worked in “typical Ponzi scheme fashion” by repaying earlier investors with money he brought in from new investors.
• White Elephant Trading Company

References

• http://www.sec.gov/news/press/2012/2012-118.htm
• http://www.huffingtonpost.com/2012/06/22/astrology-ponzi-scheme-sec-files-charges-_n_1618909.html
• http://www.sec.gov/litigation/complaints/2012/comp-pr2012-118.pdf

2. James Davis Risher

Ponzi Scheme Information

• victims were spread out across eight US states and Canada, although most were concentrated near Lakeland, Florida.
• sentenced to 19 years and 7 seven months in federal prison for mail fraud, money laundering, and engaging in an illegal monetary transaction
• court also ordered Risher to forfeit a 2007 Lexus, a 2008 Lexus, a 2008 Smart Car, ten pieces of diamond and other jewelry, and a painting, which are traceable to proceeds of the offenses
• court also entered a money judgment in the amount of $12.4 million - proceeds obtained by Risher, as part of the charged criminal conduct
• Risher pleaded guilty on September 9, 2011
• private equity fund, referred to as the Preservation of Principal Fund.
• funds would be held at Penson Financial Services, Inc.
• At least 106 victim-investors transmitted more than $21 million for investment in the purported fund.
• http://www.justice.gov/usao/flm/press/2011/dec/20111207_Rischer.html
• http://www.sec.gov/news/press/2011/2011-171.htm
• http://www.fbi.gov/tampa/press-releases/2011/convicted-felon-sentenced-for-his-role-in-more-than-21-million-ponzi-scheme

3. Norman Adie

Ponzi Scheme Information

• $530,000 from a number of cinema-loving backers for his apparently fake plans to update and expand the Heights moviehouse and two others he owned in Pennsylvania.
• he used the money on personal expenses and to keep his struggling theaters afloat
• http://www.brooklynpaper.com/stories/33/48/bh_heightscinema_2010_11_26_bk.html
• http://www.stopfraud.gov/news/news-11232010.html

4. Allen and Wendell Jacobson

Ponzi Scheme Information

• operate from a base in Fountain Green, Utah
• offer investors the opportunity to invest in limited liability companies (LLCs) in order to share ownership of large apartment communities in eight states
• SEC alleges that the Jacobsons represent that they buy apartment complexes with low occupancy rates at significantly discounted prices. They then renovate them and improve their management, and aim to resell them within five years
• Investors are said to share in the profits derived from rental income at the apartment complexes as well as the eventual sales.
• the Jacobsons raised more than $220 million from approximately 225 investors through a complex web of entities under the umbrella of Management Solutions, Inc.
• http://www.sec.gov/news/press/2011/2011-266.htm
• http://www.sec.gov/litigation/litreleases/2011/lr22195.htm

5. Dunya Predovan

Ponzi Scheme Information

• bilked investors out of about $450,000 over six years
• http://www.forbes.com/sites/halahtouryalai/2012/05/14/the-latest-in-ponzi-schemes-pretend-you-know-george-soros/
• http://www.northjersey.com/news/bergen/051412_Woman_accused_of_Ponzi_scheme_in_Bergen_County.html

6. Frederick Darren Berg

Ponzi Scheme Information

• sentenced in U.S. District Court in Seattle to 18 years in prison, and three years of supervised release for Wire Fraud, Money Laundering and Bankruptcy Fraud
• The amount of restitution, $140 million
• founder of the Meridian Group of investment funds. The funds represented that $245 million in investor money was invested in real estate contracts and real estate
• http://www.justice.gov/usao/waw/press/2012/feb/berg.html
• http://www.fbi.gov/seattle/press-releases/2012/mercer-island-man-sentenced-to-18-years-in-prison-for-ponzi-scheme-and-bankruptcy-fraud

7. Mark Feathers

Ponzi Scheme Information

• SEC alleges that more than 400 investors were attracted to the funds by promises that profits from mortgage investments would yield annual returns of 7.5 percent or more.
• Small Business Capital Corp.
• raised $42 million by selling securities issued by Investors Prime Fund LLC and SBC Portfolio Fund LLC - two mortgage investment funds they controlled.
• http://www.sec.gov/news/press/2012/2012-125.htm

8. Scott Rothstein

Ponzi Scheme Information

• Florida lawyer sentenced to 50 years in prison for running a $1.2 billion ponzi scheme
• http://www.bloomberg.com/news/2012-01-03/convicted-ex-lawyer-scott-rothstein-says-that-funds-didn-t-warn-investors.html
• http://www.fbi.gov/miami/press-releases/2010/mm060910.htm

9. (14 ) sales agents : Bryan Arias, Hugo A. Arias, Anthony C. Ciccone , Salvatore Ciccone, Jason A. Keryc, Michael D. Keryc, Martin C. Hartmann III , Laura Ann Tordy, Christopher E. Curran, Ryan K. Dunaske, Michael P. Dunne, Diane Kaylor, Anthony Massaro, Ronald R. Roaldsen Jr.

Ponzi Scheme Information

• misled investors and illegally sold securities for a Long Island-based investment firm at the center of a $415 million Ponzi scheme.
• http://www.floridastockfraudblog.com/2012/06/ponzi-scheme—south-florida-fraud-and-misrepresentation-finra-arbitration-and-litigation-attorney.shtml
• http://www.sec.gov/news/press/2012/2012-112.htm
• http://www.fbi.gov/newyork/press-releases/2012/former-agape-world-inc.-account-representatives-charged-in-new-york-with-massive-ponzi-scheme

10. Stanley Shew-A-Tjon

Ponzi Scheme Information

• raised approximately $16 million from more than 9
• http://www.fbi.gov/washingtondc/press-releases/2012/florida-man-sentenced-to-96-months-for-ponzi-scheme-that-defrauded-more-than-900-victims-of-8-million

11. George Levin/Frank Preve

• http://www.sec.gov/news/press/2012/2012-100.htm

12. R. Allen Stanford

• http://www.fbi.gov/houston/press-releases/2012/allen-stanford-gets-110-years-for-orchestrating-7-billion-investment-fraud-scheme

13. Brian Ray Dinning

• http://www.fbi.gov/norfolk/press-releases/2012/virginia-attorney-charged-in-south-african-ponzi-scheme

14. Martin B. Feibish

• http://www.fbi.gov/boston/press-releases/2012/investment-broker-sentenced-in-5m-ponzi-scheme
• http://www.justice.gov/usao/ri/news/2012/april2012/feibish.html

15. George Elia

• http://www.sec.gov/litigation/litreleases/2012/lr22319.htm
• http://www.fbi.gov/miami/press-releases/2012/fort-lauderdale-investment-advisor-arrested-in-las-vegas
• http://www.fbi.gov/miami/press-releases/2012/south-florida-investment-advisor-indicted-for-investment-fraud-scheme

16. Ray Bitar

• http://www.fbi.gov/newyork/press-releases/2012/manhattan-u.s.-attorney-and-fbi-assistant-director-in-charge-announce-the-arrest-of-full-tilt-poker-ceo-raymond-bitar

17. Keith Franklin Simmons

• http://www.fbi.gov/charlotte/press-releases/2012/ponzi-scheme-mastermind-sentenced-to-50-years-in-prison
• http://www.justice.gov/usao/ncw/pressreleases/Charlotte-2012-05-23-simmons.html

18. Alan G. Flesher, Nancy Carol Khalial

• http://www.fbi.gov/losangeles/press-releases/2012/three-plead-guilty-in-41-million-ponzi-scheme-based-in-ventura-county-that-promised-profits-in-ad-toppers-video-advertisements

19. Thomas E. Kelly

• http://www.fbi.gov/albany/press-releases/2012/thomas-kelly-sentenced-for-ponzi-investment-scheme

20. Wayne L. Palmer and his firm, National Note of Utah, LC

• http://www.sec.gov/news/press/2012/2012-119.htm

21. Samantha Delay-Wilson

• http://www.fbi.gov/anchorage/press-releases/2012/anchorage-woman-sentenced-to-seven-years-in-prison-for-running-ponzi-scheme

22. Anthony John Johnson

• http://www.fbi.gov/newyork/press-releases/2012/westchester-investment-manager-sentenced-to-10-years-for-operating-a-multi-million-dollar-ponzi-scheme

23. Jason Bo-Alan Beckman, Gerald Joseph Durand, Patrick Kiley

• http://www.fbi.gov/minneapolis/press-releases/2012/federal-jury-convicts-three-individuals-in-connection-with-trevor-cook-ponzi-scheme
• http://carlsoncaspers.com/OurExperience/SECvJasonBoAlanBeckmanetal

24. Richard H. Nickles

• http://www.fbi.gov/losangeles/press-releases/2012/orange-county-investment-advisor-sentenced-to-12-years-in-federal-prison-in-ponzi-scheme-that-caused-nearly-7-million-in-losses

25. Andrew S. Mackey, Inger L. Jensen

• http://www.fbi.gov/atlanta/press-releases/2012/two-new-york-residents-convicted-of-operating-12-million-ponzi-scheme-that-victimized-numerous-atlanta-investors

26. Joseph Blimline

• http://www.fbi.gov/dallas/press-releases/2012/dallas-man-sentenced-in-half-billion-dollar-ponzi-scheme

27. Anthony C. Morris

• http://www.fbi.gov/seattle/press-releases/2012/pastor-sentenced-to-40-months-in-prison-for-ponzi-scheme

28. Robert G. Tunnell, Jr.

• http://www.fbi.gov/sanfrancisco/press-releases/2012/san-francisco-man-sentenced-to-prison-for-running-multi-million-dollar-ponzi-scheme

29. Daniel Wise

• http://www.fbi.gov/phoenix/press-releases/2012/scottsdale-man-indicted-for-operating-66-million-ponzi-scheme

30. Steven Bartko

• http://www.fbi.gov/sandiego/press-releases/2012/ponzi-scheme-operator-sentenced-to-24-months-in-prison

31. Shervin Neman

• http://www.sec.gov/news/press/2012/2012-64.htm

32. Ephren W. Taylor II

• http://www.sec.gov/news/press/2012/2012-62.htm

33. Timothy Melvin Murphy

• http://www.fbi.gov/losangeles/press-releases/2012/orange-county-man-pleads-guilty-to-ponzi-style-investment-fraud-scheme

34. Brett A. Amendola

• http://www.fbi.gov/washingtondc/press-releases/2012/ashburn-man-pleads-guilty-to-ponzi-scheme-involving-purchase-of-beacon-hill-golf-course

35. C. Tate George

• http://www.fbi.gov/newark/press-releases/2012/former-nba-player-and-ceo-of-the-george-group-indicted-in-ponzi-scheme
• http://www.justice.gov/usao/nj/Press/files/George, C. Tate Indictment News Release.html

36. Kenneth Alfred Scudder

• http://www.fbi.gov/houston/press-releases/2012/woodlands-man-sentenced-in-ponzi-scheme
• http://www.justice.gov/usao/txs/1News/Releases/2012 March/120312 Scudder.html

37. Lauren Baumann

• http://www.fbi.gov/losangeles/press-releases/2012/promoter-of-christian-rock-concerts-sentenced-to-nearly-five-years-in-federal-prison-in-ponzi-scheme-that-took-1-million-from-victims

38. William Wise, Jacquline Hoegel

• http://www.fbi.gov/sanfrancisco/press-releases/2012/two-indicted-in-129-million-ponzi-scheme-case
• http://www.tklaw.com/millennium_bank_receivership.cfm

39. John Terzakis

• http://www.fbi.gov/sanfrancisco/press-releases/2012/vesta-strategies-majority-owner-pleads-guilty-to-25-million-ponzi-scheme

40. Jonathan D. Davey, Chad A. Sloat, Michael J. Murphy, Jeffrey M. Toft

• http://www.fbi.gov/charlotte/press-releases/2012/four-hedge-fund-managers-indicted-in-40-million-ponzi-scheme
• http://www.justice.gov/usao/ncw/pressreleases/Charlotte-2012-02-28-hedge.html

41. Ira J. Pressman

• http://www.fbi.gov/philadelphia/press-releases/2012/bala-cynwyd-man-sentenced-to-eight-years-in-6-million-ponzi-scheme

42. Joseph Mazella

• http://www.fbi.gov/philadelphia/press-releases/2012/bala-cynwyd-man-sentenced-to-eight-years-in-6-million-ponzi-scheme

43. Richard Pettibone

• http://www.fbi.gov/washingtondc/press-releases/2012/former-alexandria-businessman-pleads-guilty-to-1.5-million-ponzi-scheme-and-sentenced-to-36-months

44. CHARLES MICHAEL VAUGHN

• http://www.fbi.gov/atlanta/press-releases/2012/atlanta-man-sentenced-for-operating-ponzi-scheme

45. Laurie Schneider

• http://www.fbi.gov/newyork/press-releases/2012/oceanside-woman-indicted-for-operating-ponzi-schemes

46. Gregory Viola

• http://www.fbi.gov/newhaven/press-releases/2012/orange-resident-admits-operating-multi-million-dollar-ponzi-scheme

47. Ronald W. Shepard

• http://www.fbi.gov/kansascity/press-releases/2012/former-lees-summit-man-indicted-for-3-million-ponzi-scheme

48. ALGIRD M. NORKUS

• http://www.fbi.gov/chicago/press-releases/2012/former-sugar-grove-man-sentenced-to-63-months-in-federal-prison-for-mail-fraud-in-operating-a-9-million-ponzi-scheme

49. Jenifer Devine

• http://www.fbi.gov/newark/press-releases/2012/bergen-county-woman-sentenced-to-more-than-three-years-in-prison-for-8-million-ponzi-scheme

50. Douglas F. Vaughan

• http://www.fbi.gov/albuquerque/press-releases/2011/douglas-f.-vaughan-pleads-guilty-to-federal-wire-and-mail-fraud-charges-involving-ponzi-scheme

51. Johnny “Mickey” Brown

• http://www.fbi.gov/portland/press-releases/2011/vacuum-cleaner-distributor-sentenced-to-130-months-in-ponzi-scheme

52. GEOFFREY A. GISH, MYRA J. ETTENBOROUGH

• http://www.fbi.gov/atlanta/press-releases/2011/georgia-couple-sentenced-for-running-ponzi-scheme-that-cost-investors-18-million

53. Richard Elkinson

• http://www.fbi.gov/boston/press-releases/2011/framingham-man-sentenced-to-102-months-for-17-million-ponzi-scheme

54. Louis J. Borstelmann

• http://www.fbi.gov/portland/press-releases/2011/california-man-sentenced-to-108-months-in-prison-for-18-million-ponzi-scheme

55. David Lincoln Johnson

• http://www.justice.gov/usao/cac/Pressroom/2012/088.html

56. Celia Gallardo

• http://www.fbi.gov/losangeles/press-releases/2012/san-fernando-valley-woman-arrested-in-million-dollar-real-estate-ponzi-scheme-run-through-companies-in-santa-clarita-valley

57. Miko Dion Wady

• http://www.fbi.gov/phoenix/press-releases/2011/man-sentenced-to-prison-and-ordered-to-pay-over-30-million-in-restitution-for-multiple-concert-promotion-ponzi-schemes

58. Edward P. May

• http://www.fbi.gov/detroit/press-releases/2011/edward-p.-may-sentenced-for-orchestrating-350-million-ponzi-scheme

59. Daren Palmer

• http://www.fbi.gov/saltlakecity/press-releases/2011/idaho-falls-man-sentenced-in-29-million-loss-ponzi-scheme

60. Kurt Branham Barton

• http://www.fbi.gov/sanantonio/press-releases/2011/federal-jury-convicts-former-triton-president-and-ceo-in-ponzi-scheme

61. Dante DeMiro

• http://www.fbi.gov/detroit/press-releases/2011/investment-adviser-sentenced-to-10-years-in-ponzi-scheme

62. Wifredo A. Ferrer

• http://www.fbi.gov/miami/press-releases/2011/ponzi-scheme-defendant-receives-1712-year-sentence

63. Martin T. Sigillito, James Scott Brown, Derek J. Smith

• http://www.fbi.gov/stlouis/press-releases/2011/sl050411.htm

64. Jeremiah C. Yancy

• http://www.cftc.gov/PressRoom/PressReleases/pr6077-11

65. Timothy Durham

• http://www.nytimes.com/2011/03/17/us/17durham.html?_r=1

66. Francisco Illarramendi

• http://www.sec.gov/litigation/litreleases/2011/lr21970.htm
• http://www.justice.gov/usao/ct/Press2011/20110307.html

67. Frederick H.K. Baker, Mark W. Akin

• http://durangoherald.com/article/20110304/NEWS01/703049915/0/s/2-suspected-in-Ponzi-scheme-in-Durango
• http://www.heraldextra.com/news/state-and-regional/utah-man-in-ponzi-scheme-gets-months/article_8e0ac695-4e03-5b0f-8297-4ed3c5ee963a.html?comment_form=true

68. Paul Cirigliano

• http://www.justice.gov/usao/iln/pr/rockford/2011/pr1027_01.pdf
• http://www.dailyherald.com/article/20110226/news/702269938/

69. Anthony Eugene Linton

• http://www.cftc.gov/PressRoom/PressReleases/pr5970-11
• http://www.cftc.gov/PressRoom/PressReleases/pr6174-12
• http://www.justice.gov/usao/az/press_releases/2012/APR/PR_05152012_Linton.html

70. Richard Saunders

• http://www.justice.gov/usao/moe/press_releases/archived_press_releases/2012_press_releases/march/saunders_richard.htm
• http://www.kmov.com/news/local/Local-man-charged-for-operating-4-million-Ponzi-scheme-114820989.html

71. Lawrence Hamel

• http://articles.sun-sentinel.com/2011-03-10/news/fl-boca-raton-ponzi-20110310_1_ponzi-scheme-baron-federal-cour
• http://www.palmbeachpost.com/news/news/crime-law/suburban-lake-worth-man-accused-of-running-2-mil-1/nLpkq/

72. Christopher Jackson

• http://www.fbi.gov/sacramento/press-releases/2010/sc111510.htm
• http://www.justice.gov/usao/cae/news/docs/2011/02-03-11JacksonIndictment.html

73. Shaine Joseph Lavoie

• http://blogs.ocweekly.com/navelgazing/2011/02/shaine_joseph_lavoie_ezekiel_f.php
• http://www.ocregister.com/articles/lavoie-287365-felony-counts.html

74. Larry Benny Groover

• http://www.cftc.gov/PressRoom/PressReleases/pr5986-11
• http://www.cftc.gov/PressRoom/PressReleases/pr6165-12

75. Kent R.E. Whitney

• http://www.fbi.gov/chicago/press-releases/2011/former-chicago-options-trader-sentenced-to-44-months-in-prison-for-investment-fraud-scheme/
• http://www.cftc.gov/PressRoom/PressReleases/pr5952-10
• http://www.fbi.gov/chicago/press-releases/2011/cg021611.htm

76. Victoria Scardigno

• http://articles.cnn.com/2011-02-16/travel/continental.employee.fraud_1_vouchers-airline-tickets-sales-agent?_s=PM:TRAVEL
• http://www.justice.gov/usao/nys/pressreleases/July11/scardignovictoriasentencingpr.pdf

77. Brian Kim

• http://articles.nydailynews.com/2011-02-15/news/28619620_1_million-ponzi-scheme-cnbc-separate-theft
• http://www.nypost.com/p/news/business/kim_admits_scam_YkdA8h7gihllGmFdDeiCxM

78. Michael Hudspeth , Timothy Bailey

• http://www.cftc.gov/PressRoom/PressReleases/pr5983-11

79. Monroe L. Beachy

• http://www.washingtonpost.com/wp-dyn/content/article/2011/02/16/AR2011021607415.html
• http://www.nytimes.com/2012/02/26/business/in-amish-country-accusations-of-a-ponzi-scheme.html?pagewanted=all

80. Peter Sbaraglia

• http://www.financialpost.com/news/Ontario+part+Ponzi+scheme/4348848/story.html
• http://www.osc.gov.on.ca/en/Proceedings_soa_20110224_sbaraglia.htm

81. Josh Gould

• http://blogs.riverfronttimes.com/dailyrft/2011/03/josh_gould_orthodox_jewish_securites_broker_ponzi_indicted.php
• http://www.fbi.gov/stlouis/press-releases/2011/sl030311a.htm

82. Jeanette and Elliott Berney

• http://newyork.cbslocal.com/2011/03/03/monsey-mother-and-son-accused-in-10-million-ponzi-scheme/
• http://www.nypost.com/p/news/local/elderly_upstate_ny_woman_son_charged_5cRC0EzGsyUQaR7hcnPOfL

83. Larry Michael Parrish

• http://www.sec.gov/litigation/litreleases/2011/lr21881.htm

84. Dale Edward Lowell

• http://www.bonnercountydailybee.com/news/local/article_9f759d34-715c-11e0-bf59-001cc4c002e0.html
• http://www.cdapress.com/news/local_news/article_069fc4b4-372b-11e1-b6c8-001871e3ce6c.html

85. Ibis Febles, Giancarlo Giuseppe

• http://www.nysenate.gov/press-release/two-long-island-city-residents-charged-ponzi-scheme-which-31-victims-allegedly-lost-mo

86. Michael Crook, Roderick Rieman

• http://www.justice.gov/usao/iln/pr/chicago/2011/pr0408_01.pdf

87. Garry Bradford

• http://www.justice.gov/usao/cae/news/docs/2011/08-12-11BradfordGuiltyPlea.html

88. Royce Newcomb

• http://www.news10.net/news/article/134775/2/Granite-Bay-man-charged-with-Ponzi-scheme
• http://www.dailyrepublic.com/real-estate/roseville-man-gets-3-years-for-ponzi-scheme/

89. Steven Bingaman

• http://www.sec.gov/litigation/admin/33-8179.htm
• http://newsandinsight.thomsonreuters.com/Legal/News/2011/05_-_May/New_York_man_indicted_on_Ponzi_scheme_charges/

90. Michael Morawski and Frank Constant

• http://www.examiner.com/article/two-charged-with-ponzi-type-scheme-palatine-illinois
• http://chicago.cbslocal.com/2011/05/10/palatine-businessmen-charged-in-real-estate-ponzi-scheme/
• http://www.justice.gov/usao/iln/pr/chicago/2011/pr0510_01a.pdf

91. Nicholas Cox

• http://www.cftc.gov/PressRoom/PressReleases/pr6130-11

92. John S. Dudley

• http://www.fbi.gov/saltlakecity/press-releases/2011/slc053111.htm
• http://www.justice.gov/usao/ut/press/releases/Dudley indicted in ponzi scheme case.pdf

93. Michael Kratville, Jonathan W. Arrington, Michael J. Welke

• http://www.cftc.gov/PressRoom/PressReleases/pr6045-11

94. Steven White, Martin Kinsey

• http://www.ifaonline.co.uk/ifaonline/news/2076425/british-advisers-named-gbp10m-ponzi-scheme-trial

95. Spero X. Vourliotis, Carey Michael Billingley

• http://www.asc.state.al.us/News/2011 News/6-3-11 Ponzi scheme Vourliotis.pdf

96. Anthony Cutaia

• http://www.palmbeachpost.com/news/news/crime-law/well-known-radio-host-charged-with-running-ponzi-1/nLs65/

97. Victor E. Cilli

• http://www.cftc.gov/PressRoom/PressReleases/pr6053-11
• http://www.stopfraud.gov/news/cilli-victor-complaint.pdf

98. Juneval Eduardo Machado

• http://www.cftc.gov/PressRoom/PressReleases/pr6057-11

99. Christopher Blackwell

• http://www.courthousenews.com/2011/06/24/37662.htm

100. Fidel Bermudez

• http://www.vcstar.com/news/2011/jun/27/miami-man-charged-with-ponzi-scheme-targeting/

101. Jamie Campany

• http://articles.sun-sentinel.com/2011-06-28/news/fl-gold-bullion-campany-20110628_1_global-bullion-exchange-jamie-campany-ponzi-scheme
• http://www.nbcmiami.com/news/local/Founder-of-Buy-Gold-Firms-Admits-to-30M-Ponzi-Scheme-126850328.html
• http://www.justice.gov/usao/fls/PressReleases/111118-02.html

102. Wayne Ogden

• http://www.sltrib.com/sltrib/money/52101634-79/ogden-investors-money-wayne.html.csp

103. Shawon McClung

• http://www.cftc.gov/PressRoom/PressReleases/pr6236-12
• http://www.cftc.gov/PressRoom/PressReleases/pr6063-11

104. Edward Allen, David Olson

• http://www.sec.gov/litigation/litreleases/2011/lr22019.htm
• http://www.wytv.com/content/news/local/story/Suspect-in-14M-Ponzi-Scheme-Changes-Plea/274G6d24rUuGIsfSWALBQg.cspx

105. Robbie Dale Walker

• http://www.kxan.com/dpp/news/crime/man-arrested-for-alleged-ponzi-scheme

106. Richard Dalton

• http://www.huffingtonpost.com/2010/11/23/richard-dalton-ponzi-sche_n_787613.html

---

If you are involved in a Ponzi Scheme that is not listed on this page - contact Richard S. Lehman, Esq.

The U.S. Government Accountability Office (GAO) is an independent, nonpartisan agency that works for Congress. Often called the “congressional watchdog,” GAO investigates how the federal government spends taxpayer dollars.

Friday, October 5, 2012
Subject: GAO Madoff report

Dear Mr. Lehman,

I know it’s been a while since we spoke, but I wanted to follow up with you and send a copy of our recent report.

I’d like to thank you again for the help you gave us. In this case, your assistance helped produce instant results – as a direct result of the conversations we had with private sector tax professionals, the IRS issued new guidance on treatment of clawbacks. We were prepared to recommend the agency do so, but when they saw what we were going to report, they immediately issued the guidance on their own.

It doesn’t often happen that change comes so quickly, and this wouldn’t have been possible if you didn’t lend us some of your expertise.

Thanks again, and best regards,

CHS

—————————————————————
Christopher H. Schmitt
Senior analyst
U.S. Government Accountability Office
441 G Street NW
Washington, DC 20548

 

---

If you have a question for Mr. Lehman, please submit it below.

New United States tax laws require strict reporting of foreign assets and establish a new program granting Amnesty from criminal tax prosecution for offshore delinquent taxpayers.

The United States has finally caught up with the Global world when it comes to taxation. Three new laws are now in place to insure, as much as possible, that individual Americans and resident aliens will pay tax on their worldwide income.

Under the first new law known as the Foreign Accounts Compliance Act (“FATCA”), (“Foreign Asset Reporting”) beginning with the year 2011 annual income tax returns, there are new reporting requirements in place for U.S. individual taxpayers and U.S. entities. These laws require specified foreign assets that must be disclosed and reported on an information return that is filed together with the Federal income tax return.

At the same time that these more stringent disclosure of offshore assets is being demanded; the IRS has agreed to an open ended continued amnesty program for taxpayers who have not properly reported or paid tax on their worldwide income (the “Amnesty”). Unlike previous Amnesties, there is no time period to this latest program. However, I.R.S. has warned it can stop the Amnesty Program whenever it wants. The Amnesty Program charges a harsh fine but permits a taxpayer to avoid criminal penalties and a number of wealth destroying civil penalties that can be imposed on a U.S. Taxpayer who has not paid U.S. taxes on foreign bank deposits and other foreign assets.1/

This article is in two portions. The first portion considers the Amnesty program for unreported foreign income and the second portion considers the Foreign Asset Reporting Requirements.1/

PART I – THE AMNESTY

A U.S. Taxpayer (the “Taxpayer”) with undisclosed foreign accounts or entities and other assets, should make a voluntary disclosure because it enables the Taxpayer to become compliant, avoid substantial civil penalties and generally eliminate the risk of criminal prosecution. Making a voluntary disclosure also provides the opportunity to calculate, with a reasonable degree of certainty, the total cost of resolving all offshore tax issues.

Penalties Avoided

The following is a list with a short explanation of each potential civil and criminal penalty that is avoided by accepting the Amnesty terms.

Civil Penalties

1. There is a penalty for failing report a direct or indirect financial interest in, or signature authority over any financial account maintained with a financial institution located in a foreign country that exceeds $10,000.
2. There is a penalty for failing to file an Annual Return to Report large foreign gifts and transactions with Foreign Trusts.
3. There is a penalty for failing to report any ownership interest in foreign trusts.
4. A penalty for certain United States persons who are officers, directors or shareholders in certain foreign corporations who do not report such information to the United States.
5. There is a penalty for U.S. persons that fail to file and report ownership of foreign partnerships

There are Fraud Penalties that result only in Civil Penalties. These penalties can be almost as high as the tax that has been avoided.

1. A fraud penalty for failing to file a tax return.
2. A fraud penalty for failing to pay the amount of tax shown on the return.
3. An accuracy-related penalty on underpayment of tax.

Criminal Penalties

The failure to report and pay taxes on foreign income and bank account by US. Taxpayer can also result in Criminal Penalties.

1. Possible criminal charges related to tax returns include filing a false return and failure to file an income tax return.
2. A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000.
3. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000.

All of this can be avoided by entering into the I.R.S. Amnesty Program. However, the cost is high.

The present Amnesty program provides a tax, interest and penalty framework. Individuals must pay their taxes on any unreported income, 20% penalty on the total unpaid taxes and interest on the amounts due. In addition, individuals must pay a onetime penalty of 27.5 percent of the highest aggregate balance at any one point in time of their foreign bank accounts or entities during an eight (8) year period prior to the disclosure. Some taxpayers will be eligible for 12.5 percent penalties instead of the 27.5% penalty.

The Taxpayer must:

1. Provide copies of previously filed original or amended federal income tax returns for all tax years covered by the voluntary disclosure. The voluntary disclosure period can be a period of eight (8) years preceding the disclosure time.
2. File complete and accurate original or amended offshore-related information returns.
3. Cooperate fully with the voluntary disclosure process which includes providing information on offshore financial accounts, institutions and facilitators, and signing agreements to extend the period of time for assessing tax and penalties.
4. Pay all taxes due as a result of the disclosure.2/
5. Pay a 20% accuracy-related penalty on the full amount of the underpayment of tax for all years.
6. Pay a penalty for the failure to file a tax return if tax return was not filed.
7. Pay, in lieu of all other penalties that may apply, a penalty equal to 27.5% (or in limited cases 12.5% or 5% of the highest aggregate balance in foreign bank accounts/entitites or value of foreign assets during the period covered by the voluntary disclosure.
8. Pay all interest on the outstanding amount.

ELIGIBILITY

Taxpayers who have undisclosed offshore accounts or assets are eligible to apply for IRS Criminal Investigation’s Voluntary Disclosure Practice and penalty regime for an eight year maximum disclosure period.

Corporations, partnerships, and trusts and other entities are eligible to make voluntary disclosures.

Amnesty Not Available – Investigation Commenced

However, if the IRS has initiated a civil examination, regardless of whether it relates to undisclosed foreign accounts or undisclosed foreign entities, the taxpayer will not be eligible to come in under the Amnesty. Taxpayers under criminal investigation are also ineligible. The taxpayer or the taxpayer’s representative should discuss the offshore accounts with the agent.

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 table income but did not file FBARs, do not use the voluntary disclosure process.3/

Taxpayers who reported and paid tax on all their taxable income for prior years but did not file FBARs should file the delinquent FBAR reports according to the FBAR instructions and attach a statement explaining why the reports are filed late. The IRS will not impose a penalty for the failure to file the delinquent FBARs if there are no underreported tax liabilities,

Notice of Qualification for Amnesty

Taxpayers or representatives may file to the Criminal Investigation Lead Development Center identifying information (name, date of birth, social security number and address) and an executed power of attorney (if represented) to request pre clearance before making an offshore voluntary disclosure.

Criminal investigation will then notify taxpayers or their representatives via fax whether or not they are cleared to make an offshore voluntary disclosure.

Taxpayers deemed cleared should take the steps within 30 days from receipt of the fax notification to make an offshore voluntary disclosure. Pre clearance does not guarantee a taxpayer acceptance. Taxpayers must still truthfully, timely and completely comply with all provisions of the offshore voluntary disclosure program.

PAYMENT

The terms of the Amnesty require the taxpayer to pay the tax, interest and accuracy related penalty and other penalties with their submission. However, it is possible for a taxpayer who is unable to make full payment of these amounts to request the IRS to consider other payment arrangements.

The burden will be on the taxpayer to establish inability to pay, to the satisfaction of the IRS, based on full disclosure of all assets and income sources, domestic and offshore, under the taxpayer’s control. Assuming that the IRS determines that the inability to fully pay is genuine, the taxpayer must work out other financial arrangements acceptable to the IRS to resolve all outstanding liabilities in order to be entitled to the penalty relief under this initiative.

Amnesty Documents

1. Copies of previously filed original (and, if applicable, previously filed amended) federal income tax returns for tax years covered by the voluntary disclosure.
2. Complete and accurate amended federal income tax return (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, entities or trusts.
3. A completed Foreign Account or Asset Statement for each previously undisclosed foreign account or asset during the voluntary disclosure period. For those applicants disclosing offshore financial accounts with an aggregate highest account balance if any year of $1 million or more, a completed Foreign Financial Institution Statement for each foreign financial institution with which the taxpayer has undisclosed accounts or transactions during the voluntary disclosure period
4. A check payable to the Department of Treasury in the total amount of tax, interest, accuracy-related penalty, and if applicable, the failure to file and failure to pay penalties, for the voluntary disclosure period. The total amount of tax, interest and penalties as described above cannot be paid, submit a proposed payment arrangement and a completed Collection Information Statement.
5. 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. 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 readily available upon request.
6. Properly completed and signed agreements to extend the period of limitations.
7. In a striking new approach to the Amnesty Program, the Program now extends the penalty beyond just offshore financial assets; if the assets are not acquired with after tax income. The offshore penalty is intended to apply to offshore assets that are related to tax on compliance. Thus, if offshore assets were acquired with funds that were subject to U.S. tax but on which no such tax was paid, the offshore penalty would apply regardless of whether the assets were producing current income. Assuming that the assets were acquired with after tax funds or from funds that were not subject to U.S. taxation, if the assets have not yet produced any income, there has been no U.S. taxable event and no reporting obligation to disclose. The taxpayer will be required to report any current income from the property or gain from its sale or other disposition at such time in the future as the income is realized.

The penalty applies to all assets directly owned by the taxpayer, including financial accounts holding cash, securities or other custodial assets, tangible assets such as real estate or art and intangible assets such as patents or stock or other interests in a U.S. or foreign business, if the assets were acquired with funds that evaded the payment of U.S. taxes. Whether such assets are indirectly held or controlled by the taxpayer through an entity or alter ego, the penalty may be applied to the taxpayer’s interest in the entity or, if the Service determines that the entity is an alter ego or nominee of the taxpayer, to the taxpayer’s interest in the underlying assets.

Amnesty Program – Modifications

The Amnesty cannot be taken in parts. If any part of the offshore penalty is unacceptable to the taxpayer the case will be examined and all applicable penalties will be imposed. After a full examination, any tax and penalties imposed by the Service on examination may be appealed.

Voluntary disclosure examiners do not have discretion to settle cases for amounts less than what is properly due and owing. However, because the 27.5% percent offshore penalty is a proxy for the FBAR penalty, other penalties imposed under the Internal Revenue Code, and potential liabilities for the voluntary disclosure years, there may be cases where a taxpayer making a voluntary disclosure would owe less if the especial offshore initiative did not exist. Under no circumstances will taxpayers be required to pay a penalty greater than what they would otherwise be liable for under the maximum penalties imposed under existing statutes.

The 5% Penalty

Taxpayers who meet all four of the following conditions will entitled to the reduced 5% offshore penalty (a) did not open or cause the account to be opened (unless the bank required that a new account be opened, rather than allowing a change in ownership of an existing account, upon the death of the owner of the account; (b have exercised minimal, infrequent contact with the account, for example, to request the account balance, or update accountholder information such as a change in address, contact person, or email address, (c) have, except for a withdrawal, closing the account and transferring the funds to an account in the United States, not withdrawn more than $1,000 from the account in any year for which the taxpayer was on compliant, and (d) can establish that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. taxation).

The 12.5% Penalty (Deminimus)

A taxpayer that does not qualify for a lesser payment or a 5 percent offshore penalty, but taxpayers whose highest aggregate account balances in each or the voluntary disclosure years is less than $75,000 will qualify for a 12.5 percent offshore penalty.

FOOTNOTES:

1/ While the Amnesty Program has no time deadline; there is in fact a practical deadline. The third law, which does not come into effect until 2014 will require foreign institutions to report all U.S. investors to the I.R.S. Once a Taxpayer is under I.R.S. investigation, the Amnesty Program is no longer available.

2/ PFIC Special Taxation. A significant number of investments involve Passive Foreign Investment Companies (“PFIC”). These investments will often add to the taxable income calculation since there may be accrued gains to account for. A lack of historical information on the cost basis and holding period of many PFIC investments makes it difficult for taxpayers to prepare statutory PFIC computations and for the Service to verify them. In order to not unduly delay matters, the I.R.S. has offered taxpayers an alternative to the statutory PFIC computation that will resolve PFIC issues on a basis that is consistent with the Mark to Market methodology but will not require complete reconstruction of historical data.

3/ Some Taxpayers can breathe a sigh of relief and can avoid the Bank Deposit penalty and other penalties if they reported their offshore income even though it was never disclosed in Information Returns.

Value can be lost without good professional advice. Contact Richard S. Lehman, Today.

Introduction

Americans have become used to the idea that certain payments made to Foreign individuals, (Aliens) and Foreign Corporations require the American payor to withhold the U.S. taxes that must be paid by the foreign recipient of the U.S. income payment. This insures the taxes are paid. The law holds that if the American payor does not hold back, (withhold), the taxes due by the foreigner payee and pay these taxes to the U.S., the American payor is responsible to pay for the tax.

The United States has now passed a new law (the “New Law”) that is effective starting in 2014. This law that will require American payors to be responsible for a similar withholding tax on payments made by American Payors to American payees with accounts in certain Foreign Financial Institutions and Foreign Non Financial Entities that have substantial U.S. owners.1/

1/ Almost 50% of the New Law is used to provide definitions for all of the new “tax terms” that are used to describe the new tax concepts represented by the New Law.

The definitions have been provided to help better explain the overall pattern that the Treasury has tried to accomplish. Several of the definitions have been provided in the initial portion of this Article.

The New Law

The New Law generally requires Foreign Financial Institutions (FFIs) to provide information to the Internal Revenue Service (IRS) regarding the Foreign Financial Institutions’ United States accounts (U.S. accounts). It also requires certain Nonfinancial Foreign Entities (NFFEs) to provide information on their substantial United States owners (substantial U.S. owners).

The New Law requires that United States payors vs. Withholding Agent that make payments to Foreign Financial Institutions and Non Financial Foreign Entities to withhold the taxes payable by any U.S. persons who may be responsible for taxes to the United States on these payments.

The law takes a second step and imposes the same withholding tax on certain Foreign Financial Institutions for payments those institutions make to certain accounts that are owned by U.S. taxpayers or presumed to be owned by U.S. taxpayers.

The reasons for the new law are made quite plain in the preamble to the Regulations Governing the New Law. The United States is finally fully aware of the cost of offshore tax evasion and intends to stop it. The Preamble states:

As a result of recent improvements in international communications and the associated globalization of the world economy, U.S. taxpayers’ investments have become increasingly global in scope. Foreign Financial Institution (“FFI”) now provide a significant proportion of the investment opportunities for, and act as intermediaries with respect to the investments of, U.S. taxpayers. Like U.S. financial institutions, FFIs are generally in the best position to identify and report with respect to their U.S. customers. Absent such reporting by FFIS, some U.S. taxpayers may attempt to evade U.S. tax by hiding money in offshore accounts. To prevent this abuse of the voluntary compliance system and address the use of offshore accounts to facilitate tax evasion, it is essential in today’s global investment climate that reporting be available with respect to both the onshore and offshore accounts of U.S. taxpayers. This information reporting strengthens the integrity of the voluntary compliance system by placing U.S. taxpayers that have access to international investment opportunities on an equal footing with U.S. taxpayers that do not have such access or otherwise choose to invest within the United States.

[The New Law] extends the scope of the U.S. information reporting regime to include FFIs that maintain U.S. accounts. [It] also imposes increased disclosure obligations on certain Non Foreign Financial Institutions that present a high risk of U.S. tax avoidance. In addition, [it] provides for withholding on Foreign Financial and Non Financial Institutions that do not comply with the reporting and other requirements of [The New Law].

The New Law is codified in Internal Revenue Code Sections 1471 through 1474. This article will review each of those Code Sections.

Code Section 1471(a) of the Internal Revenue Code (“Section”) requires any person required to withhold taxes, (a “Withholding Agent”) to withhold 30 percent of any withholdable payment to a Foreign Financial Institution that does not meet certain requirements.

A withholdable payment is defined to mean

(i) any payment of interest, dividends rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income if such payment is from sources within the United States (Fixed Income) and

(ii) any gross proceeds from the sale or other disposition of any property of a type which can produce interest or dividends from sources within the United States. (“Sale Income”).

The types of U.S. income that are identified as being subject to the 30% withholding tax, when that income is paid to Foreign Financial Institutions, is the type of income known as fixed or determinable income. Also included is gains from the sale of certain capital assets. This is different than the withholding tax on payments by Americans to non resident aliens and foreign corporations because gains from the sales of capital assets are not included in the existing withholding rules.

However, while the New Law requires withholding on certain items to any Foreign Financial Institution and Foreign Non Financial entities, the Foreign Institutions can avoid the responsibility to withhold these taxes. The withholding on payments to and by a Foreign Financial Institution or a Non Financial Foreign Entity can be avoided if the Foreign entities comply with new U.S. Treasury requirements. To comply, the U.S. now wants full disclosure of every U.S. account holder in that Foreign Institution and on every substantial shareholder in the Non Foreign Financial Enterprise.

The U.S. Treasury has now made foreign banks, brokers and companies similar to U.S. bankers and brokers, when it comes to supplying information about U.S. taxpayers.

In order to avoid the withholding tax a FFI must enter into an agreement (“FFI Agreement”) with the IRS to perform certain obligations and meet requirements prescribed by the Treasury Department and the IRS.

The best way to provide an understanding of the overall purpose of the new statute and what it is all about is to start off with a list of new terms that are now going to show up as a result of this new law. After the reader has mastered these few terms, the article provides a summary of the purpose of the statute, the mechanics of the statute and the practical ramifications of what international banking is going to look like starting in the year 2014.

DEFINITIONS

U.S. Account:

A U.S. Account is any financial account maintained by a financial institution that is held by one or more specified U.S. persons or U.S. owned foreign entities. An account generally is considered to be held by the person listed or identified as the holder of such account with the financial institution that maintains the account, even if that person is a flow-through entity.

For accounts held by a grantor trust, the grantor is treated as the owner of the account or assets. For accounts held by agents, investment advisors, and similar persons, the person on whose behalf such person is acting is treated as the account holder. Each joint holder of a joint account will be treated as owning the account. Accounts that are insurance and annuity contracts consider the account holder is the person who can access the cash value of the contract or change the beneficiary, or, if there is no such person, the accountholder is the beneficiary.

Financial Account:

The term financial account means, with respect to any financial institution, any depository account maintained by such financial institution; any custodial account maintained by such financial institution; and any equity or debt interest in such financial institution (other than interests which are regularly trade on an established securities market). In addition, the Secretary may prescribe special rules addressing circumstances in which certain categories of companies, such as insurance companies, are financial institutions or the circumstances in which certain contracts of policies, for example annuity contracts or cash value life insurance contracts, are financial accounts

Depository Account:

A depository account is defined to include a commercial, checking, savings, time or thrift account, an account evidenced by a certificate of deposit or similar instruments, and any amount held by an insurance company under an agreement to pay interest. A custodial account is defined to include an account that holds any financial instrument or contract held for investment for the benefit of another person.

Debt/Equity:

The proposed regulations also provide guidance on the treatment of debt or equity as a financial account. An equity interest includes a capital or profits interest in a partnership and beneficial interests in the case of a trust.

U.S. Owned Foreign Entity:

Any foreign entity that has one or more substantial U.S. owners. An owner-documented FFI will be treated as a U.S. owned foreign entity if it has one or more direct or indirect owners that are specified U.S. persons, whether or not it has a substantial U.S. owner.

Financial Institution (FFI)

FFI means any financial institution that is a foreign entity

The term financial institution means any entity that (i)accepts deposits in the ordinary course of a banking or similar business; (ii) holds as a substantial portion of its business financial assets by the account of others; or (iii) is engaged (or holding itself out as being engaged) primarily in the business of investing, reinvesting, or trading in securities, partnership interest, commodities, or any interest (including a futures or forward contract or option) in such securities, partnership interest or commodities.

The types of entities that constitute “financial institutions” lists the activities that constitute a “banking or similar business” for a deposit-taking institution, and clarifies that entities engaged in a banking or similar business include, but are not limited to, entities that would qualify as a “bank” under [I.R.S. Rules] The proposed regulations provide that the determination of whether an entity conducts a banking or similar business is based on the character of the business conducted, and the fact that the entity is subject to local regulation is relevant, but not necessarily determinative.

An entity is engaged primarily in the business of investing, reinvesting, or trading securities and other relevant assets if the entity’s gross income from those activities is at least 50 percent of the entity’s total gross income over the testing period.

An entity that is an insurance company and issues (or is obligated to make payments with respect to): a cash value insurance policy or an annuity contract is a financial institution.

Excluded Foreign Entities:

Many Foreign Entities are excluded from the definition of a financial institution or are treated as Non Financial Institutions that do not need to meet any of the withholding and/or reporting requirements. These entities include certain nonfinancial holding companies, certain startup companies, nonfinancial entities that are liquidating or emerging from reorganization or bankruptcy, hedging/financial centers of a nonfinancial group, and charitable entities.

Recalcitrant Account Holder:

A recalcitrant account holder is defined as any holder of an account maintained by a Participating FFI if the account holder is not an FFI and the account holder either (i) fails to comply with the Participating FFI’s request for documentation or information to establish whether the account is a U.S. account, (ii) fails to provide a valid Form W-9 upon the request of the Participating FFI, (iii) fails to provide a correct name and TIN upon request of the FFI after the Participating FFI receives notice from the IRS indicating a name/TIN mismatch or (iv) fails to provide a valid and effective waiver of foreign law if foreign law prevents reporting with respect to the account holder by the Participating FFI.

Pass thru Payments:

A pass thru payment is any withholdable payment and any foreign pass thru payment

Withholdable Payments to Non Financial Foreign Entities (NFFEs)

A withholding agent must withhold tax of 30 percent of any withholdable payment made to an NFFE, unless the beneficial owner is an NFFE that does not have any substantial U.S. owners or as an NFFE that has identified its substantial U.S. owners and the withholding agent reports the required information with respect to any substantial U.S. owners.

Substantial U.S. Owner:

Generally, the term substantial U.S. owner means any specified U.S. person that owns, directly or indirectly, more than ten percent of the stock of a corporation, or with respect to a partnership, more than ten percent of the profits interests or capital interests in such partnership. For trust, a substantial U.S. owner is any specified U.S. person that holds, directly or indirectly, more than ten percent by value of the beneficial interests in such trust, or with respect to a grantor trust, any specified U.S. person that is an owner of such grantor trust. There are attribution rules to determine indirect ownership of stock.

Specified U.S. Person:

There are several categories of U.S. payees whose payments are not subject to tax and therefore would not inure a withholding tax. This list includes a corporation the stock of which is regularly traded on an established securities market; corporations that are affiliates of such corporation; organization that are exempt from tax; individual retirement plans; real estate investment trust; regulated investment companies; common trust funds; regulated investment companies; common trust funds; dealers in securities; commodities or notional principal contracts; dealers in securities, commodities, or notional principal contracts and brokers. The United States and its wholly owned agencies or instrumentalities are also excluded, as are the States, the District of Columbia, the U.S. territories and any political subdivision or wholly owned agency or instrumentality of any of the foregoing.

Summary

The rules relating to the requirement to withhold U.S. tax on certain payments apply principally to U.S. and foreign financial institutions or withholding agents. The general rule is that with certain exceptions, a withholding agent must withhold on a withholdable payment made after December 31, 2013, to an FFI regardless of whether the FFI receives the withholdable payment as a beneficial owner or intermediary.

Under certain circumstances, a participating FFI will be permitted to make an election to be withheld upon rather than meet requirements to withhold on a pass thru payment.

As will be explored, the withholding requirement is met by an FFI Agreement. Furthermore, no withholding is required when the withholding agent lacks control, custody or knowledge of the payments.

The answer for the Foreign Financial Institutions on how to avoid the withholding tax is to do as the I.R.S. requires and (i) to collect all of the information necessary to determine the U.S. payees of the Institution’s accounts (ii) to report regularly in compliance with I.R.S. requirements on these U.S. accounts and (iii) withhold taxes on payment being made to a Nonparticipating FFI or a recalcitrant account.

The FFI Agreement:

An FFI is defined as any financial institution that is a foreign entity, other than a financial institution organized under the laws of a possession of the United States. A financial institution is defined generally as any entity that: (i) accepts deposits in the ordinary course of a banking or similar business: (ii) as a substantial portion of its business, holds financial assets for the account of others; or (iii) is engaged (or holding itself out to being engaged) primarily in the business of investing, reinvesting or trading in securities, partnership interests, commodities, or any interest in such securities, partnership interests, or commodities.

The FFI Agreement requires the FFI to identify its U.S. accounts and comply with verification and due diligence procedures prescribed by the Treasury. A “Participating FFI” is an FFI that has entered into an FFI Agreement.

A U.S. account is defined as any financial account held by one or more specified United States persons, or United States owned foreign entities (U.S. owned foreign entities) with certain exceptions. A financial account means generally any depository account, any custodial account and any equity or debt interest in an FFI, other than interests that are regularly traded on an established securities market. A U.S. owned foreign entity is any foreign entity that has one or more Substantial U.S. owners.

A Participating FFI that enters into the Agreement is required to report certain information on an annual basis to the IRS with respect to each U.S. account and to comply with requests for additional information with respect to any U.S. account. The information that must be reported with respect to each U.S. account includes: (i) the name, address and taxpayer identifying number (TIN) of each account holder who is a specified U.S. person (or, in the case of an account holder that is a U.S. owned foreign entity), the account number;(iii) the account balance or value; and (iv) the gross receipts and gross withdrawals or payments from the account (determined for such period and in such manner a the Secretary may provide).

Furthermore, if the foreign law of the country where the FFI is located prevents the FFI from reporting the required information, the U.S. account holder must agree to waive any provision of foreign law within a reasonable period of time. If the information is not provided, the FFI is required to close the account.

Even if the Participating FFI has complied with all reporting requirements, there are still withholding requirements on payments to the FFI and from the FFI on two occasions.

(1) A participating FFI must withhold 30 percent of any pass thru payment to a recalcitrant account holder or

(2) to an FFI that is not a Participating FFI. A pass thru payment is defined as any withholdable payment or other payment to the extent attributable to a withholdable payment.

The FFI Agreement applies to the U.S. accounts of the participating FFI and to the U.S. accounts of other FFI’s that are a member of the same affiliated group.

Excluded Payments

Exempt Payments to Certain beneficial Owners

There are certain foreign beneficial owners of U.S. payments that are exempt and no withholding is required. The classes of persons treated as exempt beneficial owners are: foreign governments, political subdivisions of a foreign government, and wholly owned instrumentalities and agencies of a foreign government, international organizations and wholly owned agencies or instrumentalities of an international organization; foreign central banks of issue; governments of U.S. territories; and certain foreign retirement plans.

Certain foreign retirement funds will qualify as exempt beneficial owners. Specifically, a fund that is eligible for the benefits of an income tax treaty with the United States with respect to income that the fund derives from U.S. sources and that is generally exempt from income tax in that country is an exempt beneficial owner if it operates principally to administer or provide pension or retirement benefits.

Withholding on a Non Financial Foreign Entity

In order to gain full disclosure to U.S. holdings in other types of assets, the New Law also makes payments to and from Non Foreign Financial Entities (NFFE) potentially subject to withholding.

However, the manner in which an NFFE can avoid the withholding obligation is much less stringent than that of a Foreign Financial Institution.

The New Law requires a withholding agent to withhold 30 percent of any withholdable payment to Non Financial Foreign Entities (“NFFE”), if the payment is owned by the NFFE or another NFFE. An NFFE is any foreign entity that is not a financial institution.

However, there is no withholding requirement if the NFFE is: (i) the beneficial owner or payee provides the withholding agent with either a certification that such beneficial owner does not have any substantial U.S. owners, or the name, address and TIN of each substantial U.S. owner; (ii) and the withholding agent does not know or have reason to know that any information provided by the beneficial owners or payee is incorrect; and (iii) the withholding agent reports the information provided to the Secretary.

 

As with all withholding taxes, there is the ultimate penalty if the party who is supposed to withhold taxes for the United States does not do so; the New Law provides that every person required to withhold and deduct any tax is made liable for such tax and is indemnified against the claims and demands of any person for the amount of any payments made in accordance with the New Law.

The Verification Process

The FFI Agreement must comply with the IRS’s verification process for determining whether a participating FFI’s compliance with its FFI Agreement. A participating FFI must meet the following standards: (i) adopt written policies and procedures governing the participating FFI’s compliance with its responsibilities under the FFI agreement; (ii) conduct periodic internal reviews of its compliance (rather than periodic external audits, as is presently required for many [intermediates]; and (iii) periodically provide the IRS with a certification and certain other information that will allow the IRS to determine whether the participating FFI has met its obligations under the FFI agreement. The Treasury Department and the IRS intend to include the requirements to conduct these periodic reviews and to provide their certifications in the FFI agreement or in other guidance.

Withholding Requirements under the FFI Agreement

Even when the requirements of the FFI Agreement are met. Participating FFIs are required to withhold on any pass thru payment that is a withholdable payment made to a Recalcitrant Account Holder or a Nonparticipating FFI.

There is also a special withholding rule for dormant accounts, under which a participating FFI that withholds on pass thru payments (including withholdable payments) made to a recalcitrant account holder of a dormant account, may, in lieu of depositing the tax withheld, set aside the amount withhold in escrow until the are that the account cease to be a dormant account.

Identification of Account Holders under the FFI Agreement

There are general requirements with respect to the procedures to identify account U.S. holders that determine the status of an account holder and to associate an account with valid documentation and establish the standards of knowledge for reliance on documentation.

A participating FFI is required to review all information collected under its existing account opening procedures to determine whether the account holder has U.S. Indicia.

There are special identification requirements for high value accounts. A participating FFI must perform an additional enhanced review of high value accounts. A high value account is any account with a balance or value that exceeds $1,000,000 at the end of the calendar year. As part of the enhanced review, the participating FFI must identify all high value accounts for which a relationship manager has actual knowledge that the account holder is a U.S. person.

This does not apply to cause enhanced reviews of any high-value accounts for which the participating FFI has obtained documentary evidence to establish that the account is not held by a U.S. person but instead establishes the foreign status of the account holder.

Furthermore, the law requires a responsible officer of a participating FFI to make certain certifications to confirm that with respect to its preexisting accounts that are high value accounts, within one year of the effective date of the FFI agreement the participating FFI has completed the required review and to the best of the responsible officer’s knowledge, after conducting a reasonable inquiry.

Reporting Requirements of Participating FFIs

Under the FFI Agreement there are reporting responsibilities of Participating FFIs with respect to U.S. accounts and accounts held by recalcitrant account holders.

The participating FFI that maintains the account is generally responsible for reporting the account for each calendar year.

A participating FFI that maintains an account held by a financial institution that it has identified as an owner-documented FFI must report information with respect to each owner of the owner documented FFI that is a specified U.S. person.

Accounts held by specified U.S. persons and accounts held by U.S. owned foreign entities must be reported. These rules prescribe the information to be reported with respect to accounts required to be treated as U.S. accounts, the time and manner of filing the required form and procedures for requesting an extension to file such forms. There is guidance on the information required to be included in the U.S. account for determining the account balance or value

Accounts held by recalcitrant account holders are reported in aggregate but in separate categories. The separate categories of accounts held by recalcitrant account holders are accounts with U.S. indicia, or other recalcitrant account holders, and dormant accounts.

Expanded Affiliated Group Requirements

Today’s Foreign Financial Institutions can be found to have branches and subsidiaries all over the world; all of which may be opening U.S. accounts or accounts for foreign entities owned by U.S. shareholders.

The FFI Agreement makes provisions for this by allowing for “Affiliated Groups” to be covered by the FFI Agreement. The general rule is that, for any member of an expanded affiliated group to be a Participating FFI that is compliant with the Agreement, each FFI that is a member of the group must be either a Participating FFI or Registered Deemed Compliant FFI.

Each FFI that is a member of an expanded affiliated group must complete a registration form with the IRS and agree to all the requirements for the status for which it applies with respect to all of the accounts it maintains.

An FFI that is a member of an expanded affiliated group can obtain status as a Participating FFI notwithstanding that one or more members of the group cannot satisfy the requirements of the Agreement.

The Treasury Department and the IRS intend to require all Qualified Intermediaries that are FFIS to become Participating FFIs.

Adjustments for Over withholding and Under Withholding of Tax

There are certainly going to be situations in which there is over withholding as a result of the New Law requirements. Some U.S. Taxpayers are going to be claiming refunds.

The New Law provides for the potential that amounts may be over withheld by a withholding agent and if this is the case, tax refunds and credits should be available. This can result from a U.S. taxpayer whose tax rate is lower than the 30% withholding tax for many reasons. For example, a dividend from a U.S. company to a U.S. person’s foreign account that would normally be taxed at 15% may be withheld at 30%.

The New Law provides the procedures for adjustments for over withholding and under withholding of tax. If an overpayment of tax results from the withholding of tax under the New Law, the beneficial owner of an amount subject to withholding may claim a refund or credit for the overpayment of tax subject to certain requirements and limitations.

In order to obtain a reimbursement and/or set off for any over withheld amount, the withholding agent must obtain valid documentation from the beneficial owner or payee to identify its status and determine that withholding was not required.

The beneficial owner of the income or payment to which the withheld tax is attributable is allowed a credit against such beneficial owner’s income tax liability in the amount of tax actually withheld. If the tax required to be withheld is paid by the beneficial owner, payee, or withholding agent, the IRS may not collect from any other, regardless of the original liability for the tax.

To the extent the overpayment of tax was paid by a withholding agent out of its own funds, such amount may be credited or refunded to the withholding agent.

IF YOU HAVE QUESTIONS REGARDING FOREIGN FINANCIAL INSTITUTIONS - PLEASE CONTACT RICHARD LEHMAN

The Export Disc Corporation Computer Software And Internet Sales And Licenses

By Richard S. Lehman, Esq

The IC-DISC has been approved as an acceptable tax planning entity for the export of American produced computer software and programs as early as 1985. In 1998, a very detailed set of Treasury Regulations were issued that have added certainty to this area of the law.

Before the issuance of the Software Regulations, there was uncertainty about the taxation of computer program transactions. Computer programs did not fit traditional tax principles. Computer programs are usually sold pursuant to “license” or “user agreements”. A computer program transaction is unlike a sale of a physical object since the value of the program copy far exceeds the value of the physical medium on which it is transferred. Computer programs, in fact are transferred electronically. Often, there is no physical medium at all.

For purposes of determining the applicability of the DISC to computer software exports, two key analyses are often required. First, (1) is the software “export property” for DISC purposes and (2) is the software product’s source of income “from without the U.S.”? Is the product for use, consumption or sale without the U.S.?

In a technical advice memorandum in 1985, the I.R.S. issued guidance on the issue of whether certain computer software programs constituted “export property” for DISC purposes. That Technical Advice Memorandum reviewed the term “export property” for DISC purposes in depth and determined in its holding that computer software could indeed be “export property”. In doing so the Technical Advice not only reviewed the legislative history of the DISC rules it also pointed out the distinctively different treatment that “patents, inventions, models, decisions, formulas, or processes whether or not patented, copyrights, goodwill, trademarks, trade brands, franchise or other like property” receive under the DISC rules, as opposed to the treatment of “films, tapes, records or similar reproductions, for commercial or home use.”

Copyright law is the basis for the Software Regulations. The Regulations are based on the concept that it is possible to categorize a computer program transaction by analyzing the copyright rights transferred. Like many other tax laws, it is generally accepted that the taxation of payments made pursuant to a contract is determined based on an analysis of the contract’s substance, without regard to the labels.

The most important distinction created by the Software Regulations is the distinction between copyrighted articles and copyright rights. This basic distinction arises from copyright law. Copyright law distinguishes between the copyright itself, which grants the owner certain rights, and a copy of the copyrighted work. The Copyright Act grants to copyright owners the exclusive right to “reproduce the copyrighted work in copies”. The Copyright Act states that “Ownership of a copyright, or of any of the exclusive rights under a copyright, is distinct from ownership of any material object in which the work is embedded.”

The Copyright Rights are not “export property” for DISC purposes while the Copyright Articles are “export property”.

The “Export Property” analysis in the I.R.S. Technical Advice Memorandum is enlightening.

The computer software considered as an example to show the nature of “Computer Articles” was described in the Technical Advice Memorandum as follows:

Mr. X develops, markets and services standardized computer software on a worldwide basis. The software consists of computer programs on magnetic tape. Computer programs are coded instructions to operate the computer to process data in a specified manner.

Mr. X’s computer software products are manufactured in the following manner. Computer programmers develop a computer program, which is referred to as “source language software” (“source code”). The source code is highly confidential and kept under strictly controlled security at all times. The modifications to the computer programs that are required to keep the software up to date with changing technology and user requirements are made to the source code. The source code is processed by a computer into a master recording, which contains the magnetic impulses a customer will receive. Unlike the source code, the master recording cannot be used to modify a software program. The products that Mr. X markets are tapes made from the master recordings.

The Export Property Analysis

Export property is defined to mean, in general, property that is:

1. Manufactured, produced, grown or extracted in the United States by a person other than a DISC,
2. Held primarily for sale, lease, or rental, in the ordinary course of trade or business, by, or to, a DISC, for direct use, consumption, or disposition outside the United States and
3. Not more than 50 percent of the fair market value of which is attributable to articles imported into the United States.

Export property does not include “patents, inventions, models, designs, formulas, or processes, whether or not patented, copyrights (other than films, tapes, records, or similar reproductions, for commercial or home use), good will, trademarks, trade brands, franchises, or other like property . . .

Although a copyright such as a copyright on a book does not constitute export property, a copyrighted article (such as a book) if not accompanied by a right to reproduce it is export property. The legislative history of the DISC states the following: “Although generally the sale or license of a copyright does not produce qualified export receipts (since a copyright is generally not export property), the sale or lease of a copyrighted book, record, or to her articles does generally produce qualified export receipts”.

Computer software can be export property. Computer software tapes are akin to the copyrighted books, which qualify as export property. Computer programs are standardized programs that are manufactured in the United States by a person other than a DISC and then marketed outside the United States. This is not selling the source code or master recording. Those purchasing or leasing programs do not have the right to reproduce the software.

 

Copyright Rights

The regulations distinguish between transfers of copyright rights and transfers of copyrighted articles based on the type of rights transferred to the transferee. The transfer is classified as a transfer of a copyright if, as a result of a transaction, a person acquires any one or more of the following rights:

(1) the right to make copies of the computer program for purposes of distribution to the public by sale or other transfer of ownership, or by rental, lease or lending;

(2) the right to prepare derivative computer programs based on the copyrighted computer program;

(3) the right to make a public performance of the computer program; or

(4) the right to publicly display the computer program.

Transfers of Computer Programs

The regulations provide rules for classifying transactions involving the transfer of computer programs. A computer program includes any media, user manuals, documentation, database or similar item if the media user manuals, documentation, database or similar item is incidental to the operation of the computer program.

A copyrighted article is defined as a copy of a computer program from which the work can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device. If a person acquires a copy of a computer program but does not acquire any of the four copyright rights, the transfer is classified as a transfer of a copyrighted article.

In general, a transfer of a computer program is classified in one of the following ways.

1. A sale or exchange of the legal rights constituting a copyright (which generates income sourced according to the rules for sales of personal property);
2. A license of a copyright (which generates royalty income);
3. A sale or exchange of a copyright article produced under a copyright (which generates income sourced according to the rules for sales of personal property);
4. A lease of a copyright article produced under a copyright (which generates rental income).¹

¹Additional rules allow for the classification of a transfer as partially a transfer of services or of know-how. The provision of know-how, in which the transferor retains continuing use of the know how transferred, is presumably most like a license of a copyright.

The following are four examples from the Treasury Regulations that describe the four types of transactions.

Example 1 – Sale of Copyright Article

A U.S. corporation, (the “U.S. corporation”) owns the copyright in a computer program, (the “Program”).

The U.S. corporation, (the “U.S. Corporation”), makes the Program available, for a fee, on a World Wide Web home page on the Internet. Mr. P, a resident of Country Z, in return for payment to the U.S. Corporation, downloads the Program X (via modem) onto the hard drive of his computer. As part of the electronic communications, P signifies his assent to a license agreement.

Mr. P receives the right to use the program on his own computers (for example, a laptop and a desktop). None of the copyright rights have been transferred in this transaction. P has received a copy of the Program. P has acquired solely a copyrighted article.

P is properly treated as the owner of a copyrighted article. There has been a sale of a copyrighted article rather than the grant of a lease.

Example 2

The facts are the same as those in Example 1, except that the U.S. Corporation only allows Mr. P, the right to use the Program for one week. If P wishes to use the Program for a further period he must enter into a new agreement to use the program for an additional charge.

P is not properly treated as the owner of a copyrighted article. There has been a lease of a copyrighted article rather than a sale.

Example 3

A U.S. Corporation, transfers a disk containing the Program to a Foreign Corporation (the “Foreign Corporation”) and grants the Foreign Corporation an exclusive license for the remaining term of the copyright to copy and distribute an unlimited number of copies of the Program in the geographic area of the Country in which the Foreign Corporation makes public performances of the Program and publicly displays the Program.

Applying the all substantial rights test, the U.S. Corporation will be treated as having sold copyright rights to the Foreign Corporation. The Foreign Corporation has acquired all of the copyright rights in the Program and has received the right to use them exclusively within the Foreign Country.

Example 4

A U.S. corporation, transfers a disk containing the Program to a Foreign Corporation in Country X and grants the Foreign Corporation the non exclusive right to reproduce (either directly or by contracting with another person to do so) and distribute for sale to the public an unlimited number of disks at its factory in return for a payment related to the number of disks copied and sold. The term of the agreement is two years, which is less than the remaining life of the copyright.

There is a lease of copyright rights since copyright right have been assigned but for a limited time period only.

 

The Source of Income Analysis

Once it is determined that a computer program is a copyright article and thus “export property” for DISC purposes; then the issue is to determine whether the Software Program is being sold for use, consumption of disposition outside of the U.S. This analysis depends upon the “source of income” rules.

Generally under the current rules, the source of income from sales of property depends to varying extents upon both the type of property and whether the property sold or leased is “inventory property”.

Income from the lease of a copyright article must also fit this definition of non U.S. source of income.

The user of the computer program is particularly important in the international context. Income earned from commerce between countries must be assigned a source under rules. This requires a determination of whether the transaction is a sale of inventory, a rental of property, a license or sale of intellectual property or the provision of services.

The regulations focus on (i) acknowledging the special circumstances of computer programs, (ii) distinguishing between transactions in copyright rights and in copyrighted articles, and (iii) focusing on the economic substance of the transaction over the labels applied, the form and the delivery mechanism.

The Software Regulations provide explicit guidance on how to source income arising from transactions categorized under the regulations by cross referencing existing source rules.

The regulations provide that income from transactions that are classified as sales or exchanges of copyrighted articles will be sourced under the sections of Internal Revenue Code that determine if income is earned in the United States for tax purposes or earned outside of the United States. Income from the leasing of a computer program will be sourced under different Internal Revenue Code sections.

Source of Income for Sales of Copyrighted Articles

A transfer of intangible property is a sale if the actual facts and circumstances support the fact that the transferor has transferred “all substantial rights” to the computer software property. A perpetual and exclusive license of intangible property is considered to be a transfer of “all substantial rights” is also treated as a sale, rather than as a license, for tax purposes. All the facts and circumstances are reviewed to determine whether the transaction transferred “all substantial rights” to the property in question.

A sale of a copyrighted article occurs if sufficient benefits and burdens of ownership have been transferred to the buyer, taking into account all facts and circumstances. This is the same test that generally is applied to determine whether transfers of tangible personal property are sales or leases.

The source of income generated by the sale or exchange of a copyrighted article often depends upon whether the sale took place within or without the United States. The Software Regulations provide that the place of sale is determined under the “title passage rule”.

The governing regulation state that “a sale of personal property is consummated at the time when and the place where, the rights, title and interest of the seller in the property are transferred to the buyer”. The sale shall be deemed to have occurred at the time and place of passage to the buyer of beneficial ownership and the risk of loss.

As to the issue of determining the place of sale under the title passage rule, the parties in many cases can agree on where title passes for sales of inventory property generally.

 

Application of the Title Passage Rule

As described above, the source of income generated by the sale or exchange of a copyrighted article often depends upon whether the sale took place within or without the United States. The place of sale is determined under the title passage rule. The Software Regulations recognizes that typical license agreements do not refer to a transfer of property and an electronic transfer is generally not accompanied by the usual indicia of the transfer of title.

Application of the Title Passage Rule

There are important categories of copyrighted article transfers for DISC purposes: (i) a transfer of tangible property, such as a tangible medium in which the copyrighted article is embodied, and/or a hard copy of user manuals and documentation; (ii) (e.g., electronically transmitted copyrighted articles without any hard copy of user manuals and documentation). Either one of these can be the subject of a sale.

To comply with the passage of title rules, a DISC may consider language such as: Title to this computer software program, shall pass outside the United States in its agreements when tangible property is being transferred. If non tangible property is delivered, the DISC taxpayers could consider documentation for foreign users (which could be a contract to sign or terms consented to electronically) that states that the vendor’s delivery obligation shall be complete and risk of loss with respect to the copyrighted article shall pass at the time the program is copied onto the recipient’s computer at the end user’s location.

Partial Transfer of a Copyright Article: A Lease

If less than all of the benefits and burdens associated with a copyrighted article have passed to the transferee, the Software Regulations treat the transaction as a lease. Copyright articles can be leased as well as sold. Computer programs do not involve the risk of physical deterioration or physical destruction but they do have the risk of technological obsolescence. If this risk is assumed by the transferee, generally through a transaction in which the transferee makes a single payment in return for the right to use the program copy in perpetuity, then the transferee has assumed the risk of obsolescence and should be treated as the owner of the program copy.

However, if the transferee instead makes periodic payment and can cease its use of the program when it chooses, then the transferee has not assumed the relevant benefits and burdens of ownership and the transaction should be considered a lease.

Lease and Rental Source of Income

Under the Software Regulations, income derived from the rental of a copyrighted article is sourced under Section 861(a)(4) and 862(a)(4). As a general rule, rents and royalties are sourced to the place where the leased or licensed property is located, or where the lessee or licensee uses, or is entitled to use the property.

Leased property is used where it is physically located at the time of its use by the lessee. Therefore a computer program copy that is “rented” under a limited duration license should be considered to be used at the place where the computer that hosts the program is physically located while the lessee uses the program. If the copy resides on the lessee’s computer, the lessor will need to know where that computer is located in order to source its rental income.

If you have additional questions, please contact us today. Value can be lost without good legal advice.