H. Jacob Lager

Archive for July, 2012|Monthly archive page

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The dramatic tale of “A True FBAR Criminal”

In FBAR, Foreign taxes, IRS regulations, Tax Crime on July 27, 2012 at 8:02 am

One question I often hear when explaining FBAR liability is, “Are they really going to come after me?”

It’s not an unreasonable question.  Oftentimes, the penalties for FBAR non-compliance can seem very severe, especially when dealing with a foreign client who may have recently become a U.S. taxpayer and unknowingly retained reportable accounts abroad.

This week, the U.S. Attorney’s Office for the Southern District of Florida issued a press release that provides an example of just who “they” are truly “going after.”

The presser announced yesterday’s sentencing of Miami Beach resident Luis A. Quintero for willful failure to file his FBARs.  So what was the sentence?  Roddy, tell him what he won!

  • Four months in federal prison;
  • Three years of supervised release;
  • 250 hours of community service; and
  • A $20,000 criminal fine.

But wait!  There’s more!

Is that 27.5% OVDP penalty looking more attractive?

Before anyone panics, lets take a look at what Quintero actually did.  Court documents indicate that he formed two offshore corporations, which were then used to open certain Swiss UBS accounts, which housed (and hid) roughly $4 million.  Quintero then facilitated multiple transfers to and from the subject accounts.  Of course, none of that is necessarily illegal had he disclosed the accounts’ existence and their activities.

Which he didn’t.

The U.S. Attorney’s Office also noted that there was no question that Quintero knew that he was required to file an FBAR for the subject accounts.  In fact, Quintero had previously filed FBARs for other Mexican bank accounts to which he was attached.  That’s a bad fact if you’re trying to argue that your subsequent failure wasn’t “willful.”

The press release further indicates that the Quintero prosecution was a direct result of UBS’s 2009 agreement to cooperate with U.S. authorities in identifying suspected tax cheats.  If you have a U.S. client that is, or was, a Swiss UBS customer in the recent past, you may want to suggest a review of their reportable foreign accounts.

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Israel: Home Office Creates Permanent Establishment

In Foreign taxes on July 11, 2012 at 7:59 am

I often dream about working from Paris.

How hard could it be?  I’ve got a computer.  I can stay up late.  Most of my clients rarely insist on face-to-face meetings.  So what’s stopping me?

Well, for one thing, I don’t know that my firm would be too keen on inadvertently creating a permanent establishment abroad and subjecting itself to French taxes.

That’s pretty much exactly what just happened to a US company that outfitted an Israeli employee with all the tools necessary to work from home.  On July 3, 2012, the Israeli Tax Authority (“ITA”) ruled that an Israeli investment portfolio manager’s home office created a “permanent establishment” in Israel for the US company for whom she worked.  Thus, the US company was subject to Israeli taxes on its profits allocable to Israel.

“Permanent Establishment” (or “PE”) is a concept used throughout the world to determine whether a business has a taxable presence within a given sovereign jurisdiction.  Essentially, once your PE is established in Country X, you can expect to pay some kind of Country X taxes.

Typically, the factors giving rise to a PE will be described in a relevant tax treaty or, failing that, local law.  In this case, featuring an Israeli taxpayer and a US employer, the US-Israel Tax Treaty governed.  Accordingly, the ITA applied Article 5 of the treaty to hold that the Israeli employee created a PE for the US company in Israel.  The ruling relied primarily on the fact that the employee was subordinate to the head of the US investment team, the US company held all the risk regarding its clients, and that the company provided the Israeli employee with the technological and informational tools required for her work.

It should be noted that the ITA found an Israeli PE even though the US company provided no actual financial services in Israel, all its clients were located outside Israel, and the company did not even market to Israeli clients.  Indeed, the decision’s actual fiscal impact was somewhat vague since it did not explicitly state how the company’s profits should be allocated to its Israeli PE.  Instead, the ITA indicated that it would initially defer to the US company’s chosen method of allocation, subject to review.

While employing workers abroad has never been easier (from a technological and practical standpoint), employers seeking to accommodate key talent should also keep in mind whether an inadvertent PE might result.  Alternatives to direct employment include:  hiring the worker as an independent contractor, hiring the worker through the worker’s own loan-out entity, setting up a branch office abroad for the worker, and opening an actual subsidiary company to employ the worker.  Each option involves its own costs and benefits that should be considered along with the potential tax exposure.

Sadly, Paris will just have to wait.

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Foreign partner? Read this.

In IRS regulations on July 5, 2012 at 8:16 am

On June 22, IRS announced new changes to its procedures for issuing individual taxpayer identification numbers (ITINs).

So, what’s an ITIN?

ITIN literally stands for Individual Tax Identification Number.  As you likely know, every taxpayer who reports US income needs some kind of identifying number.  For individuals who are US citizens or resident aliens, that’s typically a social security number.  For business entities, that number is typically an Employer Identification Number (EIN).

An ITIN fills the same function for foreign individuals.  ITINs are typically required when a US payor intends to transfer, and withhold US taxes from, US-source income to a foreign individual.  The ITIN is the tracking mechanism that ensures the foreign person is paying his or her US tax liability.  Generally, a US withholding agent will require that its foreign payee obtain an ITIN before issuing payments abroad.  Such withholding agents often include US LLCs or partnerships or employers who hire temporary workers from overseas.

Obtaining an ITIN used to be a fairly painless operation involving a simple form application.   After 9/11, the Service tightened procedures for obtaining ITINs so as to prevent their abuse by international criminals seeking to move illicit funds.

So what’s changed?  As of last week, the IRS has announced that ITINs will only be issued to applicants who submit original identifying documents (like a passport or birth certificate) or copies of those documents certified by the issuing agency.  Notarized copies of those documents will no longer be accepted.

In other words, you need purple ink.

If you or your client is a new US business with individual foreign investors, or if you anticipate bringing in foreign talent to your US business for a short period of time, you may encounter these new rules.  Obtaining an ITIN. Can be tricky since the Service prefer that the foreign national actually submit the application concurrently with the person’s first US return.  This somewhat backward time frame can be particularly annoying for US partnerships seeking to issue K-1s to their foreign partners in advance of April 15.

When this kind of administrative Gordian Knot needs cleaving, that’s a good sign your client might need tax counsel.