Understanding fatca icatt 07-01-15

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

Outline
• Responsibilities of US persons in general
• Citizenship vs residency based taxation
• Pay
• Report
• Recent media coverage
• Former FIFA Exec
• Former Guardian Exec
• Sovereign Management & Legal, Ltd
• What is FATCA
• Impact of FATCA –
• Governments
• FFIs
• Individuals
• Governments –
• Model 1
• Model 2
• FFIs
• Register
• Report
• Individuals
• Danger #1 – FATCA
• Danger #2 – PFICs
• Danger #3 – FBARs
• Danger #4 – Non qualified insurance policies
• Amnesty
• Q&A

Responsibilities of US persons in general
- What is a US Person?
• Passport holders
• Permanent residents
• Substantial presence
• Accidental Americans
• NRA spouses who make a Sec 6013g election

- What is a US Person?

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

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

Former FIFA Exec
• No idea whether the reports are true but online, it is
being alleged…
• That the IRS and Homeland Security are looking
• If the allegations are true, it may fall under the IRS
Criminal Investigation (CI) team. This unit is comprised of
approximately 3,500 employees worldwide,
approximately 2,600 of whom are special agents whose
investigative jurisdiction includes tax, money laundering
and Bank Secrecy Act laws. The CI conviction rate is
legendary. It is one of the highest in federal law
enforcement. I understand that since CI’s inception in
1919 to the present, the conviction rate for Federal tax
prosecutions has never fallen below 90%.

Former Guardian / UTC Exec
• Undercover sting
• Picked up at MIA
• According to a November 15th article in the New York
Times, at the IRS, dozens of undercover agents chase
suspected tax evaders worldwide, by posing as tax
preparers, accountants, drug dealers or yacht buyers and
more, court records show.
• Interestingly, undercover agents at the I.R.S., appear to
have far more latitude than do those at many other
agencies
• I.R.S. rules say that, with prior approval, “an undercover
employee or cooperating private individual may pose as
an attorney, physician, clergyman or member of the
news media.”

Sovereign Management & Legal, Ltd
• Dec 14th 2014 press release on DOJ website -
http://www.justice.gov/usao/nys/pressreleases/December14/Sovereign
ManagementJohnDoeSummonsesPR.php
• “Court Authorizes IRS To Issue Summonses For Records Relating To U.S.
Taxpayers Who Used Services Of Sovereign Management & Legal, Ltd., To
Conceal Offshore Accounts, Assets, Or Entities”
• Sovereign is a multi-jurisdictional offshore services provider that offers
clients, among other things, the formation and administration of
anonymous corporations and foundations in Panama as well as offshore
entities. Related services provided by Sovereign include the maintenance
and operation of offshore structures, mail forwarding, the availability of
virtual offices, re-invoicing, and the provision of professional managers
who appoint themselves directors of the client’s entity while the client
maintains ultimate control over the assets.
• During the IRS’s investigation of Sovereign’s conduct, one taxpayer,
making a voluntary disclosure of tax non-compliance to avoid
prosecution, reported that Sovereign helped the taxpayer form an
anonymous corporation in Panama that the taxpayer used to control
assets without appearing to own them.

Common Thread
• A recent Tax Notes Today article reports on the Criminal Fraud and Tax Controversy Conference
in Las Vegas, sponsored by the American Bar Association Section of Taxation. Ajay
Gupta, Offshore Enforcement to Remain Top Priority in 2015, 2014 TNT 240-6 (12/13/14)-
• “[David Horton LB&I director for international compliance] warned of 'a lot more John Doe
summonses' in the next 12 to 24 months, in other parts of the world and 'beyond banks.' The
focus will be on intermediaries, he said, referring to those who promoted or facilitated
transactions for stashing money abroad.“
• With a normal summons, the IRS seeks information about a specific taxpayer whose identity it
knows. A John Doe summons allows the IRS to get the names of all taxpayers in a certain group.
The IRS needs a judge to approve it, but recent IRS success may to lead to more.
• A John Doe Summons is ideal for pursuing investors in tax shelters, account holders at financial
institutions, attendees at an event, donors of real estate, etc. After sniffing out American
taxpayers with UBS accounts, the IRS did the same with HSBC in India. But the IRS tells its own
examiners to use a John Doe Summons only after trying other routes. The IRS Manual says it
may be possible to obtain taxpayer identities without issuing a John Doe summons.

FATCA
• The Foreign Account Tax Compliance Act (FATCA) is codified as Chapter 4 of the Internal Revenue Code. It represents the Treasury
Department's efforts to prevent U.S. taxpayers who hold financial assets in non-U.S. financial institutions (foreign financial
institutions or FFIs) and other offshore vehicles from avoiding their U.S. tax obligations.
• The intent behind the law is for foreign financial institutions (FFIs) to identify and report to the IRS U.S. persons holding assets
abroad and for certain non-financial foreign entities (NFFEs) to identify their substantial U.S. owners.
• In order to comply with the rules, FFIs are required to enter into an FFI agreement with the U.S. Treasury or comply with
intergovernmental agreements (IGAs) entered into by their local jurisdictions.
• U.S. withholding agents (USWAs) must document all of their relationships with foreign entities in order to assist with the
enforcement of the rules. Failure to enter into an agreement or provide required documentation will result in the imposition of a
30% withholding tax on certain payments made to such customers and counter-parties.
• Failure to impose the requisite withholding under FATCA requirements could result in significant financial exposure.
• Impact on Governments, FFIs, NFFEs and US individuals

FATCA – impact on Governments
• OECD’s Tax Information Exchange Agreements –
• FATCA was a rider to the 2010 HIRE Act but the OECDs model tax information exchange agreement dates back to at least 2002
• According to the OECD’s website, the purpose of the model agreement is to promote international co-operation in tax matters through
exchange of information. It was developed by the OECD Global Forum Working Group on Effective Exchange of Information (“the Working
Group”). The Working Group consisted of representatives from OECD Member countries as well as delegates from Aruba, Bermuda, Bahrain,
Cayman Islands, Cyprus, Isle of Man, Malta, Mauritius, the Netherlands Antilles, the Seychelles and San Marino.
• The Agreement grew out of the work undertaken by the OECD to address harmful tax practices. The lack of effective exchange of information
is one of the key criteria in determining harmful tax practices. The mandate of the Working Group was to develop a legal instrument that could
be used to establish effective exchange of information. The Agreement represents the standard of effective exchange of information for the
purposes of the OECD’s initiative on harmful tax practices.
• BEPS
• Model 1 - require FFIs to report all FATCA-related information to their own governmental agencies, which would then report the
FATCA-related information to the IRS. Some Model 1 IGAs are reciprocal, requiring the U.S. to provide certain information about
residents of the Model 1 country to the Model 1 country in exchange for the information that country provides to the U.S. An FFI
covered by a Model 1 IGA will not need to sign an FFI agreement, but it will need to register on the IRS’s FATCA Registration Portal
or file Form 8957
• Model 2 - require FFIs to report information directly to the IRS. Under such IGA, FFIs will need to register with the IRS, and certain
FFIs will sign a version of the FFI agreement modified to reflect the IGA.

FATCA – Governments that have signed

FATCA – implications for FFIs
• Firstly, they must register with the IRS directly. Form 8957
• Secondly, they must take appropriate actions to know their
customers. KYC/AML. IT and HR implications
• Thirdly, they must report the activity of US persons as required by
local law. XML
• (Our firm can assist with these responsibilities)

Outline
• Responsibilities of US persons in general
• Citizenship vs residency based taxation
• Pay
• Report
• Recent media coverage
• Former FIFA Exec
• Former Guardian Exec
• Sovereign Management & Legal, Ltd
• What is FATCA
• Impact of FATCA –
• Governments
• FFIs
• Individuals
• Governments –
• Model 1
• Model 2
• FFIs
• Register
• Report
• Individuals
• Danger #1 – Non qualified insurance policies
• Danger #2 – PFICs
• Danger #3 – FBARs
• Danger #4 – FATCA
• Amnesty
• Q&A

Danger #1 – Non qualified
insurance policies
• Insurance policies can be treated as US qualified, US non-qualified or
a PFIC
• US qualified – if you have to ask…
• PFIC – to be discussed later
• US non qualified –
• If underlying fund (in which the policy invests) are only available to the fund
and not the general public
• If policy holder doesn’t have the right to select from menu of funds
• Then there should be no look-thru rule (not a PFIC)

insurance policies
• Section 7702(g) says the “income on the contract” must be reported as ordinary
income.
• “Income on the contract” = increase in “net surrender value” during the taxable
year + “cost of life insurance” for the year – premiums paid during the year.
• “Net surrender value” = cash surrender value.
• “Cost of life insurance” should roughly equate to the annual insurance cost of the
contract – as opposed to the investment component.
• We add this annual increase to the tax basis of the policy (in addition to total
premiums).
• Sickness payments should reduce this basis with any excess generating income.
• We track policy basis with increases for premiums and taxable increases in cash
value. No loss for the years when cash value goes down.
• Everything fully disclosed in attachment to return

insurance policies
• Foreign life assurance or sickness and accident policies. Must pay
customs & excise tax at a rate of 1% of the premium paid per year.
• This must be reported on Form 720 on a quarterly basis.
• To be able to file Form 720 you will first require a Employer
Identification Number . This can be obtained by completing form SS4.
• Once you have your EIN you can now complete your 720 forms

Danger #2 - PFICs
• Enacted in 1986 to limit tax deferral by US investors in off shore funds
• Previously off shore funds had an advantage over domestic funds. No
tax till distribution.
• Post 1986, there is a level playing field for both domestic and off
shore mutual funds. The U.S. puts the burden on the shareholder to
determine their share of the income of the investment company. The
tax code does not encourage U.S. persons to invest in mutual funds
outside the U.S.

Danger #2 - PFICs
• To employ this punitive regime, the IRS requires shareholders of PFICs
to effectively report undistributed earnings via choosing to be taxed
through one of three possible methods-
1. Section 1291 fund,
2. Qualified Election Fund, and
3. Mark to Market election.

Danger #4 - FATCA
• FATCA stands for ‘‘Foreign Account Tax Compliance Act”
• The goal is to stop US tax evasion by –
• Requiring Foreign Financial Institutions (FFIs) and non-financial foreign entities (NFFEs) to
provide information about financial accounts held by US taxpayers or foreign entities in which
US taxpayers hold a substantial ownership interest.
• Requiring US persons to report information about certain foreign financial accounts and
offshore assets on Form 8938 and attach it to their income tax return, if the total asset value
exceeds the appropriate reporting threshold.
• In the future, requiring domestic entities to file Form 8938 if the entity is formed or used to
hold specified foreign financial assets and the total asset value exceeds the appropriate
reporting threshold. Until the IRS issues such regulations, only individuals must file Form 8938.

Danger #4 - FATCA
• The Foreign Account Tax Compliance Act (FATCA) is codified as Chapter 4 of the Internal Revenue Code. It represents the
Treasury Department's efforts to prevent U.S. taxpayers who hold financial assets in non-U.S. financial institutions (foreign
financial institutions or FFIs) and other offshore vehicles from avoiding their U.S. tax obligations.
• The intent behind the law is for foreign financial institutions (FFIs) to identify and report to the IRS U.S. persons holding assets
abroad and for certain non-financial foreign entities (NFFEs) to identify their substantial U.S. owners.
• In order to comply with the rules, FFIs are required to enter into an FFI agreement with the U.S. Treasury or comply with
intergovernmental agreements (IGAs) entered into by their local jurisdictions.
• U.S. withholding agents (USWAs) must document all of their relationships with foreign entities in order to assist with the
enforcement of the rules. Failure to enter into an agreement or provide required documentation will result in the imposition
of a 30% withholding tax on certain payments made to such customers and counter-parties.
• Failure to impose the requisite withholding under FATCA requirements could result in significant financial exposure.

Danger #4 - FATCA
Penalty - Up to $10,000 for failure to disclose and an additional $10,000 for each 30 days of non-filing after IRS notice of a failure to disclose,
for a potential maximum penalty of $60,000; criminal penalties may also apply

TAX Amnesty
• Streamlined
• OVDP 2014

TAX Amnesty
“willfulness”
• Willfulness as a “voluntary, intentional violation of a known legal duty” was
“conclusively” affirmed in Cheek v. United States 498 U.S. 192 (1991).
• The two essential holdings of the Supreme Court were:
1. A genuine, good faith belief that one is not violating the Federal tax law based on
a misunderstanding caused by the complexity of the tax law (e.g., the complexity
of the statute itself) is a defense to a charge of "willfulness", even though that
belief is irrational or unreasonable.
2. A belief that the Federal income tax is invalid or unconstitutional is not a
misunderstanding caused by the complexity of the tax law,[16] and is not a
defense to a charge of "willfulness", even if that belief is genuine and is
held in good faith

TAX Amnesty
• Streamlined –
• No penalty for offshore
• 5% penalty for domestic
• OVDP –
• 27.5%
• A 50% offshore penalty applies if either a
foreign financial institution at which the
taxpayer has or had an account or a
facilitator who helped the taxpayer
establish or maintain an offshore
arrangement has been publicly identified
as being under investigation or as
cooperating with a government
investigation.

TAX Amnesty
CIBC, Butterfield and Stanford

TAX Amnesty
U.S. Department of Justice (DOJ) and the Swiss Federal Department of Finance - http://www.ustaxprogram.com/banks/
• Category 1 - Any Swiss bank currently under formal criminal investigation

TAX Amnesty
U.S. Department of Justice (DOJ) and the Swiss Federal Department of Finance
• Category 2 –
• Bank has reason to believe that it may have committed tax-related offenses under U.S. Code title 18 (the U.S. criminal code); U.S. Code title 26 (the Internal
Revenue Code); or monetary transaction offenses under Section 5314 (reporting requirements) or Section 5322 of title 31 of the U.S. Code, which governs
financial activities in connection with an undeclared U.S.-related account. Category 2 Banks may request a nonprosecution agreement from the DOJ.
Category 2 Banks also must agree to disclose information and evidence, perform certain due-diligence steps verified by an independent examiner, and pay a
penalty that can range from 20% to 50% of the aggregate maximum value of their undisclosed U.S. accounts.
• Participants include Union Bancaire Privee, the Geneva-based bank used by American Jordan Belfort, according to his memoir “The Wolf of Wall Street,”
• Category 3 – Banks without undeclared U.S. clients that are applying for confirmation from the DoJ that they aren’t being investigated
• Category 4 - Swiss banks with only local clients

TAX Amnesty
• Outlook for 2015

Fixed, Determinable, Annual, Periodical (FDAP) Income

Effectively Connected Income (ECI)

Kovell Letters
• Without such an agreement, communication between the client and the accountant would not be
protected from discovery by the IRS because there is no accountant-client privilege under federal
law. It is called a "Kovel Letter" because it is based on the case of United States v. Kovel, 296 F.2d
918 (2nd Cir. 1961). Practitioners, however, should review the recent case of United States v.
Adlman, 68 F.3d 1495 (2nd Cir. 1995) for limitations on the "Kovel" doctrine. The letter can be
used for both civil and criminal matters.

Impact – Democrats Abroad Survey of 6500 Americans abroad

Impact – types of accounts closed

Impact – value of accounts closed

Impact – closure stateside as well

Impact – refusal to open accounts

Impact – strained relationships

Impact – issues with employment

• Further Implications of FATCA
• US based brokerage firms
• Banks / Financial Institutions
• Annual Returns / Form 8938

Understanding fatca icatt 07-01-15

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