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Use of Shell Companies To Shield Identity Further Limited

On July 27, 2016 the Financial Crimes Enforcement Network, (FinCEN) of the Department of the Treasury issued expanded Geographic Targeting Orders (GTO) that will:
"temporarily require U.S. title insurance companies to identify the natural persons behind shell companies used to pay "all cash" for high-end residential real estate in six major metropolitan areas" The areas now cover are:
"the GTOs announced today include the following major U.S. geographic areas: (1) all boroughs of New York City; (2) Miami-Dade County and the two counties immediately north (Broward and Palm Beach); (3) Los Angeles County, California; (4) three counties comprising part of the San Francisco area (San Francisco, San Mateo, and Santa Clara counties); (5) San Diego County, California; and (6) the county that includes San Antonio, Texas (Bexar County)." The purposes of the GTO's is to assist law enforcement in tracking "the transactions covered by the GTOs (i.e., all-cash luxury purchases of residential property by a legal entity) which are highly vulnerable to abuse for money laundering. " There is a legitimate concern about money laundering through the use of "shell" companies, also referred to as single purpose vehicles (SPV's) when used to buy real property and open financial account using substantial sums of cash. Example of the problem the GTO seeks to address. Taxpayer forms an offshore shell in a tax haven jurisdiction, ( a country with a zero tax rate on out of country income). The shell is then funded often with unreported funds for U.S. tax purposes. The offshore company then forms a U.S SPV to acquire U.S. assets, such as real property. Often a "Nominee" officer and director is used to apply for an employer identification number for the SPV. The SPV is then funded with funds from the offshore company and then the SPV completes the asset purchase. With the GTO title insurance companies will be required to obtain the identities of the ultimate beneficial owners of the offshore company. This means that if a U.S. person (individual or company) is the ultimate beneficial interest holder that name must be disclosed. The expectation is that the identities of tax cheats and money launderers will be discovered as the process is implemented. When the GTO's are added to the "know Your Customer" requirements of the Foreign Account Tax Compliance Act (FATCA) the IRS may have found a way of catching those U.S. taxpayers who still have undisclosed foreign financial accounts and are trying to us those fund in the U.S. The Offshore Voluntary Disclosure Program of 2014 is still open. However, some taxpayers will just not come forward, and for them, prosecution remains a true reality along with huge civil penalties

Is Age A Defense to Failure to File Returns?

Two  recent cases illustrate why age alone is no defense to failure to file returns criminal and civil penalties.  The first case is a Tax Court Case in which the the taxpayer was assessed late iflingand late payment penalties.  The taxpyaer argued that his age and coplexity of the tax code were the reasons he did not file and pay timely.  The court responded:

Streamline Procedure Risks: Are you really Non-willful?

According to reports in Tax Analysts there have been 54, 000 Offshore Voluntary Disclosure  (OVDP) participants 30,000 Streamline Procedure filings.  The Streamline Procedure filings are now the subject of intense Department of Justice (DOJ) and IRS review.  The DOJ and IRS ar looking for taxpayers who made improper use of the Streamline Procedures. 

What are the Tax Consequences of BREXIT for U.S. Taxpayers?

Recently, The Harvard Law School Forum on Croporate Governance and Finance published a note titled "The Legal Consequence of Brexit, authored by Simon Witty.  We have restated the transactional tax commentary here.  We have added our thoughts on the tax reporting, "information exchange agreements" and federal tax reporting requirements under the heading Compliance.  


  • The EU has influenced many areas of the UK's tax system. In some cases, this has been through EU legislation which applies directly in the UK; in other cases, EU rules have been adopted through UK legislation (for example, the UK's VAT legislation is based on principles which apply across the EU); and, in still other cases, decisions of the European Court of Justice have either influenced the development of UK tax rules, or have prevented the UK's tax authority from enforcing aspects of the UK's domestic tax code. This complicated backdrop means that the tax impact of Brexit will be varied and difficult to predict.
    • Areas to watch include the following:
      • Direct tax: although the UK has an extensive double tax treaty network, not all treaties provide for zero withholding tax on interest and royalty payments. Accordingly, corporate groups should consider the extent to which existing structures rely on EU rules such as the Parent-Subsidiary Directive or the Interest and Royalties Directive to secure tax efficient payment flows. Similarly, corporate groups proposing to undertake cross border reorganisations would need to consider the extent to which existing cross-EU border merger tax reliefs will survive intact. It should also be borne in mind that, even if Brexit occurs, the UK is likely to continue vigorously supporting the OECD's BEPS initiative such that there may well be considerable constraints and complexities associated with locating businesses outside the UK.
      • VAT: although VAT is an EU-wide tax regime, it seems inconceivable that VAT will be abolished. However, it is likely that, over time, there will be a divergence between UK VAT rules and EU VAT rules, including as to input VAT recovery on supplies made to non-UK customers. Additionally, UK companies may lose the administrative benefit of the "one stop shop" for businesses operating in Europe.
      • Customs duty: if the UK left the customs union, exports to and imports from EU countries may become subject to tariffs or other import duties (as well as additional compliance requirements).
      • Transfer taxes: it seems that the UK would, at least in principle, be able to (re)impose the 1.5% stamp duty/stamp duty reserve tax charge in respect of UK shares issued or transferred into a clearance or depositary receipt system. Accordingly, the position for UK-headed corporate groups seeking to list on the NYSE or Nasdaq may become less certain".
  • Compliance:
    • Information Exchange .  Current Information Exchange Agreements, including those mandated under Foreign Account Tax Compliance Act, "FATCA" should remain unchanged.  That means that the agreement to provide financial account information about U.S. taxpayers with financial accounts in the United Kingdom, (England, Scotland, Wales, and Northern Ireland will stay in effect regardless of the ultimate decision on Brexit.  That means that the IRS and Department of Justice, where appropriate, will receive annual reports about U.S. taxpayers with accounts in the U.K. which will provide a basis for enforcment actions against  those U.S. taxpayers who do not otherwise comply with U.S. reporting laws.
    • Reporting:  The Intenal Revenue Code and the Bank Secrecy Act have specific reporting laws and Regulations that require U.S. taxpaeyrs to report foreign finanicial accounts, such as bank accounts and foregin financial assets, such as intersts in foreign privately held corporations, partnerships, foundations and trusts.  These rules and regulations remain unchanged by Brexit.
    • Enforcement:  The IRS and Department of Justice will continue to enforce the reporting laws and Regulaiions and in some cases prosecute non-complaint  taxpayers.  The penalty regime for failure to file informaiton returns, including FBARs is not affected by Brexit.
  • Voluntary Disclosure:  Brexit should have no affect on the longevity of the Offshore Voluntary Disclosure Program (OVDP) or other voluntary disclosure programs.  The decision to seek the protection of the OVDP must be made on individual facts and circumstances, none of which are likely to involve Brexit.

Conclusion:  Brexit is not certain. The Parliament must first elect a new Prime Minster who must then ask Parliament to authorize an Article 50 Notice of Withdrawal, in accordance with the provisions of the Treaty of Lisbon.  Failure to issue such a notice means no change in the U.K.relatinship with the E.U. 

Foreign Bank Account Reports Due June 30

U.S. Taxpayers who directly or indirectly controlled foreign financial accounts in 2015 are reminded that the deadline to file a Report of Foreign Financial Account (FBAR) FinCEN Form 114 is June 30. Taxpayers with unfiled FBARs for prior years should be aware of that the information exchange agreements under the Foreign Account Tax Compliance Act have bee implement:

You Skipped OVDP, now the IRS has initiated an Audit

Since 2009, the Offshore Voluntary Disclosure Program (OVDP) has been available to Taxpayers who have foreign assets, foreign financial accounts, and foreign source income unreported for U.S. Income Tax and Bank Secrecy Act purposes. In addition, in June of 2014 the IRS announced the Streamlined Procedures to further encourage Taxpayers to come forward and remedy prior failures to disclose foreign assets and foreign income. With the release of Panama Papers, those U.S. citizens and permanent residents who did not take advantage of the OVDP and the Streamlined Procedures, an IRS civil audit may be in the horizon. There is also risk of criminal investigation relating to the foreign offshore holdings.

Panama Papers To Be Released May 9, 2016. Why Does It Matter?

Panama Papers To Be Released May 9, 2016. Why Does It Matter? The International Consortium of Investigative Journalists (ICIJ) will release perhaps the largest database of private offshore companies and their ultimate owner ever made public. According to the ICIJ
"The data comes from the Panamanian law firm Mossack Fonseca, one of the top players in the offshore world, and includes information about companies, trusts, foundations and funds incorporated in 21 tax havens, from Hong Kong to Nevada in the United States. It links to people in more than 200 countries and territories. When the data is released, users will be able to search through the data and visualize the networks around thousands of offshore entities, including, when possible, Mossack Fonseca's internal records of the company's true owners. The interactive database will also include information about more than 100,000 additional companies that were part of the 2013". To understand who is likely to be affected by the release of the Panama Papers it is perhaps worthwhile to look at who may have benefited from the use of offshore companies and how. The ICIJ has an interactive depiction of hypothetical persons who would use offshore companies. https://panamapapers.icij.org/stairway_tax_heaven_game/. There are three hypothetical scenarios shown involving (i) a professional athlete, (ii) a politician and (iii) a business executive. There are clearly many more real life situations than those illustrated. The number of U.S taxpayers whose names are going to be found in the database is unknown, but criminal investigations have already begun. The U.S. Attorney for the Southern District of New York recently announced that he has opened a criminal investigation, and 13 foreign banks have been formally asked to produce records by the New York Department of Financial Services. For some U.S. taxpayers these investigations may preclude acceptance into the Offshore Voluntary Disclosure Program,(OVDP) because the government may claim lack of timeliness (they are simply too late). Form some other U.S. taxpayers, who chose to use the Delinquent Filing Program or the Streamline Procedure they may find that they are the target of IRS and/or Department of Justice enforcement actions. The only U.S. taxpayers who have offshore corporations who are reasonably secure are those who have always been in full compliance with tax and Bank Secrecy laws or who came forward through the OVDP process and have a Closing Agreement. The IRS is still receptive to taxpayer's coming forward: "People hiding assets offshore should recognize the continued changes and progress in the international tax arena" and "come forward voluntarily," the IRS said in a statement. "The IRS welcomes the OECD's support of the JITSIC's work to coordinate the effort by tax authorities across the world to respond to the released information. We will be closely monitoring the situation along with our international tax administration partners as we determine what steps to take to ensure compliance with U.S. tax laws and meet our shared global interests". How to come forward needs careful analysis by lawyers skilled in all aspects of voluntary disclosures. Communication between lawyers and clients are generally covered by the attorney-client privilege, whereas communications with others are not privileged in criminal investigations. We at Millarlaw are experts in all aspects of voluntary disclosures, both federal and state. Your inquires are welcome. 

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