This is fascinating. I would be interested in your views on these two taxpayers.

Taxpayer Number 1 – Hypothetical

This scenario comes from Jack Townsend’s blog. In a recent post titled “The big boys get better treatment than the minnows”, he discusses the Carl Levin view of what constitutes a tax loophole. Of particular interest in the world of offshore bank accounts, Senator Levin wants to end the practice of U.S. persons:

1. Creating foreign entities; and then

2. Having those entities open bank accounts in the U.S. as foreign entities; and

3. Avoid paying taxes on the profits.

Since this may be an oversimplification (but I don’t think so), I will quote from his description:

10. U.S. Bank Accounts Held by Offshore Entities with U.S. Owners

While many U.S. taxpayers have opened offshore accounts to hide assets from the IRS, other individuals have formed offshore entities and used those entities to open accounts right here in the United States. Current law allows U.S. financial institutions to treat those accounts as foreign-owned and avoid making the normal account disclosures to the IRS expected for accounts held by U.S. persons.

In 2006, a Subcommittee hearing presented multiple examples of U.S. individuals using offshore entities to open accounts at U.S. banks and securities firms to evade U.S. taxes. In one case, two brothers from Texas, Sam and Charles Wyly, established 58 offshore trusts and corporations, and operated them for more than 13 years without alerting U.S. authorities. To move funds abroad, the brothers transferred over $190 million in stock option compensation they had received from U.S. publicly traded companies to the offshore corporations. The brothers then directed the offshore corporations to cash in the stock options and start investing the money.

The Wylys also directed a number of their offshore entities to open accounts at U.S. securities firms, including Credit Suisse First Boston, Lehman Brothers, and Bank of America, and tell those firms to treat the entities as foreign accountholders. IRS regulations require U.S. financial institutions that make payments into accounts, such as for interest, dividends, or capital gains, to file disclosure forms with the IRS. The rules require a 1099 form to be filed for accounts held by U.S. persons, and a 1042 form for accounts held by non-U.S. persons. To determine an accountholder’s status, U.S. financial institutions are allowed to rely on information provided by the accountholder, unless they have “actual knowledge” or “reason to know” the information is false or unreliable. Accountholders are supposed to provide the information on a W-9 form for U.S. persons or W-8 form for non-U.S. persons.

In the Wyly matter, the Wyly-controlled offshore trusts and corporations claimed status as foreign entities and filed W-8 forms. The securities firms knew they were associated with the Wyly family, but accepted the W-8 forms anyway and did not disclose either the accounts or their Wyly connection to the IRS. Current IRS practice is to allow U.S. financial institutions to take that course of action, so long as the accountholder can produce documentation showing it was formed in a foreign jurisdiction, even if the entity is also associated with a U.S. person. The end result is that the Wylys hid millions of dollars in “offshore” funds at U.S. financial institutions.
The tax loophole that allows U.S. owners of offshore entities and the U.S. financial institutions that service them to treat those offshore entities as foreign accountholders, omitting any mention of the U.S. owners to the IRS, should be closed.

Today, U.S. multinationals hold over $1.5 trillion offshore, while numerous individuals continue to hide assets in offshore bank accounts. We can’t afford the revenue loss from offshore tax abuses. Reducing the deficit, including avoiding the draconian cuts mandated by sequestration, require a balanced approach that includes raising revenues. Closing abusive offshore tax loopholes offers a rational course of action that would not only raise revenues to help stave off sequestration and reduce the deficit, but also strengthen tax fairness, redress the imbalance between corporate and individual taxation, and remove tax incentives to shift U.S. jobs, businesses, and profits offshore.

Fascinating. I assume that the owners of the “offshore entity” would be required to file the relevant information returns: 5471, 3520, etc. It seems pretty clear that this “tax avoidance” scheme (it must be avoidance because it is perfectly legal) was designed to avoid paying taxes at all! What do you as law abiding residents in Canada, who are threatened with FBAR penalties (because you bank in Toronto instead of Buffalo) think of that?

Oh well, I guess this is a clear example of tax avoidance.

Speaking of adventures in FBAR, what about this?

Taxpayer 2 – Real Case.:79 Year Old Florida Widow Hit with 21 Million dollar FBAR Penalty for Failing To Declare Accounts Inherited From Husband

Talk about adventures in FBAR. Here is how the facts were reported (in every source I read):

A Palm Beach woman on Tuesday agreed to pay a penalty of more than $21 million for filing false tax returns in 2006 and 2007, federal officials said.

Mary Estelle Curran, 79, also faces up to six years in prison after pleading guilty on Tuesday in U.S. District Court. A sentencing date has not been set.

Federal authorities with the Justice Department and Internal Revenue Service said Curran failed to declare income from bank accounts in Switzerland and Liechtenstein. Authorities said the accounts, which Curran inherited from her husband Mortimer, who died in 2000, grew to more than $42 million in 2007.

Curran failed to pay $667,716 in taxes on the accounts, authorities said. But in her plea deal, she agreed to pay 50 percent of the highest value of the accounts, or $21,666,929.

“The Justice Department continues to pursue those who hide income and assets from the IRS through the use of nominee businesses and offshore bank accounts,” Assistant Attorney General Kathryn Keneally said in a statement. “U.S. taxpayers who fail to come forward in the voluntary disclosure program risk prosecution and substantial fines, as this case demonstrates.”

A widow, with inherited accounts. A loss to the government of $700,000. Yet a 21 million dollar fine! In other words, 50% of the value of the account. This is the account for a willful violation of FBAR rules. It is NOT the penalty for underpayment of taxes.  Although it seems clear that she was guilty of tax evasion, one must question whether the FBAR violation was willful. I have read a number of articles about this. Every article focuses on the tax issue. None focus on the whether she:

1. Knew about FBARs

2. If she knew about FBARs, she know that there was a legal duty to file FBARs.

3. If she knew about FBARs, and knew of the legal duty to file FBARs, if she intentionally decided to NOT file those FBARs.

Okay, I guess it must really be willful. But, I just wonder: a 79 year old widow with inherited accounts …

Given that this is clearly an FBAR penalty, why is all the discussion about tax evasion and no discussion of  FBAR? And to top it off, she has yet to be sentenced.

Also, this is for the years of 2006 and 2007. Who even knew of FBAR at that time?

Oh well, I guess this is a clear example of tax evasion.

If anybody has read this far, my question is:

What is the difference between the first scenario and the second scenario?

Answer:the location of the bank accounts. If the bank account is in the U.S. it’s going to be okay. (This is why a number of investment advisors are encouraging you to keep your money in the U.S. What do you think of this?)

I thought this was about “people paying their fair share”. It’s just not clear to me how the location of the bank account bears on that. Or maybe, that’s its okay to “terrorize minnows”. I wonder if this 79 year old widow would be an example of one of Ambassador Jacobson’s 70 year old grandma. (Of course not, this grandma lives in the homeland).

Question:

Which of these two people do you think is deserving of the greater penalty?