9th Circuit: Online Poker Accounts Not Reportable on FBAR

On July 21, 2016, the Ninth Circuit in United States v. Hom, No. 14-16214 D.C. No. 3:13-cv-03721-WHA (9th Cir. 2016), determined that a taxpayer who held an online poker account with PokerStars and PartyPoker was not required to report those accounts on a FinCEN Report 114, Report of Foreign Bank and Financial Accounts (FBAR).  The taxpayer, however, was required to report his FirePay account on an FBAR.

The Ninth Circuit overturned the decision of the United States District Court for the Northern District of California, in part, which had held that all these three accounts were reportable on an FBAR.

The key issue was whether either PokerStars, PartyPoker or FirePay was a financial institution.

The Ninth Circuit stated that:

“[F]inancial institution” is in turn defined to include a number of specific types of businesses, including “a commercial bank,” “a private banker,” and “a licensed sender of money or any other person who engages as a business in the transmission of funds.” 31 U.S.C. § 5312(a)(2).

Hom’s FirePay account fits within the definition of a financial institution for purposes of FBAR filing requirements because FirePay is a money transmitter. See 31 U.S.C. § 5312(a)(2)(R); 31 C.F.R. § 103.11(uu)(5) (2006). FirePay acted as an intermediary between Hom’s Wells Fargo account and the online poker sites. Hom could carry a balance in his FirePay account, and he could transfer his FirePay funds to either his Wells Fargo account or his online poker accounts. It also appears that FirePay charged fees to transfer funds. As such, FirePay acted as “a licensed sender of money or any other person who engages as a business in the transmission of funds” under 31 U.S.C. § 5312(a)(2)(R) and therefore qualifies as a “financial institution.” See 31 C.F.R. § 103.11(uu)(5) (2006). Hom’s FirePay account is also “in a foreign country” because FirePay is located in and regulated by the United Kingdom.See IRS, FBAR Reference Guide, https://www.irs.gov/pub/irs-utl/irsfbarreferenceguide.pdf (last visited July 19, 2016) (“Typically, a financial account that is maintained with a financial institution located outside of the United States is a foreign financial account.”).

In contrast, Hom’s PokerStars and PartyPoker accounts do not fall within the definition of a “bank, securities, or other financial account.” PartyPoker and PokerStars primarily facilitate online gambling. Hom could carry a balance on his PokerStars account, and indeed he needed a certain balance in order to “sit” down to a poker game. But the funds were used to play poker and there is no evidence that PokerStars served any other financial purpose for Hom. Hom’s PartyPoker account functioned in essentially same manner.

BE-10 Report: The Overlooked International Reporting Form -The June 30 Deadline is Fast Approaching

By: Matthew D. Lee, Paul E. Campbell and Jeffrey M. Rosenfeld

The Bureau of Economic Analysis (“BEA”), an agency of the U.S. Department of Commerce, is currently conducting a benchmark BE-10 survey that requires the filing of a BE-10 report by any U.S. person that directly or indirectly owned or controlled a foreign affiliate at any time during the U.S. person’s 2014 fiscal year. U.S. residents, limited liability companies, partnerships and corporations generally all qualify as U.S. persons for these purposes. A foreign affiliate is an entity located outside of the U.S. in which a U.S. person owns or controls at least 10 percent of the entity’s voting stock if the entity is incorporated or an equivalent interest if the entity is unincorporated. The purpose of the survey is to provide data regarding U.S. investment abroad and to provide a complete and comprehensive picture of the global impact of U.S. investment on the worldwide economy.

The information obtained and filed pursuant to this survey is confidential and is used only for analytical and statistical purposes. The BEA is prohibited from granting another agency access to the data for tax, investigative, or regulatory purposes. Practically speaking, this means that the information reported on a BE-10 report cannot be disclosed to the Internal Revenue Service for tax compliance purposes.

Initially, a BE-10 report was due no later than May 29, 2015 for U.S. persons required to file less than 50 forms. However, the BEA recently granted an extended due date of June 30, 2015 for all new filers who have not previously filed a BE-10 report.

Failure to file can result in both civil and criminal penalties. Civil penalties can range from fines of $2,500 to $25,000 in addition to injunctive relief requiring compliance. Willful failure to file can result in a penalty of not more than $10,000 and, for an individual, up to one year in prison, or both.

Below are answers to some frequently asked questions concerning the BE-10 report.

Why am I only now hearing about this?

In prior years, only U.S. persons who were contacted directly by the BEA were required to participate in the survey. However, this year’s survey requires a BE-10 report for every U.S. person who owned or controlled a foreign affiliate at any time during the 2014 fiscal year, regardless of whether such U.S. person was contacted by the BEA.

Do I have to file a BE-10 report if I own real property in a foreign country which I currently lease to others?

Generally, yes. As discussed above, a BE-10 report must be filed by any U.S. person which owns or controls a foreign affiliate. For this purpose, a U.S. person that owns real property located in a foreign country is considered to control a foreign affiliate. However, a U.S. person need not file a BE-10 report if such U.S. person owns real estate that is held exclusively for personal use. For example, a primary residence abroad that is leased to others while the owner is a U.S. resident, but which the owner intends to reoccupy, is considered real estate held for personal use.

What if multiple U.S. persons own more than a 10% interest in the same foreign affiliate?

In such a case, the U.S. person with the highest ownership percentage in the foreign affiliate will file a complete BE-10 report, and the other U.S. persons will file only a partial BE-10 report (in accordance with the instructions) and make proper reference to the U.S. person filing the complete BE-10 report.

For example, if eight U.S. persons each own 12.5% of a U.S. limited liability company that, in turn, owns 100% of a foreign affiliate, then the U.S. limited liability company will file the complete BE-10 report, and each of the eight U.S. members of the U.S. limited liability company will file a partial BE-10 report in accordance with the instructions, making proper reference to the U.S. limited liability company’s complete BE-10 report consistent with the rules discussed in the preceding question and answer.

If I own an interest in a U.S. entity that, in turn, owns an interest in a foreign affiliate, must I file a BE-10 report? Must the U.S. entity? Must we both file a BE-10 report?

If a U.S. individual owns more than 50% of a U.S. entity that, in turn, owns a foreign affiliate, then the U.S. business enterprise, not the individual, must file the BE-10 report. However, on its BE-10 report, the U.S. entity will be required to disclose the U.S. individual’s direct investments in the foreign affiliate.

If a U.S. individual owns 50% or less of a U.S. entity that, in turn, owns a foreign affiliate, then the rule mentioned in the preceding paragraph will not apply, and both the U.S. individual and U.S. entity will be required to separately file appropriate BE-10 reports.

How do the consolidation rules work?

If a U.S. corporation is a U.S. reporter, then it must file a BE-10 report on a consolidated basis with its entire U.S. domestic consolidated business enterprise. In other words, the parent corporation (a corporation that is not more than 50% owned by another U.S. reporter) must file (i) a BE-10 report on its own behalf and (ii) a BE-10 report for each U.S. business enterprise, proceeding down each ownership chain from said parent corporation, whose voting securities are more than 50% owned by the U.S. business enterprise above it.

Informal guidance suggests that a U.S. limited liability company or partnership must follow these same consolidation rules despite the fact that the instructions only refer to a U.S. corporation being subject to these rules.

What should I do if I am unable to complete the BE-10 report or I do not have the information necessary to accurately complete the BE-10 report?

Reasonable requests for an extension of the filing deadline will be considered. Extension requests must be received by the BEA no later than June 30, 2015 and enumerate substantive reasons necessitating the extension. The BEA will provide a written response to such requests.

In addition, the instructions to the BE-10 report specifically provide that the data disclosed on the BE-10 reports may be comprised of reasonable estimates based upon the informed judgment of persons in the responding organization, sampling techniques, pro rations based on related data, etc. The instructions require that the U.S. reporter consistently apply estimating procedures used on all BEA surveys.

Once I complete the BE-10 report, will I have any reporting obligations on a moving-forward basis?

Generally, yes. A U.S. person may have an obligation to report to the BEA on a quarterly basis, annual basis, or every five years, depending on the value of the foreign affiliates that were reported on the BE-10 report. Once a U.S. person files the BE-10 report, it is anticipated that the BEA will send the U.S. person a list of all follow-up reports required with applicable deadlines.

Individuals with questions about the BE-10 report should consult experienced counsel to understand the applicable reporting requirements, as well as to ensure proper completion of all applicable BE-10 reports. Blank Rome LLP has significant experience with international compliance matters and can assist individuals in ensuring the proper completion of the BE-10 report.

The instructions to the BE-10 report can be found at https://www.bea.gov/surveys/pdf/be10/BE-10%20Instructions.pdf.

The BE-10 report and the answers to other Frequently Asked Questions can be found at http://www.bea.gov/surveys/respondent_be10.htm.

Offshore Tax Enforcement Update: Foreign Bank Account Disclosure Deadline Is June 30, 2014

By: Matthew D. Lee and Jeffrey M. Rosenfeld

Annual Filing Deadline Approaching

The annual deadline for filing FinCEN Form 114, Report of Foreign Bank and Financial Accounts (commonly known as the “FBAR” form), is fast-approaching. Any U.S. taxpayer with a financial interest in, or signature or other authority over, a foreign bank account (which includes bank, security, and other types of financial accounts, including certain foreign life insurance policies) is required to file the FBAR form if the aggregate value of the account (or accounts) exceeded $10,000 at any time during the 2013 calendar year, subject to certain exceptions. The FBAR filing requirements apply to all types of taxpayers with offshore bank accounts, including individuals, corporations, partnerships, LLCs, trusts, and estates (with some exceptions). Corporate officers with signature authority over corporate bank accounts located in a foreign country must also file the FBAR form in their individual capacity.

The FBAR filing deadline is June 30, 2014. No extensions of time to file the FBAR are available. Significant criminal and civil penalties may be imposed for the failure to timely file the FBAR form.

As opposed to last year when the FBAR could be filed in paper form, all FBARs are now required to be filed electronically through the Treasury Department’s BSA E-Filing System. The Treasury Department’s BSA E-Filing System can be accessed at http://bsaefiling.fincen.treas.gov/main.html.

Murky Guidance on Whether Digital Currency Must Be Included on the FBAR

The Internal Revenue Service (“IRS”) has yet to release any formal guidance on whether a Bitcoin account is required to be reported on an FBAR. However, during a recent IRS webinar entitled “Reporting of Foreign Financial Accounts on the Electronic FBAR,” an IRS representative stated that taxpayers do not need to include Bitcoin accounts on their 2013 FBAR. The IRS representative cautioned that the IRS could change this policy in the future, and we further caution that any such informal guidance is not binding on the IRS.

Conversely, a federal district court in California, in a case captioned United States v. Hom, 2014 U.S. Dist. LEXIS 77489 (N.D. CA 2014), recently upheld an FBAR penalty assessment against an individual who failed to report his interest in a FirePay, PokerStars and PartyPoker account. Such decision appears to conflict with the informal IRS guidance on Bitcoin accounts. Individuals with similar online poker accounts should file an FBAR if, at any time during 2013, they had $10,000 or more in the online poker account.

The new guidance on Bitcoin and online poker accounts illustrate the need for taxpayers to consult with a tax advisor to determine the extent of their FBAR filing obligations. As the use of digital currency continues to increase, the IRS is likely to revisit its guidance and practices. As evident from the recent guidance on Bitcoin and online poker accounts, the rules relating to digital currency are often not intuitive.

FATCA Implementation Deadline Is Just around the Corner

Meanwhile, the start date for implementation of the Foreign Account Tax Compliance Act (“FATCA”) is July 1, 2014. FATCA is a new information reporting regime pursuant to which foreign bank and financial institutions will annually report information to the IRS about their U.S. account holders. Foreign financial institutions that refuse to report such information will face a stringent 30 percent withholding tax on U.S. source payments as a penalty for non-compliance. To date, over 77,000 foreign financial institutions have registered with the IRS and indicated their agreement to report information to the IRS pursuant to FATCA, and nearly 80 foreign countries have either formally signed treaties with the U.S., or are actively negotiating such agreements, in order to implement FATCA’s information sharing requirements. FATCA is expected to provide the IRS with information regarding thousands of accounts held by U.S. taxpayers at financial institutions located around the globe.

Major Changes to Offshore Voluntary Disclosure Program and Related Initiatives

Taxpayers who are not compliant with their prior year FBAR or income tax reporting obligations with respect to foreign bank accounts may wish to take advantage of the IRS Offshore Voluntary Disclosure Program (“OVDP”), an amnesty program designed to encourage U.S. taxpayers with undisclosed foreign bank accounts to come into compliance with U.S. tax laws and avoid criminal prosecution. This program permits eligible taxpayers with undisclosed foreign bank accounts, and unreported income associated with those accounts, to avoid criminal prosecution in return for the payment of back taxes, interest, and penalties. Currently, there is no deadline for participation in the OVDP, although the IRS has stated that it could end the program, or modify its terms, at any time. To date, more than 45,000 taxpayers have come into compliance voluntarily through the OVDP and predecessor programs, paying about $6.5 billion in taxes, interest, and penalties.

On June 18, 2014, the IRS announced significant changes to the OVDP and related programs, including modifications to the existing “Streamlined Filing Compliance Procedures.” According to IRS Commissioner John Koskinen, “[t]he new versions of our offshore programs reflect a carefully balanced approach to ensure that everyone pays their fair share of taxes owed. Through the changes we are announcing today, we provide additional flexibility in key respects while maintaining the central components of our voluntary programs.”

To briefly summarize the changes, taxpayers who can certify that their failure to file an FBAR and/or report income from an offshore bank account was non-willful may be eligible for a reduced penalty framework. On the other hand, taxpayers whose failure to file FBARs and reporting offshore income was willful can be subject to an increased penalty, up to 50 percent of the maximum aggregate balance of their offshore holdings. Previously, such taxpayers were subject to a penalty calculated at 27.5 percent of their foreign accounts.

Individuals with questions about FBAR reporting, or who are considering making a voluntary disclosure to the IRS regarding foreign bank accounts, should consult experienced tax counsel to understand the benefits and risks of the voluntary disclosure process. Blank Rome’s FBAR and FATCA compliance team has significant experience with offshore reporting obligations, the IRS voluntary disclosure programs, and the Foreign Account Tax Compliance Act, and can assist individuals in navigating these reporting regimes.


Last week, the IRS released IRS Notice 2014-21 (the “Notice”), its first guidance on the income tax treatment of virtual currency, including, bitcoin. A copy of the notice can be obtained at http://www.irs.gov/pub/irs-drop/n-14-21.pdf.

There are three important points to note from the Notice:

1. A Potential Accounting Nightmare For Bitcoin Spenders. According to the Notice, bitcoin is treated as property, not currency, for income tax reporting purposes. This position has far-reaching implications for any taxpayer that invests in, and regularly spends, bitcoin. As property, gains recognized on the disposition of bitcoin investments is subject to tax, similar to the income tax treatment of sales of stock. However, unlike stock, bitcoin is disposed of in everyday, mundane transactions. For example, several coffee shops in the U.S. accept bitcoin as payment. Every time a U.S. taxpayer pays with bitcoin he/she has a taxable transaction that must be reported at the end of the year on the individual’s income tax return. The amount of gain or loss recognized on such a transaction will require taxpayers to keep very detailed records of all bitcoin that is purchased and subsequently disposed of. The Notice does not indicate that there is a de minimis exception to the rule.

2. If Bitcoin is in a Foreign Account, an Even Bigger Nightmare. Whether a bitcoin account is subject to the FBAR reporting rules is an issue that practitioners are struggling with. We do not attempt to tackle this issue in this post (but plan on addressing this at a later time). However, assuming, solely for these purposes, that a bitcoin account is subject to the FBAR reporting rules, paying for a cup of coffee using bitcoin can cause the account to become a non-compliant asset for purposes of the Offshore Voluntary Disclosure Program (“Program”). The Program, pursuant to FAQ 17, permits taxpayers who are tax compliant, but merely failed to file a FBAR, to avoid the strict penalty structure of the Program and simply file back-FBARs without penalty. If bitcoin was used to pay for goods or services, and the transaction was not reported on a taxpayer’s income tax return, then the bitcoin account is not tax compliant, and the taxpayer would not be able to rely on FAQ 17. If the taxpayer decides to clear up past noncompliance through the Program, the taxpayer’s bitcoin account may be subject to the 27.5% penalty.

3. Bitcoin Investors Rejoice. The Notice is not bad news for all taxpayers who invest in bitcoin. By treating bitcoin as property, gains on the sale of bitcoin that are held for longer than one year are eligible for the lower capital-gains rate. Note this rule does not apply to taxpayers who hold bitcoin as inventory or who buy and sell bitcoin as part of a trade or business.

LETTERS FROM ABROAD: U.S. Taxpayers Receiving Letters from Their Foreign Banks May Have One Last Opportunity to Avoid Criminal Prosecution and Increased Civil Penalties

Authors: Matthew D. Lee, Jeffrey M. Rosenfeld & Jennifer L. Bell

Foreign banks from around the world are sending letters to account holders that they believe have, or had, a U.S. tax nexus (or other U.S. connection) requesting information to determine whether such account holders have disclosed their foreign bank accounts to the Internal Revenue Service (“IRS”). The letters from foreign banks generally require an account holder to disclose whether the account has been declared to the IRS through the filing of a Report of Foreign Bank and Financial Accounts (commonly known as the “FBAR”) form and/or a Form 1040 personal income tax return, participation in the various IRS Offshore Voluntary Disclosure Programs, or otherwise. Sometimes foreign banks request that the account holder submit an IRS Form W-9, which is generally required to be completed by U.S. account holders for tax reporting purposes.

The receipt of such a letter from a foreign bank typically prompts many questions, and this article seeks to answer some of the most frequently asked questions.

Why am I receiving a letter from my foreign bank?

The Foreign Account Tax Compliance Act (“FATCA”), a law enacted by Congress in 2010 and effective beginning July 1, 2014, is intended to identify noncompliance by U.S. taxpayers using offshore accounts. Under FATCA, foreign financial institutions will generally be required to comply with certain due diligence and annual reporting requirements regarding their U.S. account holders and enter into information sharing agreements with the United States. Foreign financial institutions that do not provide such information to the United States will face a stringent penalty—withholding of 30 percent of certain U.S. source payments such as interest and dividends.

Many U.S. taxpayers are receiving these letters because, in advance of the effective date of FATCA, foreign banks are undertaking the process of identifying account holders that have a U.S. tax nexus. A foreign bank may find that a taxpayer has a U.S. tax nexus through indicia such as having a phone number affiliated with an account that appears to be U.S.-based or a U.S. mailing address. If a foreign bank has identified an account as potentially having a U.S. tax nexus, the foreign bank is likely to send a letter to the account holder requesting the information discussed above.

What are the consequences of receiving a letter from my foreign bank?

If you have received a letter from a foreign bank, your account has likely been identified as potentially having a U.S. tax nexus. FATCA generally requires foreign banks to identify accounts with a U.S. tax nexus, and, as discussed above, in order to avoid significant penalties, beginning July 1, 2014, FATCA will require the foreign bank to submit to the IRS certain information related to the accounts that have been identified as having a U.S. tax nexus.

The consequences of the IRS receiving a U.S. taxpayer’s foreign account information can be dire if the U.S. taxpayer has not previously reported the foreign account on an FBAR and/or has not reported all of the income associated with the foreign account on a U.S. tax return. First, and perhaps most significant, once the IRS receives a U.S. taxpayer’s foreign account information, the U.S. taxpayer may no longer participate in the IRS offshore voluntary disclosure programs that are outlined below (assuming that the U.S. taxpayer has not already enrolled in such programs). As a result, the U.S. taxpayer may no longer be eligible for criminal amnesty and potentially lesser civil penalties. Also, the receipt of a U.S. taxpayer’s foreign account information may lead to an IRS tax audit, which can be extremely time consuming and expensive.

For these reasons, it is not in a U.S. taxpayer’s interest to simply ignore a letter received from a foreign bank. Though every case is different, a U.S. taxpayer may instead be better served by participating in one of the voluntary disclosure programs set forth below. It is also not in a U.S. taxpayer’s interest to close a foreign account in response to the letter and transfer the funds to another foreign bank. Aside from the civil and criminal penalties that might be imposed as a result of such conduct, the implementation of FATCA has dealt a severe, perhaps fatal, blow to bank secrecy, and U.S. taxpayers with undeclared foreign bank accounts can no longer assume that they will be protected by foreign bank secrecy laws or remain undetected by the U.S. government. Thus, simply closing a foreign account and transferring the funds elsewhere is a dangerous proposition.

What are my best options if I receive a letter from my foreign bank?

U.S. taxpayers with undeclared foreign bank accounts should immediately consult with knowledgeable tax counsel to review their options. Often the best option is to enroll in the IRS’ Offshore Voluntary Disclosure Program (the “OVDP”), the current amnesty initiative offered by the IRS. This may be the last opportunity for many U.S. taxpayers to enter into the program because, as discussed above, the implementation of FATCA (and associated influx of foreign bank account information that the IRS will receive under FATCA) may effectively eliminate the OVDP as a viable option for many U.S. taxpayers.

The OVDP is designed to encourage U.S. taxpayers with undisclosed foreign bank accounts and unreported income associated with those accounts to come into compliance with U.S. tax laws and avoid criminal prosecution. Taxpayers accepted into the OVDP must file amended tax returns for an eight year period and pay all back taxes, interest, and an accuracy related penalty of 20 percent of the taxes due, and a civil penalty equal to 27.5 percent of the highest aggregate value of the U.S. taxpayer’s foreign bank accounts during the eight-year period (subject to certain exceptions). Currently, there is no deadline for participation in this program, although the IRS has stated that it could end the program, or modify its terms, at any time.

Another option for U.S. taxpayers who live overseas (including dual citizens) and have not filed U.S. returns is the IRS’ streamlined non-resident compliance procedure. U.S. taxpayers that are eligible for this procedure are generally required to file delinquent tax returns for the past three years and delinquent FBARs for the past six years. All submissions are reviewed by the IRS, but the intensity of the review varies according to the level of compliance risk presented by the submission. For those taxpayers presenting a low compliance risk, the review will be expedited and the IRS generally will not assert penalties or pursue follow-up actions. Submissions that present a higher compliance risk are not eligible for the procedure and will be subject to a more thorough review and possibly a full examination (which in some cases may include more than three years), as well as the imposition of tax, interest and penalties.

Many U.S. taxpayers have sought to “roll-the-dice” and avoid civil penalties by attempting what is known as a “quiet disclosure.” In a quiet disclosure, a U.S. taxpayer may report previously-excluded foreign income on a tax return and/or report a previously-unreported foreign bank account on an FBAR on a going-forward basis pursuant to normal reporting procedures, without attempting to address noncompliance in previous tax years. Alternatively, a U.S. taxpayer may attempt to address past noncompliance by filing amended tax returns and/or delinquent FBARs for past tax years pursuant to normal reporting procedures. U.S. taxpayers should be aware that quiet disclosures may not be in their best interests because (1) quiet disclosures can trigger IRS audits, (2) quiet disclosures do not provide amnesty from criminal prosecution, and (3) the civil penalties imposed on a taxpayer who is audited can be substantially greater than the penalties that would have been assessed if the taxpayer entered into one of the voluntary disclosure alternatives set forth above.

Individuals with questions about FBAR or FATCA reporting, or who are considering making a voluntary disclosure to the IRS regarding foreign financial accounts, should consult experienced tax counsel to understand the benefits and the risk of the voluntary disclosure process. Blank Rome’s FBAR and FATCA compliance team has significant experience with FBAR and FATCA reporting obligations and the IRS voluntary disclosure programs, and can assist individuals in navigating these complicated reporting regimes.

To ensure compliance with IRS Circular 230, you are hereby notified that any discussion of federal tax issues in this advisory is not intended or written to be used, and it cannot be used by any person for the purpose of: (A) avoiding penalties that may be imposed on them under the Internal Revenue Code, and (B) promoting, marketing or recommending to another party any transaction or matter addressed herein. This disclosure is made in accordance with the rules of Treasury Department Circular 230 governing standards of practice before the Internal Revenue Service.

IRS Reverses Decision; Readmits Bank Leumi Customers Into OVDP

When making a voluntary disclosure pursuant to the IRS Offshore Voluntary Disclosure Program (OVDP), the first step involves sending a letter requesting pre-clearance to make a voluntary disclosure.  The letter includes a taxpayer’s identifying information, including the taxpayer’s name and social security number.  The IRS then runs the taxpayer’s information through an IRS database to ensure that the IRS has not already received offshore account information with respect to the taxpayer or that the taxpayer is not already under audit or investigation.  If the taxpayer’s information is not in the IRS database, the taxpayer is ordinarily preliminarily accepted into the OVDP.  The taxpayer then must complete a questionnaire, and absent extenuating circumstances (e.g., non-compliance with the terms of the program, such as the funds in the offshore accounts being derived from criminal activity), the taxpayer’s matter is transferred from the IRS Criminal Investigation Division to the IRS Civil Division for processing.

Several dozen taxpayers who were prior customers of Bank Leumi in Israel completed this process and, in many cases, were both pre-cleared to make a voluntary disclosure and transferred from the IRS Criminal Investigation Division to the IRS Civil Division.  These taxpayers were apparently fully compliant with the terms of the OVDP.

Last March, however, the IRS abruptly kicked out these taxpayers from the OVDP.  Practitioners believe that the IRS had received information from Bank Leumi with respect to the taxpayers but had yet to update its database.  As a result, the IRS preliminarily accepted the taxpayers into the OVDP, despite the fact that the IRS was already in receipt of their offshore account information.

The IRS actions caused an uproar among (1) practitioners, who were advising their clients that they had cleared a huge hurdle in being preliminarily accepted into the OVDP, and (2) taxpayers, who were faced with the possibility of the severe civil (and perhaps criminal) penalties that the taxpayers originally sought to avoid by entering into the OVDP. 

Perhaps as a response to this uproar, the IRS last week reversed its decision, and readmitted the taxpayers into the OVDP.  The OVDP has been a huge success for the IRS, with the IRS collecting approximately $5.5 billion through the program.  However, abruptly kicking taxpayers out of the program likely jeopardized the continued success of the OVDP because taxpayers were more hesitant to enter the program knowing that the IRS may remove taxpayers from the program at any time.  The IRS actions last week should provide taxpayers with some measure of comfort that they will be treated fairly within the OVDP.

New FBAR-Related FinCEN Form Released

On July 29, 2013, FinCEN released FinCEN Form 114(a), Record of Authorization to Electronically File FBARs.  Effective July 1, 2013, FBAR forms are required to be filed electronically.  An FBAR is a form that is required to be filed annually on June 30 with the Department of Treasury to report a U.S. taxpayer’s financial interest in, or signature authority over, foreign bank accounts.  While the FBAR is a pure information return (and not a tax return), the Department of Treasury receives valuable information from the FBAR that it uses to assess whether U.S. taxpayers are properly reporting all foreign source income.  FBARs can be filed at http://bsaefiling.fincen.treas.gov/Enroll_Individual.html.

Form 114(a) serves as a power of attorney that grants to an individual or entity the authority to complete and submit the FBAR on behalf of an account owner.  The form also grants to the individual or entity the power to resolve issues and answer inquiries related to the FBAR that is filed.  A copy of the form can be obtained at http://www.fincen.gov/forms/files/FBARE-FileAuth114aRecordSP.pdf.

The requirement to complete a Form 114(a) likely applies in one of two circumstances: (1) account owners granting authority to an accountant to complete and file FBARs on behalf of the account owners, and (2) a spouse granting the other spouse with the authority to file a joint FBAR. 

Form 114(a) is not filed with FinCEN, but instead, is retained by the third party and the account owner.  The form is required to be provided to FinCEN or the IRS upon request.

IRS Releases FY2012 Whistleblower Report to Congress

The Internal Revenue Service has released its annual whistleblower report to Congress which is entitled “Fiscal Year 2012 Report to the Congress on the Use of Section 7623.”  Section 7623 of the Internal Revenue Code requires the IRS to pay monetary rewards to whistleblowers if information which is provided substantially contributes to the collection of tax, penalties, and interest when the amounts in dispute are more than $2 million.  The IRS has established a Whistleblower Office to administer those awards (more details available on the IRS website here).  In the report to Congress, the IRS states that during fiscal year 2012, the IRS received 332 whistleblower submissions identifying 671 taxpayers.  Awards are not paid to whistleblowers until the taxpayer in question has exhausted all appeal rights and the statutory period for refund claims has expired or been waived; as a result, whistleblower awards are often not paid for several years after the whisleblower claim has been filed.  The report notes that most of the claims paid in FY 2012 were based upon claims filed prior to 2006.  During FY 2012, the IRS paid out over $125 million in awards, based upon collection of $592 million in taxes, penalties, and interest.  The FY 2012 awards are by far the largest amounts paid by the IRS since the whistleblower law was amended in 2006 (in contrast, only $8 million was paid out during FY 2011), and the bulk of the funds ($104 million) paid in FY 2012 went to Bradley Birkenfeld, the former UBS banker who blew the whistle on the Swiss bank.