The IRS is aggressively using intelligence gathered from the agency’s Offshore Voluntary Compliance Program to study the movement of undisclosed funds abroad and to deter tax avoidance, an IRS official said February 18.
“When [taxpayers] come in and tell us about their offshore account in one bank in one country, they may tell us about another account in another bank in another country and about the bankers they used,” said Rebecca Sparkman, Acting Executive Director Investigations and Enforcement Operations Division of the IRS at the American Bar Association Section of Taxation meeting in San Diego. “As you can imagine we start looking at all that intelligence and it points the way for the next criminal investigation.”
Although her comments had undertones of the recent indictment of Wegelin & Co., Switzerland’s oldest private bank, she declined to speak directly on any specific matter. The bank has been charged with aiding tax offenders move their undisclosed accounts from UBS.
“We want to assure you that we are reviewing all the information that comes in from your clients to match up [and provide direction on] where we should look next,” she said.
She cautioned practitioners to be fully truthful when bringing their clients into compliance.
“Please be fully, fully truthful,” she told the audience. “Because there may be those folks that are tempted to only disclose that account in that one bank that they think we know about in that one country because they think we don’t know about [an account] somewhere else. But guess what? They come in, they come through the whole program, we get their name on a list for some other bank, some other country, all bets are off! Now they are facing criminal investigation because they were not fully truthful.”
Sparkman stressed that the time to come forward with all offshore account information is at the time a voluntary disclosure is made, not subsequently.
“When you walk in the door, that is the time to be fully truthful,” she said. “Don’t be hiding anything else.”
The Treasury Department, in a joint statement with five European countries, said on Feb. 8 that the nations intend to pursue a government-to-government framework for implementing the Foreign Account Tax Compliance Act (FATCA).
Treasury sees this as a key step “toward addressing legal impediments” faced by financial institutions in complying with proposed FATCA regulations that were published on Feb. 8. “The statement does not contemplate an exemption from FATCA for any jurisdiction, but instead offers a framework for information sharing pursuant to existing bilateral income tax treaties and allows FFIs [Foreign Financial Institutions] to report the necessary information to their respective governments rather than to the IRS,” Treasury said. The countries that joined in the statement were France, Germany, Italy, Spain and the United Kingdom. In the joint statement, the U.S. acknowledged that the policy objective of FATCA centers on enhanced reporting rather than collecting withheld tax.
The U.S. also affirmed its willingness to reciprocate in the collection and exchange of information on accounts held in U.S. financial institutions by residents of the five European countries. In addition, the joint statement cited the need to keep compliance costs as low as possible and the desirability of achieving common reporting and due diligence standards. Based on these considerations, the countries “have agreed to explore a common approach to FATCA implementation through domestic reporting and reciprocal automatic exchange and based on existing bilateral tax treaties,” the joint statement said. The document also offers a possible framework for an intergovernmental approach that provides a valuable insight into Treasury’s thinking on the subject.
IRS has issued final regs clarifying eligibility for the foreign tax credit. Specifically, they provide additional guidance for determining who is considered to pay a foreign tax for purposes of the foreign tax credit. The regs affect taxpayers claiming direct and indirect foreign tax credits.
Code Sec. 901 permits taxpayers to claim a credit for income, war profits, and excess profits taxes paid or accrued during the tax year to any foreign country or to any U.S. possession. In 2006, IRS issued proposed regs that would retain the general principle that tax is considered paid by the person who has legal liability under foreign law for the tax. However, they would further clarify application of the legal liability rule in situations where foreign law imposes tax on the income of one person but requires another person to remit the tax. The regs also provide detailed guidance on how to treat taxes paid on the combined income of two or more persons.
Code Sec. 909, which addresses concerns about the inappropriate separation of foreign income taxes and related income, was added by the Education, Jobs and Medicaid Assistance Act, effective for foreign income taxes paid or accrued in tax years beginning on or before Dec. 31, 2010.
Under Code Sec. 909, there is a foreign tax credit splitting event if a foreign income tax is paid or accrued by a taxpayer and the related income is, or will be, taken into account by a covered person with respect to such taxpayer. In such a case, the tax is suspended until the tax year in which the related income is taken into account by the payor of the tax.
IRS recently announced (IRB 2011-48) that Panama is now included in the North American region for the purposes of IRC 274 in order to claim the travel expenses for attending conventions. Until recently, in order to claim expenses related to travel for convention in Panama taxpayers had to meet special conditions.
IRS Publication 463 states that “You can deduct your travel expenses when you attend a convention if you can show that your attendance benefits your trade or business. You cannot deduct the travel expenses for your family.”
It further states that “You cannot deduct expenses for attending a convention, seminar, or similar meeting held outside the North American area unless:
- The meeting is directly related to your trade or business, and
- It is as reasonable to hold the meeting outside the North American area as in it.”
The North American area per IRS includes American Samoa, Antigua and Barbados, Aruba, Bahamas, Bermuda, Costa Rica, Canada, Dominican Republic, Honduras, Jamaica, Mexico, Puerto Rico and US Virgin Island to list only a few. The North American area also includes U.S. islands, cays, and reefs that are possessions of the United States and not part of the fifty states or the District of Columbia.
Panama is included in the list now.