Monday, November 19, 2012

Holders of Foreign Bank Accounts Need to Worry About IRS's Data-Mining Program !

Have you ever been surprised by Facebook or LinkedIn's ability to suggest people to whom you may be connected, when even you had forgotten how you were connected to those people? 

Perhaps the social networks' technology crunched data that you provided on your home town, Boy Scout troop, high school, first job at McDonald's, or fly-fishing hobby, to find latent connections between you and a long-lost acquaintance.

Use of such data-mining technology is widespread, and the IRS has adopted it to find taxpayers with undisclosed offshore bank accounts.

U.S. taxpayers who are still considering whether to disclose their accounts need to understand that IRS's data-mining software increases their risk of being detected. They should act accordingly and seek legal advice immediately.

According to a Sept. 21, 2011, report by the Treasury Inspector General for Tax Administration (TIGTA), IRS's data-mining software is called the E-Trak Offshore Voluntary Disclosure system.

E-Trak does not lack for data inputs. Since 2009, more than 33,000 taxpayers have contributed detailed information to E-Trak by participating in IRS's Offshore Voluntary Disclosure Program (OVDP).

Taxpayers with undisclosed accounts need to act before E-Trak and IRS find them. This is because taxpayers whose accounts IRS has discovered are ineligible to participate in the OVDP.

Unfortunately, even if you have not heard from IRS, it may already be too late to come forward and participate in the OVDP. This is because eligibility depends on when IRS discovers your accounts, not on when IRS informs you of its discovery. This makes it imperative that taxpayers with offshore accounts discuss their options with an attorney immediately.

Taxpayers with undisclosed accounts have options. First, they can enter the OVDP and pay a penalty.
Second, they can enter the OVDP and choose to “opt out.” This allows the taxpayer to use the OVDP's protection from criminal prosecution while choosing to go through a full IRS audit instead of paying the prescribed OVDP penalties. A taxpayer for whom a 27.5% penalty is inappropriate might choose this option. Finally, the taxpayer can make a so-called quiet disclosure. This means filing amended tax returns and Reports of Foreign Bank and Financial Accounts (FBARs) for the years for which the statute of limitations is still open. While a quiet disclosure does not provide the protections of the OVDP, certain taxpayers with small account balances and other favorable characteristics may find this route attractive.
Although the risk of detection by IRS may seem low, IRS's use of E-Trak in the last few years has greatly improved its ability to find taxpayers, bankers, and other professionals who are involved in the world of offshore bank accounts.

Data-mining with E-Trak is simply a way to exploit large quantities of data to find connections among people that might not otherwise have been apparent. In a sense it is a cousin of the well-known social networks that have arisen on the internet. It is often said that we are all no more than six degrees of separation from any other person. It seems reasonable to assume that far fewer degrees separate each of the U.S. taxpayers who maintain undeclared offshore accounts at a relative handful of foreign banks in Switzerland, Israel, India, China, Hong Kong, Liechtenstein, the United Arab Emirates, and other jurisdictions.

E-Trak's advantage over commercial social networks is the quality of the data that it processes. IRS requires taxpayers who voluntarily disclose their accounts to provide information that will be fed to E-Trak, including:

• the names of any and all foreign financial institutions where they maintained accounts;
• the dates on which they opened or closed the accounts;
• their points of contact at each financial institution;
• the circumstances of all face-to-face meetings with their points of contact;
• all of their communications with the financial institutions; and
• all face-to-face meetings or communications regarding their accounts with independent, non-bank advisers.

In addition to filling out detailed disclosure forms, many of the 33,000 taxpayers who have disclosed offshore accounts have undergone face-to-face interviews with IRS and the Department of Justice.

This sort of data-mining-as-social-networking is a force multiplier for IRS. Instead of having information on only 33,000 self-reporting U.S. taxpayers, IRS can use data-mining to uncover similarly situated taxpayers who have not disclosed their accounts. The same is true of E-Trak's ability to identify the professionals who may have assisted U.S. taxpayers in setting up and maintaining undisclosed accounts.

The phasing in over the coming year of the Foreign Account Tax Compliance Act of 2010 (FATCA) will only increase the breadth and depth of the data available to IRS and E-Trak.

On its website, IRS touts the role of FATCA reporting in improving its ability to find taxpayers with undisclosed foreign accounts: “The IRS remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts. Moreover, increasingly this information is available to the IRS under tax treaties, through submissions by whistleblowers, and will become more available under the Foreign Account Tax Compliance Act (FATCA) ….”

With large budget deficits for the foreseeable future, the U.S. government is likely to step up its efforts to find undeclared foreign accounts and income. Refusal to deal with this reality is no longer an option.
The only way to deal effectively with the internalization of tax enforcement is to get out ahead of IRS and talk about your options with a Tax Attorney from Marini & Associates, P.A. for a FREE Tax Consultation at or or Toll Free at 888-8TaxAid (888 882-9243).
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  1. That is a pretty comprehensive statement of the BIG DATA landscape we live in. Thanks.

    Combine that with the intention and determination of Evangelical ideological technocrats at Treasury, (the FATCANATICS) and their co-enablers in the FATCA Compliance Complex (FCC) to use FATCA as the Tip of the Spear to create a global automatic tax data regime, or GATCA, and it becomes obvious to me, anyway, that we are moving into a new world Taxing order.

    We are in the middle of a perfect storm of fiscal deficits, inter connectedness and BIG DATA capabilities with a new fanatical compliance mind by Governments set that makes this the reality of our times.

    If you are willfully non compliant, in the face of all that has been happening the past 3 years, then you have to do some serious risk assessment to make about the reality of the hand being dealt.

    I don't like it. I think it will, in the end, be disastrous for the world economy and the systemic risk and collateral damage is yet to be determined, but I decided 3 years ago, I could not ignore what I saw coming. That is why I engage in CCW mode, Compliant, Complain and Warn

    Posted by Marvin Van Horn

  2. Word on the street is that DOJ is preparing indictments against people with unreported accounts in the under $100,000 range. Not sure I agree with that use of prosecutorial resources. Nevertheless, it adds impetus to the call for everyone with unreported accounts who resides in the US to do something to address their exposure.

    Posted by LeVine Richard

  3. On Friday The Tax Times repeated Taxpayer Advocate Nina Olson's remark before the ABA Tax Section that "there may be as many as 5 to 7 million U.S. resident taxpayers and perhaps tens of millions of nonresident U.S. taxpayers who are subject to the FBAR rules this year. Only 741,000 taxpayers filed FBAR returns in 2011. So far there have been approximately 28,000 OVDI filings for 2012."

    These numbers have been quoted in a number of practitioner journals and law firm newsletters. "Tens of millions" of nonresident US taxpayers is a startling number, especially given the State Department's onetime guess that there are 6 to 7 million Amcits abroad. (Nobody really knows.) My own observation is more germane: most of those I speak to have balances under $10,000 and so need only check the box at the bottom of Form 1040 Schedule B without filing FBAR or FATCA forms.

    Posted by Andrew Grossman

  4. Another point is more interesting: there are those I have spoken to who have not been to the USA in years, do not have a valid US passport and have no assets in the USA. They comprise a substantial portion of the "6 to 7 million" Amcits and most will also also have the nationality of the country where they live. Tax treaties define residence and US treaties allow for (secondary) US tax on the basis of citizenship. It will be interesting to see how foreign treaty partners respond to claims that they have constructively abandoned their US citizenship. Such cases have arisen in the past between the USA and certain countries that do not (or did not) permit expatriation. Iran and Greece come to mind but there were consular treaties between the USA and many East European countries that assured short-term visitors traveling with visas and US passports they would be treated solely as US citizens for consular and exit-visa purposes whatever their national origin. (Digest U.S. Prac., 1973, p. 72; 1974, pp. 178-82; 1975, pp. 255-56; Sipkov, Consular Conventions Between the United States and the Communist Countries, Law Library of Congress, 1978.) Too bad that "hypocrisy" is not a legal principle.

    And as to connections proposed by "social media": while the selection of those names is a mystery to many, most are acquaintances of "friends" or connected in some way with activity or personal description. The IRS can use personal connections in many ways: they sent at least one rep to the funeral of Marc Rich's daughter Gabrielle in 1996 and together with TECS, enforcement officers can try to intercept nonpaying foreign-resident taxpayers who may visit the USA. But as with social media, name searches are likely to yield huge numbers of false positives.

    It seems to me that the IRS is, for the moment, going after (1) US-residents named in documents already turned over by banks and whistleblowers, (2) self-reported nonfilers through OVDI and other programs, (3) potential large-value cases. I wonder how fruitful it will be for them to pursue middle-class nonfilers abroad, those living in high-tax countries with little assets and perhaps married to foreigners. There can't be much incentive for such persons to "come in out of the cold" when the penalties are likely to exceed assets and involve, in some cases, double taxation (of income and gains already taxed abroad) and penalties on the double taxation, as well as penalties for nonreporting of trusts and trust-like assets, foreign corporations and inheritance. And prejudice the foreign spouse.

    It may be Treasury succeeds in getting mutual collection agreements in foreign countries like the one with Canada. But one problem here in Europe is assimilation under EU law and treaties of all EU/EEA/Swiss nationals as equally entitled to reside, work and do business. And in those countries with liberal bankruptcy laws a right to discharge tax debts would render IRS claims unenforceable in the foreign country of discharge even though the IRS would probably never file proof of claim.

    Posted by Andrew Grossman