As I previously indicated, I do not think that the efforts in Congress will result in the elimination of 6707A penalties (as many brokers and promoters are representing to clients); however, I do think there is substantial likelihood that legislation will pass which will provide some relief to individuals and small businesses who are potentially subject to these penalties.
Attached below is the position paper of the SBC. It provides a good road map as to where this legislation is headed.
Read the Small Business Council of America Position Paper on 6707a Penalties (read the paper by clicking here)
As always, feel free to contact me at Chrish@PDKHlaw.com
Monday, August 24, 2009
Sunday, August 9, 2009
More on Section 6707A Penalties
I receive quit a few calls about 412(i) plans and the subject of 6707A penalties seems to be an issue that is on the minds of almost every accountant, attorney, or individual who contacts me. It is for this reason that I wanted to post some additional information on this issue. Let me begin by saying that I am not an accountant or tax attorney.
I am a litigation attorney who represents individuals and small business against the entities or individuals involved in selling or promoting what I consider to be inappropriate, improper, or fraudulent plans. As part of that endeavor, I have come to learn quite a bit about 412(i) and 6707A penalties.
BACKGROUND ON 6707A
The American Jobs Creation Act of 2004 created Section 6707A of the Internal Revenue Code which was intended to stop the proliferation of multi-million-dollar abusive tax shelters. Pursuant to the Act, a strict liability penalty was imposed on "listed transactions" not reported to the IRS.
A listed transaction is a transaction the IRS has determined, through audits and reviews of other returns, has the potential for avoidance or evasion. The strict liability penalty applies if the taxpayer fails to disclose a listed transaction. The penalty is $100,000 per year for individuals and $200,000 per year for corporations and these penalties are stackable.
6707A penalties are in addition to the 30% accuracy related penalty imposed on the tax understatement under section 6662A. The 6707A penalties apply regardless of the amount of the understatement and regardless of whether the taxpayer can show a "reasonable cause" for the failure to make a disclosure AND regardless of whether the taxpayer amends prior to audit. Furthermore, the Commissioner of the IRS has no discretion to abate the listed transaction penalty. As if it could not get any worse, 6707A does not grant due process of law because there is no judicial review in the Tax Court.
WHAT IS BEING DONE ABOUT THIS PROBLEM
Currently, there are bills pending in both houses of Congress to address the 6707A problem. The National Taxpayer Advocate and the IRS Commissioner have both indicated the need for change and the IRS is currently in a stand down position on some of these penalties (for more information, see prior post http://412ilitigation.blogspot.com/2009/07/irs-suspends-6707a-penalites-until.html). The Small Business Council of America is releasing a position paper on the legislation and I will review and post it shortly.
In my opinion, despite what happens in Congress, Taxpayers need to understand that there are going to be penalties. There is not going to be a magic bullet. We are not going to wake up one day and these plans are going to be "legal" and the penalties are going to magically disappear. The penalties may become proportionate to the tax understatement, the pass- through penalties may be reduced, the Commissioner may be allowed discretion to review, and the taxpayer may get judicial review---BUT---taxpayers should not think that this is all simply going to go away.
Taxpayers who are confronted with these penalties need to evaluate a realistic strategy to include to include claims against the individuals responsible for promoting and selling of these plans, and the insurance companies who sold them after being advised of the ultimate result.
Chris Hellums can be reached at Chrish@pdkhlaw.com or toll free at 1-866-515-8880.
I am a litigation attorney who represents individuals and small business against the entities or individuals involved in selling or promoting what I consider to be inappropriate, improper, or fraudulent plans. As part of that endeavor, I have come to learn quite a bit about 412(i) and 6707A penalties.
BACKGROUND ON 6707A
The American Jobs Creation Act of 2004 created Section 6707A of the Internal Revenue Code which was intended to stop the proliferation of multi-million-dollar abusive tax shelters. Pursuant to the Act, a strict liability penalty was imposed on "listed transactions" not reported to the IRS.
A listed transaction is a transaction the IRS has determined, through audits and reviews of other returns, has the potential for avoidance or evasion. The strict liability penalty applies if the taxpayer fails to disclose a listed transaction. The penalty is $100,000 per year for individuals and $200,000 per year for corporations and these penalties are stackable.
6707A penalties are in addition to the 30% accuracy related penalty imposed on the tax understatement under section 6662A. The 6707A penalties apply regardless of the amount of the understatement and regardless of whether the taxpayer can show a "reasonable cause" for the failure to make a disclosure AND regardless of whether the taxpayer amends prior to audit. Furthermore, the Commissioner of the IRS has no discretion to abate the listed transaction penalty. As if it could not get any worse, 6707A does not grant due process of law because there is no judicial review in the Tax Court.
WHAT IS BEING DONE ABOUT THIS PROBLEM
Currently, there are bills pending in both houses of Congress to address the 6707A problem. The National Taxpayer Advocate and the IRS Commissioner have both indicated the need for change and the IRS is currently in a stand down position on some of these penalties (for more information, see prior post http://412ilitigation.blogspot.com/2009/07/irs-suspends-6707a-penalites-until.html). The Small Business Council of America is releasing a position paper on the legislation and I will review and post it shortly.
In my opinion, despite what happens in Congress, Taxpayers need to understand that there are going to be penalties. There is not going to be a magic bullet. We are not going to wake up one day and these plans are going to be "legal" and the penalties are going to magically disappear. The penalties may become proportionate to the tax understatement, the pass- through penalties may be reduced, the Commissioner may be allowed discretion to review, and the taxpayer may get judicial review---BUT---taxpayers should not think that this is all simply going to go away.
Taxpayers who are confronted with these penalties need to evaluate a realistic strategy to include to include claims against the individuals responsible for promoting and selling of these plans, and the insurance companies who sold them after being advised of the ultimate result.
Chris Hellums can be reached at Chrish@pdkhlaw.com or toll free at 1-866-515-8880.
Monday, August 3, 2009
UBS UPDATE: Swiss & US Government Reach Confidential Settlement In Tax Evasion/Bank Secrecy Case Involving 52,000 Names
An agreement reached Friday between the Swiss and US governments prevents an interesting trial proceeding today. On Friday, U.S. District Judge Alan S. Gold told the parties at a hearing that it was the last chance for to strike a deal before trial would begin Monday.
Just a few weeks ago, the Swiss government made it clear that their long-standing bank secrecy laws do not allow UBS to disclose information wanted by the Americans; Swiss bank account holders who are American citizens.
"The US civil proceedings against UBS are to be settled out of court after Switzerland and the USA reached an Agreement in Principle on Friday," Swiss Federal Department of Foreign Affairs (FDFA) said in a statement on Friday.
The dispute involves about 52,000 Americans the U.S. believes are hiding billions of dollars of assets possibly evading taxes. Swiss government and the UBS bank say the names cannot be disclosed without violating long-standing Swiss bank secrecy laws.
In February, UBS had paid USD 780 million to the US government to settle criminal charges related allegations of the bank helping Americans in tax evasion.
Check out the LA Times article describing the time line of legal events this past year.
http://www.latimes.com/business/nationworld/wire/sns-ap-eu-ubs-timeline,0,7323298.story
May 2008: Authorities in the United States begin investigating the Switzerland-based services UBS offers to customers living in the United States. UBS manager Martin Liechti is detained as a witness in the United States.
June 19, 2008: Former UBS client adviser Bradley Birkenfeld admits to a U.S. District Court in Fort Lauderdale, Florida, to assisting tax evasion.
June 30, 2008: The U.S. Department of Justice applies to a U.S. court in Miami for the Internal Revenue Service to be allowed to issue a "John Doe" summons for the Swiss to provide information about American clients of UBS without singling them out by name. The court approves the request a day later.
July 17, 2008: The Swiss government receives a formal request for assistance from the IRS to help uncover UBS clients involved in tax fraud. UBS manager Mark Branson apologizes to a U.S. Senate panel for the bank's failings and announces that UBS will accelerate its withdrawal from
the U.S. cross-border business.
Nov. 12, 2008: A U.S. court in Miami charges senior UBS manager Raoul Weil with conspiracy to commit tax fraud.
Feb. 18, 2009: UBS reaches a settlement with the Justice Department and the U.S. Securities and Exchange Commission in a U.S. District Court, agreeing to pay $780 million dollars in fines, penalties, interest and restitution. On the same day Swiss officials give U.S. authorities files on 255 American clients suspected by the U.S. of tax fraud without allowing for the right of appeal required under Switzerland's banking secrecy law.
Feb. 19, 2009: The IRS submits the John Doe summons in a civil lawsuit in Miami, asking for the details on 52,000 UBS clients to be handed over.
March 13, 2009: Threatened with international sanctions, the Swiss government agrees to drop the distinction between tax fraud and tax evasion when dealing with foreign requests for legal assistance. Until then Switzerland had refused to provide information to other countries in cases of alleged tax evasion, which is an administrative offense in Switzerland but not a felony.
June 18, 2009: Switzerland and the United States agree on a new double taxation accord to increase Swiss cooperation in U.S. tax evasion probes.
July 2009: UBS freezes the accounts of U.S. offshore clients who failed to act on a letter asking them to close their accounts or transfer funds to a U.S.-supervised unit of the bank.
July 7, 2009: The Swiss government announces that it may seize UBS customer files to prevent them from being handed over to the United States.
July 8, 2009: Federal Judge Alan Gold in Miami asks the U.S. government whether it would consider seizing the U.S. assets of UBS in order to enforce the outcome of the case.
July 13, 2009: Judge Gold postpones until Aug. 3 the trial at the request of the U.S. and Swiss government and UBS in order to give the governments more time to negotiate a settlement.
July 31, 2009: The U.S. and Swiss governments say they have agreed on most major disputes in the U.S. effort to get names of thousands of wealthy Americans suspected of evading taxes by hiding billions in assets with UBS. The trial is postponed.
Just a few weeks ago, the Swiss government made it clear that their long-standing bank secrecy laws do not allow UBS to disclose information wanted by the Americans; Swiss bank account holders who are American citizens.
"The US civil proceedings against UBS are to be settled out of court after Switzerland and the USA reached an Agreement in Principle on Friday," Swiss Federal Department of Foreign Affairs (FDFA) said in a statement on Friday.
The dispute involves about 52,000 Americans the U.S. believes are hiding billions of dollars of assets possibly evading taxes. Swiss government and the UBS bank say the names cannot be disclosed without violating long-standing Swiss bank secrecy laws.
In February, UBS had paid USD 780 million to the US government to settle criminal charges related allegations of the bank helping Americans in tax evasion.
Check out the LA Times article describing the time line of legal events this past year.
http://www.latimes.com/business/nationworld/wire/sns-ap-eu-ubs-timeline,0,7323298.story
May 2008: Authorities in the United States begin investigating the Switzerland-based services UBS offers to customers living in the United States. UBS manager Martin Liechti is detained as a witness in the United States.
June 19, 2008: Former UBS client adviser Bradley Birkenfeld admits to a U.S. District Court in Fort Lauderdale, Florida, to assisting tax evasion.
June 30, 2008: The U.S. Department of Justice applies to a U.S. court in Miami for the Internal Revenue Service to be allowed to issue a "John Doe" summons for the Swiss to provide information about American clients of UBS without singling them out by name. The court approves the request a day later.
July 17, 2008: The Swiss government receives a formal request for assistance from the IRS to help uncover UBS clients involved in tax fraud. UBS manager Mark Branson apologizes to a U.S. Senate panel for the bank's failings and announces that UBS will accelerate its withdrawal from
the U.S. cross-border business.
Nov. 12, 2008: A U.S. court in Miami charges senior UBS manager Raoul Weil with conspiracy to commit tax fraud.
Feb. 18, 2009: UBS reaches a settlement with the Justice Department and the U.S. Securities and Exchange Commission in a U.S. District Court, agreeing to pay $780 million dollars in fines, penalties, interest and restitution. On the same day Swiss officials give U.S. authorities files on 255 American clients suspected by the U.S. of tax fraud without allowing for the right of appeal required under Switzerland's banking secrecy law.
Feb. 19, 2009: The IRS submits the John Doe summons in a civil lawsuit in Miami, asking for the details on 52,000 UBS clients to be handed over.
March 13, 2009: Threatened with international sanctions, the Swiss government agrees to drop the distinction between tax fraud and tax evasion when dealing with foreign requests for legal assistance. Until then Switzerland had refused to provide information to other countries in cases of alleged tax evasion, which is an administrative offense in Switzerland but not a felony.
June 18, 2009: Switzerland and the United States agree on a new double taxation accord to increase Swiss cooperation in U.S. tax evasion probes.
July 2009: UBS freezes the accounts of U.S. offshore clients who failed to act on a letter asking them to close their accounts or transfer funds to a U.S.-supervised unit of the bank.
July 7, 2009: The Swiss government announces that it may seize UBS customer files to prevent them from being handed over to the United States.
July 8, 2009: Federal Judge Alan Gold in Miami asks the U.S. government whether it would consider seizing the U.S. assets of UBS in order to enforce the outcome of the case.
July 13, 2009: Judge Gold postpones until Aug. 3 the trial at the request of the U.S. and Swiss government and UBS in order to give the governments more time to negotiate a settlement.
July 31, 2009: The U.S. and Swiss governments say they have agreed on most major disputes in the U.S. effort to get names of thousands of wealthy Americans suspected of evading taxes by hiding billions in assets with UBS. The trial is postponed.
Friday, July 24, 2009
LA TIMES: Tax penalty reprieve brings collective sigh of relief at firms
It appears that the movement to repeal or modify 6707(a) penalties has finally reached critical mass. This story from the Los Angeles Times illustrates the inherent problems with these penalties and the failure to give the IRS any discretion in imposing these penalties.
http://www.latimes.com/business/la-fi-smallbiz14-2009jul14,0,3018084.story
I recently met with a client who also illustrates this point. She was a long time employee. Her employer wanted to do something for her, and for himself. He purchased a 412(i). As the plan has collapsed, she is facing $100,000 per year in penalties for a plan she was not involved in purchasing or funding, and for which she was to receive relatively little benefit.
http://www.latimes.com/business/la-fi-smallbiz14-2009jul14,0,3018084.story
I recently met with a client who also illustrates this point. She was a long time employee. Her employer wanted to do something for her, and for himself. He purchased a 412(i). As the plan has collapsed, she is facing $100,000 per year in penalties for a plan she was not involved in purchasing or funding, and for which she was to receive relatively little benefit.
Wednesday, July 15, 2009
IRS SUSPENDS 6707a PENALITES UNTIL SEPTEMBER 30, 2009 AFTER CONGRESS & GAO URGE REFORM
Last week, IRS Commissioner Douglas Shulman agreed to temporarily suspended 6707a penalties until September 30, 2009 in his letter to Congress.
(See Shulman response letter here)
The IRS Commissioner acted in response to a June 12, 2009 letter from the Senate Finance Committee, which urged the IRS to suspend its efforts to collect penalties for some listed tax shelter transactions, or 6707a penalties. (See Congressional letter here.)
Last month, the IRS received a report with recommendations from the Government Accounting Office indicating that the IRS should develop a plan to better focus its penalty efforts (see the GAO report here.)
The report says the GAO conducted their work “from October 2007 through May 2009 in accordance with generally accepted government auditing standards."
The GAO recommended:
"The Commissioner of Internal Revenue should direct the Office of Servicewide Penalties (OSP) to evaluate penalty administration and penalties’ effect on voluntary compliance and develop a plan to focus its efforts. The Commissioner also should use IRS’s standard outreach methods to again alert taxpayers of the need to disclose reportable loss transactions. In commenting on a draft of this report, IRS concurred with GAO’s recommendations, and summarized the actions it plans to take."
Sen. Grassley said “It’s good to have the reprieve from the IRS, though the suspension will probably need to be longer in order to get necessary changes through Congress.”
“The IRS should also do the right thing by studying why only small businesses have been hit with the penalties since they’re less likely to have the expensive lawyers that big corporations do. It’s a matter of tax fairness for both the IRS and Congress.”
Sen. Baucus also commented: “I’m pleased the IRS complied with our request so that Congress can do its part to ensure the Tax Code treats small businesses fairly.”
“Make no mistake, I will continue to go after tax cheats and tax shelter investments, but these are disproportionate and undue penalties on honest, hardworking American business owners and their employees. I appreciate the IRS’ help on this, and I will move this forward until the issue is resolved.”
“We are working — both sides of the aisle and the Capitol — to ensure assessed tax penalties fall in line with received tax benefits. Until we reach that goal, we require cooperation from the IRS so that millions of American small businesses don’t get another chip stacked against them in the lagging economy."
Friday, July 10, 2009
UBS Case Update: Judge Turns Heat Up on UBS to Get Disclosure
The IRS believes that Americans shelter approximately 15 billion dollars in UBS Swiss Bank accounts, who have a strong US presence which the government argues subjects UBS to American law.
In February, the DOJ sued UBS for access to some 52,000 accounts belonging to it
A day earlier, the agency announced a settlement with UBS in which the bank agreed to pay $780 million in fines and give names and account information for a group of clients to avoid prosecution. Swiss authorities said that group numbers between 250 and 300 clients.
On Monday, the
The options available to the Government are: seizure of property, staggering fees, or potential arrests and imprisonment of UBS decision makers.
UBS might reach a settlement with
Arguments between the parties and government have intensified this past week as reported in the media.
The chief executive of UBS, Oswald J. Grubel, sent a memo on Thursday to the bank's top executives saying that disclosing the names of the account holders would require UBS to violate Swiss criminal law, and that it couldn't comply.
On Wednesday, the Swiss government said it would block any move by UBS to turn over the names.
Meanwhile, Swiss bank account holders have been turning themselves in to the Internal Revenue Service in the past months, in hopes of finding leniency under a voluntary disclosure program at the agency. This is true especially since the IRS has a civil penalty deal on the table right now that for some people may be too good to pass up, and it expires in nine weeks.
The IRS is cracking down on people who hold
http://online.wsj.com/article/BT-CO-20090710-712796.html
http://www.bloomberg.com/apps/news?pid=20601085&sid=a5YQivGDnNjA
Thursday, July 2, 2009
UBS Case Update: Justice Department Continues Its Pursuit to Obtain American Swiss Bank Account Holders Who Evaded Taxes
In the case U.S. v. UBS AG, 09-cv-20423, the Justice Department argued in U.S. District Court, Southern District of Florida (Miami), that UBS should be forced to divulge the private and long-time regarded secret account information of Americans with Swiss Bank accounts who are evading taxes.
The DOJ argues approximately 52,000 names should no longer be held secret since UBS violated US laws on American soil, providing jurisdiction to authorities to pursue legal action in American courts against the tax evaders.
Justice Department filling stated “UBS has systematically and deliberately violated the laws of the United States on U.S. soil.” It further said UBS “regularly conducted business in secret” in the U.S. and routinely sent private bankers into the U.S. to solicit business." The UBS business “cost the U.S. Treasury hundreds of millions of dollars in unpaid taxes.”
Contrary to reports earlier this week about a settlement, the DOJ pushed forward with a lawsuit to force the Swiss bank giant to identify offshore clients since the estimated 52,000 Americans are suspected of using secret foreign accounts to hide nearly $15 billion in assets from the IRS.
The DOJ filing says UBS earned more than $100 million in fees in helping US clients set up secret offshore accounts and that the business cost the US Treasury hundreds of million of dollars in unpaid taxes.
Bloomberg News
Gulf DailyNews
The DOJ argues approximately 52,000 names should no longer be held secret since UBS violated US laws on American soil, providing jurisdiction to authorities to pursue legal action in American courts against the tax evaders.
Justice Department filling stated “UBS has systematically and deliberately violated the laws of the United States on U.S. soil.” It further said UBS “regularly conducted business in secret” in the U.S. and routinely sent private bankers into the U.S. to solicit business." The UBS business “cost the U.S. Treasury hundreds of millions of dollars in unpaid taxes.”
Contrary to reports earlier this week about a settlement, the DOJ pushed forward with a lawsuit to force the Swiss bank giant to identify offshore clients since the estimated 52,000 Americans are suspected of using secret foreign accounts to hide nearly $15 billion in assets from the IRS.
The DOJ filing says UBS earned more than $100 million in fees in helping US clients set up secret offshore accounts and that the business cost the US Treasury hundreds of million of dollars in unpaid taxes.
UBS has resisted the request because it says it would violate Swiss bank secrecy laws. The lawsuit against UBS is being closely watched by the offshore banking industry amid a global crackdown on tax cheats.
UBS and the Swiss government have argued that any exchange of confidential banking information should be handled through existing legal treaties rather than in the courts. The Swiss government has said the lawsuit would “seriously jeopardize” efforts to revise a 1996 tax treaty. Under that treaty, Switzerland can turn over account data only on a reasonable suspicion of “tax fraud or the like,” according to a UBS court filing.
Unlike the U.S., the Swiss don’t view tax evasion as a crime.
UBS is facing a first court hearing July 13.
UBS agreed in February to pay $780m to avert criminal charges related to the tax dispute while UBS admitted it helped taxpayers hide money in Swiss accounts and provided the IRS more than 250 clients’ names. UBS also admitted that its private bankers marketed securities and banking services in the U.S., even though it didn’t have the required license from the Securities and Exchange Commission. Those bankers, UBS admitted, met with clients in the U.S. and communicated with them regularly as they traded securities in their accounts or transferred assets.
The Justice Department filing stated “UBS must disclose the identity of every U.S. taxpayer with an undisclosed UBS account” so they can “get right with their government." It further said “the United States has a strong national interest in making sure that all U.S. taxpayers comply with the tax laws.”
UBS is hoping for a settlement, which would be the bank's second with US authorities and would allow the world's biggest wealth manager to concentrate on a badly needed restructuring after it lost billions of dollars in the global financial crisis and had to be rescued by the Swiss state.
Bloomberg News
Gulf DailyNews
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