FAQ 47 it directed to tax return preparers and provides as follows:

I have a client who may be eligible to make a voluntary disclosure. What are my responsibilities to my client under Circular 230?

The IRS anticipates that taxpayers will seek qualified tax and legal advice and representation in connection with considering and making a voluntary disclosure. If a taxpayer seeks the advice of a tax practitioner, the practitioner must exercise due diligence in determining the correctness of any oral or written representations made to the client about the program and the implications for that taxpayer of going forward. If the taxpayer decides to proceed with the disclosure, the practitioner must exercise due diligence in determining the correctness of any oral or written representations that the practitioner makes during the representation to the Department of the Treasury; and must avoid giving, or participating in giving, false or misleading information to the Department of the Treasury or giving a false or misleading opinion to the taxpayer. If the taxpayer decides not to make the voluntary disclosure despite the taxpayer’s noncompliance with United States tax laws, Circular 230 requires the practitioner to advise the client of the fact of the client’s noncompliance and the consequences of the client’s noncompliance. A practitioner whose client declines to make full disclosure of the existence of, or any taxable income from, a foreign financial account during a taxable year, may not prepare the client’s income tax return for that year without being in violation of Circular 230

FAQ 47 would seem to apply not only to voluntary disclosures in connection with unreported foreign bank accounts (un-filed FBAR’s ) and unreported income from those accounts, but also to unreported gifts and bequests of specified foreign financial assets. A new form , Form 8938 s required to be attached income tax returns for 2011 if the taxpayer has specified foreign financial assets in excess of $50,000. Tax return preparers will now be under an affirmative duty to ask all tax payers, about such assets for purposes of completing Form 8938. The trap, if there is one, is that the taxpayer will be dealing in a communication that is not privileged by the Attorney-Client Privilege when the disclosure is made. The communications with the tax return preparer are simply not privileged. The failure to file a Report of Foreign Gift or Bequest in excess of $100,000 in a calendar year, absent a reasonable cause, carries substantial penalties. The return preparer who learns of such assets and the source must advise the taxpayer of their obligation to make the disclosure of the assets and to report the gift or bequest. Once the taxpayer has been advised, the return preparer should carefully consider whether to prepare the return or not in light of FAQ 47 and its warnings. It is not a far stretch to imagine a case where a return preparer is not only disciplined under Circular 230, but prosecuted. A proper course of action for a return preparer who learns of unreported foreign bank accounts or unreported foreign gifts or bequests should be to refer the client to counsel and put the return on extension.

First, Dr. Reiss made no effort to enter the IRS Voluntary Disclosure Program (OVDP) which began in 2009.
Implication: Taxpayer’s should make every effort to come forward on their own Taxpayer’s should now come forward if they have not already.
Second, Reiss was aware of his obligation to file a Report of Foreign Bank Account (FBAR) as he filed reports annually on certain offshore accounts, but not the Swiss accounts.
Implication: This is a badge of willful behavior and the 50% FBAR penalty will be sought in similar circumstances.
Third, Dr. Reiss hired an independent financial advisor (presently under indictment) who assisted in obscuring the ownership of the accounts through the use of “dummy” foundations. Dr. Reiss failed to disclose the ownership or existence of the foundation.
Implication: The use of “blocking:” strategies to conceal account ownership is another badge of willful behavior. Taxpayer’s who have used independent advisors should come forward and cooperate to avoid prosecution.

Fourth,Dr Reiss is a “dual national”. He has Dutch citizenship and a U.S. Green Card. He was issued the Green Card in 1988. The Sentencing Memo makes note, that even though the crimes charged and to which Dr. Reiss pled are not “aggravated felonies” his immigration status is in doubt.
Implication: Conviction of an FBAR offense may affect immigration status.

Fifth, the disclosure of foreign accounts on an FBAR is only one example of dual national immigration vulnerability. Other examples include failure to file Reports of Foreign Gifts or Bequest, (Form 3520) or an interest in a Controlled Foreign Corporation (Form 5471).  The Offshore Voluntary Disclosure Program porivde as safe haven for dual nationals by allowing them to file such information returns as part of the program.
Implication: Dual nationals and U.S. Ex-patriots may be particularly vulnerable to attack for failure to report inherited funds, in light of reporting requirement of Form 8938. A new Form 8938 is required for tax returns for year 2011. Taxpayer’s must disclose specified  foreign financial assets.  This is an income tax return schedule, not an FBAR and unless fully and accurately completed brings the risk of prosecution for “false statement crime” and evasion.  Of course, if there are assets that are revealed, which surely there will be for some taxpayer’s,  that should have been reported in prior years, as a result of gift or inheritance, curative disclosure steps may now be required.

Conclusion: Dr. Reiss’ life was left in shambles. He career was destroyed, between, income tax, interest, failure to file and failure to pay tax penalties, and the 50% FBAR penalty he is left in financial ruin. He may even face deportation if his Green Card is revoked. Why, because he did not file an accurate, and timely FBAR, and/or enter a Voluntary Disclosure Program when he could have. The U.S. Government is not holding back on its efforts to insure FBAR compliance and collect income and estate tax on worldwide income and on worldwide assets of U.S. taxpayers. Tax return preparers should now be particularly alert to these issues and make reasonable efforts to alert clients to seek counsel.

Form 8938 is required for U.S. taxpayers as part of Form 1040 whose aggregate “specified foreign financial assets” exceed specified values depending on filing status. The value test is applied against the greater of the highest value in the year or the year end value. Example: individuals who have aggregate value in excess of $75,000 at any point during the year or $50,000 at year end must comply. Form 8938 is required under the HIRE Act as part of IRC section 6038D. It is important to note that the disclosures required under IRC section 6038D include foreign trusts which are treated as “grantor trusts” under IRC section 6048. What does all this mean for taxpayers?

Form 8938 requires the disclosure of the following asset classes. (a) accounts maintained at foreign financial institutions;(b) stock or securities issues by someone other than a U.S. person; (c) any interest in a foreign entity and (d) any financial instrument or contract that has an issuer or counterparty that is other than a U.S. person. The first provision, disclosure of accounts is somewhat like the disclosure required under the Bank Secrecy Act (BSA) which (FBAR’s) except that the aggregate account disclosure level for an FBAR is only $10,000. There are important penalty and enforcement differences applicable to failure to file FBAR’s and failure to file Form 8938. FBAR enforcement is governed under the BSA and Form 8938 enforcement under the IRC. But the real issue with Form 8938 is what is the disclosure likely to reveal. The disclosure may have income tax and estate and gift tax consequences.

It would be a dubious proposition to state that Form 8938 is designed to interdict money launderers, drug dealers or arms dealers, which are among the listed objectives of the BSA. But there is a consistent theme and that is tax evaders. Tax evasion may be discovered by auditing activity following the filing of Form 8938. How the specified foreign financial assets were acquired will likely be a primary inquiry. Were the assets acquired by gift or inheritance? If so, was a Form 3520 required? Was a distribution from a foreign trust involved? Was a Form 3520A required? Is the taxpayer the holder of in interest in a PFIV or CFC and if so were those returns required? These questions pose ethical issues for tax return preparers who are now obligated to ask about foreign holdings. The burden will fall particularly on taxpayers and who are dual nationals or U.S. ex-patriots.

Returns prepares may have to refer clients to tax counsel once the return preparer discovers the existence of unreported foreign holdings, in order to preserve attorney client privileges. The absence of a specific voluntary disclosure program, like the 2009 OVDP and 2011 OVDI means that taxpayers may now have to apply to enter the general voluntary disclosure program or make a decision to file returns and make a reasonable cause argument for penalty abatement. The penalties assessable under the IRC and mitigation remedies are both complex and require careful reasoned approaches. The result is that some practitioners and taxpayers will be on the wrong side of enforcement actions. As we approach the effective date of FATCA 2014 more and more foreign financial institutions will require proof of U.S. income tax compliance, including the filing of FBAR’s and reporting of income. Once FATCA kicks in, those foreign financial institutions and who enter into agreements with the IRS will provide account information on U.S. account holders.

The noose is tightening on a U.S. taxpayers with un disclosed foreign assets. Going forward the cost benefit of non-disclosure will increase, but then again so will the need for careful asset planning. Among the points to consider is how future estate planning should be managed. Assets disclosed on Form 8938 may need to be included in estate tax and/or gift tax returns and result in the taxable estate exceeding the then applicable estate and gift tax exemptions. Should U.S. taxpayers who expect to inherit foreign assets speak with counsel, and their relatives to plan, of course. The result of not acting could be a taxable estate without sufficient liquidity to cover the tax.

Form 8938 is just the beginning of a whole new enforcement and compliance campaign which will mandate more diligence by return preparers and more expense by taxpayers.

Whether to file a claim, once the procedure is announced, will be a purely personal decision, but it should be based upon analysis of risks and benefits, including the cooperation obligations attendant to making the claim, the taxation elements and possible penalties ( such as income tax civil penalties,  and potential prosecution for  false statement crimes on tax returns resulting from unreported income) .

According to published reports from the G20 meeting, a total of $14bn in unpaid tax has recently been collected by seven of the G20 members from about 100,000 individuals worldwide from hidden assets (bank accounts) estimated to be worth in excess of $120bn. There remain, according to some estimates, in excess of $1tn in hidden untaxed assets globally. Since 2009 the IRS has offered two voluntary disclosure programs to get U.S. taxpayers to report foreign held financial accounts, the most recent program was the 2011 Offshore Voluntary Disclosure Initiative (OVDI). Many of the participants in the two IRS programs were “dual nationals”, but many more did not enter either program. However, some “dual nationals” are now being forced to come forward because of actions being taken by offshore financial institutions.

Foreign financial institutions, including banks, trust companies, and investment companies are preparing for the implementation of the Foreign Account Tax Compliance Act (FATCA) which mandates these institutions report U.S account holder information to the IRS no less often than quarterly beginning in 2014. Some institutions are sending letters to account holders with a U.S. address or other nexus, which demand they account holder do severl things, among which are: (1) consent to release of account information to the IRS, (2) sign IRS Form W-9. (3) provide a certification, and in some cases proof, that the account holder has filed a Report of Foreign Bank Account (FBAR) and reported income earned on the foreign account on U.S. income tax returns and paid the tax. The failure to provide such information, in many cases, will result in the account being closed and a potential disclosure to the IRS of the account information. These letters are now being issued with regulalry and may have serious consequences to the account holders. The consequences include penalties for failure to file FBAR’s; failure to file and failure to pay income tax penalties and penalties associated with failing to file information returns, like Form 5471, Controlled Foreign Corporation Return, or Form 3520, Report of Foreign Gift or Bequest. Dual Nationals are particularly vulnerable to these penalty risks if they have financial interests in their country of origin or elsewhere outside the U.S.

The IRS issued a press release on December 13, 2011 which was addressed to “dual nationals” and attempts to clarify their reporting obligations and potential penalty relief mechanisms. What is very clear from the press release is that the IRS is putting the “dual national” community on notice that it will enforce the filing requirements and impose penalties if this class of taxpayer does not come forward. The IRS is also alerting the “dual national” community that it will look at not imposing penalties based upon “reasonable cause”. Reasonable cause definitions vary a bit based upon the particular form of non-compliance. A reasonable cause effort should be put foth for a failure to file an FBAR may possibly result in no penalty, or a warning letter, but can escalate to a “non-willful” penalty of $10,000 per violation per year or in the case of a “willful violation” a penalty of the greater of $100,000 or 50% of the account balance per year per violation. Failure to file information returns like Form 3520 Report of Foreign Gift or Bequest carry penalties of up to 35% of the value of the gift or bequest. Of course there are failure to file and failure to pay income tax penalties as well.

Many “dual nationals” have inherited or been gifted business interests or real property interests which have not been reported to the IRS. Under the two voluntary disclosure programs these taxpayers could have come forth and filed FBAR’s and any other unfilled information returns and be eligible for a single unified penalty structure, in the form of a “miscellaneous civil penalty” or elect to “opt out” of the program and make reasonable cause arguments. In the absence of a third formal program an option for a “dual national” who is subject to any of these potential penalties is to file the missing returns, and make reasonable cause arguments for penalty mitigation. A reasonable cause argument may include reliance on the advice of a professional who was fully informed of all facts, or specific facts showing lack of awareness of U.S.filing obligations. The alternative of continuing non-compliance (the Ostrich factor) is offset by the fact that beginning with income tax returns due for 2011, a new schedule, Form 8938 will require disclosure of specified foreign financial assets in excess of $50,000 in value and statements that information returns, like Form 5471 and 3520 have been filed. This new Form 8938 is much more detailed in scope and required information and is in addition to the FBAR reporting obligation; it is a Super FBAR. The income tax return is filed under penalty of perjury, so a taxpayer runs the risk of committing a false statement crime if assets are intentionally left off Form 8938. Further, in light of preparer penalties, return preparers may have a greater duty of inquiry about foreign held assets as part of return preparation where dual nationals are the clients.

When the global scale of enforcement as reflected in the OECD statements is put into context with the affect that FATCA is having already and the warning issued in the form of the IRS news release, “dual nationals” with assets offshore have complex analysis ahead. They must consider the income tax consequences of filing returns including income tax treaty benefits where applicable, information return penalties, including FBAR penalties, and reasonable cause defenses. While these non-filer deficiencies apply equally to all taxpayers, including those with unreported offshore asset protection plans, the fact that the IRS has singled out the “dual national” community for a special news release, would to the conclusion that they know where to look to find more of what the OECD says in $1tn in hidden offshore assets. The new release may raise as many fears as it seeks to dispel.

If an individual taxpayer held $100,000 in specified foreign financial assets at anytime during 2011 or had held $50,000 in such assets at the end of the year reporting is required. Specified Foreign Financial assets include investments that produce interest or dividends and include listed and non-listed funds. Failure to report specified foreign financial assets through the use of Form 8938 subject the taxpayer to penalties up to $50,000. but that is not the end of the range of penalties.

U.S. taxpayers are required to report gifts or bequests from foreign sources, if those gifts or bewqests exceed $100,000 per year. Failure to report the gifts or bequests can result in penalties from 25% – 35% of the gross amount of the gift or bequest. Form 8938 asks specifically if reports of foreign Gifts or Bequests, were made (using Form 3520, and 3520A). Taxpayers are required to check a box on the Form 8938 to indicate if they filed the required forms to report the foreign source gifts or bequests. Form 8938 will most likely be an essential tool in auditing by the IRS. Dual citizens and other U.S. taxpayers may find themselves confronting very substantial penalties if on audit the revenue agent
determines that report of foreign gift or bequest should have been filed and was not.

The question that taxpayers must now confront is how to come into compliance with the reporting foreign gift and bequest reporting rules. Under the 2009 and 2011 Offshore Voluntary Disclosure programs the penalties for not filing a Report of Foreign Bank Account (FBAR), Report of Foreign Gift or Bequest, (Form 3520)  and other information returns was integrated into a single miscellaneous civil penalty. But is is no longer possible to enter those programs and taxpayer now face major penalties if discovered.  Compliance options range from running the “audit lottery” (waiting to be caught) to filing now and asking for a penalty waiver based upon reasonable cause.   Some taxpayers may even consider expatriation, an extreme response no doubt.  Whichever approach a taxpayer chooses, the one approach that is unwise is non-disclosure.

For tax years beginning after March 18, 2010 (the effective date of the HIRE Act), a U.S. taxpayer who is treated as the owner of a foreign trust must provide such information as IRS may require.   An owner of a foreign trust  is  a U.S. person who directly or indirectly transfer property to a foreign trust. What this means is that for 2011 tax returns a Form 8938 must be completed and attached to Form 1040 if an individual taxpayer has at the end of the year 2011 more than $50,000 in specified foreign financial assets ($100,000 for married taxpayers). Specified foreign financial assets include the   assets transferred and held by an offshore trust. Specified foreign financial assets, include bank accounts, brokerage accounts and other financial instruments as well as interests  in private companies foundation and partnerships. The important part about the disclosure requirements is that it applies to the transferor without limit as to how long ago the transfer was made. So for existing as well as newly established offshore trusts even if the taxpayer who made the transfer is not a trustee or beneficiary of the trust, or even a trust protector. There are penalties for not making the required disclosure including the possibility of prosecution for income tax evasion based upon falsely signing a tax return under penalty of perjury without the disclosure.

There is no doubt that the focus of income tax enforcement, according to the Commissioner of Internal Revenue is offshore tax evasion. With foreign financial institutions now taking a serious look at who their account holder really are for purposes of future disclosure to the RS under the Foreign Account Tax Compliance Act, FATCA, U.S. taxpayers who set up foreign trusts, often known as foreign asset protection trusts, need to start planning their disclosures now.

Under IRC Section 6038D U.S. taxpayers are required to report “specified foreign financial assets” above threshold amounts on Form 8938, the Super FBAR. The draft instructions to Form 8938 describe “specified foreign financial assets” as (1) Any financial account maintained by a foreign financial institution. (2) other foreign financial assets which include any of the following assets that are held for investment such as (a) stock or securities issued be someone other than a U.S. person (b) any interest in a foreign entity (emphasis added), any financial instrument or contract that has an issuer or counterparty that is other than a U.S. person. Form 8938 becomes part of the taxpayers Form 1040 and as such enforcement is governed by the IRC not the BSA. Disclosure on Form 8938 is limited to assets or interests not already disclosed on other information returns, like the Controlled Foreign Corporation Return (Form 5471), or the Report of Foreign Gift (Forms 3520 and 3520A). The civil penalty for failure to file a complete and correct a Form 8938 is ranges from $10,000 to a maximum of $50,000 per year. This penalty may be in addition to penalties for failure to file other information returns if required, such as Form 5471, 35020,3520A, etc. An accuracy related penalty of 40% applies to underpayments of tax for undisclosed specified foreign financial assets. The 75% fraud penalty for intentional understatement is still possible as is prosecution for tax evasion.

There are several different parties that are affected by the disclosure requirements of Section 6038D. First, U.S. taxpayers. Among the various taxpayer groups are dual residents/dual nationals and U.S. expatriates. Second, included in as affected parties are tax return preparers. The important point to note is that the disclosure relates to investment assets, not interests in an active trade or business. The taxpayer must disclose the maximum value during the year of each specified foreign financial asset (very much like the highest account balance requirement disclosure on the FBAR). A reasonable estimate is all that is required an appraisal is not required. Presumably tax preparers will be able to rely on their clients for the valuation of these assets, if they are not publicaly traded.

Taxpayers, including dual residents and dual nationals who hold specified foreign financial assets should be prepared to provide supporting documentation to their tax preparer to support the valuation estimates. Just what level of scrutiny that tax return preparer will have to give the taxpayer valuation estimates is unclear, but the draft instructions to Form 8938 described the valuation methods to be applied to certain interests. Tax preparers should be aware of the required valuation methods and advise their clients accordingly. The IRS may very well take the position that tax preparers must test the information provided by their clients in order to avoid discipline. The result of having to review and test valuations may be more expensive tax return costs to the taxpayers.

In addition to the disclosures under Section 6038D beginning in 2014 Foreign Financial institutions will begin reporting foreign held financial accounts of U.S. taxpayers to the IRS under information exchange agreement created under the Foreign Account Tax Compliance Act, (FATCA). Information provided under FATCA agreements will presumably by tied to “matching program” of the IRS. The matching program is used to correlate information returns (such as Form 1099′s) with income tax returns to make sure taxpayers have reported all reportable income.

So, it should be obvious now to everyone concerned, that the IRS “is just getting started here” when it comes to moving offshore enforcement into the IRS and thereby centralizing the assessment and collection efforts. This is not to say that FBAR’s are not going to be required in the future, they will, for they serve a distinctly different function than tax returns. FBAR’s are used to combat terrorism, drug dealing, money laundering and tax evasion, while tax returns are intended primarily for assessment and collection of tax. For tax preparers it is certainly going to be a challenge to manage the disclosures. For taxpayers, the risks of non-compliance with foreign asset disclosure are increased. If this is the start, what should be expect in the future?