Category: Tax

Criminal Tax Fraud and Tax Controversy 2012 – December 6-7, 2012

The National Law Review is pleased to bring you information about the upcoming ABA Criminal Tax Fraud Conference:

When

December 06 – 07, 2012

Where

  • Wynn Las Vegas
  • 3131 Las Vegas Blvd S
  • Las Vegas, NV, 89109-1967
  • United States of America

As in past years, these institutes will offer the most knowledgeable panelists from the government, the judiciary and the private bar.  Attendees will include attorneys and accountants who are just beginning to practice in tax controversy and tax fraud defense, as well as those who are highly experienced practitioners.  The break-out sessions will encourage an open discussion of hot topics.  The program will provides valuable updates on new developments and strategies, along with the opportunity to meet colleagues, renew acquaintances and exchange ideas.

Criminal Tax Fraud and Tax Controversy 2012 – December 6-7, 2012

The National Law Review is pleased to bring you information about the upcoming ABA Criminal Tax Fraud Conference:

When

December 06 – 07, 2012

Where

  • Wynn Las Vegas
  • 3131 Las Vegas Blvd S
  • Las Vegas, NV, 89109-1967
  • United States of America

As in past years, these institutes will offer the most knowledgeable panelists from the government, the judiciary and the private bar.  Attendees will include attorneys and accountants who are just beginning to practice in tax controversy and tax fraud defense, as well as those who are highly experienced practitioners.  The break-out sessions will encourage an open discussion of hot topics.  The program will provides valuable updates on new developments and strategies, along with the opportunity to meet colleagues, renew acquaintances and exchange ideas.

Criminal Tax Fraud and Tax Controversy 2012 – December 6-7, 2012

The National Law Review is pleased to bring you information about the upcoming ABA Criminal Tax Fraud Conference:

When

December 06 – 07, 2012

Where

  • Wynn Las Vegas
  • 3131 Las Vegas Blvd S
  • Las Vegas, NV, 89109-1967
  • United States of America

As in past years, these institutes will offer the most knowledgeable panelists from the government, the judiciary and the private bar.  Attendees will include attorneys and accountants who are just beginning to practice in tax controversy and tax fraud defense, as well as those who are highly experienced practitioners.  The break-out sessions will encourage an open discussion of hot topics.  The program will provides valuable updates on new developments and strategies, along with the opportunity to meet colleagues, renew acquaintances and exchange ideas.

Criminal Tax Fraud and Tax Controversy 2012 – December 6-7, 2012

The National Law Review is pleased to bring you information about the upcoming ABA Criminal Tax Fraud Conference:

When

December 06 – 07, 2012

Where

  • Wynn Las Vegas
  • 3131 Las Vegas Blvd S
  • Las Vegas, NV, 89109-1967
  • United States of America

As in past years, these institutes will offer the most knowledgeable panelists from the government, the judiciary and the private bar.  Attendees will include attorneys and accountants who are just beginning to practice in tax controversy and tax fraud defense, as well as those who are highly experienced practitioners.  The break-out sessions will encourage an open discussion of hot topics.  The program will provides valuable updates on new developments and strategies, along with the opportunity to meet colleagues, renew acquaintances and exchange ideas.

Criminal Tax Fraud and Tax Controversy 2012 – December 6-7, 2012

The National Law Review is pleased to bring you information about the upcoming ABA Criminal Tax Fraud Conference:

When

December 06 – 07, 2012

Where

  • Wynn Las Vegas
  • 3131 Las Vegas Blvd S
  • Las Vegas, NV, 89109-1967
  • United States of America

As in past years, these institutes will offer the most knowledgeable panelists from the government, the judiciary and the private bar.  Attendees will include attorneys and accountants who are just beginning to practice in tax controversy and tax fraud defense, as well as those who are highly experienced practitioners.  The break-out sessions will encourage an open discussion of hot topics.  The program will provides valuable updates on new developments and strategies, along with the opportunity to meet colleagues, renew acquaintances and exchange ideas.

Criminal Tax Fraud and Tax Controversy 2012 – December 6-7, 2012

The National Law Review is pleased to bring you information about the upcoming ABA Criminal Tax Fraud Conference:

When

December 06 – 07, 2012

Where

  • Wynn Las Vegas
  • 3131 Las Vegas Blvd S
  • Las Vegas, NV, 89109-1967
  • United States of America

As in past years, these institutes will offer the most knowledgeable panelists from the government, the judiciary and the private bar.  Attendees will include attorneys and accountants who are just beginning to practice in tax controversy and tax fraud defense, as well as those who are highly experienced practitioners.  The break-out sessions will encourage an open discussion of hot topics.  The program will provides valuable updates on new developments and strategies, along with the opportunity to meet colleagues, renew acquaintances and exchange ideas.

Top Ten Trends in I-526 Requests for Evidence

The National Law Review recently published an article by Kate Kalmykov of Greenberg Traurig, LLP regarding I-526 Requests for Evidence:

GT Law

1. Lack of five years of tax returns.  In countries where tax returns are not readily available it is advisable for applicants to provide copies of the relevant sections of the law that explain the tax filing requirements, as well as corroborating evidence from independent third parties such as accountants.  In certain countries employers pay taxes directly on their employees.  In these cases it is advisable that EB-5 investors request this documentation directly from their employer or a corroborating letter attesting to their salary and compliance with the tax filing requirements of their home country.

2. Sale of Property.  USCIS seems to be requesting extensive documentation related to the sale of property if it was purchased less than 7 years ago.  Investors are advised to present sales contracts, deeds, and bank statements showing the sale and transfer of proceeds from the sale of property.  In cases where property was purchased over 7 years ago and evidence is not readily available, as long as a reasonable explanation for the lack of funds is given, USCIS seems to be showing more leniency.

3. Home Equity Loans as Source of Funds.  As the EB-5 program grows in popularity, many investors, particularly those from China have begun to obtain home equity loans for their EB-5 investments.  While investment through loan proceeds are permitted in EB-5, USCIS requires that the Investor prove that they have secured the loan with collateral as well as evidence that they are able to make payments on the loan from a lawful source.

4. Loans from a Petitioner’s Business, another popular source of EB-5 investment funds, particularly with Chinese nationals.  In these cases, USCIS often requests proof of approval from the company’s Board of Directors for issuance of the loan.  Likewise, USCIS requires proof that the investor has the ability to repay the loan.

5. Petitioner’s Salary.  USCIS often requests evidence to show that the investor has a level of income and savings that enables the investor to make the EB-5 investment.  To this end, USCIS may request proof of the investor’s yearly expenses as well as records of ongoing salary.

6. Retained Earnings from Investor’s Business.   Investors must demonstrate that they were allowed access to the funds that they ultimately used for their EB-5 investment and that they had authority to make distributions to themselves.

7. Gift Taxes.  More and more USCIS is requesting proof that the investor has complied with the home country’s gift tax requirements.  Likewise, the giftor must demonstrate their source of funds, as well as their understanding that the gift was made without an expectation of repayment.

8. Use of Intermediaries.  In some countries, like China individuals are restricted in the amount of foreign currency that they can exchange each year.  Where “friends and family” are used to assist in transferring money out of the country, bank statements or currency exchange receipts are often required to demonstrate:

  • Transfers from the investor to the friends and family members
  • Transfers from each friend and family member to the investor’s overseas account
  • Transfer from the Investor to the Regional Center

9. Proof of Common Country Specific Currency Practices.  Many countries operate on a “cash” economy and money is not often deposited in banks.  In these instances, it is important to provide independent, third-party evidence of these practices to account for any “gaps” in the trace of funds.

10. Proof of Source of Administrative Fee.  In addition to the required $500,000 (TEA investments) or $1,000,000 investment amount required by the EB-5 regulations, regional centers often charge a one-time administrative fee ranging from $30,000-60,000 to each investor. EB-5 investors that have been through the process know that the regulations only require that they  demonstrate the source of their EB-5 investment.  Not their entire net worth or earnings over time.  However, USCIS has begun to impose an additional requirement as of late by requesting that investors demonstrate the source and trace of their administrative fee.

©2012 Greenberg Traurig, LLP

IRS: Interest Paid to Nonresident Aliens to Be Reported

The National Law Review recently published an article regarding a Recent IRS Decision About Nonresident Aliens and Interest Payments written by Rebecca Leon, Richard S. Zarin and the Investment Management Practice of Morgan, Lewis & Bockius LLP:

Information regarding nonresident alien deposits in the United States could be provided to foreign governments as of January 2013, raising concern among non-U.S. residents holding deposits in the United States.

As part of the U.S. Department of the Treasury’s (Treasury’s) efforts to prevent tax evasion, on April 19 the Internal Revenue Service (IRS) issued final regulations (the New Rules) requiring the U.S. offices of financial institutions (such as commercial banks, savings institutions, credit unions, securities brokerages, and insurance companies) to report to the IRS deposit interest payments made to nonresident alien individuals.[1] The New Rules are effective as of April 19, 2012, but only apply to interest payments made on or after January 1, 2013.[2] The measure was taken by the IRS, in part, to enable the United States, through reciprocity, to obtain information on interest paid to U.S. taxpayers abroad, which, according to the IRS, often goes unreported.[3]

The information collected by the IRS under the New Rules may be shared with countries that have an existing tax convention, agreement, or bilateral treaty with the United States regarding the exchange of tax information (collectively, information exchange agreements). In connection with the New Rules, the IRS has issued a list of the countries with which the United States has information exchange agreements:[4]

Antigua & Barbuda
Aruba
Australia
Austria
Azerbaijan
Bangladesh
Barbados
Belgium
Bermuda
British Virgin Islands
Bulgaria
Canada
China
Costa Rica
Cyprus
Czech Republic
Denmark
Dominica
Dominican Republic
Egypt
Estonia
Finland
France
Germany
Gibraltar
Greece
Grenada
Guernsey
Guyana
Honduras
Hungary
Iceland
India
Indonesia
Ireland
Isle of Man
Israel
Italy
Jamaica
Japan
Jersey
Kazakhstan
Latvia
Liechtenstein
Lithuania
Luxembourg
Malta
Marshall Islands
Mexico
Monaco
Morocco
Netherlands
Netherlands island territories: Bonaire, Curacao, Saba, St. Eustatius and St. Maarten (Dutch part)
New Zealand
Norway
Pakistan
Panama
Peru
Philippines
Poland
Portugal
Romania
Russian Federation
Slovak Rep.
Slovenia
South Africa
South Korea
Spain
Sri Lanka
Sweden
Switzerland
Thailand
Trinidad and Tobago
Tunisia
Turkey
Ukraine
United Kingdom
Venezuela

In most cases, the IRS has some discretion in determining whether sharing information conforms to the applicable information exchange agreement. Canada is the only country that will receive the information automatically, without the need for a specific request. At this time, little guidance has been provided by U.S. tax officials regarding circumstances under which it will deny a request for information under the New Rules. It has been reported that U.S. officials have indicated a reluctance to share information with certain countries (e.g., Venezuela), but no such country-specific exclusions have been set forth.[5]

While the New Rules will facilitate the IRS’s collection of information regarding nonresident aliens’ accounts in the United States, information exchange agreements usually carve out some protections for the dissemination of tax-related information. The information generally (i) will be provided only upon request of the recipient country (except in the case of Canada); (ii) must be protected by the confidentiality and secrecy laws of the recipient country; and (iii) may only be provided to authorities of the recipient country involved in the assessment, collection, and enforcement of taxes (and used for those purposes).[6]

In addition, specific restrictions with respect to the exchange of tax information may apply under information exchange agreements between the United States and other countries. For example, with respect to Article 27 (Exchange of Information) of the U.S.-Venezuela Treaty to Prevent Double Taxation and Fiscal Evasion (the Convention), the technical explanation issued by the IRS on January 1, 2000, sets forth the following:

[T]he obligations undertaken in paragraph 1 [of Article 27 of the Convention] to exchange information do not require a Contracting State to carry out administrative measures that are at variance with the laws or administrative practice of either State. Nor is a Contracting State required to supply information not obtainable under the laws or administrative practice of either State, or to disclose trade secrets or other information, the disclosure of which would be contrary to public policy. Thus, a requesting State may be denied information from the other State if the information would be obtained pursuant to procedures or measures that are broader than those available in the requesting State.[7]

In this example, the laws of Venezuela could be instrumental in denying a request made by Venezuelan authorities under the Convention. Further, the Guidance on Reporting explains that the IRS is not compelled to exchange information, including information collected pursuant to the Revised Regulations, if there is concern regarding the use of the information or if other factors exist that would make exchange inappropriate.[8] It is unclear to what extent this language may be used to deny requests from countries where U.S. authorities believe that shared information may not be adequately protected by foreign authorities.

Concerns with and Implications of the New Rules

In letters to Congress and the IRS, the American Bankers Association (ABA) expressed concerns about the impact of the New Rules.[9]  Specifically, the ABA is concerned that the New Rules leave too much uncertainty with respect to the protection and confidentiality of sensitive financial information by recipient countries, and that as a consequence, foreign investors will move their money to offshore accounts in order to avoid having their information shared with foreign authorities. There could be a sizeable impact in states like Florida and Texas, which have historically received a steady flow of deposits from Latin American investors. Wealthy individuals in some countries, including Mexico and Venezuela, often hold deposits in the United States, not to evade local taxes, but to protect their financial information and to avoid kidnappings for ransom, which have become commonplace in some areas. The ABA fears that billions in deposits may be removed from U.S. offices of financial institutions and that some regional banks may be particularly hard hit.[10] More transparency in delineating between countries with which the IRS intends to regularly and consistently share information collected under the New Rules, and those with which it will not, could potentially avoid the transfer of U.S. deposits to offshore jurisdictions. It’s unclear when and if the IRS will address these concerns.

[1]. The New Rules were implemented through revisions to U.S. Treasury Regulations sections 1.6049-4(b)(5) and 1.6049-8 [hereinafter Revised Regulations], and were accompanied by a preamble to the Revised Regulations titled Guidance on Reporting Interest Paid to Nonresident Aliens, 77 Fed. Reg. 23,391 (April 19, 2012) (to be codified at 26 C.F.R. pts. 1 and 31) [hereinafter Guidance on Reporting].

[2]. On July 26, 2012, the House of Representatives passed a bill that included an amendment that could delay the January 1, 2013, operating date for the New Rules. The amendment (H. Amdt. 1469), offered by Representative Bill Posey (R-Fla), was added to the Red Tape Reduction and Small Business Job Creation Act, H.R. 4078, availablehere. The bill would prevent federal agencies from imposing new major regulations until the average of monthly unemployment rates for any quarter beginning after the date of enactment of the law is less than or equal to 6%, and it classifies the final New Rules as a significant regulatory action.

[3]. As previously reported by Morgan Lewis, the Treasury released proposed regulations on February 8, 2012 implementing the Foreign Account Tax Compliance Act (FATCA). In general, FATCA seeks to prevent tax evasion by identifying U.S. taxpayers who hold accounts with non-U.S. financial institutions, such as banks, offshore investment funds, and other entities. FATCA reporting is generally only applicable with respect to U.S. taxpayers. This includes reporting on nonresident U.S. taxpayers. Our LawFlashes discussing FATCA are available here.

[4]. See Rev. Proc. 2012-24.

[5]. Kevin Wack, Banks Push Back on New Tax Rules for Foreign Accounts, American Banker, May 2, 2012, at 12.

[6]. Guidance on Reporting, supra note 1.

[7]. Department of the Treasury Technical Explanation, Tax Convention with Venezuela, Art. 27, Exchange of Information, p. 2, available here.

[8]. Guidance on Reporting, supra note 1.

[9]. Letter from Francisca Mordi, Vice Pres., Am. Bankers Ass’n, to the Internal Revenue Serv. (Apr. 2, 2011), available here; Letter from Frank Keating, President and CEO, Am. Bankers Ass’n, to the Hon. Mario Diaz-Balart, Vice Chairman of the House Appropriations Fin. Servs. Subcomm., U.S. House of Representatives (March 28, 2012), availablehere; Transcript of Internal Revenue Serv. Hearing on Guidance (REG-146097-09) on Reporting Interest Paid to Nonresident Aliens (May 18, 2011), available here.

[10]. Jared Janes, Foreign Deposits Could Leave Valley Banks under New IRS Regulation, The Monitor, April 28, 2012, available here.

Copyright © 2012 by Morgan, Lewis & Bockius LLP

Criminal Tax Fraud and Tax Controversy 2012 – December 6-7, 2012

The National Law Review is pleased to bring you information about the upcoming ABA Criminal Tax Fraud Conference:

When

December 06 – 07, 2012

Where

  • Wynn Las Vegas
  • 3131 Las Vegas Blvd S
  • Las Vegas, NV, 89109-1967
  • United States of America

As in past years, these institutes will offer the most knowledgeable panelists from the government, the judiciary and the private bar.  Attendees will include attorneys and accountants who are just beginning to practice in tax controversy and tax fraud defense, as well as those who are highly experienced practitioners.  The break-out sessions will encourage an open discussion of hot topics.  The program will provides valuable updates on new developments and strategies, along with the opportunity to meet colleagues, renew acquaintances and exchange ideas.

Michigan Zaps Zappers – Cash Business Owners Beware!

The National Law Review recently featured an article by Paul L.B. McKenney of Varnum LLP regarding Cash Business Owners in Michigan:

Varnum LLP

The proverbial “second set of books” cat and mouse game with taxing authorities now reflects the fact that most point-of-sale, or POS, bookkeeping is done electronically.  Michigan recently joined numerous other jurisdictions by enacting tax enforcement spawned legislation making the sale, purchase, installation, transfer or mere possession of any “zapper” software subject to a felony.   Zappers are also known as automated sales suppression devices.  Michigan’s statute contains a mandatory minimum of one year incarceration and severe monetary sanctions. See MCLA § 750.411w.  The statute defines a zapper as a software program, however accessed or possessed, that “falsifies the electronics records of electronic cash registers and other point-of-sale systems, including, but not limited to transaction data and transaction reports.”  MCLA § 750.411w(4)(a). In essence it creates a second set of books, albeit electronic. While the sole purpose of zappers is tax evasion, the prosecution does not have to prove intent, merely use, sale or possession. The zapper software is typically run off a USB thumb drive rather than residing on the computer’s hard drive to avoid leaving evidence of its use.  However, as noted below, there is a readily identifiable electronic trail.  Zappers have been quietly marketed by freelancing IT types and certain cash register sales people.

A not uncommon example illustrates what a zapper does.  Assume a restaurant or other cash receipts business grosses $250,000 per month and is highly profitable.  A zapper software “entrepreneur” visits the restaurant early in the month and is told precisely what recorded cash bank deposits are as well as credit card charges totals by day.  Alternately, the peddler may sell a USB drive and also provide needed technical support. Assume reported sales total $200,000 and there is $50,000 of unreported cash, or “skim.”  The zapper software will quickly and accurately modify the sales records a) by transaction b) by day c) to the penny resulting in the credit card charges and cash deposits equaling what is reported on the books.  Thus a traditional audit will find that everything appears to be in order, at least until someone finds evidence of the zapper.

Zappers represent significant lost sales tax and other tax dollars to states.  For example, three years ago California estimated zappers at restaurants cost that state $2,800,000,000 in receipts and the corresponding New York estimate was $1,700,000,000.  See “State governments target tax-cheating software,” Bloomberg Businessweek, April 3, 2012.  In an era of record state fiscal problems, this is real money.

The recent Michigan legislation is effective as of August 29, 2012.  It is patterned after  another enforcement problem the Michigan Department of Treasury encountered and overcame, false cigarette tax stamps.  The Michigan Treasury was hemorrhaging cash because of cigarettes that were brought in from out of state and counterfeit Michigan stamps were purchased on a flourishing underground market.  The Department of Treasury urged the legislature to adopt legislation that the mere possession of cigarettes with counterfeit stamps required a minimum prison term.  Legislation followed, the minimum mandatory jail time virtually ended the fake stamp problem overnight and Treasury receipts from  cigarette taxes swelled.

Economic Sanctions Too

The zapper legislation has teeth.  In addition to the one-year minimum mandatory term, there is a fine of up to $100,000.  However, from a monetary perspective, there is another more costly provision with which requires disgorgement of “all profits associated with the sale or use of …” a zapper.  In the above example, if the skim is $50,000 a month, then $600,000 a year is subject to forfeiture.  The offending party is also responsible for all Michigan sales, withholding and other taxes, penalties and interest.  These other levies include the corporate income tax and  individual income tax.  Typically cash businesses that use zappers, such as restaurants and retailers selling small dollar amount items, also pay employees all or some of their wages in cash “under the table” and/or purchase food or inventory.

Zapper programs originated in Europe and migrated first to Quebec in North America.  They came from jurisdictions where there were value added taxes.  The Internal Revenue Service has taken certain steps to target businesses that might employ zappers, and the State of Michigan has taken notice.  It should be pointed out that Michigan’s vigorous criminal and civil penalty regime is separate and distinct from the Internal Revenue Service, which is also free to pursue the same individual and business.  There is an exchange of information agreement between the Internal Revenue Service and the Michigan Department of Treasury.

Zapper’s Electronic Fingerprints and Enforcement

Those selling zappers to business owners tout that it leaves no electronic fingerprints, and thus is invisible to the IRS and other law enforcement agencies. That dog don’t hunt.  The reality is that zappers leave telltale electronic fingerprints, and the IRS and other agencies have sophisticated criminal techies who can readily check a computer system and flag evidence of a zapper.

How have the IRS and Michigan uncovered businesses running zappers?  A secret ceases to be secret when two or more people know about it.  When the owner, the manager of a restaurant or store, the zapper software peddler and others, such as the controller or bookkeeper, key employees at the restaurant, at least one or more people at each location, etc. know about the zapper, only one needs to talk.  Somebody may have reason to talk, such as a problem with the DEA, IRS, FBI or other law enforcement agency and will readily give up the business owner in exchange for no prosecution or a reduction in charges or sentencing.  For example, a metro Detroit freelance IT salesman peddling zappers to bars and restaurants was discovered when a party with law enforcement issues named him.  That salesman, in exchange for an extremely lenient sentence,  in turn identified and cooperated with Federal law enforcement in prosecuting numerous customers for tax evasion.  Some of his customers went to jail. The IRS and other federal and state agencies are seasoned veterans of how to play that game most effectively.

Reality

Those who raid businesses with search warrants typically take away computers, hard drives, USB thumb drives, and other hardware for inspection by highly sophisticated technicians.  What does a cash business owner face if his or her business is raided by the State Police or other tax or  law enforcement personnel and evidence that a zapper has been applied to the electronic books is uncovered?  A plethora of problems.  A short, non-inclusive list includes:

  1. The new Michigan legislation and its mandatory jail time and economic sanctions;
  2. Michigan criminal sanctions for various false returns as well as associated civil tax liabilities, fraud penalties and other penalties and interest;
  3. IRS criminal issues including, a five year evasion felony per year and a three year max for false statements on a tax return,
  4. Myriad IRS civil liabilities for income tax and payroll taxes and associated penalties as well as interest, compounded daily, and
  5. If there is fraud, then there is no civil statute of limitations in tax.  The IRS and Michigan can and do go back many, many years.

In a well-publicized local zapper case,  the owner of the LaShish chain of thirteen suburban Detroit restaurants  and his wife were found by the IRS with zapper software that underreported over $16,000,000 in skimmed revenues.  The owner was indicted on tax and other charges, is currently a fugitive living in Lebanon, his wife went to jail, and the government seized and sold the formerly prosperous restaurants.

Passive Business Owners & Entities With Multiple Locations

Owners are not the only ones who might want to skim, and use a zapper to hide it. A absentee owner as well as owners of multiple locations have two problems if managers or key employees use zappers to hide embezzlement.  In addition to being the victim of the skim, the larcenous employee will tell the IRS and Michigan Treasury that the owner must have done it, and the owner has criminal and civil exposure.  Such owners can protect themselves by unannounced electronic audits to determine if any zappers have been used.  A telltale sign is that servers, per managers, need to be replaced with unusual frequency.  That can well be  an attempt to hide evidence of electronic tampering..

What To Tell Clients

Smaller business clients that have zappers are not going to boast about it to their counsel. You might pass along a proverbial word to the wise to cash business owners.  This new zapper law is out there, it has teeth, and those who ignore it do so at their peril to both personal liberty and treasure.  Also, as noted just above, beware of skimming employees.

© 2012 Varnum LLP