A brief analysis of the IRS three separate relief programs, by Richard S. Lehman Esq

1.    The Offshore Voluntary Disclosure Initiative

 Under this program, taxpayers who are found to be willful may submit their name to the IRS in advance of making any disclosures regarding their tax issues.  The IRS will then notify the taxpayer that the taxpayer’s record is clean as far as the IRS is concerned and that the taxpayer is not under examination, nor have any foreign banks reported that the taxpayer has a bank account in that bank.  If the I.R.S. has prior knowledge of the taxpayer’s failure to comply, the taxpayer will not be able to enter this relief program.

Once the taxpayer has received this clearance from the IRS, the taxpayer will then be required to file eight years of amended tax returns, together with eight years of proper reports for the taxpayer’s foreign bank accounts.

The taxpayer will then be required to include in the amended tax returns any and all income not reported from the foreign bank accounts and pay the tax on such income.  This tax will be subject to a 20% accuracy penalty and will, in addition, be charged with interest on unpaid taxes.  The taxpayer will also be required to pay a bank deposit penalty equal to 27 ½% of the highest bank deposit balance over the eight year period.

2.    The Streamlined Program – Nonresident Taxpayers

The Streamlined Program may apply to United States taxpayers who are resident outside of the United States.  United States taxpayers who are tax residents outside of the United States may clear their record for their failure to file foreign bank reports in a much simpler fashion than those who are resident in the U.S.  They must however be  “non-willful” in their failure to file the foreign bank reports.

Non-willful taxpayers who are nonresidents outside of the United States will be permitted to enter into the Streamlined Program for nonresident taxpayers. Pursuant to the Streamlined Program, they will be required only to file three years of tax returns that should be amended to include any and all unreported income and they will be required to file FBAR reports for the prior six years.  There will be no penalty assessed on foreign bank deposits of those United States taxpayers who are residents abroad.

3.    Streamlined Program for Resident Taxpayers

The Streamlined Program is also open for United States taxpayers who are U.S. residents. United States taxpayers who are tax residents within the United States and are “non-willful” may clear their record for their failure to file foreign bank reports.

Non-willful taxpayers who are residents of the United States will be permitted to enter into the Streamlined Program for resident taxpayers.  Pursuant to this Streamline Program, they will be required only to file three years of tax returns that should be amended to include any and all unreported income and they will be required to file FBAR reports for the prior six years.  There will be a five percent penalty assessed on foreign bank deposits of those United States taxpayers. 

Read the full article "The FATCA Team Approach; The Role of Lawyer and Accountant" by Richard S. Lehman, Esq. http://www.lehmantaxlaw.com/?p=1388

Richard S. Lehman answers frequently asked questions on the topic of Ponzi Scheme Theft Loss

Question 1.    Ponzi Scheme victims may be entitled to a theft loss deduction.  What is considered a theft loss?

Answer:    For purposes of theft loss deduction, the term “theft” shall be deemed to include, but shall not necessarily be limited to, larceny, embezzlement, and robbery.  Whether “theft “occurs for federal tax purposes can also depend on the law of the jurisdiction where the loss was sustained.  A taxpayer claiming a theft loss must prove that the loss resulted from a taking of property that was illegal under the law of the jurisdiction in which it occurred, and was done with a criminal intent.  The IRS ruled that, if the perpetrator of the Ponzi scheme violated a state criminal law, the Ponzi scheme losses are theft losses for federal tax purposes because the perpetrator intended to, and did, deprive the investor of money by criminal acts.

 

Question 2: How much can be claimed if there is a Ponzi Scheme Theft loss?

Answer:    The amount of the theft loss that is deductible is calculated as the tax basis of the lost asset reduced by insurance proceeds recoverable and other claims for which there is a reasonable prospect of recovery.

 

Question 3: Can a taxpayer claim a theft loss for income that was reported for tax purposes and not distributed to the victim.

Answer:   A taxpayer will receive basis for taxes paid on “phantom income” that was credited to the investor’s account, whether or not it was paid to that account by the Ponzi scheme.

 

Question 4: Is a theft loss deductible as a capital gains or ordinary income?

Answer:    The investor is entitled to an ordinary loss rather than just a capital loss.  The IRS considered a Ponzi scheme theft loss to be a loss that is incurred in a transaction entered into for profit.

 

Question 5: How many years may a theft loss be carried back from the year the loss is reported?

Answer:   The investment theft loss forms part of the taxpayer’s operating loss that may be carried back or forward under normal net operating loss rules.  Generally these rules provide for a three year loss carryback and 20 year loss carryforward (or “carryover”) limitation.

 

Question 6: When should a theft loss be claimed as a deduction?

Answer:    A theft deduction is allowed for ay theft loss sustained during the taxable year and not compensated by insurance or otherwise.  A theft loss is treated as sustained during the taxable year in which the taxpayer discovers the loss.  However, a theft loss is not deductible in the taxable year in which the theft was discovered to the extent that a claim for reimbursement exists and there is a reasonable prospect of recovery of the loss.  If a theft loss cannot be deducted in the year of discovery because a reasonable prospect of recovery of the loss exists, then it cannot be deducted until the year in which it can be ascertained with reasonable certainty that no reasonable prospect of recovery exists.

 

Questions 7: Is there an IRS procedure that expedites the deduction of theft losses from a Ponzi scheme?

Answer:    Yes.  In 2009, two important documents were issued by the IRS regarding the taxation OF Ponzi schemes.  In Rev. Rul. 2009-9, the IRS clarified much of the previously unsettleld law in this area.  The IRS provided a “safe harbor” that offers thousands of Ponzi scheme victims a badly needed uncomplicated shortcut cash refunds form tax losses.

Richard Lehman answers tax questions about U.S. Exporting using the IC-DISC

Question: What are the tax benefits to be gained by using a DISC?

ANSWER: The tax benefits of the IC-DISC come in two separate fashions. The IC-DISC shareholders may leave the IC-DISC profits in the IC-DISC and defer taxation until actual distribution of the profits or the IC-DISC may distribute profits to its shareholders like any other corporation.

Since IC-DISC distributions are considered "qualified dividends", they are subject to a maximum tax of 20%.  Thus the magic of the IC-DISC is to provide both tax deferral and to apply a 20% maximum dividend tax rate to profits that would otherwise be taxable in the U.S. taxpayer’s highest brackets that can range as high as 50% when city, state and federal income taxes are calculated.

---

Question: What is the definition of "Export Property" that will qualify for DISC treatment?

 ANSWER:    Export property means property: Manufactured, produced, grown or extracted in the United States; held for sale, lease or rental, in the ordinary course of business, for use, consumption or disposition outside the United States; and Not more than 50% of the fair market value of which is attributed to articles imported into the United States.

---

Question: What methods of pricing may be used to determine the amount that can be paid to a DISC?

ANSWER:   

Gross Receipts Methods.  Under the gross receipts method of pricing, the transfer price for a sale by the related supplier to the DISC is the price as a result of which the taxable income derived by the DISC form the sale will not exceed the sum of (i) 4 percent of the qualified export receipts of the DISC derived from the sale of the export property and (ii) 10 percent of the export promotion expenses of the DISC attributable to such qualified export receipts.

Taxable Income Method.  Under the combined taxable income method of pricing, the transfer price for a sale by the related supplier to the DISC is the price as a result of which the taxable income derived by the DISC from the sale will not exceed the sum of (i) 50 percent of the combined taxable income of the DISC and its related supplier attributable to the qualified export receipts form such sale and (ii) 10 percent of the export promotion expenses of the DISC attributable to such qualified export receipts.

Arm's Length Method.  If the rules of the preceding paragraphs are inapplicable to a sale or a taxpayer does not choose to use them, the transfer price for a sale by the related supplier to the DISC is to be determined on the basis of the sale price actually charged but subject to the rules provided by the rules of sale between related parties.