How to Find Your Spouse’s Secret Offshore Bank Account - Using U.S. Tax Reporting Requirements as a Discovery Tool for Locating Foreign Assets.

1. 1
How to Find Your Spouse’s Secret
Offshore Bank Account:
Using U.S. Tax Reporting Requirements as a
Discovery Tool for Locating Foreign Assets
Presented by:
Matthew D. Lee, Blank Rome LLP
G. Daniel Jones, CBIZ

2. Matthew D. Lee
Matthew D. Lee is a former U.S. Department of Justice trial attorney who concentrates his
practice on all aspects of white collar criminal defense and federal tax controversies. He has
extensive experience in advising clients on issues regarding foreign bank account reporting (FBAR)
obligations, the Foreign Account Tax Compliance Act (FATCA), and the Internal Revenue Service’s
2009 Offshore Voluntary Disclosure Program, 2011 Offshore Voluntary Disclosure Initiative, and
2012 Offshore Voluntary Disclosure Program. He has represented hundreds of U.S. taxpayers
with undisclosed foreign bank accounts. Mr. Lee has published numerous articles regarding the
IRS voluntary disclosure programs and FBAR and FATCA reporting obligations and speaks
frequently on these topics.
He has also represented clients in all stages of proceedings before the Internal Revenue Service,
including audits, appeals, and collections, and Tax Court and district court litigation. Mr. Lee also
has experience in conducting corporate internal investigations and advising clients as to
corporate compliance issues involving the Bank Secrecy Act, the USA Patriot Act, FATCA, and anti-
money laundering laws and regulations.
Mr. Lee has represented both corporations and individuals in criminal investigations involving tax,
money laundering, health care, securities, public corruption, and fraud offenses, and has
significant experience in handling all stages of federal litigation including trials and appeals.
Mr. Lee publishes a blog devoted to addressing the latest developments in the tax controversy
field at www.taxcontroversywatch.com.

3. G. Daniel Jones, CPA, CFF
Dan Jones is a Managing Director for CBIZ MHM, LLC, a division of CBIZ, Inc. (NYSE:
CBZ) in the FFS Group, which includes forensic accounting, litigation support and
valuation services. After graduation from Temple University, Dan began his
professional career as an Internal Revenue Agent for the U.S. Treasury Department
from 1973-1977, where he also served as an expert witness for the Department of
Justice. In 1982 he helped establish the firm of Jones, Hayward & Lenzi, CPA’s.
Since 1976, Dan has been qualified as an expert witness in the Federal, Pennsylvania,
New Jersey, Tennessee, state courts and the counties of Philadelphia, Bucks,
Montgomery, Delaware, Chester, Lancaster and Monroe in Pennsylvania.
Active in professional, community and charitable affairs, Dan has served, or currently
serves, on the boards of Continental Bank; Marine Corps – Law Enforcement
Foundation; Torresdale-Frankford Country Club; Accountants Professional Liability
Group (Orion Capital, NYSE); and Progress Bank (PFNC-OTC). He has also served as an
adjunct professor at Philadelphia University and is a member of the American and
Pennsylvania Institutes of CPAs.
Dan has presented at over 30 conferences during the last dozen years on forensic
accounting, tax and family law related issues. He has also authored articles in national
and local publications.
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4. Introduction
•Internal Revenue Service now requires more
disclosure than ever of the offshore assets and
offshore activities of U.S. taxpayers
•Harsh financial penalties, and even criminal
prosecution, can result from the failure to make such
disclosures
•Significant amount of information regarding offshore
activities can be gleaned from U.S. tax reporting forms
•Discovery requests should be specifically tailored to
request this type of information
4

5. The Case of Dr. Michael Brandner:
A Cautionary Tale
5

6. United States v. Michael Brandner, M.D.
•Dr. Brandner is a plastic surgeon in Anchorage, Alaska
•In 2007, Dr. Brandner’s wife of 28 years files for
divorce in Alaska Superior Court
•Dr. Brandner devises scheme to defraud his wife and
hide millions of dollars of assets from his wife and the
Court
•Shortly after his wife files for divorce, Dr. Brandner
converts $3 million into five cashier’s checks and
drives south to Central America
6

7. Dr. Brandner’s 6,891 mile journey
from Alaska to Panama
7

8. Dr. Brandner’s banking activity
• Opens account at Capital Bank in Panama, and deposits
five cashier’s checks worth over $3 million. Government
alleges that this account was opened to conceal assets
from wife.
• It turns out that the banker in Panama assisting Dr.
Brandner was cooperating with the U.S. government in a
separate fraud investigation. Banker advises Dr. Brandner
of the requirement to file the FBAR form with the Internal
Revenue Service.
• Dr. Brandner later transfers another $1.5 million (primarily
from an IRA account at Pensco Trust Company) to the
Panama account, again to conceal assets from his wife.
8

9. Dr. Brandner’s banking activity
(continued)
• Alaska court enters a divorce decree on April 19, 2011, and
awards wife the funds in the Pensco IRA account.
• On May 10, 2011, the banker records a phone call to Dr.
Brandner, who states that respect to the funds awarded to
his wife, “my intention is to not hand it over to the court.”
Banker advises Dr. Brandner of a new U.S.-Panama tax
treaty that could be problematic, and Dr. Brandner asks
banker to assist in further concealing assets from wife.
• Dr. Brandner creates Evergreen Capital LLC, which is
structured to disguise Brandner’s identity as beneficial
owner.
9

10. Dr. Brandner’s banking activity
(continued)
•In August 2011, Dr. Brandner opens account in name
of Evergreen Capital at Bank of America in Seattle.
•$4.65 million wire transferred from Panama to Bank of
America account.
•U.S. Department of Homeland Security seizes all funds
from the Bank of America account on September 12,
2011.
10

11. Federal Charges Filed
1. February 9, 2012: U.S. Department of Justice files
federal forfeiture lawsuit in California alleging that
Dr. Brandner engaged in wire fraud and money
laundering to conceal assets from his wife.
2. September 18, 2013: federal grand jury in Alaska
returns indictment charging Dr. Brandner with
seven counts of wire fraud and seeking forfeiture of
$4.6 million in funds concealed from wife and
divorce court.
11

12. Why is tax reporting regarding
offshore activities more important
today than in the past?
12

13. Offshore Assets
• The world is more globally integrated
• Easier to invest assets offshore
• Easier to access jurisdictions with strict privacy/secrecy rules;
very strong asset protection rules.
• Easier to hide assets from the IRS (and from a spouse)
• The IRS and the DOJ have responded in kind . . .
13

14. IRS Offshore Focus
IRS Commissioner Douglas H. Shulman:
• “Combating international tax evasion is a top priority for the IRS. We
have additional cases and banks under review. The situation will just
get worse in the months ahead for those hiding assets and income
offshore.” (February 8, 2011)
• “Tax secrecy continues to erode. . . . We are not letting up on
international tax issues, and more is in the works. For those hiding
cash or assets offshore, the time to come in is now. The risk of being
caught will only increase.” (February 8, 2011)
• “Our focus on offshore tax evasion continues to produce strong,
substantial results for the nation’s taxpayers . . . . As we’ve said all
along, people need to come in and get right with us before we find
you. . . . We are following more leads and the risk for people who do
not come in continues to increase.” (January 9, 2012)
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15. Justice Department
Offshore Compliance Initiative
“The Tax Division’s top litigation priority is the concerted civil and
criminal effort to combat the serious problem of non-compliance
with our tax laws by U.S. taxpayers using secret offshore bank
accounts – a problem that a 2008 Senate report concluded costs the
U.S. Treasury at least $100 billion annually.”
– U.S. Department of Justice website
15

16. Key Enforcement Milestones
•End to historic Swiss bank secrecy laws
– Believed to be 52,000 U.S. accounts at UBS alone
– UBS agreement with U.S. government and turnover of
names
•Numerous criminal cases filed against accountholders,
advisors, and bankers
•Global crackdown on use of secret bank accounts
(Israel, India, and many other countries)
•Over 100 Swiss banks seeking amnesty as of February
2014
16

17. Key Enforcement Milestones
(continued)
•IRS Offshore Voluntary Disclosure Programs (2009 to
the present)
– Over 40,000 individuals have enrolled
– Over $5.5 billion in additional revenue to U.S. Treasury
•Passage and implementation of Foreign Account Tax
Compliance Act in 2013 will end bank secrecy
worldwide and impose global transparency and
information sharing
•Indictment of Credit Suisse expected imminently
17

18. Foreign Bank Account (FBAR)
Reporting Requirements
18

19. Foreign Bank Accounting Reporting
• Form TD F 90-22.1, Report of Foreign Bank and Financial
Accounts (“FBAR”), now known as FinCEN Form 114
• Primary weapon in the IRS’ arsenal for enforcing information
reporting
• Severe penalties for noncompliance: criminal and civil
• Required as part of Bank Secrecy Act, not Internal Revenue
Code; hence, penalties more stringent than Internal Revenue
Code penalties
• Obligation to file introduced in 1970s but enforcement was lax
prior to 2009
19

20. Who is required to file an FBAR?
• An FBAR must be filed if all of the following requirements are
satisfied:
– Filer is a U.S. Person;
– U.S. Person has a financial account;
– U.S. Person has a direct or indirect financial interest in, or
signature or other authority over, the financial account;
– Financial account is in a foreign country, including the
foreign branch of a U.S. bank; and
– Aggregate account balances exceed $10,000 (USD) at any
point during calendar year
20

21. What is reported on the FBAR?
• A U.S. Person must report all their financial interests in, or
signature or other authorities over, foreign financial accounts.
• Financial accounts include:
– Bank accounts with offshore banks;
– Securities and brokerage accounts with offshore financial
institutions;
– Commodity futures and options account;
– Insurance policy with a cash value and an annuity policy;
and
– Shares in a mutual fund
21

22. FinCEN 114 (new form)
22

23. FinCEN 114
23

24. FinCEN 114
24

25. FinCEN 114
25

26. Form TD F 90-22.1 (old form)
26

27. Form TD F 90-22.1
27

28. FBAR Penalties for Non-Compliance
• Criminal penalties for willful violations:
– Up to 5 years imprisonment and $250,000 fine
• Civil penalties
– Non-willful violation: Up to $10,000 for each violation
– Willful violation: Greater of $100,000 or 50 percent of the
balance in the account at the time of the violation
• Both civil and criminal penalties may be imposed together.
• Assisting a U.S. person in evading reporting may also result
in tax and money laundering charges, and seizure and
forfeiture of the assets in the account.
28

29. Example of exposure to FBAR sanctions
1. assume balance in BDA a/c since 2008 is $5M
2. Sale of a foreign based hedge fund a/c created balance just before meltdown.
3. No form 90-22.1 or Sch B, 1040 answered or filed
4. Husband never told CPA and never discussed with wife.
5. But H's AA knew about it and was sympathetic to wife. She drops a dime.
6. Penalty exposure to H (and the marital estate)
YearBalance Penalty Cum Pen All amounts in millions
2008 $5.0 $ 2.5 $ 2.5
2009 4.2 2.1 4.6
2010 4.6 2.3 6.9
2011 5.4 2.7 9.6
2012 6.0 3.0 12.6
2013 7.0 3.5 $ 16.1
Conclusion; you may have located a $7M asset for division with your client.
How do you handle the potential liabilty of $16M if you
- Represent wife?
- Represent husband?

30. Foreign Bank Account Reporting
on Income Tax Returns
•Must report income from foreign account on Schedule
B (interest/dividends) and Schedule D (capital
gain/loss)
•Must also check the box on Form 1040, Schedule B,
Part III
– Also, Forms 1120, 1120-S, 1065, 706, and 990
30

31. Form 1040, Schedule B
31

32. Foreign Tax Credit (FTC)
32

33. Form 1040, Line 47
33

34. If there is a foreign tax credit claimed, it "could" lead to discovery of significant marital assets or
income.
1. Request certificates of tax withheld at source.
That reflects dividends paid and foreign taxes withheld
If there are dividends, think about it and work backwards to
imply asset values.
2. Assume a Foreign Tax Credit of say $150,000 on form 1116 is disclosed.
A. if at 15% = $150,000
B. Dividend earned or received = $1,000,000
C. If dividend is 40% of net income = $2,500,000 is Hs share
D. If value compared to div is 5x, the asset is $12,500,000.
E. if the PE ratio is 15X, the implied value is $37,500,000

35. Foreign Account Tax Compliance Act
(FATCA)
Foreign Asset Reporting
35

36. What is FATCA?
• “The Foreign Account Tax Compliance Act (FATCA) is an important
development in U.S. efforts to improve tax compliance involving
foreign financial assets and offshore accounts.” (www.IRS.gov)
• FATCA was enacted in 2010 as part of the Hiring Incentives to Restore
Employment (HIRE) Act
• Under FATCA, U.S. taxpayers with specified foreign financial assets
that exceed certain thresholds must report those assets to the IRS.
This reporting will be made on Form 8938, which taxpayers attach to
their federal income tax return, starting with the 2011 tax filing
season.
• In addition, FATCA will require foreign financial institutions to report
directly to the IRS information about financial accounts held by U.S.
taxpayers, or held by foreign entities in which U.S. taxpayers hold a
substantial ownership interest.
36

37. Two Primary FATCA Requirements
• In general terms, foreign financial institutions are
annually required to report to the U.S. government
information about financial accounts held by U.S.
taxpayers, or held by foreign entities in which U.S.
taxpayers hold a substantial ownership interest.
•U.S. taxpayers with specified foreign financial assets
that exceed certain thresholds must report those
assets to the IRS annually on the Form 8938
information return.
37

38. FATCA Policy in Context of U.S. Tax Laws
• U.S. taxpayers’ investments have become increasingly global in
scope.
• Recognition that foreign financial institutions (“FFIs”) are in best
position to identify and report with respect to their U.S. account
holders.
• Absent reporting by FFIs, some U.S. taxpayers may attempt to
continue to evade U.S. tax by hiding money in offshore accounts.
• “To prevent this abuse of the U.S. voluntary tax compliance system
and address the use of offshore accounts to facilitate tax evasion, it is
essential in today’s global investment climate that reporting be
available with respect to both the onshore and offshore accounts of
U.S. taxpayers.” (Preamble to Final Regulations).
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39. What Does FATCA Require of Foreign Banks?
• FATCA requires foreign banks and financial institutions (FFIs) to report to the
IRS information about financial accounts held by U.S. taxpayers, or by
foreign entities in which U.S. taxpayers hold a substantial ownership
interest. In order to avoid withholding under FATCA, a participating FFI will
have to enter into an agreement with the IRS to:
– Identify U.S. accounts;
– Report certain information to the IRS regarding U.S. accounts; and
– Withhold a 30 percent tax on certain U.S.-connected payments to non-
participating FFIs and account holders who are unwilling to provide the required
information.
• Registration take places through an online system which opened January 1,
2014.
• FFIs that do not register and enter into an agreement with the IRS will be
subject to withholding on certain types of payments relating to U.S.
investments.
39

40. FATCA Implementation Through
Intergovernmental Agreements
•As of May 1, 2014:
– Treasury has signed 30 agreements with foreign
jurisdictions to implement FATCA
– Treasury has reach agreements in substance with 29
other foreign jurisdictions to implement FATCA
40

41. FATCA Asset Reporting Regime
• New Internal Revenue Code provision enacted as part of 2010
HIRE Act
• Requires reporting of specified foreign financial assets if
aggregate value exceeds certain thresholds
• Applies to tax years beginning with 2011
• Requires that new information return be attached to a
taxpayer’s U.S. income tax return entitled Form 8938,
“Statement of Foreign Financial Assets”
41

42. Form 8938
42

43. What is a
“Specified Foreign Financial Asset”?
A specified foreign financial asset (SFFA) is:
• Any financial account maintained by a foreign financial
institution
– Foreign bank accounts
– Foreign mutual funds
– Foreign hedge funds
– Foreign private equity funds
– Certain foreign insurance products
43

44. Form 8938 – Part I
44

45. What is a SFFA?
(continued)
• Other foreign financial assets held for investment that are not
in an account maintained by a U.S. or foreign financial
institution, namely:
– Stock or securities issued by someone other than a U.S.
person
– Any interest in a foreign entity
– Any financial instrument or contract that has as an issuer
or counterparty that is other than a U.S. person
– Foreign pensions and deferred compensation plans
– Foreign trusts and estates (if “specified individual” is
aware of its existence)
45

46. Form 8938 – Part II
46

47. Form 8938 – Part II (continued)
47

48. Other U.S. Tax Information Returns
Addressing Offshore Activities
48

49. U.S. Tax Information Returns Requiring
Disclosure of Foreign Assets and Activities
49
• Form 3520 – Annual Return To Report Transactions With
Foreign Trusts and Receipt of Certain Foreign Gifts
• Form 3520-A – Annual Information Return of Foreign Trust
With a U.S. Owner
• Form 5471 – Information Return of U.S. Persons With Respect
to Certain Foreign Corporations
• Form 8621 – Information Return by a Shareholder of a PFIC or
Qualified Electing Fund
• Form 8865 – Return of U.S. Persons With Respect to Certain
Foreign Partnerships

50. Form 3520 – Foreign Trusts & Foreign Gifts
50
• Purpose of the form
• Information reporting
Distributions from foreign trusts
US owner of a foreign trust
Gifts and bequests from foreign persons
• Filed with the US taxpayer’s income tax return
• Mandatory filing obligation with penalties of $10,000 or up to
35% of the fair value of property transferred to or received
from the trust or 5% of the gross value of the trust

51. Form 3520-A – Foreign Trust with U.S. Owner
51
• Purpose of the form
• Separate filing by the foreign trust – not part of the U.S.
owner’s tax return
• Provides details about:
Foreign trust and its P&L and balance sheet
Fair market value of the distributions (if any)
US Owner(s), income attributable to each US owner and
the value of US owner’s interest in trust
• Mandatory – US owner subject to penalty of $10,000 or 5% of
gross value of assets

52. Form 5471 – Controlled Foreign Corporations
52
• Purpose of the form
• Controlled foreign corporation (“CFC”) – More than 50% of vote
or value held by US Shareholders (each with a 10% or greater
voting interest)
• Different filing obligations
Category 2 – US director or officer
Category 3 – Investment into a foreign corporation
Category 4 – Controlling US shareholder
Category 5 – Non-controlling US shareholder

53. Form 5471 – Controlled Foreign Corporations
53
• Form 5471 can be filed on behalf of other taxpayers but such
taxpayers must attached a statement to their tax returns
indicating such.
• Penalties for non-compliance - $10,000 per Form 5471 and
return remains open for audit

54. Form 5471 – Controlled Foreign Corporations
54
Schedule Details Categories
2 3 4 5
General Identification information √ √ √ √
Sch. A Shares on issue by class √ √
Sch. B U.S. Shareholders in foreign corp. √ √
Sch. C,E,F Profit & loss, balance sheet & foreign taxes paid √ √
Sch. G Other investment information √ √ √ √
Sch. H Earnings & Profits √ √
Sch. I Shareholder’s income from foreign corporation √ √
Sch. J Accumulated Earnings & Profits √ √
Sch. M Transactions between controlled entities √
Sch. O, Pt I Investing/selling shareholder information √
Sch. O, Pt II Transaction details of buying/selling stock √

55. Form 5471 – Controlled Foreign Corporations
55

56. Form 8621 – Passive Foreign Investment
Companies
56
• Purpose of the form
• Passive foreign investment company – foreign corporation
with 75% or more passive income or 50% or more passive
income generating assets. Excludes CFCs.
• No dollar threshold or 10% threshold
• Elections for recognizing income
• Draconian regime for taxing income and gains from PFICs
unless elections made to recognize income over term of
investment
• Report income and gains on sales

57. Form 8865: Foreign Partnerships
•Purpose of form
•Requires disclosure of
– Identity of partners
– Affiliates of partnership
– Income statement of partnership
– Balance sheet of partnership
– Transactions between partnership and partners
•Financial penalties and possibility of criminal
prosecution for failure to file form
57

58. Obtaining Information Directly From
the Internal Revenue Service
58

59. Other Options for Obtaining Tax Information
• Internal Revenue Code 6103(e)(1)(B) authorizes either
individual to request “return information” from IRS
regarding a jointly filed return
– “return information” includes the tax return and supporting
schedules/information returns
• Divorced/separated spouses may also request, in writing,
that the IRS disclose details regarding collection activities
undertaken with respect to jointly filed returns (IRC
6103(e)(8))
• Use IRS Forms 4506 or 4506-T, or Freedom of Information
Act, to request this information
59

60. 60

61. 61

62. Discovery Checklist
• Form 1040 (tax return) and all schedules/attachments
• FBAR forms
– TD F 90-22.1 (prior to 2014)
– FinCEN Form 114 (starting in 2014)
• Form 8938 (FATCA asset disclosure form)
• Form 3520
• Form 3520-A
• Form 5471
• Form 8621
• Form 8865
62

63. What if you discover that your client has a
secret offshore bank account?
63

64. IRS Offshore Voluntary Disclosure Program
• To date, over 40,000 individuals have come forward and
enrolled, and the U.S. government has collected $5.5 billion.
• IRS reopened program on January 9, 2012.
• Similar to the 2011 program, but with a few significant
differences:
– Open for an indefinite period of time until otherwise announced –
terms of Offshore Voluntary Disclosure Program (“OVDP”) could
change at any time;
– Requires individuals to pay an FBAR penalty of 27.5% (compared to
25% in the 2011 program), may be reduced to 12.5% or 5% in certain
circumstances; and
– 8 year “rolling” look-back period with exclusion of compliant years.
64

65. OVDP
(continued)
•More stringent eligibility requirements:
– U.S. government receipt of taxpayer information from
“John Doe” summons, treaty request, or similar action is
disqualifying event;
– Taxpayers who appeal foreign tax administrator’s decision
to release account information must notify U.S. Attorney
General or be disqualified;
– IRS may in its discretion designate certain classes of
taxpayers ineligible.
65

66. Questions?
Matthew D. Lee
Blank Rome LLP
One Logan Square
Philadelphia, PA 19103
(215) 569-5352
(215) 832-5352 (facsimile)
Lee-M@BlankRome.com
66
G. Daniel Jones
CBIZ MHM, LLC
401 Plymouth Road, Suite 200
Plymouth Meeting, PA 19462
(610) 862-2210
(215) 432-6309 (cell)
Gdjones@cbiz.com

67. Circular 230 Notice
To ensure compliance with IRS Circular 230, you are hereby
notified that any discussion of federal tax issues in this
presentation is not intended or written to be used, and it cannot
be used by any person for the purpose of:
(A) avoiding penalties that may be imposed on them under the
Code; and
(B) promoting, marketing or recommending to another party any
transaction or matter addressed herein.
This disclosure is made in accordance with the rules of Treasury
Department Circular 230 governing standards of practice before
the Service.
67