Chile Forum

The IRS Wants Your Electronic Data - Mark Nestmann (November 30, 2011)

Other than the crisis in Europe or Herman Cain’s latest mistress, what else is happening in the world?

In case you missed it, on October 18, the IRS issued what’s called a “Chief Counsel Advice” (CCA) concerning what it calls “original electronic data files.” Basically, the IRS now asserts the right to issue a summons to force a taxpayer to provide this data within whatever statute of limitation applies for the type of examination the agency is undertaking. And that means that you need to be careful not to dispose of any electronic communications or records you maintain that might concern some future tax issue.

The Internal Revenue Code gives the IRS authority to review “books, papers, records or other data,” to confirm the accuracy of tax or information returns, calculate a tax liability, or collect any tax or penalty. To enforce these provisions, the IRS may issue a summons to you or any third party custodian of records relevant to the inquiry.

The standard of proof necessary to enforce an IRS summons is laughably low. All the IRS needs to demonstrate is that the investigation is legitimate, the inquiry is relevant to that investigation, the IRS doesn’t already have the information, and that the agency has followed all required administrative steps. This means any efforts to quash the summons probably won’t be successful.

What electronic records does the IRS want you to maintain? Essentially, it’s “metadata,” which Google helpfully defines as “a set of data that describes and gives information about other data.” But in the context of an IRS examination, or other demand for electronic data, metadata is information on who, when, and how electronic data was created. For instance, the IRS could request e-mail metadata including:

Author
Recipient(s), including cc and bcc
Date and time sent
Date and time received
Subject
Attachment relationship to original email (and metadata fields listed for e-documents)
Forwarded e-mails; attachment documents and files

Fortunately or unfortunately, every email you send or receive probably has the metadata associated with it automatically included. So does every file you save on your PC. To get a sense of what information email metadata contains, look at the “Internet headers” your messages—sent and received—contain. It’s easy to produce this data if you save your emails or computer files without editing them. Editing the emails or files changes the metadata. But be careful: these changes may be recorded in the metadata!

This discussion may seem esoteric, but it’s not. It means that you need to be careful when deleting emails or other files that may have even the slightest relevance to an IRS investigation. For instance, unreported offshore accounts currently are an IRS hot-button issue. Earlier this month, the IRS revised the Internal Revenue Manual (IRM) to include additional guidance to agents investigating violations of the requirements for reporting foreign accounts on the Foreign Bank Account Reporting Form TD F 90-22.1 (FBAR).

Any U.S. citizen or permanent resident must file this form annually to acknowledge a financial interest in, signature authority, or other authority over foreign financial accounts outside the United States if the aggregate value of those accounts exceeds $10,000. Failure to file this form—and to keep all relevant records associated with it—can subject you to both civil and criminal penalties.

The new section of the IRM provides detailed guidelines to IRS agents for assessing FBAR-related penalties. It also makes clear that failing to keep the required records relating to the FBAR is a separate violation from failing to file the FBAR itself. The civil penalty for failing to file the FBAR is $10,000 for each violation. Now there are two possible fines: a $10,000 fine for failure to file and an additional $10,000 fine for failing to keep the appropriate records. You must keep the records for at least six years after the due date of the FBAR. For instance, for most U.S. taxpayers, the 2010 FBAR form was due June 30, 2011. That means you need to keep the relevant records relating to offshore accounts you held in 2010 at least until June 30, 2017.

One way to avoid the additional $10,000 fine for failing to keep the appropriate records would be to turn over those records in response to an IRS summons. But if you do so, that could give the IRS the ammunition to prove that you “willfully” failed to file the FBAR. That’s a much more serious violation punished with a maximum sentence of five years imprisonment and a $500,000 criminal fine.

What to do? There are no easy answers. One possible solution to the metadata dilemma is to avoid any type of electronic communication or storage for anything related to your taxes. That’s not realistic for most people, so the only other alternative is to save all foreseeably relevant electronic communications for at least three years after the due date for your “regular” tax return and six years for anything that’s offshore-related. And no, it’s not sufficient to print out emails, statements, etc. You need to save the original electronic records!

It may not make you feel any better, but the IRS isn’t alone in demanding metadata. An increasing number of lawsuits ask for metadata in discovery requests. In one case, lawyers representing employees eliminated in a corporate “downsizing” demonstrated that the corporation involved tried to delete metadata from electronic records. The records allegedly proved that the company had illegally targeted older employees to positions that were eventually eliminated. The corporation eventually settled the lawsuit with a payout of nearly $60 million.

A good rule of thumb is never to write in an email or store in an electronic file anything you wouldn’t want published on the front page of the National Enquirer…because that’s where it could wind up!

Reaction to US Tax Law
European Banks Stop Serving American Customers

European banks are dumping clients with US citizenship due to a new American law meant to curb tax evasion. The law would require financial institutions around the world to report on certain client activities. Compliance, say many banks, is way too expensive.

The idea was to ensure that US citizens were paying their taxes on investments made through overseas banks. The result, however, has been that Americans in Europe may have difficulties finding banks who want their business.

According to a report in the Wednesday edition of the Financial Times Deutschland, several European banks have elected to no longer serve American securities investors due to stricter reporting requirements pushed through last year by the administration of President Barack Obama.

German financial institution HypoVereinsbank has informed its customers that it will no longer offer certain services to its US-based clients or to US citizens as of Jan. 1. Deutsche Bank told the paper that it already cancelled such accounts held by American citizens in the middle of 2011. Germany's second largest bank, Commerzbank, is considering a similar move. Customers with normal checking or savings accounts in Germany are not affected, however.

British banking giant HSBC has also reported that it will no longer serve US investors as has the Swiss bank Credit Suisse.

The reason for the sudden reticence to serve American clients is the Foreign Account Tax Compliance Act (FATCA), which was passed in 2010 and will go into effect in January of 2013. The act requires all foreign banks to identify and report on US citizens with accounts holding more than $50,000 in an effort to clamp down on tax evasion. If banks refuse to comply, they could face a punitive 30 percent withholding tax on all payments from the US. The law is expected to increase tax revenues by $8 billion over the next 10 years.

'Easier to Write a Check'

Banks say that the law is already resulting in significant costs and that compliance will ultimately be exorbitant. "With FATCA, there is a cost on us in Europe but the benefits are in the US," James Broderick, a senior manager with JP Morgan Asset Management, told Reuters in November.

He says that some financial institutions face one-off costs of up to $100 million. "It would be easier to just write a check to the Internal Revenue Service," he said.

An official for DWPBank, which takes care of securities transactions for 1,600 banks in Germany, estimated that total cost of compliance in Germany alone could amount to €10 billion. Furthermore, some German privacy laws may actually prevent some institutions, particularly insurance firms, from compliance, the official, board member Karl-Martin im Brahm, told the Financial Times.

"Strict laws (for insurers) make it illegal to reveal some customer data," he said. "They are in a very difficult position."

Not Entirely Safe

The US introduced the law in response to numerous high-profile tax-evasion cases, including several involving secret accounts in Switzerland. But banks began lobbying against it almost as soon as it was passed. Several large banks, including Credit Suisse, Barclays and the Canadian bank TD Bank have spent millions fighting the law. European Union officials have also sought changes to reduce the burden on European banks. To no avail.

"The US interest is to have reporting on accounts to stem the tide of offshore tax evasion," senior Treasury Department official Manal Corwin told the Financial Times.

And even banks that cease serving US customers may not be entirely safe. "Even if you have no US customers, you are not out of scope," Mark Naretti, managing director of auditing firm KPMG, told Reuters this week. "This would also require that the firm not have any US investments and not be part of an expanded affiliated group that includes entities that are participating foreign financial institutions."

In other words, HypoVereinsbank and Deutsche Bank may be on the hook no matter what.

greg~judy wrote:well this is certainly getting interesting...
the euro~peon bankstas are wising up...
anyone think the latino~amurk'n bankstas might follow?

Reaction to US Tax Law
European Banks Stop Serving American Customers
European banks are dumping clients with US citizenship due to a new American law meant to curb tax evasion. The law would require financial institutions around the world to report on certain client activities. Compliance, say many banks, is way too expensive.
...
The reason for the sudden reticence to serve American clients is the Foreign Account Tax Compliance Act (FATCA), which was passed in 2010 and will go into effect in January of 2013. The act requires all foreign banks to identify and report on US citizens with accounts holding more than $50,000 in an effort to clamp down on tax evasion. If banks refuse to comply, they could face a punitive 30 percent withholding tax on all payments from the US. The law is expected to increase tax revenues by $8 billion over the next 10 years.
....