Examining the FBAR / Offshore Account Information Document Request (IDR)
Posted by Hochman Salkin Toscher Perez P.C. 
Posted on Wednesday, January 11, 2012
Questions regarding the depth of an offshore account examination for those who, for whatever reason, did not participate in the 2009 OVDP or the 2011/2012 OVDI are now beginning to be answered in various IRS examinations around the country. A voluntary disclosure would not likely be considered timely following receipt of a notice of an IRS examination. These examinations are highly focused on the source of funds deposited into the foreign financial account, earnings on the account and the reasoning behind the taxpayer not previously pursuing a voluntary disclosure. A non-taxable nature of the funds deposited (such as an inheritance or deposits before the taxpayer became a U.S. person) does not seem to slow the momentum of these examinations.
The initial IDR issued in connection with the commencement of a examination involving previously undisclosed offshore financial accounts will seem overwhelming to even the most seasoned tax practitioners. Predictably, the IRS appears to have somewhat standardized their IDR in these matters by requesting everything imaginable with respect to the taxpayer under examination and all related entities. For the year under examination, a typical offshore account IDR will request that the taxpayer provide:
A. TAX RETURNS.
1. Provide copies of all Tax Returns and Information Return Forms filed:
a. Form-l040, U.S. Income Tax Return for Individuals including all schedules and attached informational returns for the year.
b. Forms 1099 received by the taxpayer for the year.
c. Forms 1099 issued by the taxpayer for the year.
d. Forms 1065. U.S. Partnership Return of Income including all schedules and attached informational returns for the year.
e. Forms 1120 and 1120S, U.S. Corporate Income Tax Returns including all schedules and attached informational returns for the year for each corporation, of which taxpayer owned or exercised control over more than 50 percent of the total combined voting power of all classes of stock or more than 50 percent of the total value of the stock of the corporation.
f. Form 1120F, U.S. Income Tax Return of a Foreign Corporation including all schedules and attached informational returns for the year 2008 for each corporation of which the taxpayer owned or exercised control over more than 50 percent of the total combined voting power of all classes of stock or more than 50 percent of the total value of the stock of the corporation.
g. Form 1041, U.S. Income-Tax Return for Estates and Trusts, including all schedules and attached information returns for which the taxpayer was the administrator, executor, fiduciary, trustee, grantor, or a beneficiary for year.
h. Form l040NR (used for foreign trusts), U.S, Nonresident Alien Income Tax Return. including all schedules and attached information returns for which the taxpayer was the administrator, executor, or beneficiary for the year.
i. Form 3520A, Annual Information Return of Foreign Trust With a U.S. Owner for year 2008 for which the taxpayer is treated as an owner.
j. Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts for the year for which the taxpayer is or is treated as an owner.
k. Form 1042, Annual Withholding Tax Return for U.S. Sourced Income of Foreign Persons for the year.
l. Form 1042S, Foreign Persons U.S. Source Income Subject to withholding for the year.
m. Form 5471, Information Return of a Person With Respect to Certain Foreign Corporations for the year.
n. Form 5471. Information Return of a. 25-percent Foreign-Owned Corporation or a Foreign Corporation Engaged, in a U.S. Trade or Business for the year.
o. All amended tax returns and informational returns.
B. BANK RECORDS
1. For each bank account, in any name, whether foreign or domestic, over which the taxpayer had signature other authority and/or over which the taxpayer exercised control, during the year, produce all documents in the taxpayer’s possession, custody, or control including, but not limited to:
a. account applications (regardless of date; in english)
b. monthly or periodic statements (in english)
c. wire transfer authorizations and confirmations
d. deposit slips’ and deposited items
e. credit and debit memos and advices
f. cancelled checks
g. check registers
h. passbooks
l. loan applications (regardless of date)
j. promissory notes
k.. certificates of deposit
1. letters of credit
m. cashiers checks
n. money orders
o. safe deposit box rental agreements (regardless of date)
p. safe deposit box visitation ledgers
q. all correspondence/emails (in english) from the inception of the account through today
r. memorandum files maintained by the bank or other financial institution or any of their officers or employees, reflecting communications between the bank and the taxpayer or others acting on the taxpayer’s behalf and documenting actions taken pursuant to directions received from the taxpayer or on the taxpayer’s behalf, reflecting any thoughts or decisions of the bank or its employees or officers regarding the account
s. documents verifying the origin of all funds used to open the accounts or deposited to these accounts (regardless of date).
2. For the year, provide all period statements for each bank account, whether foreign or domestic, under any name, over which the taxpayer had signature or other authority or over which the taxpayer exercised control.
3. For each bank account, whether foreign or domestic, under any name, over which the taxpayer had signature or other authority and/or over which the taxpayer exercised control during the year produce the Know Your Customer Account information given to the bank and/or financial institution by the taxpayer and/or on the taxpayer’s behalf including. but not limited to, all account set up documents (regardless of the year), such as signature cards, opening deposit slips, passport copies, certificates of beneficial ownership, letters of reference, certificates of clean funds and/or other source of funds documentation.
4. For each Certificate of Deposit, Time Deposit, or equivalent account at a bank or financial institution. whether foreign or domestic, over which the taxpayer had signature authority or other authority or over which the taxpayer exercised control at any time during the year produce statements of certificate of deposit, records reflecting purchase of the certificate, earnings, records reflecting redemption or other disposition of the certificate. In addition, provide documents verifying the origin of all funds used to open these accounts or deposited to these accounts at any time.
5. For all transfers of funds during the year between all bank accounts, financial accounts, and other accounts over which the taxpayer had signature or other authority, or over which the taxpayer exercised control during the year, provide the following:
a. list of transfers
b. documents showing the source of the funds transferred (e.g.; copy of check- back and front, wire transfer authorizations, bank statement, source of cash deposit)
c. documents showing the deposit of the funds transferred (e.g., bank statement)
d. advice memos, correspondence or other direction the taxpayer sent or received regarding the transfers, withdrawals and deposits.
6. All documents relating to foreign and domestic credit, debit, ATM or charge accounts over which the taxpayer had or other authority or over which the taxpayer exercised control for the year, including, but not limited to:
a. original cards (The IRS will make a copy of each card and return it to the taxpayer)
b. card applications (regardless of date)
c. agreements (regardless of date)
d. customer relationship records or other similar record identifying persons with signatory authority or other authority over the account (regardless of date)
e. monthly or periodic charge statements
f. charge receipts
g. cash advance confirmations
h. payments or funds transferred for balances due
i. electronic payment and/or transfer records
7. For each foreign bank account, in any name, over which the taxpayer had signature other authority and/or over which the taxpayer exercised control, during the year, produce all documents from such bank informing you that your account information was subject to an exchange of information request with the United States government. If you received such a notice, state whether you signed a waiver or consent permitting disclosure of your account information to the IRS.
C. BROKERAGE OR SECURITIES ACCOUNTS
1. For each brokerage or securities account, in any name, whether foreign or domestic, over which the taxpayer had signature, dealer or other authority or which the taxpayer controlled, either directly or through nominees, agents, powers of attorney, letters of direction, or any device whatsoever, during the year produce all documents in the taxpayer’s possession, custody or control or to which the taxpayer had right of access for the period January 1 through December 31 of the year, including but not limited to:
a. account application (regardless of date)
b. signature cards (regardless of date)
c. monthly or periodic account statements
d. annual account statements
e. wire transfer authorizations and confirmations
f. all correspondence, including but not limited to, letters, memoranda, telegrams, telexes, e-mail, and letters of instruction,
g. memorandum files maintained by the brokerage firm or any of their officers or employees, reflecting communications between the firm, their officers, or employees and the taxpayer or others acting on the taxpayer’s behalf, documenting actions taken pursuant to directions received from the taxpayer or on the taxpayer’s behalf, and reflecting any thoughts or decisions of any person regarding the account
h. documents verifying the origin of all funds deposited in the account
i. know-your-customer KYC) files or other similar records maintained for anti-money laundering purposes (regardless of date), including but not limited to account set up documents, identification documents such as passports, driver’s licenses, opening deposit slips, certificates of beneficial ownership, letters of reference, certificates of clean funds and other source of funds documentation
D. OWNERSHIP
1. For each entity or structure, foreign or domestic (including but not limited to all foundations, stiftungs, anstalts, and/or other legal entities) in which the taxpayer exercised control and/or held an ownership interest, legal interest, fiduciary interest, and/or beneficial interest at any time during the year, provide all documents relating to each entity or structure, including but not limited to:
a. organizational documents, deeds of incorporation. by-laws, registrations (regardless of date)
b. ownership documents including those reflecting the taxpayer’s percentage of legal ownership. percentage of beneficial ownership, and all changes in ownership (regardless of date)
c. operational and business documents
d. financial statements
2. For each entity or structure identified, provide all books and records for the year, including, but not limited to:
a. monthly or periodic bank statements, general ledgers
b. articles of incorporation
c. memoranda of association
d. stock record book
e. minute book
f. partnership agreements
g. trust instruments and other formation documents
h. documents designating beneficiaries
i. documents designating trustees
j. documents designating protectors
k. documents designating partners
1. documents designating percentage ownership
m. contracts and agreements
n. records of brokerage or other investment accounts
o. records of assets and liabilities
p. powers of attorney, letters of wishes, letters of direction, or other similar documents granting authority to agents to act on behalf of the entity
q. correspondence files
r. documents under “mail to be kept at the bank” agreements
s. safe deposit boxes
t. correspondence to or from the legal entity
u. organizational charts
v. orders to change representation or for cancellation of the ega entity
w. internal notes and memoranda referencing any aspect of the legal entity, founder, and/or beneficiary(s)
x. last will and testament and all estate planning documents, whether superceded or not, of the founder and al beneficiaries
3. For each entity or structure identified, provide all documents distributed, sent, and/or transmitted by or to any legal, fiduciary and/or beneficial owners to and from professionals
(e.g., attorneys, accountants, bankers, trust advisors, etc.) including, but not limited to contracts, agreements, advisories, schedules, letters, memoranda, notes and instructions.
4. For each entity or structure identified, provide the name, address and telephone number of the person(s)controlling the assets of the entity or structure during the year.
5. All written contracts, agreements, letters, memoranda, notes, statements, and all other documents of the year pertaining to the assignment and transfer of ownership interest in and rights to use of real, personal or intangible property by or for the taxpayer or the taxpayer’s benefit.
6. All powers of attorney giving the taxpayer authority to act on behalf of any person or entity, foreign or domestic, during the year.
7. All powers of attorney executed by the taxpayer giving another the authority to act on the taxpayer’s behalf or on behalf of any person or entity, whether foreign or domestic over which the taxpayer exercises control, during the year.
8. All certificates of beneficial ownership, stock certificates, including bearer shares or other similar evidences of ownership in owned by the taxpayer at any time during the year with respect to any foreign trust, corporation, foundation, international business company, or similar entity.
9. Provide all records, returns, information related to foreign joint venture profit participation from inception to current.
E. NON-TAXABLE SOURCES OF INCOME.
1. All records pertaining to any non-taxable sources of income, including, but not limited to, proceeds of loans, gifts, inheritances, insurance settlements, tax refunds, and tax-exempt interest the taxpayer received for year.
a. For each loan whether commercial or private, made or obtained by the taxpayer or on the taxpayer’s behalf during the year or which was in existence during the year, provide all documents evidencing the terms and performance of the transaction, including, but not limited to:
1. loan applications (regardless of date)
2. loan agreements and contracts (regardless of date)
3. loan amortization schedules (regardless of date)
4. promissory notes
5. grant deeds, deeds of trust, mortgages, or other security
6.documents showing disbursement of the loan proceeds (e.g., wire transfer authorization)
7. records of receipt of principal and interest
8. records of payment of principal and interest
F. TRAVEL
1. All of the taxpayer’s original U.S. passports, both current and expired.
2. All of the taxpayer’s original foreign passports, both current and expired.
3. All records of foreign travel during the year, including, but not limited to, commercial transportation, private leasing, and vehicles/aircraft/boats owned by the taxpayer.
G. PROFESSIONALS
1. All financial statements prepared by the taxpayer, for the taxpayer, or on the taxpayer’s behalf for any purpose during and/or for the year.
2. Provide the name, address, telephone number of each private banker, broker, trust advisor, investment or other financial advisor. advisor on privacy matters, lawyer and accountant from whom the taxpayer received advice or services during the year.
3. All business cards for attorneys, paralegals, consultants, accountants, and/or other professionals in the taxpayer’s possession and/or within the taxpayer’s control during year.
4. All records relating to any payments in the year 2008 by or for the benefit of the taxpayer or any non-publically traded entity, foreign or domestic, in which the taxpayer held a direct or indirect ownership or beneficial interest or over which the taxpayer exercised control. either directly or through a nominee, agent, power of attorney, letter of direction, letter of wishes, or any device whatsoever, for:
a. management fees
b. consulting fees
c. research and development fees
d. legal fees
e. brokerage fees
f other personal service fees
g. salaries or wages
h. insurance premiums
i. royalties
j. lease or rental fees
k. loan fees
l. interest
The foregoing records should include, but are not limited to:
a. contracts or agreements
b. invoices
c. cancelled checks
d. wire transfers
e. letters of credit
f. all correspondence
5. Identify all professional, social and civic organizations the taxpayer has been a member of from January 1 of the year to present. Include in your response the following:
a. name, telephone number and current address of the organization
b. dates of membership
c. offices held (and dates)
d. membership number or other identifying numbers (e.g., State Bar Numbers, CPA ID numbers)
6. If the taxpayer is a member of an organization with and oversight committee or disciplinary board, identify any complaints filed against you. including;
a. name and address of the complainant (if anonymous, so indicate)
b. date of complaint
c. copy of your written response
d. disposition or result of investigation
e. date and location of any hearing, including the tribunal you appeared before
f. copy of your written response
g. disposition or result of investigation
In responding to the foregoing offshore Account IDR, the following instructions are provided:
INSTRUCTIONS FOR THIS REQUEST-READ CAREFULLY
1. The term “document(s) is used in the broadest sense and includes all attachments. Document(s) includes any written, typed, photo static, recorded or otherwise visually reproduced communications or presentations, whether comprised of letters, words, numbers, pictures, sounds, symbols, or any combination thereof. Document(s) refers to all written, printed, typed, graphically, visually or aurally reproduced material of any kind, or other means of preserving thought or expression, and all tangible things from which information can be processed or transcribed. Further, “documents” include, but are not limited to:
a. Items designated as internal, confidential, ”not to be disclosed” or private;
b. All electronic mail (e-mail), whether on an electronic disk and/or any other system or device which saves emails, attachments, links; and
c. Videotapes, audiotapes, CDs, cassettes, DVDs, films, flash drives (memory sticks, etc.), microfilm, computer files, computer discs, computer programs and other electronic media.
2. If a document has been prepared in several copies, or additional copies have been made, and the copies are not identical (or, by reason of subsequent modification or notation, are no longer identical), each non-identical copy is a separate “document.”
3. The taxpayer has “possession, custody, or control” if the taxpayer has actual or constructive possession of the document and/or can access the document upon inquiry and/or through a legal right to obtain the document including, but not limited to, responsive documents in the possession, custody, or control of taxpayer’s lawyer(s),accountant(s), banker(s), advisor(s), and/or trust advisor(s).
4. All responsive documents in the taxpayer’s possession, custody or control should be provided, as well as all documents, in the possession, custody, or control of the taxpayer’s agents, employees, and/or representatives, including but not limited to , responsive documents in the possession, custody or control of taxpayer’s lawyer(s), accountant(s), advisors, and/or trust advisor(s).
5. If any responsive document was, but is no longer, in taxpayer’s possession, custody or control, state what disposition was made of it, the reason for such disposition and who has possession or control of the document.
6. The term “taxpayer” means the individual under audit. The term “taxpayer” also means all foreign or domestic entities or structures over which the individual taxpayer exercises control including, but not limited to, corporations, partnerships, associations, limited liability companies, trusts, estates, foundations, escrows, charitable foundations, banks, and nominees.
7. A taxpayer can “exercise control” by acting directly or indirectly. Indirect control includes, but is not limited to, the use of nominees, agents, powers of attorney, protectors, advisors, trusts, letter of wishes, by-laws, letters of direction, or any device whatsoever.
8. The taxpayer has “signature or other authority” over an account if the taxpayer can control the disposition of money or other property in the account by delivery of a document containing the taxpayer’s signature-either alone or with the signature of other person(s) and/or with code word(s) and/or code name(s)-to the bank or other person with whom the account is maintained, or if the taxpayer can exercise comparable authority over the account by direct or indirect communication with the bank or other person with whom the account is maintained, either orally or by some other means.
9. If the taxpayer claims a “privilege’ for any document responsive to any request, or any part of such document, specify:
a. name and title of the author;
b. date appearing on such document or, if undated, the date or approximate dates such document was created;
c. name and title of each addressee and of each recipients of the document and/or copies thereto;
d. subject matter of the document;
e. name and address of each persons having present possession, custody, or control of such document and/or copies thereof;
f. privilege or protection claimed; and
g. number of the request(s) to which production of the document would otherwise be responsive.
10. If you do not have-one or more of the requested items or do not know the answer to one or more of the questions asked, but you know who does, please state the name, address, and phone number or other contact information for each such person in your response to the request or question.
Detailed responses to detailed requests for information often generate additional detailed requests for information. As such, offshore account IDRs typically conclude with the admonition that additional years and items can be added as audit issue(s), and additional records or documents may be requested as the examination progresses. Further, taxpayer’s are cautioned to retain all potentially relevant and previously requested records or documents until the examination is concluded.
Taxpayers having previously undisclosed interests in foreign financial accounts should immediately consider methods of becoming compliant. There is no better time to prepare for a later examination than when the documents are being drafted and executed. Files for relevant documents and schedules should be coordinated with a view towards accelerating any later examination. If the transaction has any unique concerns, those issues should be well documented. It is sometimes difficult to later recall why documents were drafted in a certain manner or with unique provisions.
During the examination, the IRS may require responses within a relatively short timeframe (often less than 30 days since most such examinations are being worked as part of a larger examination project focused on foreign financial institutions and their accountholders). If documents are not readily available, make that fact known in advance.
The standardized offshore account IDR may cause the practitioner to wonder about their ability to effectively respond as well as their ethical responsibilities. Upon request by the IRS, practitioners must promptly submit non-privileged records & information to the IRS, notify the IRS of the location of requested records & information in possession of others, and make reasonable inquiries of the taxpayer regarding the location of requested records & information in possession of others.[i] Further, a practitioner may not unreasonably delay the prompt disposition of any matter before the IRS. [ii]
Competent counsel must be consulted before the examination begins since sensitive tax issues permeate an examination of any taxpayer having previously undisclosed interests in a foreign financial account or foreign assets. How can any practitioner promptly and effectively respond to an offshore account IDR that requests everything imaginable with respect to the domestic and foreign activities of what are likely high wealth taxpayers having numerous domestic and foreign related entities? Neither the taxpayer nor the IRS have any desire to unnecessarily prolong the examination process. Initially, the practitioner should coordinate a meeting with the examiner to determine whether it might be possible to streamline the examination process, being careful about obvious sensitive issues. Is it possible to determine whether the examination will be resolved in a purely civil manner without a referral for criminal investigation? That may be the purpose of the examination.
The practitioner’s duty of representation to the client must be balanced with the effort to reasonably cooperate with the examination process. The practitioner should attempt to reasonably limit the scope of the inquiry and limit the information provided so as to avoid the waiver of any potential privileges. If matters are privileged, the correspondence and relevant files should be appropriately labeled. Be aware of any potential privileges that may apply and make sure not to inadvertently waive any privilege. Separate files should be maintained for relevant documents that might be requested by the IRS as well as documents that contain potentially confidential, privileged information. It is important to know exactly which documents are deemed important to the IRS. Copies of documents provided during the course of the examination should be made in duplicate – one copy for the IRS and an extra copy to be maintained in a separate audit file specifically identifying documents provided during the course of the examination.
It is generally advisable to attempt to resolve any examination at the earliest opportunity. However, the design of foreign account examinations mostly precludes any ability for a prompt resolution. Practitioners must respect the nature of these examinations and exercise discretion and their best judgment in responding (or not) to each request for information. The IRS has expended considerable resources rooting out non-compliant taxpayers having previously undisclosed interests in foreign financial accounts. IRS has determined that such taxpayers represent a compliance challenge worthy of devoting substantial enforcement resources. Taxpayers and their representatives must be prepared to respond in kind.
Compliance, compliance, compliance. Those with interests in foreign accounts that have not previously been disclosed should immediately consult competent tax counsel about coming into compliance. The ability of a U.S. taxpayer to maintain an undisclosed, “secret” foreign financial account is fast becoming nonexistent. Foreign account information is flowing into the IRS under tax treaties, through submissions by whistleblowers, and from others who participated in the OVDP and the OVDI identifying their banks, bankers, advisors and others. Additional information will become available as the FATCA[iii] and Foreign Financial Asset Reporting (new Code § 6038D) become effective in the next few years.
The criminal “pre-clearance” OVDP/OVDI voluntary disclosure process of submitting the taxpayer’s name, address, date of birth and taxpayer identification number to Criminal Investigation is expected to remain available indefinitely. Representatives of numerous taxpayers having undisclosed interests in foreign financial accounts will continue to contact Criminal Investigation although there is no certainty in any potential civil resolution of the issues involved. However, likely far more taxpayers may not come forward out of concern that the IRS might assert FBAR (and other offshore related) penalties of up to 50% of the high account balance, per year. Some will undoubtedly decide to risk detection by the IRS and the imposition of substantial penalties, including the civil fraud penalty, numerous foreign information return penalties, and the potential risk of criminal prosecution.
Many taxpayers will decide to submit a voluntary disclosure based on a personal desire to come into compliance now that they are aware of the FBAR and other foreign account reporting requirements. Others will recognize an opportunity to repatriate stagnant foreign funds into a domestic recessionary economy or may simply want to move on with their lives. Practitioners should continue to respect the value to our system of tax administration founded upon IRS and Department of Justice voluntary disclosure practice and policies as well as the ongoing governmental international tax enforcement efforts within a shrinking global community.
This is a target rich environment for the government. The IRS is committed to enforcement concerning offshore accounts and can be expected to continually enhance these efforts. The changing environment concerning bank secrecy will continue to uncover overly optimistic U.S. persons. However, the IRS simply will not be able to locate the vast majority of foreign account holders through enforcement efforts alone. The voluntary disclosure practices of the IRS and the Department of Justice are designed to encourage non-compliant taxpayers to come forward into compliance.
Our system of tax administration requires a perception of fairness and respect for those who make a voluntary, conscious decision to come into compliance before being contacted about their previous tax indiscretions. Accordingly, it can be anticipated that the IRS will continue to “draw a clear line between those individual taxpayers with offshore accounts who voluntarily come forward to get right with the government and those who continue to fail to meet their tax obligations. People who come in voluntarily will get a fair settlement . . . For taxpayers who continue to hide their head in the sand, the situation will only become more dire. They should come forward now under [the] voluntary disclosure practice and get right with the government.”[iv] Coming into past compliance through a voluntary disclosure, or at least prospective compliance, is the right thing to do. Waiting is simply not a viable option . . .
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[i]. Treasury Department Circular No. 230 (CIR 230), Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, Enrolled Retirement Plan Agents, and Appraisers before the Internal Revenue Service, §10.20
[ii]. CIR 230 §10.23
[iii] See “FATCA and Foreign Bank Accounts: Has the U.S. Overreached?” by Scott D. Michel and H. David Rosenbloom, (Tax Analysts Viewpoints, May 30, 2011).
[iv] IRS Commissioner Douglas H. Shulman, March 26, 2009
