File an FBAR or Find Yourself Behind Bars!

The much ballyhooed IRS amnesty deadline of October 15 for taxpayers who failed to declare assets held in foreign banks accounts is upon us.   The highly publicized legal action against UBS and their agreement to turn over account information on thousands of clients to the IRS has created some awareness about the amnesty program.  Numerous high profile prosecutions and substantial media coverage of the amnesty program is designed to create a sense of urgency and convey the need to comply with the tax code.  Individuals and corporations with assets greater then $10,000 held in foreign bank accounts have until tomorrow to file a  Foreign Bank Account Report (FBAR) with the IRS or face potential legal action.

UBS alone has indicated that it has over 52,000 US citizens are private banking clients of the firm.  I would guess that most of them have accounts with balances far greater then the $10,000 declaration threshold.  Investors participating in private equity and hedge fund partnerships should also be aware that they are not excluded from this reporting requirement.  HNW investors and institutions should conduct some extra due diligence on their hedge fund manager.  Investors may well be served by inquiring if all the appropriate declarations and forms have been filed by the investment partnership and their administrators.  They should call the chief compliance officer at the fund and get an attestation letter that the fund is in full compliance with foreign bank reporting requirements.

Sir Allen Stanford and Bernie Madoff may look good in those orange prison jumpsuits but that doesn’t mean that you become a slave to fashion and succumb to this growing industry trend.  All it takes to get compliant and keep the tax man a bay is a little form called an FBAR.  Hedge fund managers, CPAs, attorneys and fund administrators can  get in full compliance with FBAR filing requirements by implementing Sum2’s BSA Reporting Module.  You can down load an FBAR and supporting resources needed to comply with AML and BSA statutes by subscribing to Sum2’s  Bank Secrecy Act (BSA) compliance program.  This program will help you address this pressing tax compliance requirement.

The IRS and Justice Department officials have conducted a high profile public relations and marketing campaign to convey their intent to aggressively pursue tax evaders and non-compliant corporations.  Taking a little precaution will prevent big problems for fund managers and their clients.  It may also save you from doing time in The Big House.

Sum2 provides a suite of AML compliance products to help investment managers and broker dealers comply with the AML provisions of The Patriot Act, BSA and OECD best practices.  To learn more about our outstanding AML product suite click here.  Sum2 e-commerce.

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Risk: legal, compliance, tax, reputation, criminal prosecution

A Taxing Situation

President Obama announced his intention to curb the use of offshore tax havens for multinational corporations.  The Treasury Department is looking to raise tax revenues and believes that by closing the use of offshore tax shelters it will be able to raise over $200 bn over the next ten years.  According to the New York Times,  firms like Citibank, Morgan Stanley, GE and Proctor and Gamble utilize hundreds of these type structures to shelter revenue from being taxed by the IRS.  It has effectively driven down the tax rates these companies pay and has been a key driver in maintaining corporate profitability.

This move should come as a surprise to no one.  The Treasury Department needs to find sources of tax revenues to cover the massive spending programs necessitated by the credit crisis and the global economic meltdown.  The TARP program designed to revitalize banks has  expenditures that amounted to $700 bn.  Amounts pledged for economic recovery through EESA, PPIP and ARRA will push Treasury Department expenditures targeting economic stimulus projects and programs to approximately $2 tn.  These amounts are over and above routine federal budget expenditures that is running significant deficits as well.

The planned move by the Treasury Department to rewrite the tax code may be an intentional effort to close budget deficits but it also represents a significant rise in tax audit risk.   For the past two years the IRS has been developing a practice strategy and organizational assets to more effectively enforce existing tax laws.  Private sector expertise, practices and resource has significantly out gunned the IRS’s ability to detect and develop a regulatory comprehension of the tax implications of the sophisticated multidomiciled structured transactions flowing through highly stratified and dispersed corporate structures.  The IRS is looking to level the playing field by adding to its arsenal of resources required to engage the high powered legal and accounting expertise that corporate entities employ.

The IRS has hired hundreds of new agents  and has developed risk based audit assessment guidelines for field agents when examining corporations with sophisticated structures and business models.  As such investment partnerships, global multinational corporations and companies utilizing offshore structures can expect to receive more attention from IRS examiners.

The IRS had developed Industry Focus Issues (IFI) to be used as an examination framework to guide audit engagements for sophisticated investment partnerships and  Large and Mid-size Businesses (LSMB).  The IFI for LSMB has developed three tiers of examination risk.  Each tier has comprises about 12 examination issues that will help examiners focus attention of audit resource on areas the agency considers as high probability for non-compliance.  Clearly the audit risk factors risk

To respond to this challenge, Sum2 developed an audit risk assessment program to assist CFO’s, tax managers, accountants and attorneys conduct a through IFI risk assessment.  The IRS Audit Risk Program (IARP) is a mitigation and management tool designed to temper the threat of tax audit risk.   A recent survey commissioned by Sum2 to measure industry awareness of IFI risk awareness indicated extremely low awareness of tax audit risk factors.

Sum2’s IARP helps corporate management and tax planners score exposure to each IFI risk factor.  It allows risk managers to score the severity of each exposure, mitigation capabilities, mitigation initiatives required to address risk factor, responsible parties and mitigation expenses. The IARP allows corporate boards and company management to make informed decisions on tax exposure risk, audit remediation strategies, arbitration preparation and tax controversy defense preparation.

The IARP links to all pertinent IRS documentation and information on each tax statute and IFI audit tier.  The IARP links to pertinent forms and allows for easy information retrieval and search capabilities of the vast IRS document libraries.  The IARP also has links to FASB to have instant access to latest information on accounting and valuation treatments for structured instruments.

The IARP is the newest risk application in the Profit|Optimizer product series.  The Profit|Optimizer is a enterprise risk management tool used by SME’s and industry service providers.

The IARP is available in two versions.

The IRS Audit Risk Program for investment partnerships (IARP)

Buy it on Amazon here: IARP

The Corporate Audit Risk Program (CARP)

Buy it on Amazon here: CARP

Sum2’s Audit Risk Survey results are here: IFI Audit Risk Survey

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IRS Audit Risk Survey: Final Results

Sum2 is please to report the final results of the IRS Audit Risk Survey for Fund Managers. Sum2 has commissioned the survey to determine financial services industry awareness and readiness for IRS audit risk factors. The survey sought to determine industry awareness and readiness to address IRS Industry Focus Issue (IFI) risk exposures for hedge funds, private equity firms, RIAs, CTAs and corporations using offshore structures.

Survey Background

Due to the pressing revenue requirements of the United States Treasury and the need to raise funds by recognizing new sources of taxable revenue; hedge funds, private equity firms, CTA’s and other corporations that utilize elaborate corporate structures, engage in sophisticated transactions and recognize uncommon forms of revenue, losses and tax credits will increasingly fall under the considered focus of the IRS.

Since 2007 the IRS began to transition its organizational posture from a benign customer service resource to a more activist posture that is intent on assuring compliance and enforcement of US tax laws. Specifically the IRS has invested in its Large and Mid-Size Business Division (LMSB) to enhance its expertise and resources to more effectively address the tax audit challenges that the complexity and sophistication of investment management complexes present. The IRS has developed its industry issue competencies within its LMSB Division. It has developed a focused organizational structure that assigns issue ownership to specific executives and issue management teams. This vertical expertise is further enhanced with issue specialists to deepen the agencies competency capital and industry issue coordinators that lends administrative and agency management efficiency by ranking and coordinating responses to specific industry issues. IRS is building up its portfolio of skills and industry expertise to address the sophisticated agility of hedge fund industry tax professionals.

To better focus the resources of the agency the IRS has developed a Three Tiered Industry Focus Issues (IFI). Tier I issues are deemed most worthy of in depth examinations and any fund management company with exposure in these areas need to exercise more diligence in its preparation and response. Tier I issues are ranked by the IRS as being of high strategic importance when opening an audit examination. This is followed by Tier II and Tier III focus issues that include examination issues ranked according to strategic tax compliance risk and significance to the market vertical. Clearly the IRS is investing significant organizational and human capital to address complex tax issues of the industry. The IRS is making a significant institutional investment to discover potentially lucrative tax revenue streams that will help to address the massive budget deficits of the federal government.

Survey Results

The survey was open to fund management executives, corporate treasury, tax managers and industry service providers. CPAs, tax attorneys, compliance professionals, administrators, custodians and prime brokers were also invited to participate in the study. The survey was viewed by 478 people. The survey was completed by 43% of participants who began the survey.

Geographical breakdown of the survey participants were as follows:

• North America 73%
• Europe 21%
• Asia 6%

The survey asked nine questions. The questions asked participants about their awareness of IFI that pertain to their fund or fund management practice and potential mitigation actions that they are considering to address audit risk.

The survey posed the following questions:

• Are you aware of the Industry Focus Issues (IFI) the IRS has developed to determine a fund managers audit risk profile?
• Are you aware of the organizational changes the IRS has made and how it may effect your firms response during an audit?
• Are you aware of the Three IFI Tiers the IRS has developed to assess a funds audit risk profile?
• Are you aware of how the Three IFI Tiers may affect your audit risk exposures?
• Have you conducted any special planning sessions with internal staff to prepare for IFI audit risk exposures?
• Has your outside auditor or tax attorney notified you of the potential impact of IFI risk?
• Have you held any special planning meetings with your outside auditors or tax attorneys to mitigate IFI risk?
• Have you had meetings with your prime brokers, custodians and administrators to address the information requirements of IFI risk?
• Have you or do you plan to communicate the potential impact of IFI risk exposures to fund partners and investors?

Survey highlights included:

• 21% of survey participants were aware of IFI
• 7% of survey respondents planned to implement specific strategies to address IFI audit risk
• 6% of survey respondents have received action alerts from CPA’s and tax attorney’s concerning IFI audit risk
• 26% of survey respondents plan to alert fund investors to potential impact of IFI audit risk

Recommendations

Sum2 believes that survey results indicate extremely low awareness of IFI audit risk. Considering the recent trauma of the credit crisis, sensational fraud events and the devastating impact of last years adverse market conditions; fund managers and industry service providers must remain vigilant to mitigate this emerging risk factor.

These market developments and the prevailing political climate surrounding the financial services sector will bring the industry under heightened scrutiny by tax authorities and regulatory agencies. Unregulated hedge funds may be immune from some regulatory issues but added compliance and disclosure discipline may be imposed by significant counter-parties, such as prime brokers and custodians that are regulated institutions.

Market and regulatory developments has clearly raised the tax compliance and regulatory risk factors for hedge funds and other fund managers. Issues concerning FAS 157 security valuation, partnership domiciles and structure, fund liquidation and restructuring and complex transactions has increased the audit risk profile for the industry. Significant tax liabilities, penalties and expenses can be incurred if this risk factor is not met with a well considered risk management program.

In response to this industry threat, Sum2 has developed an IRS Audit Risk Program (IARP) that prepares fund management CFOs and industry service tax professionals to ascertain, manage and mitigate its IRS risk exposures within the Three IFI Tiers. The IARP provides a threat scoring methodology to ascertain risk levels for each IFI risk factor and aggregates overall IFI Tier exposures. The IARP uses a scoring methodology to determine level of preparedness to meet each of the 36 audit risk factors.

The IARP helps managers to outline mitigation actions required to address audit risk factors and determine potential exposures of each risk. The IARP calculates expenses associated with mitigation initiatives and assigns mitigation responsibility to staff members or service providers. The IARP links users to issue specific IRS resources, forms and documentation that will help you determine an IFI risk relevancy and the resources you need to address it.

The IARP will prove a valuable resource to help you manage your response to a tax audit. It will also prove itself to be a critical tool to coordinate and align internal and external resources to expeditiously manage and close protracted audit engagements, arbitration or litigation events. The IARP product is a vertical application of Sum2’s Profit|Optimizer product series.

The Profit|Optimizer is a C Level risk management tool that assists managers to uncover and mitigate business threats and spot opportunities to maintain profitability and sustainable growth.

The IARP product is available for down load on Amazon.com.

The product can also be purchased with a PayPal account: Sum2 e-commerce

Sum2 wishes to thank all who anonymously took part in the survey.

If you have any questions or would like to order an IARP please contact Sum2, LLC at 973.287.7535 or by email at customer.service@sum2.com.

Sum2 Commissions IRS Audit Risk Study

IRS Audit Risk

Sum2 has commissioned a survey to determine financial services industry awareness and readiness for IRS audit risk factors.  The survey seeks to determine industry awareness of IRS Industry Focus Issue risk exposures for hedge funds, private equity firms, RIAs, CTAs and corporations using offshore structures.

The survey is open to fund management executives, corporate treasury, tax managers and industry service providers.  CPAs, tax attorneys, compliance professions, administrators, custodians and prime brokers are welcome to take the study.

The study’s purpose is to determine the level of industry preparedness and steps fund managers are taking to mitigate potential exposures to IRS Industry Focus Issue risk.

The goal of the survey is to help Sum2 better respond to the critical needs of fund managers and the alternative investment management industry by improving our just released IRS Audit Risk Program (IARP) for fund managers.

Product information on IARP can be accessed here.

If you are unaware of the issues raised in this study, IRS background information can be found here.

Sum2 has also posted a series of alerts on the subject on our Credit Redi blog which can be found here.

This survey asks ten questions. The questions concern participants awareness about IFI that pertain to their fund or fund management practice. The survey seeks to determine overall industry risk awareness, awareness of potential risk exposure to IFI risk factors and any mitigation initiatives managers may plan to address IFI risk factors.   It should take no more then 5 minutes to complete the questionnaire.

Participation in this study is completely voluntary. There are no foreseeable risks associated with this project.   If  participants feel uncomfortable answering any questions, they can withdraw from the survey at any point.   It is very important for us to learn your opinions.

Survey responses will be strictly confidential and data from this research will be reported only in the aggregate.   Respondent data will be coded and will remain confidential.   If you have questions at any time about the survey or the procedures, you may contact Sum2, LLC at 973.287.7535 or by email at customer.service@sum2.com.

Thank you for your time and support.

Please start with the survey by clicking here: IRS Audit Risk Study