On December 2, the Department of Justice (“DOJ”) filed with the Federal District Court for the Northern District of Texas an ex parte petition (and a memorandum in support of the petition) for leave to serve a “John Doe” summons on the court-appointed receiver for the Stanford Group Company, Stanford Trust Company, Ltd., Stanford Fiduciary Investor Services, Inc., and related entities (the “Stanford Group”), claiming that the summons will allow it to uncover the identities of taxpayers who used accounts with the Stanford Group to avoid paying U.S. taxes (Securities and Exchange Commission v. Stanford International Bank Ltd. (In re Tax Liabilities of John Does), N.D. Tex., No. 3-09-CV-0298-N, petition filed 12/2/09).

The requested summons would require the receiver to provide documents identifying certain U.S. taxpayers holding foreign accounts at or through the Stanford Group from 2002 through 2008.

According to the petition, as part of the its Offshore Compliance Initiative, the Internal Revenue Service (the “IRS”) is investigating U.S. taxpayers who, as clients of the Stanford Group Company or the Stanford Trust Company, directly or indirectly held interests in or had signature or other authority over financial accounts with Stanford International, or directly or indirectly held a beneficial ownership interest in a corporation, trust, foundation, or other entity formed or managed through the Stanford Trust Company and, as stated in the petition, “who are likely not complying with U.S. internal revenue laws requiring the disclosure of interests held in foreign accounts and the reporting of income earned on the foreign financial accounts.” U.S. taxpayers having a financial interest in or signature or other authority over financial accounts in a foreign country with aggregate balances over $10,000 must report those accounts to the Treasury Department by filing Form TD F 90.22-1, Report of Foreign Bank and Financial Accounts (“FBAR”), and disclose such interest or signature or other authority on Schedule B of Form 1040 U.S. Individual Income Tax Return.

The declaration of an Internal Revenue Agent and Offshore Compliance Technical Advisor, attached to the petition, states that “approximately 15,000 to 17,500 FBARs should have been filed by the U.S. owners of the [Stanford International Bank] offshore CDs per year and another 3,000 to 3,500 FBARs should have been filed by Stanford Trust per year on the IRA CDs over which it exercised control. Despite this, less than 1,000 FBARs were filed in 2006, and less than 2,000 FBARs were filed in 2007 and 2008 respectively, indicating a high level of non-compliance by U.S. owners of offshore accounts at Stanford International Bank in Antigua.”

In February, the Securities and Exchange Commission charged R. Allen Stanford and his companies with orchestrating a fraudulent, multibillion dollar investment scheme centering on an $8 billion certificate of deposit program. Stanford was indicted for mail, wire, and securities fraud in June.

Who Has an FBAR Reporting Obligation?
Each U.S. person must file an FBAR if such person has a financial interest in, or signature or other authority over, certain foreign financial accounts whose balances, in the aggregate, are greater than $10,000 at any time during a calendar year. The term “financial account” includes any bank, securities, securities derivatives, or other financial instruments accounts. According to the Instructions to the FBAR, the term “financial account” also encompasses any accounts in which the assets are held in a commingled fund, and the account owner holds an equity interest in the fund (including mutual funds).

A U.S. person has a “financial interest” in a foreign financial account if such person is the owner of record or has legal title of such account, regardless of whether the account is maintained for such person’s benefit. U.S. persons having certain relationships with a corporation, partnership, or trust are also considered to have a financial interest in the foreign financial account owned by such corporation, partnership, or trust.

A U.S. person has “signature” authority if such person can control the disposition of money or other property by delivery of a document containing his or her signature to the account holder. Similarly, a U.S. person has “other” authority over a foreign financial account if such person can exercise comparable power over an account by communication with the account holder. Accordingly, with certain exceptions, officers and employees of businesses having signature authority over foreign business financial accounts may individually be required to file an FBAR for such accounts.

However, in Notice 2009-62, 2009-35 I.R.B. 260, the IRS announced that persons with signature authority over, but no financial interest in, a foreign financial account, and persons with a financial interest in, or signature authority over, a foreign commingled fund, have until June 30, 2010, to file an FBAR for the 2008 and earlier calendar years with respect to such foreign financial accounts. For additional information on the FBAR filing deadline with respect to accounts in which assets are held in a commingled fund (including investors in foreign hedge funds and other foreign investment funds), please see Fulbright’s August 10, 2009 Alert – IRS Extends FBAR Filing Deadline for Certain U.S. Persons Until June 30, 2010.

Civil and Criminal Penalties For Failure To File an FBAR
U.S. persons failing to comply with the FBAR filing requirements can face civil and criminal penalties (which can be imposed simultaneously) for such non-compliance. The civil penalty for a non-willful violation of FBAR reporting requirements is up to $10,000 per violation, and the civil penalty for a willful violation is the greater of $100,000 or 50% of the amount in the account at the time of the violation. If the failure to file the FBAR is determined to be criminal, the penalty can rise to a fine of up to $250,000, imprisonment for up to five years, or both. If the failure to file is determined to be part of a criminal activity (for example, it occurs during the violation of another law or is part of an illegal activity), the maximum fine increases to $500,000 and imprisonment of up to 10 years.

Voluntary Disclosure Options
Although the deadline expired on October 15, 2009, for participation in the IRS’s Offshore Voluntary Disclosure Program, which allowed taxpayers with undisclosed offshore bank accounts to settle their tax liabilities with the IRS with reduced penalties and no criminal prosecution, voluntary disclosure still remains an option. According to statements by IRS and DOJ representatives on December 3, 2009, although the IRS’s Offshore Voluntary Disclosure Program is over, taxpayers still can contact the IRS and voluntarily report offshore accounts.

The Internal Revenue Manual discusses voluntary disclosure and defines it as having taken place when the taxpayer’s communication is truthful, timely, and complete, and requires that the taxpayer show a willingness to cooperate with the Service in determining the correct tax liability. The taxpayer must also make good faith arrangements with the IRS to pay the tax, interest, and penalties in full. When successful, taxpayers can avail themselves of the IRS’s voluntary disclosure practice to come into compliance and to possibly avoid criminal prosecution. Taxpayers must be aware that not all voluntary disclosure submissions are accepted, making criminal prosecution a potential outcome in the case of a non-qualifying disclosure (for example, cases involving illegal source income).

Disclosures are timely if they are received before any of the following occurs: (1) the IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation; (2) the IRS has received information from a third party, for example, an informant or other governmental agency, alerting it to the taxpayer's noncompliance; (3) the IRS has already initiated a civil examination or criminal investigation directly related to the taxpayer’s liability; or (4) the IRS has acquired information directly related to the disclosing taxpayer’s liability from a criminal enforcement action, such as by search warrant or grand jury subpoena.

Other Tax Issues for Stanford Group Investors
Investors should consider prompt actions to claim all available income tax refunds and theft loss deductions, and to evaluate the tax implications of any potential exposure to “clawback” claims. Please see Fulbright’s March 4, 2009 Alert - Tax Issues for Investors in Alleged Ponzi Schemes. However, an important factor in consideration of these actions is the exposure to civil and criminal penalties for failure to accurately report in the past on foreign financial accounts.

Text of the petition is available at http://op.bna.com/dt.nsf/id/egrr-7ycup3/$File/stanford.petition.12.2.pdf. Text of the United States memorandum in support of the petition is available at http://op.bna.com/dt.nsf/id/egrr-7ycuq6/$File/memo.stanford.12.2.pdf. Text of the declaration that IRS Revenue Agent Daniel Reeves filed in the case is available at http://op.bna.com/dt.nsf/id/egrr-7ycuvf/$File/stanford.agent.declaration.pdf.

This article was prepared by Jasper G. “Jack” Taylor III (jtaylor@fulbright.com or 713 651 5670), Gregory M. Matlock (gmatlock@fulbright.com or 713 651 5500) and Susan V. Sample (ssample@fulbright.com or 713 651 5458) from Fulbright’s Tax Controversies Practice Group. If you have any questions or need any assistance related to these or any other tax controversy matters, please feel free to contact any of the authors listed above or Nancy T. Bowen (nbowen@fulbright.com or 713 651 7705), Andrius R. Kontrimas (akontrimas@fulbright.com or 713 651 5482), William S. Lee (wlee@fulbright.com or 713 651 5633), Charles W. Hall (chall@fulbright.com or 713 651 5268), Richard L. Hunn (rhunn@fulbright.com or 713 651 5293), Kathryn Keneally (kkeneally@fulbright.com or 212 318 3213), Robert C. Morris (rmorris@fulbright.com or 713 651 8404) or Shawn R. O'Brien (sobrien@fulbright.com or 713 651 5285).

IRS Circular 230 Disclosure
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or tax-related matter[s].