What Constitutes "Reasonable Cause" Under the Streamlined Filing Compliance Procedures—and What Happens If You Don’t Have It?

The IRS’s Streamlined Filing Compliance Procedures (SFCP) offer a lifeline for taxpayers with unreported foreign income or accounts who acted non-willfully. A key eligibility requirement is that the failure to file or report must have been due to non-willful conduct—which includes mistakes, negligence, or good faith misunderstandings—and often overlaps with the concept of “reasonable cause.”

But what if you don’t qualify? This article explains what amounts to “reasonable cause” in the streamlined context and what penalties a taxpayer could face if the IRS determines that the filing failures were due to willful conduct or lacked sufficient justification. We cite relevant case law, Internal Revenue Code provisions, and IRS guidance to provide a practitioner-focused overview.

I. What Is “Reasonable Cause”?

“Reasonable cause” is a defense to avoid penalties for noncompliance with tax filing and reporting obligations. According to Treas. Reg. § 301.6651-1(c)(1):

“If the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time, then the delay is due to reasonable cause.”

This standard applies across numerous information reporting contexts, especially those involving foreign corporations, partnerships, trusts, and bank accounts. For streamlined procedures, the IRS explicitly requires a narrative explanation that outlines the facts leading to noncompliance and supports the taxpayer’s claim that the failure was due to non-willful conduct—essentially, conduct that would qualify as having reasonable cause.

II. Penalties for Failure to File International Forms

Here’s a breakdown of the statutory penalties imposed for failing to file common international information returns—absent reasonable cause.

1. Form 5471 – Foreign Corporations (IRC § 6038)

Failure to file Form 5471 (for U.S. persons with control or ownership in foreign corporations) carries significant penalties:

• $10,000 per form, per year for each failure.

• An additional $10,000 per 30 days (up to $50,000) if the failure continues after IRS notice.

These are automatic assessable penalties (not subject to Tax Court review), unless the taxpayer demonstrates reasonable cause.

See: Farhy v. Commissioner, 160 T.C. No. 6 (2023) (holding that IRS lacked authority to assess §6038(b) penalties without formal notice and demand).

2. Form 8865 – Foreign Partnerships (IRC § 6038 & 6038B)

Similar to Form 5471, the penalty for failing to file Form 8865 is:

• $10,000 per form, plus continuation penalties up to $50,000.

• Additional penalties may apply if required disclosures under § 6038B (transfers to foreign partnerships) are not made.

Penalty abatement is available only with a written showing of reasonable cause, submitted under penalties of perjury.

3. Form 5472 – Foreign-Owned U.S. Corporations (IRC § 6038A)

This form must be filed by 25%+ foreign-owned U.S. corporations and LLCs engaged in reportable transactions with related foreign parties. Penalties include:

• $25,000 per failure, and

• An additional $25,000 per month if the failure continues after notice.

There is no de minimis exception; even dormant entities can face penalties if filing requirements are triggered.

4. FBAR (FinCEN 114)

• Up to $10,000 per year (per FBAR report) for non-willful violations;

• Up to the greater of $100,000 or 50% of the account balance for willful violations;

• Up to $250,000 and 5 years imprisonment (rare, requires fraud) for criminal violations

5. 3520/3520-A

• Up to 35% of foreign gift or distribution, and 5%/penalty per month for failure to file trust returns.

6. 926 (Transfer of property to foreign corp)

• 10% of value transferred, up to $100,000, unless intentional disregard.

III. What Courts Have Said About Reasonable Cause

The legal standard for “reasonable cause” has been shaped by decades of court decisions, especially in the context of civil penalty defenses and international reporting obligations. Courts look to whether the taxpayer exercised ordinary business care and prudence under the circumstances and generally require a fact-specific analysis. Here are the most instructive decisions.

1. United States v. Boyle, 469 U.S. 241 (1985)

In Boyle, the Supreme Court held that reliance on an attorney to file a return does not constitute reasonable cause when the duty is nontechnical and clearly imposed on the taxpayer. There, the executor of an estate relied on counsel to file an estate tax return on time. The Court rejected this as reasonable cause, stressing that the obligation to file is personal and not delegable.

Relevance to Streamlined Procedures:
While Boyle is still cited by the IRS, it is often distinguished in streamlined cases where taxpayers failed to file foreign information returns, not standard returns. Courts have acknowledged that Forms 5471, 8865, FBARs, and other international filings are far more complex than an estate tax deadline.

2. James v. United States, 850 F. Supp. 2d 858 (C.D. Cal. 2012)

The court in James denied penalty relief to a taxpayer who failed to file FBARs. Although he claimed ignorance, the court emphasized his financial sophistication, access to advisors, and the ease with which he could have discovered the requirement.

Key takeaway:
A taxpayer who is educated, wealthy, or who has used tax professionals before is held to a higher standard of diligence. Courts look unfavorably on taxpayers who made no effort to inquire about their obligations, especially when they have substantial foreign accounts.

3. Moore v. United States, 151 Fed. Cl. 294 (2020)

In Moore, the taxpayer failed to file Form 5471 for multiple years. He argued that he was unaware of the filing requirement and relied on his preparer. The court rejected this defense, noting:

• Moore failed to ask questions or review what was filed.

• He had significant foreign investments, indicating some financial sophistication.

• There was no evidence of misleading advice.

Takeaway: Passive reliance on a preparer—without questions or engagement—is insufficient. Taxpayers must show that they made good-faith efforts to understand their filing obligations.

4. Tax Court Memo Decision on 5471 Penalties (2008–09)

In an unpublished U.S. Tax Court decision, the court waived penalties where a taxpayer failed to file Forms 5471 for 2008 and 2009. The court accepted that the taxpayer had relied in good faith on their CPA and was unaware of the specific filing obligations.

Takeaway: Courts will consider the quality of the advice received, the taxpayer’s access to legal or tax guidance, and the overall credibility of their explanation.

5. In re Wyly, 552 B.R. 338 (Bankr. N.D. Tex. 2016)

Though not a streamlined case, Wyly involved failures to report offshore trusts and companies. The court found that the taxpayer’s elaborate offshore structures and conduct lacked credibility, leading to a rejection of his claims of reasonable cause.

Takeaway: Taxpayers with complex offshore arrangements must demonstrate transparency and diligence. Complexity alone is not a defense—it increases the need for caution.

IV. Administrative Guidance on Reasonable Cause

In addition to case law, the IRS has issued substantial administrative guidance that interprets reasonable cause standards in the context of international reporting penalties. While not legally binding, this guidance often reflects the framework IRS examiners use in evaluating penalty abatement or streamlined certifications.

1. Internal Revenue Manual (IRM) § 20.1.1.3.2

This IRM section outlines the general criteria for reasonable cause, including:

• Whether the taxpayer made a reasonable effort to comply;

• Whether circumstances beyond the taxpayer’s control interfered;

• Whether the taxpayer’s actions were consistent with ordinary business care and prudence.

Examples of valid reasonable cause:

• Death or serious illness of the taxpayer or immediate family;

• Destruction of records;

• Reliance on incorrect written IRS advice;

• Good faith reliance on a qualified tax professional regarding a complex issue.

2. IRM § 4.26.16.4.4.1 – FBAR Penalties

This section provides FBAR-specific criteria for evaluating reasonable cause:

• Ignorance of the law may be reasonable cause if coupled with other factors—such as lack of sophistication, minimal account value, or residence outside the U.S.

• Consulting a tax preparer, even if they missed the requirement, may help establish good faith if the taxpayer made a reasonable inquiry.

• Corrective action upon discovery (such as immediately filing once aware) can support mitigation.

3. IRS Practice Units (Forms 5471, 8865, 5472)

The IRS Practice Units—used internally for training—reinforce that:

• Penalty relief requires a formal written statement that includes all facts.

• The taxpayer must file all missing forms with the reasonable cause statement.

• If the taxpayer acted in good faith and the failure was not due to willful neglect, penalties under §§ 6038, 6038A, and 6038B may be waived.

These internal units consistently apply a facts-and-circumstances approach, with a strong emphasis on:

• Whether the taxpayer made reasonable efforts to comply;

• Whether the taxpayer has a history of compliance;

• Whether corrective action was prompt and complete.

4. Private Letter Rulings (e.g., PLR 201147030)

This ruling involved Form 3520 (foreign gift reporting) where the taxpayer misunderstood the requirement. The IRS waived the penalty, noting:

• The taxpayer’s misunderstanding was credible and reasonable.

• The taxpayer relied on poor advice but made efforts to comply.

• Full disclosure was eventually made, with no tax avoidance intent.

Relevance: Even when an error stems from flawed advice, if the taxpayer acted in good faith and corrected the mistake swiftly, the IRS may find reasonable cause.

V. Implications for Streamlined Procedures

Under SFCP, taxpayers must file all missed returns and submit a narrative certification (Form 14653 or 14654) stating:

• The conduct was non-willful;

• The failure resulted from reasonable cause;

• The taxpayer is now fully compliant.

Although the IRS does not impose separate 6038 or FBAR penalties under the streamlined procedures, it reviews submissions carefully. If the IRS suspects willfulness or rejects the reasonable cause claim, the taxpayer can be exposed to full penalty regimes, potential examination, and even criminal investigation.

VI. Best Practices for Practitioners

• Use case law and PLRs to support reasonable cause.

• Emphasize non-willfulness and mitigating factors.

• Provide details on education, access to advisors, and steps taken after discovery.

• Include all required forms—incomplete filings negate the defense.

• Consider alternatives (e.g., voluntary disclosure or quiet disclosure) if facts are borderline.

• Each taxpayer’s situation is different—and in our experience, the difference between a successful streamlined submission and a rejected one often comes down to how the reasonable cause statement is framed.

Conclusion

“Reasonable cause” in the streamlined context is both a shield and a sword. It protects eligible taxpayers from harsh penalties but requires thorough documentation, consistency, and truthfulness. The cost of failure to file international forms can be steep—running into tens of thousands of dollars per year, per form—but where the failure was truly non-willful and supported by facts, there is still a path to compliance and relief.

For customized tax advice, contact Christine Alexis Concepción at caconcepcion@concepcionlaw.com.

Proposed IRC Section 899: U.S. Strikes Back at Discriminatory Foreign Taxes

On May 22, 2025, the U.S. House of Representatives narrowly passed the “One Big Beautiful Bill Act”, a $3.8 trillion tax reconciliation package. Tucked inside is the proposed Section 899, a powerful new provision targeting what the U.S. considers discriminatory foreign tax practices.

While the legislation now moves to the Senate—where changes are likely—the introduction of Section 899 represents a significant shift in U.S. international tax strategy.

What Is Proposed IRC Section 899?

Section 899 would authorize the Treasury to impose surtaxes on individuals and entities from countries implementing taxes perceived as unfair or extraterritorial toward U.S. businesses.

Targeted foreign taxes include:

·       Digital Services Taxes (DSTs)

·       Diverted Profits Taxes (DPTs)

·       Undertaxed Profits Rules (UTPRs) under OECD’s Pillar Two

·       Other taxes Treasury designates as discriminatory

Importantly, Section 899 is designed not simply as a penalty but as a negotiating tool — encouraging foreign governments to repeal these taxes before penalties take effect.

Who Would Be Affected?

The surtax would apply to “applicable persons,” including:

·       Foreign governments and their sovereign wealth funds (even those normally exempt under Section 892)

·       Foreign individuals and corporations from designated countries

·       Trusts with majority beneficial ownership by applicable persons

·       Private foundations organized in discriminatory jurisdictions

·       Non-U.S. corporations more than 50% owned by applicable persons (using Section 958(a))

Foreign corporations majority-owned by U.S. persons are excluded.

Once “tainted,” entities must have zero ties to discriminatory countries for a full year to remove the designation.

When Is a Country “Discriminatory”?

A country earns this label by imposing:

·       DSTs, DPTs, UTPRs, or

·       Other taxes deemed unfair by Treasury

Treasury will publish a quarterly list of designated jurisdictions. Likely impacted regions: Europe, Asia-Pacific (Australia, India, South Korea, Japan), Canada, parts of the Middle East.

How the Surtax Works

The surtax applies to U.S.-source income:

• FDAP Income (dividends, interest, rents, royalties): Currently subject to a 30% withholding tax, this could rise to a maximum of 50% after the surtax phases in.

• FIRPTA Real Estate Gains: Gains from the sale of U.S. real estate (or interests in real estate investment trusts or partnerships) are currently subject to a 15% withholding tax, which could increase to 35% with the surtax.

• Effectively Connected Income (ECI): Active business profits earned by non-U.S. corporations in the United States would be taxed at higher U.S. corporate rates under the surtax regime.

• Branch Profits Tax: Non-U.S. companies operating through U.S. branches currently face a 30% tax on repatriated profits, which could climb to 50%.

• Private Foundation Investment Income: Investment income earned by non-U.S. private foundations would see U.S. tax rates rise from 30% up to 50%.

Non-U.S. persons’ capital gains on public stock remain unaffected.

Impact on BEAT

Non-U.S. corporations subject to the Base Erosion and Anti-Abuse Tax (BEAT) will face:

·       A fixed 12.5% BEAT rate

·       No 3% base erosion threshold — any deductible payment triggers BEAT

·       Capitalized amounts treated as deductions — reducing flexibility

Tax Treaties and Exemptions

While Section 899 doesn’t explicitly override U.S. tax treaties, treaty-reduced withholding rates could still face the surtax increases.

Portfolio Interest Exemption (PIE) appears to be protected — but further clarification is needed to ensure zero-rate exemptions are not subject to the surtax.

Traps for the Unwary

·       Residency Missteps: Simply incorporating in Cayman/Luxembourg may not avoid taint if ownership is tied to discriminatory countries.

·       Ultimate Beneficial Ownership: Must be documented carefully.

·       Withholding Agents: Will need updated systems and compliance documentation.

Immediate Planning Steps

Action Items:

·       Monitor U.S. Legislation: Stay updated on Congressional negotiations.

·       Monitor Foreign Taxes: Watch for countries repealing discriminatory measures.

·       Clarify Effective Dates: Track jurisdiction-specific triggers.

·       Review Corporate Structures: Ensure U.S. majority ownership where possible.

·       Reassess Income Sourcing: Can revenue streams be restructured as foreign-sourced?

·       Model Financial Impacts: Evaluate after-tax returns and cash flow.

·       Prepare Withholding Agents: Update documentation, systems, gross-up clauses.

Conclusion

Section 899 introduces a diplomatic tax penalty designed to encourage foreign governments to scrap discriminatory taxes. Whether it becomes a significant tax burden or a largely avoided measure will depend on global diplomatic negotiations.

However, companies, private investors, and family offices should assume the risk is real — and consider reviewing their structures to identify potential Section 899 traps.

For customized tax advice, contact Christine Alexis Concepción at caconcepcion@concepcionlaw.com

When TurboTax Isn't Enough: What the Huang Case Teaches About Reasonable Cause

In an increasingly digital world, many taxpayers turn to tax preparation software like TurboTax to file their returns. However, the recent case of Huang v. United States (N.D. Cal. 2025) highlights the risks of relying solely on software—especially for taxpayers with international reporting obligations.

The Case in Brief

Jiaxing Huang, a U.S. taxpayer, received sizable monetary gifts from her non-resident parents in 2015 and 2016. Using TurboTax, she filed her tax returns but did not file Form 3520, which is required to report certain foreign gifts. TurboTax advised her that gifts did not need to be reported—a statement generally true for domestic gifts, but not for foreign-sourced gifts.

When Huang later discovered her reporting obligation, she promptly filed the missing Forms 3520, most likely as a “quiet disclosure” and not through the Streamline procedures. Despite her corrective action, the IRS assessed penalties exceeding $90,000. Huang sought abatement, arguing that she had "reasonable cause" because she relied on TurboTax’s advice and acted quickly to correct the issue once aware. The IRS denied her request.

Huang subsequently filed a refund suit in federal court, asserting four claims: (1) she had reasonable cause for the late filing, (2) the IRS acted arbitrarily by inflating her penalties, (3) the IRS lacked authority to assess the penalties, and (4) the IRS failed to properly obtain supervisory approval for the penalties.

The court ruled in favor of Huang on one key issue: her reasonable cause argument. The other claims were dismissed. Notably, the court found that Huang plausibly alleged she relied on TurboTax in good faith—analogous to relying on a competent tax professional—and that her inexperience and the complexity of the international reporting obligations could amount to reasonable cause. Her case will now proceed on the reasonable cause issue.

Why This Case Matters for Taxpayers Using Tax Software

This decision is significant for individuals who rely on tax software, particularly those with international reporting requirements like Forms 3520, 5471, or FBARs. These forms involve complex rules that most standard software platforms are not well-equipped to handle.

The Huang case signals that courts may be willing to treat reliance on reputable tax software as reasonable cause, at least at the motion to dismiss stage. The court acknowledged that TurboTax’s erroneous guidance—advising that gifts did not need reporting—could mislead a taxpayer exercising ordinary business care and prudence. Importantly, the court also noted that ignorance of the law alone is insufficient; however, combined with other factors such as the complexity of the law and immediate corrective actions, a reasonable cause defense could be viable.

For clients with international elements in their financial lives, this case emphasizes that even honest mistakes made while using widely available tax tools could potentially be excused, provided they act diligently to remedy errors once discovered.

Where This Case May Not Help Clients Using Tax Preparers

However, Huang may prove to have its limits. Taxpayers who use human tax return preparers instead of software face a different legal standard. Courts generally expect that tax professionals—even non-CPAs or unenrolled preparers—are competent and that taxpayers exercise some oversight. If a preparer fails to file required forms or provides incorrect advice, the taxpayer may not be able to simply claim reliance as a defense.

Unlike software, where it seems like courts may be sympathetic to arguments that the platform’s limitations or misinformation led to a reasonable misunderstanding, reliance on a human preparer often requires showing that the taxpayer did not ignore warning signs, asked reasonable questions, and disclosed all necessary facts.

Additionally, courts scrutinize whether the preparer was qualified and whether the taxpayer’s reliance was truly in good faith. This standard stems from case law such as United States v. Boyle, 469 U.S. 241 (1985), where the Supreme Court held that taxpayers have a non-delegable duty to file tax returns on time, even if relying on an agent or preparer. Courts have consistently applied this principle to tax preparer reliance cases, requiring a showing that the preparer was competent and that the taxpayer acted prudently. Blind reliance on an unqualified or unvetted preparer is unlikely to establish reasonable cause. By contrast, Huang’s reliance was on a commercially reputable software product widely used by millions.

Practical Lessons

For clients with foreign gifts, inheritances, investments, or business interests, this case underscores the need to:

1. Understand Software Limitations: Tax software is designed for broad use and may not flag niche international reporting requirements.

2. Seek Professional Help for Complex Issues: When international elements are involved, consulting a tax professional experienced in cross-border matters is crucial.

3. Act Quickly if Mistakes are Found: Immediate corrective action, as Huang took, can be a strong factor in demonstrating reasonable cause.

4. Document Reliance and Communications: Keeping records of software guidance or preparer advice can help support a reasonable cause defense if penalties are assessed.

While Huang opens a potential path to relief for taxpayers misled by software, it also serves as a cautionary tale. For complex international tax matters, an investment in qualified advice is likely far cheaper than litigating a penalty dispute years later.

For customized tax advice, contact Christine Alexis Concepción at caconcepcion@concepcionlaw.com.

Pre-Immigration Tax Planning: What You Need to Know Before Moving to the United States

If you're planning to move to the United States, there’s more to think about than booking flights and finding a new home. One of the most important — and most overlooked — parts of the transition is your financial and tax planning.

The U.S. taxes its residents on their worldwide income, and it applies complex rules to foreign trusts, corporations, and investment structures. Without the right strategy, you could find yourself facing unexpected tax bills and complicated compliance requirements.

Here are key areas to address before making the move:

1. Entity Restructuring and Classification: If you own foreign companies, you may be surprised to learn that the U.S. has special rules (like Subpart F and GILTI) that can tax you on your company’s profits — even if the company doesn’t pay you a dividend. Careful restructuring can help you avoid being caught in these rules and can also streamline your future tax reporting.

   Under the U.S. "check-the-box" regulations (Treasury Regulations §301.7701-2 and §301.7701-3), certain foreign entities are assigned default classifications based on the number of owners and their liability for debts. For example, a Spanish S.L. (Sociedad Limitada) would typically default to corporate treatment unless an entity classification election (Form 8832) is filed to treat it as a disregarded entity (if single-member) or a partnership (if multi-member). By contrast, a French S.A. (Société Anonyme) defaults to corporate treatment and is considered a "per se" corporation under U.S. regulations, meaning it cannot change its classification through the check-the-box election. Making a timely entity classification election or converting a per-se corporation to an eligible entity before becoming a U.S. tax resident can prevent unfavorable anti-deferral regimes and reduce the compliance burden.

2. Tax Reporting for International Entities and Investments: Becoming a U.S. tax resident means you’ll be subject to extensive reporting requirements. This includes filing FBARs (FinCEN Form 114) for foreign bank accounts, Form 8938 for foreign financial assets, and potentially Forms 5471, 5472, 8865, or 8858 if you own interests in foreign corporations, partnerships, or disregarded entities.

   Part of the goal of pre-immigration planning is not just to minimize taxes, but also to simplify your reporting obligations. Restructuring foreign investments, including foreign mutual funds that may be treated as Passive Foreign Investment Companies (PFICs), can help avoid punitive anti-deferral tax regimes and reduce the complexity and cost of annual compliance.

3. Foreign Trust Cleanup: Many countries use trusts differently than the U.S., and the IRS imposes strict reporting and tax rules on foreign trusts once you become a U.S. person. If you are the beneficiary or creator of a trust abroad, it’s critical to review whether that trust will trigger burdensome filings like Form 3520/3520-A or create adverse income tax consequences. Sometimes it’s better to restructure or terminate foreign trusts before becoming a U.S. resident.

4. Gain Recognition Planning: In the U.S., you don’t get a "step-up" in the value of your assets when you become a tax resident. That means any appreciation in your assets before your move could be taxed later when you sell. It’s often a good idea to trigger gains before moving, taking advantage of lower foreign tax rates and capturing unrealized gains before the IRS takes an interest.

For Wealth Advisors and Professionals: Wealth advisors, private bankers, and tax professionals often serve as the first point of contact when clients begin planning a move. Flagging these issues early can make a huge difference in the client’s long-term financial health. Partnering with an experienced international tax attorney ensures that no key issues are overlooked and that the client’s transition is as smooth as possible.

Final Thoughts: Pre-immigration planning is about more than tax savings — it’s about peace of mind, compliance, and securing your financial future in your new home. If you're considering a move to the United States, now is the time to develop a strategy that protects and preserves your wealth across borders.

If you or your clients are planning an international move, we’re here to help.

For customized tax advice, contact Christine Alexis Concepción at caconcepcion@concepcionlaw.com.

Protecting Attorney-Client Privilege in IRS Streamlined Filing Compliance Submissions: The Role of Kovel Agreements

The IRS Streamlined Filing Compliance Procedures (which includes the Streamlined Domestic Offshore Procedures and the Streamlined Foreign Offshore Procedures) offer a critical path to compliance for taxpayers who failed to report foreign financial assets but whose conduct was non-willful. While these procedures provide relief from certain penalties, the decision to come forward is often accompanied by sensitive discussions about intent, omissions, and timing—issues that could be pivotal if the IRS challenges the non-willfulness assertion. This raises an essential question: how do we protect those communications during the disclosure process?

I. Privilege Concerns in Tax Compliance

Attorney-client privilege exists to protect confidential communications between a client and their attorney when made for the purpose of obtaining legal advice. However, this privilege does not extend to accountants—even when they are providing advice on complex tax matters—unless specific structures are put in place.

This distinction was made clear in United States v. Arthur Young & Co., 465 U.S. 805 (1984), where the Supreme Court held that there is no accountant-client privilege under federal law in criminal or civil tax proceedings. The Court emphasized that the public has a right to “every man’s evidence,” and that accountants serve as “public watchdogs,” not confidential advisors.

In Florida, attorney-client privilege is codified in § 90.502, Florida Statutes, which protects communications made for the purpose of securing legal services. Importantly, this privilege may extend to third parties—such as accountants—when their involvement is necessary to facilitate legal advice. This is where the doctrine established in United States v. Kovel, 296 F.2d 918 (2d Cir. 1961), becomes crucial.

II. The Kovel Agreement: Bridging Legal and Accounting Expertise

The Kovel doctrine allows attorneys to extend privilege to non-lawyers, such as accountants, if the non-lawyer is acting as a “translator” or facilitator of legal advice. In Kovel, the Second Circuit held that communications with an accountant working under the direction of an attorney could be protected as part of the attorney-client relationship.

For this protection to apply:

1. The accountant must be engaged by the attorney, not the client directly.

2. The accountant’s role must be to assist the attorney in providing legal advice, not to provide standalone accounting services.

3. A formal agreement should be in place—often called a Kovel letter—outlining the scope of engagement.

IRS Chief Counsel has acknowledged the application of privilege in these settings in internal memoranda, but also cautions that the privilege is narrowly construed and does not apply to the preparation of tax returns or communications intended for eventual disclosure.

III. Streamlined Procedures and the Risk of Disclosure

The Streamlined Filing Compliance Procedures require the taxpayer to submit amended or delinquent tax returns, FBARs, and a signed Certification of Non-Willfulness—a narrative explanation of their conduct. This certification becomes a key document if the IRS later audits the submission or disputes the taxpayer’s good-faith intent.

Discussions surrounding how to frame the facts, what to include or omit, and whether the taxpayer qualifies for the streamlined program are all potentially sensitive. If these discussions occur outside of the protection of attorney-client privilege—such as directly with an accountant—they may be discoverable.

In contrast, if a taxpayer first retains an attorney, and the attorney then brings in an accountant via a Kovel agreement, these same communications may be shielded. The attorney oversees the legal analysis, and the accountant supports the legal work with technical calculations, data reconstruction, or return preparation.

IV. Best Practices for Maintaining Privilege

To ensure the protection of privilege in Streamlined or other voluntary disclosures:

• Engage legal counsel early. Privilege applies from the first confidential consultation, so the initial point of contact matters.

• Use a Kovel agreement to structure the engagement of accountants. Ensure the accountant is working at the direction of the attorney and only for purposes of facilitating legal advice.

• Document the relationship clearly. A Kovel letter should define scope and confirm that communications flow through legal counsel.

• Avoid mixing privileged and non-privileged functions. Tax return preparation is not privileged—even if done by an accountant under Kovel.

V. Limits of Privilege: The Crime-Fraud Exception

Even when attorney-client privilege exists, courts can pierce that protection under the crime-fraud exception. This exception applies when a client uses legal advice or attorney communications to further a crime or fraud—even unknowingly.

In United States v. Lax, No. 1:18-cv-04061 (E.D.N.Y. 2022), the court addressed whether privilege protected communications in a civil tax enforcement action. The IRS alleged that the taxpayer, Lax, had engaged in fraudulent behavior with the assistance of counsel. The court permitted the government to access attorney communications under the crime-fraud exception, finding sufficient evidence that the legal advice may have furthered a scheme to mislead the IRS.

This case serves as a warning: privilege is not absolute. If a taxpayer provides false information to an attorney or misuses the legal process, those communications may lose protection. In the context of the Streamlined Procedures, where a signed certification of non-willfulness is central, the stakes are particularly high.

VI. Legal Authority for the Streamlined Filing Compliance Procedures

It is important to understand that the Streamlined Filing Compliance Procedures (SFCP) are not grounded in statute. Instead, they were developed and announced administratively by the IRS, originally in 2012 and substantially revised in June 2014, in response to increasing offshore noncompliance among U.S. taxpayers.

The SFCP exists as an exercise of IRS enforcement discretion, grounded in general statutory authority, including:

• IRC § 6201 – authority to assess tax,

• IRC § 7801 and § 7803 – authority of the Secretary of the Treasury and the IRS Commissioner to administer the Internal Revenue Code, and

• Treasury regulations granting discretion in enforcement and penalty administration.

There is no safe harbor or codified right to participate in the streamlined program. It is not found in the Internal Revenue Code or the Code of Federal Regulations, nor has it been published as formal guidance in the Internal Revenue Bulletin. Instead, its terms are laid out in IRS FAQs, website pages, internal memoranda, and taxpayer forms such as Form 14654 (U.S. residents) and Form 14653 (non-residents).

Because of its administrative nature, the IRS may modify or terminate the program at any time. Likewise, a taxpayer who submits under SFCP has no formal appeal rights if the IRS later determines that the submission was invalid due to willfulness or other deficiencies.

VII. Conclusion

Taxpayers seeking relief under the Streamlined Filing Compliance Procedures may be exposing themselves to legal risk if they do not structure their representation properly. Attorney-client privilege, when preserved through a Kovel agreement, can provide essential protection—especially when the narrative surrounding intent is at the heart of the submission.

As the IRS continues to scrutinize offshore compliance, maintaining privilege isn’t just good practice—it’s a critical safeguard.

For customized tax advice, contact Christine Alexis Concepción at caconcepcion@concepcionlaw.com

Part II: An In-Depth Analysis of U.S. Tax Implications for Usufruct Arrangements

Estate planning in many civil law jurisdictions often involves splitting full property ownership into two distinct parts: the right to use and enjoy the property (the usufruct) and the underlying legal title (the bare ownership). Although this method serves both tax and non‐tax objectives abroad, it poses unique challenges under U.S. tax law, where there is no direct counterpart to these civil law concepts. U.S. tax authorities therefore frequently draw analogies—comparing the arrangement to gifts of future interests, testamentary bequests, foreign trusts, or even joint tenancies—to determine its tax treatment.

Basic Framework of Usufruct and Bare Ownership

When an individual retains a usufruct, they secure the right to benefit from an asset during a specified period (often their lifetime) while another party receives the bare title. For instance, in real estate, the usufructuary may live in the property or collect rental income, whereas the bare owner holds title without immediate use. Similarly, with financial assets like stocks, the usufruct holder receives dividends and income, while the bare owner’s rights to capital appreciation remain on hold until the usufruct ends.

For U.S. taxpayers, the income generated by the usufruct—such as rents or dividends—is taxable. In contrast, the bare owner generally does not face current income tax on the asset’s earnings until a triggering event (like a sale) occurs. However, future capital gains are calculated using the donor’s original basis, potentially increasing tax liability if the asset has appreciated significantly.

French Tax Planning and Divided Ownership

French estate planning has long employed divided ownership strategies because of steep gift and inheritance taxes—rates can climb as high as 45–60% between close relatives, with a modest annual exemption. In this system, when a donor transfers the bare ownership while retaining usufruct, the bare interest is valued at a fraction of the full property’s worth. For example, depending on the usufructuary’s age, the bare interest might be appraised at as little as 90% of the property's value.

This valuation method is coupled with a favorable “step-up” in basis: when the gift is made, the bare ownership is revalued to its fair market value, erasing any built-in gain for future sales. Additionally, because French law renews a modest exemption every 15 years, long-term planning can further reduce estate tax exposure. The net effect is that retaining a usufruct while transferring bare ownership becomes an attractive strategy for inter vivos transfers and estate planning under French tax rules.

The French Model of Divided Ownership

Under French law, full property rights are divided into:

Usufruct: Grants the right to use the asset and collect income (such as rent or dividends). The usufructuary is responsible for maintaining the property’s condition during the term.

Bare Ownership: Represents the legal title without the right to immediate enjoyment. The bare owner can eventually sell or transfer the property but is restricted during the usufruct term.

Transfers of bare ownership must be executed through a notarial deed and are subject to legal restrictions. For example, if the bare owner is also an heir under forced heirship rules, the transfer might be considered an advance on inheritance. Further, conditions in the deed may prevent the bare owner from selling or encumbering the property without satisfying specific criteria, ensuring the donor’s retained rights remain protected.

U.S. Tax Treatment: Life Estates versus Trust Structures

U.S. tax authorities have addressed the tax consequences of usufruct and bare ownership arrangements in several rulings, though their guidance is not entirely consistent. Broadly, the analysis tends to fall into two frameworks: treating the arrangement as a life estate or as a trust.

Treating the Arrangement as a Life Estate

In Revenue Ruling 64‑249, the IRS examined a case involving a Louisiana usufruct in S corporation shares. The court analogized the arrangement to a life estate—where the usufructuary is entitled to the economic benefits (like dividends) for life, while the remainder (bare ownership) passes to other beneficiaries. The IRS concluded that the usufruct holder should include the S corporation’s dividend income in gross income and be treated, for certain tax purposes, as if they were the owner.

A similar approach was taken in another ruling (LTR 201032021) involving a foreign holding company. Here, even though the donor transferred the legal title to her descendants, she retained full economic benefits through her usufruct. The IRS thus regarded her retained interest as equivalent to a life estate, emphasizing that she maintained the power to enjoy income from the shares throughout her lifetime.

Analyzing the Arrangement as a Trust

Other rulings have focused on whether the arrangement should be viewed as establishing a trust. In LTR 9121035, for example, a foreign individual received a usufruct interest through his mother’s will while the bare ownership passed to his children who were dual citizens of the U.S. and the foreign country. The IRS ruled that, because the usufruct retained all the income benefits and the arrangement met specific trust characteristics under entity classification rules (the father was usufruct holder, the executor, and had the responsibility to protect and conserve the estate for his children), it should be treated as a trust for U.S. federal tax purposes.

Similarly, in LTR 8748043 the IRS grappled with the issue of which party should be considered the owner of a foreign corporation’s stock for purposes of controlled foreign corporation rules. Since the usufruct holder received 100% of the income from the stock during the usufruct term, the IRS cited to Treas. Reg. Section 1.958-1(c)(2) and determined that, for anti-deferral purposes, the usufructuary was treated as the owner—thus shielding the bare owners from immediate tax liabilities on certain distributions.  This decision was consistent with the IRS’s position taken in Rev. Rul. 64-249 discussed above.

Special Cases: Incomplete Gifts and Testamentary Dispositions

Not every arrangement neatly fits into a completed gift framework. In LTR 201825003, a transfer of valuable artworks was structured so that the donor and spouse retained a usufruct while the remainder interest was designated for foreign museums. Although conditions existed that might have allowed revocation of the transfer, the IRS ultimately concluded that the gift was complete for U.S. gift tax purposes—meaning the full value of the artwork would eventually be included in the donor’s estate.

In Estate of Lepoutre v. Commissioner, 62 T.C. 84, a French marital contract that created a usufruct on community property was considered, for U.S. estate tax purposes, as a testamentary disposition. Even though the surviving spouse’s rights arose during the donor’s lifetime, they only fully materialized upon death, and thus the transfer was taxed accordingly.

Income Tax Considerations for Usufruct Holders

From an income tax perspective, a U.S. taxpayer holding a usufruct is generally taxed on the full income generated by the asset—whether that income comes in the form of rent, dividends, or other returns. This treatment mirrors that of an outright owner. To avoid double taxation, any income taxed in a foreign jurisdiction may be eligible for a foreign tax credit.

Nonetheless, complexities emerge when U.S. taxpayers hold usufruct interests in foreign entities. For example, anti-deferral regimes such as subpart F can apply if the economic benefits derived from a foreign corporation’s shares are attributed solely to the usufruct holder. Determining the precise allocation of income between the usufruct holder and the bare owner requires a detailed review of both U.S. tax principles and the applicable foreign law.

Conclusion and Key Considerations

Despite the limited and occasionally inconsistent guidance from U.S. authorities, several themes emerge when analyzing the tax treatment of usufruct and bare ownership arrangements:

Document Review: A careful examination of the legal documents that establish the property split is essential. Understanding the precise rights and restrictions under both U.S. and foreign law is critical.

Variety of Fact Patterns: The specifics of each arrangement—ranging from the degree of control retained by the usufruct holder to how economic benefits are shared—can materially affect tax outcomes.

 Need for Expert Advice: Given the complexity of these issues, it is advisable for taxpayers to seek guidance from professionals experienced in both U.S. tax law and the relevant foreign legal systems.

In essence, while a usufruct arrangement might simplify the division of rights under foreign law, its U.S. tax implications are multifaceted. Both income and transfer tax consequences must be evaluated in light of the arrangement’s detailed terms, making expert consultation a vital part of effective estate and tax planning.

For customized tax advice, contact Christine Alexis Concepción at caconcepcion@concepcionlaw.com

The One Big, Beautiful Bill: What the 2025 Tax Reform Means for Businesses, Employees, and Investors

Overview of the 2025 Tax Reform

The U.S. House of Representatives has passed the “One Big, Beautiful Bill”, a sweeping 2025 tax reform package that redefines the U.S. tax landscape. From new business deductions to expanded health savings account (HSA) eligibility and revised international tax enforcement, this bill has major implications for businesses, employees, and investors.

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International Tax Policy Updates

1. TCJA Provisions Made Permanent: The bill locks in lower international tax rates: GILTI (10.5%), FDII (13.125%), and BEAT (10%).

2. New Section 899: Penalties for Discriminatory Foreign TaxesImposes escalating taxes on foreign entities from “discriminatory countries,” aligning with U.S. efforts to resist the OECD global minimum tax.

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Estate & Gift Tax Changes

$15M Unified Credit Exemption Made Permanent

The estate, gift, and GST tax exemption increases to $15 million per individual, indexed for inflation. This encourages long-term estate planning and wealth transfer.

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Business Tax Reform Highlights

1. R&D Expense Deduction Flexibility
   Taxpayers can now choose how to deduct domestic research and development expenses, with expanded credits for software and engineering work. Startups benefit from refundable R&D credits—even without taxable income.

2. Bonus Depreciation & Section 179 Expansion
   Reinstates 100% bonus depreciation through 2030 and increases the Section 179 deduction limit to $2.5 million, supporting capital investment in equipment and property.

3. 199A QBI Deduction Boost

   The Qualified Business Income deduction is made permanent and increased to 23%, with clarified income eligibility rules.

4. More Generous Business Interest Deductions
   Changes to adjusted taxable income (ATI) calculations allow for greater interest expense deductions by excluding depreciation and amortization.

5. Excess Business Losses Made Permanent
   Codifies the excess business loss limitation, now with broader applicability and indexed thresholds.

6. Qualified Opportunity Zones (QOZ) Revamped
   A new QOZ program begins in 2027, emphasizing rural investment, with new compliance and reporting mandates.

7. Expanded Low-Income Housing Tax Credits
   The bill increases credit allocations through 2029 and enhances access for rural and Indian areas.

8. Rural Loan Interest Exemption
   Banks may exclude 25% of interest income on agricultural or aquaculture real estate loans from taxable income.

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Employee Benefits & ACA Changes

1. HSA Expansion
   Health Savings Accounts (HSAs) see broadened eligibility, including Medicare recipients and FSA spouses. Contribution limits double for individuals earning under $75,000.

2. Employee Retention Credit (ERC) Restrictions
   ERC claims filed after January 31, 2024 are denied. Statute of limitations for audits is extended to 6 years.

3. ACA Exchange Updates
   ACA marketplaces must verify 75% of new enrollees and conduct shorter open enrollment periods. Employers may see higher plan participation.

4. DACA Exclusion from ACA
   DACA recipients lose eligibility for ACA coverage and subsidies, potentially shifting coverage burdens to employers.

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Conclusion: What Comes Next?

The Senate will now review the bill. If passed, the One Big, Beautiful Bill will reshape tax policy for the next decade. Businesses, estate planners, and benefits administrators should prepare now.

For customized tax advice, contact Christine Alexis Concepción at caconcepcion@concepcionlaw.com 

Part I: A Primer on Usufructs and Their Treatment by the IRS

In the complex world of tax law, unique property rights often create uncertainty, especially when navigating international tax and estate planning. One such concept that arises in civil law jurisdictions but is less familiar in common law countries like the United States is the usufruct.

Understanding its legal implications and how it is treated by the IRS is essential for international tax professionals and individuals dealing with cross-border tax and estate planning.

What is a Usufruct?

A usufruct is a legal arrangement in which one party (the usufructuary) has the right to use and enjoy the benefits of an asset while another party (the bare owner) retains ownership of the underlying property. This structure is commonly used in countries with civil law systems, such as France, Spain, and Louisiana in the U.S.

In practical terms, a usufructuary can live in a property, lease it out, or generate income from it without holding full legal ownership. Upon the expiration of the usufruct—either due to the usufructuary’s death or the completion of a predetermined term—full ownership reverts to the bare owner.

IRS Treatment of Usufructs

The U.S. tax system does not explicitly recognize usufructs in the same way as civil law jurisdictions. However, the IRS typically treats them based on their economic substance rather than their formal classification. Some key considerations include:

1. Estate and Gift Tax Implications:
   — When a usufruct is granted, the IRS may consider it a transfer of a present interest in property. If a U.S. taxpayer receives a usufruct from a non-U.S. person, the IRS might treat the value of the usufruct as a gift subject to U.S. gift tax regulations.

   — If the usufructuary dies, the IRS may include the usufruct’s value in their taxable estate, depending on the circumstances.

2. Income Tax Considerations:
   — The usufructuary is generally considered the beneficial owner of the property for income tax purposes. Any rental income or other earnings derived from the usufruct are taxable to the usufructuary under U.S. tax law.

   — Depreciation deductions, where applicable, might also be available to the usufructuary.

3. Step-Up in Basis Issues:
   — One major question in estate planning involving usufructs is whether the bare owner receives a step-up in basis upon the usufructuary’s death. The answer often depends on how the IRS classifies the arrangement, whether as a life estate or another structure.

Key Considerations for U.S. Taxpayers

For U.S. persons inheriting or receiving property interests through a usufruct, it is crucial to:

• Consult with a tax attorney or advisor familiar with cross-border estate planning.

• Determine whether any U.S. tax filing obligations arise from the usufruct (such as Form 3520 for foreign gifts or trusts).

• Understand potential reporting requirements related to foreign assets.

Final Thoughts

While usufructs offer valuable estate planning advantages in civil law jurisdictions, they introduce unique tax challenges for U.S. persons. Given the IRS’s focus on the substance of an arrangement rather than its form, taxpayers must ensure compliance with U.S. tax laws when dealing with usufructuary rights.

Proper planning and expert legal guidance can help mitigate risks and optimize tax outcomes in these situations.

For customized tax advice, contact Christine Alexis Concepción at caconcepcion@concepcionlaw.com

FBAR UPDATE: The Sixth Circuit Rules Willfulness Includes Recklessness - March 2024

Background

Under the Bank Secrecy Act, individuals with foreign bank accounts containing an aggregate of $10,000 or more must annually file a Report of Foreign Bank and Financial Accounts (“FBAR”) with the U.S. Department of the Treasury. An individual who fails to file an FBAR by the deadline risks civil penalties.

If the failure to file an FBAR is not willful, the penalty shall not exceed $10,000.  However, for any person willfully violating the FBAR requirement, the maximum penalty increases to the greater of $100,000 or 50% of the balance in the account at the time of the violation. A person willfully violating the FBAR requirements could also subject himself to criminal penalties.

Unfortunately, there is no “clear-cut” test to determine whether an act is “willful” and several federal courts tasked with assigning it a legal interpretation have expanded its meaning. While it inherently involves the obvious meaning that a person is willful if they are aware of the FBAR reporting requirement and intentionally choose not to file, these courts have broadened the definition to encompass objectively reckless conduct related to the FBAR reporting obligation. According to this expanded definition, a taxpayer is deemed to engage in objectively reckless conduct if they clearly should have been aware of an FBAR reporting requirement, and discovering this obligation would have been relatively straightforward for them.

In the recent Sixth Circuit Court of Appeals case, United States v. Kelly (2024), the court further expanded the definition of willfulness to include “objectively reckless conduct.”

Summary of United States v. Kelly

In United States v. Kelly (2024), Kelly (the “taxpayer”), a U.S. citizen, opened an interest-bearing account at a bank in Switzerland in 2008, keeping it "numbered" to hide his identity and avoiding disclosure to the IRS. Despite warnings from Swiss bank about U.S. tax compliance, the taxpayer did not seek professional advice and maintained around $1.5 million in the account. In 2012, the Swiss bank closed his account due to non-compliance, later reopening it as "Mandatory High Risk." The bank urged the taxpayer to comply with U.S. tax laws or face disclosure to U.S. authorities.

In 2013, the Swiss bank requested proof of compliance with U.S. tax laws, and the taxpayer, fearing disclosure, applied for the IRS Offshore Voluntary Disclosure Program (“OVDP”) in 2014. His voluntary disclosure was preliminarily accepted, contingent on truthful cooperation. Meanwhile, he closed the Swiss bank account, transferring funds to another bank in Liechtenstein.

In 2016, over two years later, the taxpayer filed delinquent FBARs for 2008-2013, omitting 2014 and 2015. In 2018, the IRS removed him from the OVDP for failing to provide foreign asset information. The IRS then investigated, finding the taxpayer willfully failed to file FBARs for 2013-2015 and proposed penalties totaling approximately $770,000. The taxpayer's non-payment led to a government action, resulting in cross-motions for summary judgment. The district court favored the government, prompting the taxpayer's appeal. The Sixth Circuit affirmed the district court’s decision because it found that the taxpayer's failure to file was a willful violation of the Bank Secrecy Act.

Citing various U.S. Supreme Court cases, the Sixth Circuit explained that term "willfulness" in the context of violating FBAR requirements carries different meanings depending on whether it pertains to criminal or civil penalties. In criminal cases, it refers to a "voluntary, intentional violation of a known legal duty," and such violation can be inferred from conduct meant to conceal or mislead financial information. For civil penalties, including those under FBAR, the Sixth Circuit held that “willfulness” encompasses both knowing and reckless violations. This interpretation aligns with the Supreme Court's ruling in Safeco Insurance Company of America v. Burr, which clarified that civil liability under the Fair Credit Reporting Act for willful violations includes reckless disregard of statutory duty. The court's decision is consistent with every other circuit court, which include the Eleventh Circuit, Fourth Circuit, Third Circuit, and Federal Circuit, that has addressed this issue.

In Kelly, the taxpayer did not dispute his failure to file FBARs for the relevant tax years but argued he did not act knowingly or recklessly. The record, however, revealed evidence of willful and reckless non-compliance. The Sixth Circuit found that the taxpayer intentionally evaded legal obligations by concealing his assets, shielding his Swiss bank account from U.S. authorities, and opting out of U.S. securities to avoid disclosure. Despite participating in the OVDP, he failed to meet the 2013 FBAR deadline and provided false and incomplete information to the IRS about his foreign assets.

The Sixth Circuit also found that the taxpayer's conduct was objectively reckless, as he failed to seek professional advice about reporting obligations notwithstanding having previously done so.  Further, the taxpayer did not confirm the Swiss bank’s reporting practices and neglected to inquire about FBAR preparation. Even after becoming aware of his reporting requirements, the taxpayer did not file the 2014 and 2015 FBARs. The taxpayer's reliance on his OVDP participation and engagement of a Swiss account manager was dismissed as insufficient to excuse noncompliance. The undisputed facts demonstrated the taxpayer's intentional efforts to keep his foreign account secret, failure to consult professionals, and neglect in ensuring FBAR submissions. Consequently, the taxpayer's failure to meet FBAR requirements for 2013-2015 was deemed a willful violation of the Bank Secrecy Act.

Observations

In recent circuit courts decisions coming from the Sixth, Eleventh, Fourth, Third, and Federal Circuits, there is a discernible trend that broadens the scope of actions considered as willful violations by taxpayers.  Taxpayers who believe their failure to file FBARs (and potentially other international forms) is non-willful should assess their set of facts in light of these decisions.  What a taxpayer may think is non-willful intent may actually constitute a willful act.

This news alert does not constitute legal advice and only contains informative content.

For assistance with complying with U.S. tax laws, please contact:

Christine Alexis Concepción, Esq., Partner

Corporate Transparency Act Update: Unenforceable Against Only Certain Businesses

Background

In 2021, Congress enacted the Corporate Transparency Act (“CTA”) as part of an anti-money-laundering initiative. The CTA mandates that all entities formed or registered to do business in the US (“Reporting Companies”) and all foreign entities registered to do business in any state, unless exempt, must disclose their beneficial ownership to the Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”).

A legal challenge to the CTA and FinCEN's implementing rules arose in the case of National Small Business United v. Yellen in the US District Court of the Northern District of Alabama. On March 1, 2024, the court ruled in favor of the plaintiffs, deeming the CTA unconstitutional, stating it exceeded the constitutional limits on the legislative branch.

National Small Business United v. Yellen

In National Small Business United v. Yellen, the National Small Business Association (“NSBA”) and one of its members filed suit challenging the constitutionality of the CTA and FinCEN’s authority to implement the CTA. On March 1, 2024, the District Court ruled in favor of the plaintiffs, deeming the CTA unconstitutional, stating it exceeded the constitutional limits on the legislative branch.

The District Court dismissed the US government's arguments that Congress had the power to enact the CTA under its (1) powers to conduct foreign affairs, (2) Commerce Clause authority, or (3) taxing power, or the authority to pass laws "necessary and proper" for enumerated powers.  The key issue, as highlighted by the District Court, focused on determining whether the Commerce Clause empowers Congress “to regulate non-commercial, intrastate activity when certain entities, which have availed themselves of states’ incorporation laws, use channels of commerce, and their anonymous operations substantially affect interstate and foreign commerce.”  The court ruled that Congress did not have such power under the Commerce Clause.

Effect on Businesses

Although the District Court declared the CTA unconstitutional, the injunction against enforcement applies solely to the plaintiffs, including the National Small Business Association (NSBA).

In response, FinCEN released a statement indicating it would comply with the ruling for the specific plaintiffs and a commitment not to enforce the CTA against them. The affected entities are those that were NSBA members when the court ruled on March 1, 2024. Other reporting companies remain subject to CTA requirements unless exempt.

Entities formed on or after January 1, 2024, must plan for CTA compliance, filing initial Beneficial Ownership Information (BOI) reports within 90 days if not exempt. Existing entities formed before January 1, 2024, should continue preparing for compliance by the January 1, 2025 deadline, keeping an eye on legal updates.

While the District Court's decision impacts the federal CTA, it does not affect reporting requirements under state statutes. States, including New York with the LLC Transparency Act, have introduced disclosure laws similar to the CTA, reflecting a broader landscape of regulatory developments.

Expected Future Developments

On March 11, 2024, the US Department of Justice filed a notice of appeal with the United States Court of Appeals for the Eleventh Circuit. It is expected that the DOJ will ask for a stay of the ruling during the appeals process. The outcome of similar litigation in other courts remains uncertain.

This news alert does not constitute legal advice and only contains informative content.

For assistance with complying with U.S. tax laws, please contact:

Christine Alexis Concepción, Esq., Partner

AmCham Peru Renews Its Members For The Period 2024-2025

Carlos F. Concepción has been renewed as a member of The Arbitration Court of the International Arbitration Center of the American Chamber of Commerce of Peru (AmCham Perú) for 2024-2025.

The Corporate Transparency Act is Finally Effective: What You Should Know

I. Executive Summary:

The Corporate Transparency Act (“CTA”) is finally effective January 1, 2024. Enacted in 2021, the CTA requires certain U.S. and foreign entities to disclose beneficial information for purposes of combatting illicit activity, including money laundering, tax fraud, and terrorism financing.

Under the CTA, certain domestic and foreign companies are required to disclose information about their beneficial owners (“BOs”) and individuals who file paperwork on the company’s behalf (a “Company Applicant”) to the US Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”).

This alert will discuss what entities are subject to reporting and which ones are exempt, who must file, and what information must be reported. Further, it will address who has access to the report, when it is due, and penalties associated with civil and criminal non-compliance. Finally, it will include a brief analysis of New York’s recently enacted New York LLC Transparency Act.

II. What is a Reporting Company

An estimated 32 million entities are now mandated to report to FinCEN beneficial ownership information (“BOI”) concerning a broad range of U.S. and foreign entities. An entity that is required to report is a reporting company (“Reporting Company”). A Reporting Company includes the following:

Domestic Entities

• a U.S. corporation,

• a U.S. limited liability company, or

• any other entity created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe.

Foreign Entities

• a corporation, limited liability company, or other entity formed under the law of a foreign country, and

• registered to do business in any U.S. state or in any Tribal jurisdiction, by the filing of a document with a secretary of state or any similar office under the law of a U.S. state or Indian tribe.

It is important to stress that the mere formation of an entity in the U.S. will bring the entity under the scope of the CTA reporting requirements, subject to limited exemptions.

III. Who Must Report to FinCEN

Beneficial Owners

Individuals who either (1) directly or indirectly own or control 25% or more of a Reporting Company or (2) exercise substantial control over the Reporting Company are required to complete the BOI form.  

An individual has control if such individual serves as a senior officer, has authority over the appointment or removal of any senior officer or a majority of the board of directors or similar body, has substantial influence over important business, financial or corporate decisions or has similar indirect or direct substantial control, including through board representation or control over intermediary entities that exercise substantial control.  

An individual who owns or controls an ownership interest in an entity through a contract, arrangement, understanding, relationship or otherwise, including through ownership or control of intermediary entities that separately own or control the entity’s ownership interests is considered as controlling the Reporting Company.

Company Applicants

Company applicants are individuals who file the document to create or register the Reporting Company and the individual who is primarily responsible for directing and controlling the filing. 

IV. What Entities are Exempt from Reporting

The CTA carved exemptions to report BOI to FinCEN for narrow categories of entities. The applicant will still need to file a written certification with FinCEN clearly identifying the exemption to disclosure. A few of the 23 non-reporting entities are as follows:

• financial entities that report to governing authorities i.e. banking institutions, credit unions, investment advisors, venture capital funds, public accounting firms, and insurance companies;

• any pooled investment vehicle that is operated or advised by an exempt financial entity described above;

• Regulated Private Trust Companies (Regulated PTC);

• 501(c) organizations, which can include private foundations;

• sole proprietorships and general partnerships;

• large businesses with at least 20 full-time employees, over 5 million USD in gross receipts, and a substantial U.S. presence;

• inactive companies created prior to January 1, 2020, excluding foreign owned entities, companies with annual receipts above $1,000 USD and those that had any recent changes in ownership; and

• subsidiaries of the exempted entities (except for the pooled investment company).

The text of the CTA includes specific criteria for the exemptions, which should be analyzed on a case-by-case basis before concluding that an entity qualifies for an exemption. Many of these exempt entities are excluded from the CTA because they are already regulated by federal and/or state government reporting requirements (i.e. under SEC).  

V. What BOI Must Be Reported

Beneficial Owner

A BO must report his/her name, current residential or business address, birth date, and an identification number of driver’s license number or non-expired U.S.  or foreign passport number (with a photograph for those not holding a U.S.  ID, driver’s license or passport). Alternatively, the BO can provide his FinCEN Identifier (see below).

The Reporting Company

The Reporting Company must report its name, its “doing business as” (if applicable), address, tax identification number (TIN) or foreign TIN, jurisdiction of formation/registration, and whether the filing is an initial filing, a correction, or an update.  Alternatively, the Reporting Company can provide his FinCEN Identifier (see below).

Company Applicants

An individual who files the document that creates or forms the Reporting Company under local law is a Company Applicant.  For a foreign Reporting Company, the Company Applicant is the individual who files the document that first registers such foreign entity to do business in the U.S. Anyone who directs or controls the filing of an entity creation or registration document by another is also Company Applicant.

VI. FinCEN Identifiers For Simplified Reporting

Individuals and Reporting Companies may want to consider requesting a FinCEN identifier to keep track of their reported information. For individuals, the number is called an “individual FinCEN identifier” and for Reporting Companies, the number is called an “entity FinCEN identifier” (collectively, “FinCEN Identifier”). A FinCEN Identifier would simplify reporting, because, in some circumstances, the FinCEN Identifier can be provided instead of BOI.   

If an individual has obtained an individual FinCEN Identifier and provided such individual FinCEN Identifier to a Reporting Company, the Reporting Company may include the FinCEN Identifier in its report in lieu of the BOI. Additionally, an individual FinCEN Identifier would allow those individuals to submit personal information directly to FinCEN rather than providing it to every Reporting Company that must report on such individual. 

As to the entity FinCEN Identifier, a Reporting Company may report another entity's FinCEN Identifier and full legal name instead of the information required with respect to the BOs of the Reporting Company if: (1) such entity has obtained a FinCEN Identifier and provided that FinCEN Identifier to the Reporting Company; (2) an individual is or may be a BO of the Reporting Company by virtue of an interest in the Reporting Company that the individual holds through the entity; and (3) the BO of the entity and of the Reporting Company is the same individuals. 

VII. Who Has Access to BOI

BOI can be disclosed to five (5) types of recipients: 

• U.S. Federal, state, local, and Tribal government agencies requesting BOI for specified purposes; 

• foreign law enforcement agencies, judges, prosecutors, central authorities, and competent authorities; 

• financial institutions (“FIs”) using BOI to facilitate compliance with customer due diligence (“CDD”) requirements under applicable law; 

• Federal functional regulators and other appropriate regulatory agencies acting in a supervisory capacity assessing FIs for compliance with CDD requirements; and 

• the U.S. Department of the Treasury, which of course includes the Internal Revenue Service (“IRS”) and Office of Foreign Assets Control (“OFAC”).

The BOI will be stored in a federal, searchable database, with limited access for use by law enforcement or for national security or intelligence purposes. This system is called the Beneficial Ownership Secure System (“BOSS”).

VIII. Penalties for Failure to File 

Civil Penalties

Entities that fail to report the required information about their BOs, or report incorrect or incomplete information, face fines up to $500 per day until the violation is corrected.

Criminal Penalties

In cases where non-compliance is found to be willful or accompanied by fraudulent intent, criminal penalties may be imposed. This includes cases in which false or misleading information is knowingly submitted. Violators can face fines of up to $10,000 USD and imprisonment for up to two years. 

The severity of these penalties is a clear indication of the seriousness with which the government views compliance with the CTA.

IX. When Is a BOI Report Due 

For entities created before January 1, 2024:

A Reporting Company created or registered to do business before January 1, 2024, will have until the deadline of January 1, 2025 to file its initial beneficial ownership information report.

For entities created  January 1, 2024 – December 31, 2024:

New companies created or registered on or after January 1, 2024, have 90 days to file initial BOI reports from the time the company receives notice that its creation or registration is effective, or after a secretary of state or similar office provides public notice of its creation or registration, whichever is earlier.

For entities created on or after January 1, 2025:

Only Within 30 days of notice of creation or registration.

Ongoing Reporting:

The reporting obligation entails the submission to FinCEN of an annual filing containing a list of:

• the current beneficial owners of the corporation or limited liability company and the information for each beneficial owner; and

• any changes in the beneficial owners of the corporation or limited liability company during the previous year (but not changes to the applicants); and

• update the list of the beneficial owners of the corporation or limited liability company within 30 days

Reporting companies have 30 days to report changes to the information in their previously filed reports. Inaccurate information in previously filed reports must be corrected within 30 days of when the Reporting Company becomes aware or has reason to know of the inaccuracy of information in earlier reports.

In conclusion, the CTA will require annual and continuing reporting, and a prior analysis to identify the ultimate beneficial owners under the stringent “substantial control” or “benefits” criteria based on the evolving guidance of FinCEN.  Lack of compliance in not reporting or incomplete/incorrect reporting can expose individuals to civil and criminal penalties, with a short 30-day timeframe for correction, making the CTA a top priority for both small and larger entities that will have to examine their exemption status and file a certification with FinCEN to avoid non-compliance. 

X. New York’s Version of the CTA: The NY LLC Transparency Act

New York enacted its own version of the CTA, called the New York LLC Transparency Act (the “NY Act”), which was signed into law on December 23, 2023. The NY Act applies to limited liability companies that are organized under the laws of New York and foreign entities that are registered to do business in New York.  The NY Act is significantly narrower than CTA because CTA covers more entities, including corporations, LLCs, limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships.

The NY Act states that reporting companies must provide BOI to the New York State Department of State (“DOS”) each beneficial owner's full legal name, date of birth, and current business street address.  Reporting companies can satisfy New York's requirements by submitting a copy of the BOI form filed with FinCEN.

NY’s reporting companies must file the required BOI with the DOS and exempt companies must file an exemption statement with the DOS:

• By January 1, 2025, if formed or qualified to do business in New York on or before the Act's effective date.

• With the articles of organization, if a domestic LLC formed after the Act's effective date.

• With the application for authority to do business in New York, if a foreign LLC qualified in New York after the Act's effective date.

Any changes to a New York LLC’s BOI must be reported to the DOS within 90 days.  Foreign entities registered to do business in NY must amend their application to do business in the state whenever there is a change in BOI.

One alarming difference between CTA and the NY Act is database of BOI that the NY Act creates.  While CTA’s database of BOI is maintained in a nonpublic database accessible only in certain circumstances by authorized entities, some of the BOI under the NY Act will be made public. The beneficial owners' full legal names and current business street addresses will be included in a public database maintained by the DOS. However, BOs of reporting companies can cite significant privacy interests and apply for a waiver to withhold their name, business address, or both, from the database under procedures to be established by the DOS.

This news alert does not constitute legal advice and only contains informative content.

For assistance to determine your reporting requirements with federal or state regulation and additional requirements under the CTA please contact:

Christine Alexis Concepción, Esq., Partner  

Munia El Harti Alonso, Esq., Counsel 

IRS’s New Tax Amnesty Program: Voluntary Disclosure Program for questionable Employee Retention Credits

On December 21, 2023, the Internal Revenue Service announced a new Voluntary Disclosure Program (the “ERC VPD”) to assist taxpayers who want to pay back the IRS after having erroneously filed for Employee Retention Credits (the “ERC”).

The IRS is also urging employers to withdraw pending ERC claims in a separate program that allows them to remove a pending claim with no interest or penalty. Over $100 million in withdraws have been made by taxpayers as the IRS continues aggressively pursuing audits and criminal investigations.

Taxpayers must apply for the ERC VDP by March 22, 2024 and those who are accepted must pay back only 80% of the ERC the taxpayer received. Taxpayers who cannot repay the amount owed may be enter into an installment agreement. The IRS agreed to accept only 80% because many ERC promoters charged a percentage of the ERC paid to the taxpayers and so the taxpayer never actually received the total amount of the ERC.

To qualify for the ERC VDP, applicants must report the name, address, and telephone numbers of the advisors or tax preparers who advised or assisted in the preparation of the claims.

Any employer who received an ERC but was not entitled to one can apply to the ERC VPD if all of the following are true:

• The employer is not under criminal investigation and has not been notified that they are under criminal investigation.

• The employer is not under an ERC examination for the tax period for which they are applying for the ERC VDP.

• The employer has not received an IRS notice and demand for repayment.

• The IRS has not received information from a third party that the employer is not in compliance or has not acquired information directly related to the noncompliance from an enforcement action.

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If you are interested in applying for the ERC VDP, please contact Christine Concepción at caconcepcion@concepcionlaw.com