<div> <div> Before the Event Audio Check - Please take the opportunity to check your headset and microphone by selecting the Audio Icon on the upper tool bar, then follow the prompts. Echo Cancellation - Please enable echo cancellation by selecting “tools" on the menu bar, select “options", click on the second tab called "Voice” and check the echo cancellation box.  Export the PowerPoint to a PDF - In the right margin, at the agenda box click on the button that looks like a floppy disk to save the PowerPoint in .pdf format.      Disclosure per I.R.C. § 6103 Access to Federal Tax Information (FTI) is permitted only to individuals who require the FTI to perform their official duties and as authorized under the I.R.C. FTI must never be indiscriminately disseminated, even within the recipient agency, body, or commission. Personally Identifiable Information (PH) is any information that, by itself or in combination with other information, may be used to uniquely identify an individual. Sharing FTI and PH is only allowed under a “Need to Know" exception. slm Large Business | &amp; International Disclosure Warning We encourage you to ask questions. ❖ However, please keep in mind the I.R.C. § 6103 Disclosure Rules and do not disclose any identifying information about taxpayers including • Names • TINS ■ Profession or type of business • Locations • Amounts Large Business &amp; International Participant Disclosure Agreement Please select the green check mark ✓ to confirm • You understand the disclosure rules under I.R.C. § 6103, and ■ Your attendance today meets the "Need to Know" standard, and • You will not disclose any Pll during this CPE training class. slm Large Business I &amp; International Presenters Objectives Describe offshore life insurance and annuity policies ❖ Identify the requirements for the offshore insurance policy to be recognized as insurance for Federal income tax purposes Identify income tax ramifications for offshore life insurance and annuities Identify information return filing requirements for offshore life insurance and annuity policies Describe how offshore life insurance contracts and annuity policies are used for tax evasion purposes Describe examination steps to determine if offshore life insurance contracts and annuity policies are used for tax evasion purposes Large Business 7 &amp; International ' Questionable Acts by Offshore Insurance Companies ❖ Creating sham entities ❖ Opening financial accounts in the name of the policy ❖ Opening policies and/or financial accounts in the names of foreign nationals as nominees for U.S. taxpayers ❖ Transporting large amounts ofcash into the United States ❖ Facilitating large cash deposits into foreign financial institutions ❖ Structuring wire transfers to make them difficult to trace slm Large Business | &amp; International In the News ❖ In the news ■ Swiss Bank Settlements Program (DOJ) ■ Foreign Account Tax Compliance Act (FATCA) ❖ Have you heard? ■ News about offshore life insurance contracts and annuity policies being used for tax evasion purposes slm Large Business | &amp; International  Offshore Insurance Companies Services ❖ Offshore insurance companies provide the following services to U.S. Persons ■ Asset management services ■ Insurance products (life insurance, annuities, etc.) slm Large Business I &amp; International Typical Insurance Products Offered ❖ Variable Universal Life Insurance (VUL) ■ Flexible premium and investment options ■ Death benefit and investment feature ■ Deferral of investment income ■ Emphasis on cash value ■ No endowment age ❖ Deferred Variable Annuities (DVA) ■ Flexible premium ■ Investment feature ■ Deferral of investment income 81™ Large Business | &amp; International Recognized as Insurance for Federal Tax Purposes Requirements - ALL must be present to be recognized as insurance ❖ Presence of insurance risk. • Allied Fid. Corp, v. Commissioner. 572 F.2d 1190 (7th Cir. 1978); Rev. Rul. 89-96.1989-2 C.B. 114 ❖ Risk must shift to insurance company and must be distributed. • Helverinq v. LeGierse. 312 U.S. 531 (1941) ❖ Investments in variable policy sub-accounts must meet diversification requirements. • I.R.C. § 817(h) and Treas. Reg. § 1.817-5 ❖ Investment account must satisfy the investor control tests. • Rev. Rul. 77-85 and 81-225 Life Insurance Contract Defined ❖ To be treated as a life insurance contract for federal income tax purposes ■ Policy must meet I.R.C. § 7702 Requirements ■ Cash value accumulation test, or • Both guideline premium test and cash value corridor test ■ Segregated asset account must meet diversification requirement of I.R.C. § 817(h) and Treas. Reg. § 1.817-5. • No more than - 55% from one investment - 70% from two investments - 80% from three investments _ . 90% from four investments Large Business &amp; International Life Insurance Contract Defined (Cont.) ❖ Tax consequences ■ If policy complies with I.R.C. • Deferral of investment growth under I.R.C. § 7702(g) • Tax free death benefit under I.R.C. § 101(a) ■ If policy does not comply with I.R.C. • Investment income (interest, dividends, gains, etc.) taxable as earned under I.R.C. § 7702(g). Sim Large Business | &amp; International Taxability of Life Insurance Contract Distributions ❖ Modified Endowment Contract (MEC) (I.R.C. § 7702A(a) and § 72(e)(10)) ■ Amounts received • Treated first as distributions of the income earned within the contract, then as recovery of cost (I.R.C. § 72(e)(10) and § 72(e)(2)(B)) ■ Loans • Treated as amounts received and considered income first before any cost recovery (I.R.C. § 72(e)( 10) and § 72(e)(4)(A)) ■ Additional 10% income tax penalty (I.R.C. § 72(v)) • Imposed on certain amounts received that are includable in gross income unless the distribution is made - To a policy owner who has reached age 59 % - To a policy owner as a result of his or her disability or as part of a life annuitization arrangement Taxability of Life Insurance Contract Distributions ❖ Non-modified Endowment Contract (non-MEC) ■ Partial surrender distributions considered recovery of basis first, gains second (Treas. Reg. § 1.72-11(d)), ■ Loans not treated as distributions and thus, not taxable • 10% income tax penalty not applicable. Technical and Miscellaneous Revenue Act of 1988 split life insurance into modified and non-modified endowment contracts and added I.R.C. § 7702(h) which allows for endowment contracts to receive preferential treatment. Sim Large Business | &amp; International Taxability of Life Insurance Contract Distributions ❖ I.R.C. § 7702A ■ Defines modified endowment contract (MEC) • Life insurance contract entered into on or after June 21, 1988, • Meets requirements of I.R.C. § 7702, and • Fails to meet the 7 pay test ■ Defines the test used to determine if a contract is a "MEC” or a "non-MEC” • Failing the 7 pay test - Accumulated amount paid under the contract at any time during the first 7 contract years exceeds the sum of the net level premiums which would have been paid on or before such time if the contract provided for paid-up future benefits after the payment of 7 level annual premiums. Large Business 1 &amp; International Annuity Defined ❖ Annuity contract for federal income tax purposes ■ Defined from regs., case law and certain statutory provisions • Recognizable as annuity under customary practices of life insurance companies (Treas. Reg. § 1,72-2(a)(1)) • Must provide for periodic payments - Periodic payments must liquidate principal applied to provide payments along with interest or earnings thereon (Iqleheart v. Comm'r.. 174 F. 2d 605. 606-07 (7th Cir. 1949), affg 10 T.C. 766 (1943)) • Must be held by a natural person - Unless merely held by a trust or entity that is an agent for the taxpayer (I.R.C. § 72 (u)) - PLR 109833-99 stressed that an agent could not have any interest, claim, or benefit • Must satisfy by its terms the minimum distribution-at- death requirements of I.R.C. § 72(s).  Annuity Defined (Cont.) ❖ Offshore annuities ■ Generally, are variable annuities with an investment component in a segregated account • Investment aspect is desired, but can cause problems unless - Segregated asset account meets the diversification requirement of I.R.C. § 817(h) and Treas. Reg. § 1.817-5. - Contract must meet the investor control requirements as outlined in Rev. Rul. 77-85 and 81-225. ❖ Tax Consequences ■ Meets definition (including diversification and control tests) • Investment income deferred and reported ratably as annuity payments are received. ■ Does NOT meet definition (including diversification and control tests) • Contract treated as investment account and income is reported as earned. Large Business &amp; International Excise Tax Due under I.R.C. § 4371 ❖ 1% excise tax on life insurance and annuity premiums paid to foreign life insurance companies ❖ Can be avoided if the foreign insurance company makes an election under I.R.C. 953(d) and files a U.S. Federal income tax return slm Large Business I &amp; International Advantages of Offshore Insurance Products ❖ Customization and less restriction by the states ❖ More investment options ❖ Tax avoidance possibilities slm Large Business I &amp; International Disadvantages of Offshore Insurance Products ❖ May require traveling to purchase the contract ❖ Foreign information return filing requirements ❖ May require high minimum balance ❖ May require high management fees ❖ Excise tax (where insurance company does not make election under I.R.C. § 953(d)) slm Large Business I &amp; International How It Works ❖ Taxpayer purchases life insurance policy or annuity contract to consolidate or diversity offshore investments. ❖ Taxpayers may ■ Find suitable insurance company on their own, or ■ Find licensed insurance broker who will suggest one ■ Note: Many wealth and investment advisers are also insurance brokers in Europe. ❖ Insurance Company may suggest creating foreign entity (IBC, trust, foundation, etc.) to own the policy, but not mandatory Large Business &amp; International How It Works (Cont.) ❖ Obtain or get referred to offshore management/consultant company to manage investment. ■ Some companies let a bank, whom the taxpayer is familiar with, hold and manage assets which allows for taxpayer to have direct contact. ❖ Investment option strategies ■ Usually offered by the insurance company that do not list specific investments ■ Some insurers allow a client to move specific investments such as real estate, stock in a family business, stock options, etc.      How It Works (Cont.) ❖ Offshore bank accounts in name of insurance company or nominee entity holds actual policy investments ■ In some instances, accounts have been put in name of a foreign national to further conceal true ownership. ❖ Insurance company ■ Has taxpayer complete some paperwork usually taking less than one hour ■ Handles transferring the funds ❖ All future communication is typically with insurance company and/or insurance broker Large Business &amp; International How it Works - With No Policy ❖ Insurance company may only function as manager of investments without any insurance or annuity policy in place ■ Investments still held at offshore bank ■ Paperwork consists of an agreement to manage investments ■ No insurance or annuity aspects to the account ■ Steps to open would be similar to a foreign bank account • Decide to have a managed foreign investment account • Research and decide a foreign insurance company is a wise choice • Contact the company and complete necessary paperwork Examination ❖ Scope ❖ Contacting the taxpayer ❖ Other considerations ❖ Statute of Limitations ❖ Fraud and accuracy related penalties ❖ FBARs and international information returns ❖ Excise taxes ❖ Counsel involvement slm Large Business I &amp; International Page 10 Withheld pursuant to exemption (b)(7)(E) of the Freedom of Information and Privacy Act  Step 3 - Were Funds Accessed? ❖ MEC and Annuity Distribution Treatment ■ Distributions are from earnings first ■ Early distribution penalty of 10% unless exception is met ❖ Non-MEC Distribution Treatment ■ Distributions are from premium basis first ■ No early distribution penalty  Statute of Limitations ❖ I.R.C. § 6501(e) - Substantial Omission of Items ■ 25% Omission of Gross Income ■ Greater than $5,000 of unreported income related to foreign financial asset. ❖ I.R.C. § 6501(c)(8) - Failure to File Foreign Information Returns ■ Pre H.I.R.E Act ■ Post H.I.R.E Act ❖ I.R.C. § 7609(e)(2) - John Doe Summons ❖ I.R.C. § 6501(c)(1) and (2) - Fraud ❖ Alpha Statute YY ■ Does not extend the statute 81™ Large Business | &amp; International  (b)(7)(E) International Information Returns IRS Form    Reporting Obligation    IRC Sections Form 5471    U.S. persons who control foreign corporations, or become an officer or director of a foreign corporation    6038. 6046 Form 926    Non-recognition transfers to foreign corporations    6038B Form 8865    U.S. persons who control, make transfers to, or change their interest in a foreign partnership    6038, 6038B, 6046A Form 3520    Gratuitous transfers to foreign trusts and U.S. owners of foreign trusts    6048(a), (b), (c) Form 3520-A    Foreign Trust owned by a U.S. Person    6048(b) Form 8938    Reporting of certain foreign financial assets    6038D Form 8621    Shareholder of PFIC    1298(f) International Information Return Penalties Penalty Section    Form    Penalty IRC 6038(b)    Form 5471, Form 8865    S10.000 per failure, with an additional S 10,000 for each 30-day period (or fraction thereof) beginning 90 days after notification of failure of filing requirement, not to exceed $50,000 per return IRC 6038B(c)    Form 926    10% of the value of the property transferred up to a maximum penalty of S100,000 per return, with no penalty limit if the failure to report was due to intentional disregard IRC 60380(d)    Form 8938    S 10,000 per failure with an additional $10,000 for each 30-day period (or fraction thereof) beginning 90 days after notification of failure of filing requirement, not to exceed $50,000 per return IRC 6677(a)    Form 3520    Greater of $10,000 or 35% of Gross Reportable Amount with additional S 10,000 for each 30 day period (or fraction thereof), with penalty not to exceed the Gross Reportabte Amount IRC 6677(b)    Form 3520-A    Greater of $10,000 or 5% of the gross value of trust assets determined to be owned by the U.S person at the dose of the year with additional S10.000 for each 30-day period (or fraction thereof), with penalty not to   FBAR - Penalties v....-.-..    c— r- ..... &lt;= —          »• M « C                       ~™xr«rjs“     ,SU-~S.tS.’2'SSU.. WM - F-.K... ~ FW F«^« o.        ■SI USS IM5IIXUBUP1 .„..0.0 000 ».MMC »„»»&lt;.&gt; „ O ~ „ . »—&gt; ». C F « s ,oi M.O. ro.                   »» u ateTwatBliu »» - '■TCT'-rr » -T"1 **'**“"’’        1,0000 O »*CFR » l'oiCUU, Ufa.   &lt;=     - —».0,0 ...      Willful and mitigation - before 10/22/04: IRM Exhibit 4.26.16-1 Non-Willful and mitigation - after 10/22/04: IRM Exhibit 4.26.16-2 Large Business &amp; International Excise Tax Referral ❖ 1 % of premiums paid to foreign insurance company ❖ Insurance company can make I.R.C. § 953(d) election to be treated as a domestic insurance company and their U.S. customers will not have to pay excise tax. ❖ Consider referral to excise tax if excise tax appears to be owed, but unpaid slm Large Business | &amp; International Counsel Assignment of Local Counsel ❖ Early assignment and involvement is crucial. slm Large Business | &amp; International Open Discussion Remember... you do not need to be a presenter to share ❖ Etiquette ■ Refrain from making negative comments. ■ Offer positive alternatives ❖ Raise Hand to Speak ■ After receiving the microphone hold the Ctrl key down the entire time you are speaking. You will see a yellow box around the microphone. When you are completely finished speaking, release the Ctrl key. ❖ Text Chat ■ Send comments to “All". ■ Do not include Pll. Large Business .. &amp; International IPN Contacts Offshore Arrangements IPN Mailbox: LBI.IIC.Offshore.Arrnq.IPN@irs.gov Technical Specialists • Eddie Edelman • Lilia Peraza • Minh Tran Foreign Entities IPN Mailbox: LBI.IIC.FQn.Entities.IPN@irs.gov Technical Specialists ■ Frank Cincotta • RaDel Lloyd ■ JimWu 81™ Large Business | &amp; International Thank You! </div> </div>

IRS Releases LB&amp;I Training Documents on Offshore Insurance

IRS Releases LB&I Training Documents on Offshore Insurance

Internal Revenue Service

The IRS released a 2015 slide presentation for training employees in the Large Business and International Division about offshore insurance and annuity policies in response to a Freedom of Information Act request.

The IRS released a 2015 slide presentation for training employees in the Large Business and International Division about offshore insurance and annuity policies in response to a Freedom of Information Act request.

The IRS released a 2015 slide presentation for training employees in the Large Business and International Division about offshore insurance and annuity policies in response to a Freedom of Information Act request.