A new report from the Government Accounting Office (GAO) says that IRS efforts to catch taxpayers who hide money overseas are resulting in substantial recouped taxes. Four IRS voluntary disclosure programs over recent years have resulted in some 39,000 taxpayers coming forward, and more than $5.5 billion in additional taxes and penalties. In addition, the number of people reporting foreign accounts to the IRS nearly doubled from 2007 to 2010, to 516,000. However, GAO’s analysis of data from the 2009 program suggests that many additional taxpayers are not entering the amnesty programs, but are making so-called “quiet disclosures” by filing amended returns or by beginning to report foreign account proceeds on newly filed returns, and avoiding the associated penalties and interest that would result from taking advantage of the amnesty program.
The Full Story:
Today’s tax quote: “Tax day is the day that ordinary Americans send their money to Washington, DC, and wealthy Americans send their money to the Cayman Islands.” Jimmy Kimmel
In recent years, however, this strategy has become fraught with risk of punishment, as the IRS has cracked down on U.S. taxpayers who avoid U.S. taxes by hiding money overseas. Required reporting of foreign accounts has been emphasized with increased enforcement, new reporting regimes (e.g., new Form 8938 which is required to be filed with the U.S. tax return) have been imposed, a new law (FATCA) requires foreign financial institutions to report accounts maintained by U.S. taxpayers, the IRS has succeeded in extracting information from Swiss bank UBS and others identifying U.S. accountholders, and a number of miscreants have been successfully prosecuted under the criminal tax laws.
Along with these actions, IRS has also encouraged taxpayers with these accounts who have not reported either the accounts or the associated income in the past to come forward voluntarily and disclose them. Taxpayers who do so will avoid criminal prosecution, and will limit the amount of civil penalties that might otherwise be due. There have been four of these programs, beginning in 2003, the latest of which is still available. These programs accelerated beginning in 2009, when the large Swiss bank UBS AG agreed to pay a $780 million fine and turned over details of thousands of accounts to U.S. investigators.
In an April 26, 2013, report, GAO examined these programs and praised the IRS for its diligence and success in seeking and collecting back taxes in these programs. For the report, go to http://www.gao.gov/products/GAO-13-318
. However, GAO also suggested that some taxpayers are avoiding the voluntary disclosure program by quietly filing amended returns, or by beginning to report the accounts on new returns without amending prior returns, and that IRS is missing out on substantial additional back taxes by not doing more to identify such taxpayers and pursue them.
According to the GAO data, some 39,000 taxpayers who participated in the voluntary disclosure programs paid more than $5.5 billion in back taxes and penalties. The study focused on data from the 2009 disclosure program, finding that of more than 10,000 cases closed so far under that program, the median unreported account balance was $570,000. Some 6% of those accounts suffered penalties greater than $1 million.
In addition, reports of offshore accounts have risen significantly. Reports of foreign bank accounts on Schedule B of the Form 1040 tax return nearly doubled, to 516,000, between 2007 and 2010, which was even before the new law requiring a separate Form 8938 to be filed with the return, and the number of Reports of Foreign Bank Account (the FBAR) filed with Treasury showed a similar increase. While GAO acknowledged that some of this increase may simply reflect increased awareness of the reporting requirement by taxpayers who were paying their taxes but failing to report the accounts, GAO also cited data suggesting that a large share of the increase reflects taxpayers engaging in “quite disclosure,” as noted above.
The GAO report emphasizes that there are many legitimate reasons for maintaining financial accounts overseas; however, taxpayers who do so must adhere to the requirements to report those accounts, and to pay taxes due.
As Worldwide ERC® has pointed out on numerous occasions during recent years, increased IRS enforcement of reporting and tax requirements for Americans maintaining financial accounts overseas may put expat employees assigned to jobs in foreign countries at risk unless they are regularly made aware of reporting and tax requirements, and encouraged to adhere to them.
Posted by Peter K. Scott
Under the Patient Protection and Affordable Care Act of 2010, there is a new 3.8% tax on net investment income of high income taxpayers. Although the tax is intended to help fund Medicare, it is in fact an additional income tax and is imposed by new section 1411 of the Internal Revenue Code. Unfortunately, it appears that it is not a tax against which taxes incurred in foreign countries, even on the same income, may be credited. As a result, American expats who are subject to the tax will wind up paying it in full even if foreign taxes exceed the total of U.S. regular tax and net investment income tax on that income.
The Full Story:
Today’s tax quote: “The wisdom of man never yet contrived a system of taxation that operates with perfect equality.” Andrew Jackson
As of January 1, 2013, the new 3.8% tax on net investment income goes into effect.
The tax applies if a taxpayer has Adjusted Gross Income (AGI) above $200,000 ($250,000 married filing a joint return), and also has Net Investment Income (NII). The tax is on the smaller of Net Investment Income or the amount by which AGI exceeds the applicable threshold. So if a couple has AGI of $300,000, which includes $30,000 of NII, then the tax applies to $30,000. If AGI is $270,000, then the tax would only apply to $20,000 of the NII (the amount by which AGI exceeds the $250,000 taxability threshold for married couples filing a joint return).
NII includes dividends, interest, capital gains, rental and royalty income, annuities other than from qualified plans, and some other types of non-wage income. It does not, however, include wages, self-employment income, unemployment compensation, social security benefits, alimony, tax exempt interest, or distributions from qualified plans such as IRA’s and 401k’s.
A U.S. citizen or resident on a foreign assignment (an expat) remains taxable in the United States on worldwide income, including the NII tax. Expats are also taxable in the foreign country in which they are working. Although that country probably has no tax comparable to the extra U.S. tax on NII, it undoubtedly does tax investment income earned there, as well as wages.
The U.S. alleviates the effect of the same income being taxable both in the U.S. and the foreign country by allowing a foreign tax credit. (Note that under the foreign earned income exclusion, some earned income in the foreign country may be excludable from U.S. income without the need for the foreign tax credit). Consequently, in general if the foreign country taxes investment income at the same rate as the U.S., the U.S. tax is completely offset by the foreign tax credit and there is no double tax. The U.S. also has tax treaties with many foreign countries that, among other things, seek to eliminate double tax.
However, a quirk of the Internal Revenue Code would not allow the foreign tax credit to offset the new 3.8% tax. Section 27 of the Code says that foreign taxes shall be allowed as a credit “against the tax imposed by this chapter.” The words “this chapter” refer to chapter 1 of the Code, which includes sections 1 through 1400. Unfortunately, the NII tax is imposed by section 1411, which is not in chapter 1. Therefore, it may not be offset by foreign taxes, even if those taxes are imposed on some or all of the same investment income on which the NII tax is imposed.
Nor do model treaty provisions eliminate this problem.
Consequently, American expats who earn enough income to be subject to the NII tax will not be able to offset that tax with taxes incurred in the foreign country where they work, even if those taxes are otherwise creditable. Although this may not technically be a “double tax” because foreign taxes will still offset regular U.S. income taxes on investment income and there is no comparable foreign tax to the NII tax, it may still cost the expat extra U.S. taxes.
Worldwide ERC® companies who tax equalize their expatriate employees will need to consider this dynamic in their annual tax calculations.
Posted by Peter K. Scott
New procedures designed to encourage “low compliance risk” taxpayers residing overseas to come forward and file delinquent income tax returns or Reports of Foreign Bank Accounts (FBARs) have been provided by IRS, but fall somewhat short of expectations. Analysis suggests that the most likely beneficiaries are Canadians who have failed to make U.S. elections to defer tax on Canadian retirement accounts.
The Full Story:
Today’s tax quote: “The best measure of a man’s honesty isn’t his tax return. It’s the zero adjust on his bathroom scale.” Arthur C. Clarke
In the absence of access to bathroom scales, however, the IRS persists in insisting upon honesty on tax returns. In recent years, it has focused intently on the returns and reports of Americans who live or have assets overseas.
Following through on promises made in June, the IRS on August 31, 2012, announced streamlined compliance procedures for use by some taxpayers residing overseas with unreported foreign accounts who, according to IRS, represent a “low compliance risk.”
The intent of the new procedures was to allow taxpayers overseas who had failed to file tax returns or Foreign Bank Account Reports (FBARs) to avoid penalties by coming forward under the IRS’s existing voluntary disclosure program without undergoing the intense scrutiny or extensive documents required under the general program. However, in general practitioners were disappointed with the streamlined procedure, largely because it will likely apply to so few people.
To take advantage of the program, taxpayers will have to file any delinquent tax returns (with appropriate backup information such as Forms 3520 or 5471) for the past three years, as well as delinquent FBAR’s for the past six years. Full payment of any tax and interest owed is also due with the returns.
However, taxpayers are not eligible for the streamlined program unless they meet rather stringent criteria included in the IRS announcement and on the Questionnaire that must be submitted. According to IRS, if the returns and Questionnaire do not reveal any “high compliance risk” factors, then the taxpayer is eligible for the streamlined process if tax due is less than $1,500 in each of the delinquent years. Not only is this a rather low threshold, but “high risk” factors that will disqualify the taxpayer include: (1) any return claims a refund; (2) there is material economic activity in the U.S.; (3) the taxpayer has not declared all income in the country of residence; (4) the taxpayer is under audit or investigation; (5) FBAR penalties have previously been assessed against the taxpayer; (6) the taxpayer has a financial interest or authority over accounts outside the country of residence; (7) the taxpayer has a financial interest in an entity located outside the country of residence; (8) there is U.S. source income; or (9) there are “indications of sophisticated tax planning or avoidance.”
Given these criteria, it is likely that a large majority of residents of the EU, for example, will not qualify, if only because they are likely to have financial accounts or assets in countries other than the country of residence, or have U.S. source income. The only taxpayers who appear clearly to benefit are Canadians who have failed to elect to defer tax on funds in Canadian retirement plans. (For a full discussion of the issue faced by Canadians with retirement plans, see the Mobility LawBlog post of March 12, 2012, at http://www.worldwideerc.org/Blogs/MobilityLawBlog/Lists/Posts/Post.aspx?ID=128
The easy availability of voluntary disclosure is important because of the overwhelming emphasis IRS has recently placed on bringing taxpayers with money overseas into compliance with U.S. tax laws, and because of its increasingly vigilant enforcement of the requirement to file FBAR’s.
For example, it was recently announced that the IRS has paid a whisteblower award of $104 million to a former UBS banker for information leading to collection of more than $5 billion in unpaid taxes from banks and individuals involved with Swiss banking. The UBS investigation led to collection of information about several thousand U.S. taxpayers with Swiss accounts, and agreements with Switzerland and other Swiss banks to allow the IRS access to information about formerly secret accounts.
Also, a recent report from the Tax Justice Network says that wealthy individuals have secreted between $21 and $32 trillion in unreported financial wealth in tax havens around the world, leading to a worldwide tax shortfall of $190 to $280 billion per year. Given numbers like these, it is hardly surprising that IRS is devoting enormous resources to finding offshore tax cheats.
The stakes for failing to file FBAR’s have also become somewhat higher with a government victory in a case in which it was successful in imposing the maximum civil penalty for “willful” failure to file the FBAR even though the taxpayer was already under audit and had admitted to avoiding tax on foreign accounts. The case is United States v. Williams, No. 10-2230, 4th Cir. Court of Appeals, July 20, 2012, http://www.ca4.uscourts.gov/Opinions/Unpublished/102230.U.pdf
With high stakes, and intense IRS focus on this area, it is imperative that companies make sure that their expat employees are made aware of their U.S. tax and reporting responsibilities. As discussed above, if those employees have previously failed to comply, there may be significant difficulties, including penalties, involved in becoming compliant after the fact.
Posted by Peter K. Scott
The pressure has been intensifying on the European Union (EU) from external and also internal sources to eliminate its carbon tax on international flights that originate or end within EU countries. Since the carbon tax took effect on January 1 of this year, the governments of non-EU countries with airlines that operate in the EU have stepped up efforts on the EU to stop the tax on grounds that it violates international aviation treaties and intrudes on national sovereignty. EU officials have stated that they will not back away from the tax so long as no similar international plan is developed to reduce carbon emissions by airlines and other international aircraft operators.
While EU officials continue to take a hard stance against international pressure on the tax, the same officials are now hearing stronger concerns from sources within the EU. In early March, the European aircraft manufacturer Airbus, French aerospace group Safran, German aircraft engine manufacturer MTU and six European airlines wrote to the governments of Britain, France, Germany and Spain about the economic consequences of the tax on their operations. The letter which included the airlines of British Airways, Air France, Lufthansa, Iberia, Virgin Atlantic and Air Berlin was sent to British Prime Minister David Cameron, French Prime Minister Francois Fillon, German Chancellor Angela Merkel and Spanish Prime Minister Mariano Rajoy. These leaders represent the four countries which founded Airbus.
The letter was sent after China in retaliation over the carbon tax blocked the planned purchase of Airbus aircraft by Chinese airlines. According to Airbus and industry analysts, the freeze of the orders could cost the aircraft manufacturer an estimated $12 billion and result in the direct layoff at Airbus of 1,000 workers and many more thousands of jobs by suppliers to the company. Despite the concerns voiced by non-EU nations and now aircraft companies within Europe, the EU continues to hold firm on the tax and cutting carbon emissions for aircraft operators by 20 percent by 2020.
The European Union adopted the carbon tax on air transport in 2008 as part of the aviation directive to its Emissions Trading System (ETS). The ETS utilizes the “cap and trade” principle as the framework for EU policies to combat climate change and reduce greenhouse gases. The intent of the tax is to force airlines and other air carriers to purchase more efficient aircraft that use less fuel and thus emit less carbon dioxide.
Airlines and air carriers will be allocated free allowances based on historical carbon dioxide emissions that can then be redeemed to offset future emissions. The base line for acceptable emissions is reduced in future years. Those airlines and air carriers exceeding emission levels can purchase allowances from other airlines and carriers which have credits, or will be fined the tax. Exempt from the law are those commercial air transport operators that have 2 flights or less per day, emit less than 10,000 tons of carbon dioxide a year or use small aircraft of less than 5,700 kilograms. Also exempt are aircraft used for state, military, rescue, emergency or training purposes. While the tax went into effect on January 1, 2012, the EU won’t issue tax bills until 2013.
Prior to the heightened pressure, a vast majority of airlines and air carriers had applied for the free allowances. So far, airlines and air carriers are still preparing to reduce their carbon tax burden. It appears that U.S. Airlines have not yet incorporated into airfares any additional taxes or fees to European flights for offsetting the carbon tax. Industry experts believe that the carbon tax cost per round-trip fare will range from $5.25 to $31.50.
Posted by Tristan North
Beginning with returns for 2011, U.S. taxpayers will have to report foreign financial accounts and other specified foreign assets on Form 8938 with their federal income tax return if those assets exceed an aggregate of $50,000 at the end of the year or $75,000 at any time during the year. New regulations and an IRS publication explain those rules, and relax the reporting thresholds to $200,000 at year end or $300,000 during the year for taxpayers who qualify as foreign residents for purposes of the section 911 foreign earned income exclusion ($400,000/$600,000 for married couples filing joint returns). This reporting is in addition to foreign bank account reports (the FBAR) required to be made to Treasury each June.
The Full Story:
Today’s tax quote: “Taxpayers who neglect paying tax on offshore income out of ignorance must be educated. Taxpayers who do it on purpose need to be scared.” Martin A. Sullivan
A new reporting provision to be implemented with returns for 2011 should provide both education for the ignorant, and fright for the purposely noncompliant.
The Internal Revenue Service and the Treasury Department issued Temporary and Proposed Regulations on December 14, 2011, to implement the requirement that taxpayers report certain foreign assets on their U.S. tax returns. At the same time, the IRS announced that it will soon issue Form 8938, “Statement of Specified Foreign Financial Assets,” to be filed with taxpayers’ 2011 tax returns, and provided an explanation of the new regulations that is quite helpful in understanding the requirements (and, presumably, will scare the pants off those still hiding their assets offshore). The IRS explanation is at http://www.irs.gov/businesses/corporations/article/0,,id=251219,00.html.
Under section 6038D of the Internal Revenue Code, added in 2010, individuals who are citizens or residents of the United States who own specified foreign assets (which include accounts in foreign financial institutions, stock of foreign issuers not held by a financial institution, and some others) must attach a statement to their U.S. tax return providing information about those assets if the aggregate value of the assets exceeds $50,000 at any time during the taxable year. This reporting is effective for assets held in 2011 and later years, and will affect, for example, U.S. employees who are assigned overseas by their employers and who establish bank accounts in the foreign country.
The new regulations provide guidance as to a number of issues under the statute, and also exercise authority given to the Treasury to provide appropriate rules, including the authority to increase the reporting threshold under appropriate circumstances.
Treasury has exercised its authority in a very welcome way in the regulations, providing higher threshold amounts for the required reporting in certain circumstances. Under the regulations, reporting is required if assets exceed $50,000 at the end of the year, or $75,000 at any time during the year. As a result, in most cases taxpayers whose assets don’t exceed $50,000 at the end of the year won’t have to report, unless they have knowledge that those assets exceeded $75,000 at some point during the year. There is also a special rule that will shield many expats from the requirement to report. If a U.S. individual is a resident of a foreign country for purposes of section 911 (the foreign earned income exclusion), then that individual does not have to file Form 8938 unless foreign assets exceed $200,000 at the end of the taxable year, or $300,000 at any time during the taxable year. If an individual who qualifies under section 911 is married and files a joint return, these numbers are increased to $400,000 and $600,000.
In determining the fair market value of assets, the regulations provide that a reasonable estimate of value during the year will suffice, and that individuals may rely on year-end financial account statements or other year-end values if they reasonably approximate the highest value during the year. In many cases those values will be expressed in terms of foreign currency. For reporting purposes, the values must be converted to dollars. However, the regulations provide that the taxpayer is not required to determine the currency conversion rate as of the date of the asset’s highest value during the year, but may use the year-end spot rate for currency conversion.
The regulations also explain how joint owners in general, and married couples in particular, divide and report jointly owned assets. For unmarried joint owners, each must include the full value of the asset in the Form 8938. Married couples filing a joint return file only one Form 8938, on which they report all of the specified foreign assets in which either has an interest, or which they own jointly. However, married couples filing separate returns must each file a separate Form 8938, each including all of the foreign assets the spouse owns separately as well as one-half of foreign assets that are owned jointly with the other spouse.
The regulations and the IRS explanation make clear that the rules concerning filing of Form 8938 are separate and distinct from the obligation to file a Form TD F 90-22.1, the foreign bank account report or “FBAR” with the Treasury Department by June 30 of each year. For example, the FBAR has a $10,000 reporting threshold, and applies to slightly different assets in some instances. However, there are welcome differences in the two reporting regimes. While the FBAR must be filed not only by persons who have a beneficial interest in foreign bank accounts, but by persons who have signature authority but no beneficial interest in such accounts, that rule does not apply to reporting under section 6038D. Moreover, the regulations make clear that neither accounts in U.S. branches of foreign institutions, nor foreign branches of U.S. institutions, need be reported on Form 8938, unlike the FBAR.
Unfortunately, if one does reach the asset threshold to require reporting, the reporting that is required is quite extensive. For accounts in foreign financial institutions, the taxpayer must report the name and address of the institution, the account number, the maximum value of the account during the year, whether the account was opened or closed during the year (or the date an asset other than a financial account was acquired or disposed of), the amount of any income, gain, loss, deduction, or credit recognized during the year with respect to the account or other financial asset along with the form or schedule or return on which it was reported, and the foreign currency exchange rate used and its source.
Sanctions for noncompliance with these rules are severe. If a taxpayer does not file Form 8938, and does not have reasonable cause for the failure, there is a $10,000 failure to file penalty. If the failure to file continues for 90 days after the taxpayer is notified of the failure by the IRS, there is an additional $10,000 penalty for every 30 days in which the failure continues, up to a maximum of $50,000. There is also a 40% penalty on any understatement of tax attributable to assets not disclosed on a Form 8938, and the statute of limitations for the year is extended until the taxpayer does provide the required information. If the taxpayer omits $5,000 or more from gross income attributable to foreign assets, the statute of limitations is extended to six years, whether or not the taxpayer met the threshold amount of specified foreign financial assets that would require reporting.
These new rules are yet another indication of the extreme seriousness with which the U.S. government is pursuing taxpayers who hide assets overseas to avoid U.S. tax responsibilities. In recent years the IRS has summonsed information from credit card companies about cards issued by foreign institutions, vigorously pursued information from Swiss banking authorities about Swiss bank accounts, conducted two separate programs providing limited amnesty for taxpayers who come forward to admit their past transgressions, begun numerous audits of taxpayers identified as having foreign assets, expanded the reporting required under the FBAR, and implemented two new reporting regimes. One, the Foreign Account Tax Compliance Act, requires foreign financial institutions to register with the IRS and report to the IRS accounts maintained by U.S. taxpayers. The other is section 6038D, under which the new Form 8938 will be required.
Worldwide ERC member companies with employees assigned overseas should become familiar with these requirements and make sure that those employees are made aware of the filing requirements for both the FBAR and the Form 8938. Generally, ignorance of these requirements will no longer be tolerated by the tax authorities.
Posted by Peter K. Scott
There are a number of news-like items which I think are relevant to segments of the employee mobility industry, but which are really too short or of fleeting importance to rate a detailed analysis. However, they are issues that may be important in risk management and compliance programs in our industry. Too short for an article, too long for a tweet. Here are some for this week:
Costs going up in China.
Two issues here. First is the November extension of the VAT surcharge, known as the City Maintenance and Construction Tax (CMAT). It is an add on to the already existing VAT, and ranges from one to seven percent additional tax, depending on the location. It applies to foreign enterprises, foreign invested enterprises and foreign individuals, which were previously exempted. See http://www.mondaq.com/article.asp?articleid=119014.
The second is more subtle. This month the World Bank issued its first bonds denominated in the Chinese Yuan (Renminbi); which indicates that the Chinese currency may begin to fluctuate against the dollar, introducing the same type of currently calculations required in dealing with, say, the Euro. It appears that the Chinese government will allow the currency to rise up to six percent this year, determined by the market. This will likely affect costs, including payroll, in local currency. See http://apnews.myway.com/article/20110105/D9KI6Q3O0.html.
U.S. Housing market.
The HAMP program, which was originally touted as the federal government’s answer to the housing crisis, has bottomed out and is likely to remain a minor solution to a major problem. The program was designed to allow cash strapped, but employed, homeowners to negotiate a five year reduction in payments with the lender. In the third quarter, the number of completed modifications fell to 59,000, down significantly from the previous quarter, and much lower than the 159,000 loan modifications done outside of the program. In addition, the OCC reported that the number of new foreclosures increased to more than 382,000—31.2 percent more than in the previous quarter and 3.7 percent more than a year earlier. The number of foreclosures in process increased to 1.2 million—4.5 percent more than in the previous quarter and 10.1 percent more than a year earlier. The number of completed foreclosures also increased to nearly 187,000—14.7 percent more than in the previous quarter and 57.5 percent more than a year earlier. See http://www.occ.treas.gov/news-issuances/news-releases/2010/nr-ia-2010-150.html.
A very important risk management calculation for home sale programs involves estimating if, when, and how much an inventory property is going to sell for. Decisions regarding selling versus renting, for example, are often based upon these calculations, as are decisions regarding government relocation home purchases. A recent article in the Wall Street Journal pinpoints 4 areas of the economy to watch in 2011 in order to understand where house sales are going; specifically, jobs, foreclosure delays, Washington (especially the effects of Dodd-Frank on bank retention requirements and the mortgage interest deduction), and lending standards and rates (almost all new mortgages purchased by Freddy and Fannie are guaranteed by a federal agency like the FHA). I regularly blog on many of these issues, and both Pete and I will be following all of them in the future. See http://blogs.wsj.com/developments/2010/12/29/four-housing-issues-to-watch-in-2011/.
A companion story notes agrees with my analysis last week that the real turnaround in the housing market is fully dependent on the general economy, especially employment. It also points out the importance of the change in the federal government’s role; federal mortgage modification plans are not helping, and an assault on the mortgage interest deduction which is predicted to be introduced this year certainly will not help, either. See http://online.wsj.com/article/SB10001424052970203731004576045811887540604.html?mod=WSJ_RealEstate_LeftTopNews.
The Dodd-Frank Act (DFA) and HUD regulations changed many aspects of the disclosure requirements of RESPA, including the massive overhaul of the HUD-1, the tightening of the cost estimated for mortgages and attendant costs, and related transparency requirements. However, there are still many unresolved legal issues surrounding other aspects of the law involving payments between settlement service providers. During the late lamented real estate boom, “one stop shopping” business models flourished as settlement service providers attempted to navigate the uncharted shoals of RESPA’s Section 8 (which prohibits or regulates most payments from one service provider to another). RESPRO®, the very effective trade association founded by settlement service providers, has been active in following current litigation in this area, as well as lobbying federal and state agencies. Some of the cases it is following include:
Edwards v First American, a ninth circuit case in which the plaintiff claimed that an investment by First American Title into a title agency in California which sold First American’s product only constituted an illegal fee sharing arrangement in violation of Section 8, even though title policy rates are set by the government, so that consumers would pay the same, regardless of any ownership issues. The Circuit Court affirmed the trial court’s holding that the suit was permissible even though there could be no damages to the consumer. There is a split in the circuits on the issue, and RESPRO and other associations have urged the U.S. Supreme Court to review the case.
In Cantlin/Noall v. Howard Hanna Company, an Ohio district court certified a question to the Sixth Circuit as to whether the Section 8(b) prohibition on unearned fees requires a finding that these fees were also split with another settlement services provider or prohibited person. The circuits are split on this issue, with the majority holding that splitting must occur in order to violate 8(b).
These and other recent court decisions are discussed at http://newsmanager.commpartners.com/respro/issues/2010-12-13.html.
The bottom line for the employee mobility industry is that there is still uncertainty in the reach and effect of RESPA in the “one stop shopping” business model for U.S. home sales. This becomes more important as the enforcement of RESPA, TILA and mortgage related federal laws is transferred to the newly formed Consumer Financial Protection Bureau, which has pledged to play an active enforcement role as outlined in DFA.