In 2003 the IRS offered taxpayers with unreported income in offshore accounts an "amnesty" program if they would come forward voluntarily. Some did, but apparently not as many as the IRS was hoping would do so. Now they are offering a somewhat revised incentive for taxpayers with unreported income in foreign accounts to come forward. They are promising not to pursue
criminal penalties and to only impose limited civil penalties.
This web page provides an extensive article and numerous links to other Internet information about the current (2009) voluntary compliance program. It also includes links to the web sites of lawyers who have published information on this subject -- which indicates that they provide taxpayer representation services for taxpayers with unreported income. It does not necessarily mean that these lawyers are also familiar with the somewhat arcane tax rules that apply to U.S. persons who own foreign entities, investments or have transferred assets to a foreign trust. If the lawyer is not familiar with those rules, it is essential that the lawyer retain an accountant who is. It is also essential for taxpayers with unreported income to retain someone (usually an accountant) to help them determine the full extent of the potential tax and penalties that the IRS could impose before making any disclosures to the IRS. And it is suggested that an attorney should be retained to hire the accountant(s) under a confidentiality agreement that protects the taxpayer's right to not incriminate himself. OVCP Not Required Where There is No Unpaid Tax It seems there has been quite a bit of careless reporting about the Offshore Voluntary Compliance Program (OVCP) and whether it applies to situations where a taxpayer has only failed to file a required report like the FBAR form or the information returns for foreign trusts, corporations or partnerships. The OVCP only applies to situations where there is an understatement of income and therefore an understatement of tax. At the present time, there is no information about situations where there is only a minimal understatement, in which case, the OVC Program would be applicable. Where someone has a foreign account that not reported but where any income has been reported, the IRS answers to questions (FAQ) about the OVCP states, 9. I have properly reported all my taxable income but I only recently
learned that I should have been filing FBARs in prior years to report my personal foreign bank account or to report the fact that I have signature authority over bank accounts owned by my employer. May I come forward under the voluntary disclosure practice to correct this? IRS REPLY: The purpose for the voluntary disclosure practice is to provide a way for taxpayers who did not report taxable income in the past to voluntarily come
forward and resolve their tax matters. Thus, If you reported and paid tax on all taxable income but did not file FBARs, do not use the voluntary disclosure process. For taxpayers who reported and paid tax on all their taxable income for prior years but did not file FBARs, you should file the delinquent FBAR reports according to the instructions and attach a statement explaining why the reports are filed late. Send copies of the delinquent FBARs, together with copies of tax returns for all relevant years, by September 23, 2009, to the Philadelphia Offshore Identification Unit at: Internal Revenue Service 11501 Roosevelt Blvd. South Bldg., Room 2002 Philadelphia, PA 19154 Attn: Charlie Judge, Offshore Unit, DP S-611 The IRS will not impose a penalty for the failure to file the FBARs. (Emphasis added.) While the IRS did not directly address the question of whether to use the OVCP where a foreign account or business had no income or incurred losses, it seems that the OVCP is only concerned with situations where there was a failure to report income and to pay the taxes that would be due on that income. However, other tax professionals have informed me that they have spoken with IRS representatives who have stated that ALL delinquent forms will be sent to Criminal Investigations (C.I.) for review. Although the IRS FAQ on the OVCP states that no penalties will be imposed for a failure to file the FBAR form, taxpayers may encounter a different conclusion on the part of IRS agents who deal with other forms and are not involved in the OVC Program. Without participation in the OVCD program, substantial penalties could be imposed for a late filing of forms such as the foreign trust form 3520-A and 3520, the foreign corporation form 5471 and 926 and the foreign partnership form 8865. Where there has been no failure to report income from foreign investments or business interests, there should be no justification for the C.I. to pursue the matter after a preliminary review. But the case is likely to be sent to a department that would impose penalties for a failure to file various reports on a timely basis. Between a Rock and Hard Spot A taxpayer who has some unreported income from a foreign account but who also has ample justification for penalty relief due to reasonable cause is faced with a very difficult choice. Even if the amount of money involved is negligible, the current IRS policy is that requests for a waiver of the penalty will be denied and the case will be forwarded to C.I. This is analogous to someone who is accused of a felony but who insists they are are not guilty. Their lawyer urges them to "cop a plea" for a reduced sentence -- which might only be some form of supervised parole. Nonetheless, the compromise represents in an admission of guilt. participation in the OVCD program is similar. There is an implied admission of having committed tax evasion -- which is a felony. Would that have any kind of unintended or unexpected consequences? Is the commission of a tax felony a public offense that would be a matter of record. I don't know but it seems that anyone thinking of participating in this program should seek some legal guidance before jumping into it. But what about the person who has a financial interest in a foreign account with unreported income but who had no knowledge of the existence of such accounts until recently. This can occur on the death of a parent or other person who leaves the account in their will. The person with a financial interest may be named as a joint owner or as a co-beneficiary or even as the shareholder of a foreign corporation without their knowledge. The OVCD program will not consider ANY justification or reasonable cause. Is that option lost if the taxpayer does not participate in the 'voluntary" disclosure program? I see no legal justification for that. Even where there is unreported foreign source income, the reasonable cause exception in the tax code and the regulations are still applicable. The first person in the IRS to receive a request fr a reasonable cause waiver where there is some unreported income may automatically assess late filing penalties and as many other penalties as possible. So anyone with unreported foreign source income who chooses to bypass the OVCD program can reasonably anticipate that they will need to appeal any penalties --- possibly even in court. It seems to me that the IRS has taken a sledge hammer approach in designing this program and in choosing to ignore the possibility that there might be genuine cases of unreported foreign income that was not due to the willful intent or negligent failure of the taxpayer. But from the top down, they have made this an either-or program. Either admit you are guilty of tax evasion and pay the reduced civil penalties specified for participation -- or spend the time and money to seek relief from maximum penalties through the courts. The UBS and Foreign Bank Report Squeeze Play The
IRS was not able to get the Swiss bank UBS to disclose the identity of
nearly 50,000 (estimated) U.S. taxpayers who have offshore accounts
with the bank and are presumed to have unreported income in their UBS
accounts. Instead, the Swiss government agreed to a concession
regarding banking secrecy by offering to provide account information on
U.S. persons only if the IRS could identify the person and demonstrate
that a tax crime had been committed. This precludes the IRS from
engaging in fishing expeditions through the records of Swiss banks, but
it also gives them a way to penetrate Swiss banking secrecy on a case
by case basis.
The IRS has been steadily increasing pressure on U.S. taxpayers to disclose their foreign financial accounts on a Form TD F 90-22.1 that must be filed with the Treasury Dept. on or before June 30th of each year. That form gives the IRS (and virtually any law enforcement agency) access to the account number, name and address of the bank, the maximum balance in each account during the previous calendar year and information about the taxpayer, including the taxpayer identification number. IRS examiners can easily access that information during an audit and if the tax return does not show any income from the foreign account, then the IRS can use that data to contact the foreign bank to find out how much income was received in the account. Armed with this new ability to access Swiss bank data when unreported income is discovered by the foreign financial accounts form, the IRS is now offering a new voluntary compliance program to encourage taxpayers with unreported income in foreign accounts to come forward in exchange for some leniency in the penalties that could otherwise be imposed. According to the WSJ, "Taxpayers
who take part in a new program being offered over the next six months
will face lower penalties than would otherwise be due, and will likely
avoid criminal prosecution, the agency said.
A key part of the program, IRS officials said, is "developing intelligence" on bankers, lawyers, accountants and others who help the rich hide assets from tax authorities. This raises the likelihood that the IRS and the Justice Department could take aim at major financial firms, as they have against UBS AG, the Swiss bank that admitted in a settlement last month that some of its bankers had helped U.S. clients evade taxes. Lawyers representing clients who are trying to make amends with the IRS said their clients are being prodded to name those who helped them set up offshore accounts, or risk losing the leniency they would receive by coming forward." "The IRS is clearly interested in information about bankers, financial advisers, lawyers and intermediaries," said Scott D. Michel, a lawyer at Caplin & Drysdale who helps clients navigate the IRS's voluntary process to pay back taxes. "Lawyers who go in for voluntary disclosures are being asked to identify any such people with whom their clients interacted." (WSJ 3/27/09) The voluntary compliance program essentially requires the taxpayer to file an amended income tax return for up to six years to include the unreported income and to re-compute the tax for each year. What is not stated is that if that income was generated by an offshore trust, a foreign corporation, a foreign partnership or even a foreign disregarded entity, there are substantial penalties for a late filing of each of the forms for these entities. For example, if the taxpayer had a foreign account in the name of a foreign corporation (or International Business Company), there is a penalty of $10,000 per year for a failure to file the applicable information returns (Form 5471 and form 926) and the foreign bank and financial accounts form. This could add up to $30,000 per year for up to six years. Merely hiring an accountant to prepare the returns and compute the tax is risky because the accountant can not provide the same protection against self-incrimination as an attorney. And unless the accountant is familiar with the required information returns, they might not be filed properly (or at all). The safest course of action is to hire an attorney who represents taxpayers in disputes with the IRS and who is familiar with the international tax rules. The attorney can then retain an accountant (under a special agreement so that the accountant is covered by the attorney-client privilege) who is familiar with the required returns for foreign entities. (A list of attorneys who appear to do this kind of work is at the bottom of this document.) Statement from IRS Commissioner Doug Shulman On Offshore Income March 26, 2009 My goal has
always been clear -- to get those taxpayers hiding assets offshore back
into the system. We recently provided guidance to our examination
personnel who are addressing voluntary disclosure requests involving
unreported offshore income. We believe the guidance represents a firm
but fair resolution of these cases and will provide consistent
treatment for taxpayers.
The goal is to have a predictable set of outcomes to encourage people to come forward and take advantage of our voluntary disclosure practice while they still can. In the guidance to our people, we draw a clear line between those individual taxpayers with offshore accounts who voluntarily come forward to get right with the government and those who continue to fail to meet their tax obligations. People who come in voluntarily will get a fair settlement. We set up a penalty framework that makes sense for them “ they need to pay back taxes and interest for six years, and pay either an accuracy or delinquency penalty on all six years. They will also pay a penalty of 20% of the amount in the foreign bank accounts in the year with the highest aggregate account or asset value. Just to be clear, this is 20% of the highest asset value of an account anytime in the past six years. This gives taxpayers “ and tax practitioners “ certainty and consistency in how their case will be handled. We have instructed our agents to resolve these taxpayers™ cases in a uniform, consistent manner. Those who truly come in voluntarily will pay back taxes, interest and a significant penalty, but can avoid criminal prosecution. At the same time, we have also provided guidance to our agents who have cases of unreported offshore income when the taxpayer did not come in through our voluntary disclosure practice. In these cases, we are instructing our agents to fully develop these cases, pursuing both civil and criminal avenues, and consider all available penalties including the maximum penalty for the willful failure to file the FBAR report and the fraud penalty. We believe this is a firm, but fair resolution of these cases. It will make sure that those who hide money offshore pay a significant price, but also allow them to avoid criminal prosecution if they come in voluntarily. As we continue to step up our international enforcement efforts, this is a chance for people to come clean on their own. Our guidance to the field is for the next six months only, after which we will re-evaluate our options. For taxpayers who continue to hide their head in the sand, the situation will only become more dire. They should come forward now under our voluntary disclosure practice and get right with the government. Additional Articles and News About the 2009 Offshore Voluntary Compliance Program 30 Questions Taxpayers May be Asked When Applying for the OVCP IRS FAQs re Voluntary Disclosure Compliance Initiative IRS FAQs Archive on www.offshorepress.com Tax Compliance and Enforcement Issues (Staff of Joint Committee) IRS Voluntary Disclosure Practice, Internal Revenue Manual § 9.5.11.9 IRS Memorandum: Offshore Examination Cases IRS Memorandum: Routing of Voluntary Disclosure Cases IRS Memorandum: Penalty Framework Alvin Brown Blog on the 2009 OSVI WithersWorldWide: IRS Issues Guidance for US Taxpayers Declaring Offshore Accounts Duane Morris Law Firm - IRS Offshore Disclosure Program CCH - IRS Announces Offshore Compliance Incentives PRNewsWire - IRS Encourages Offshore Disclosure WSJ - IRS Rules Coax Offshore Disclosure Tax Resolution.com - Revised Voluntary Disclosure J.R. Duke - A Guide to the Voluntary Disclosure Process Offshore Press - 2003 Tax Amnesty Program Law Firms and Lawyers that Represent Taxpayers Kevin Packman Gideon Rothschild TEIG Lawrence, P.A. Rettig & Toscher Greenberg, Traurig Caplin & Drysdale Mopsick and Williams Withers World Wide Mark A. Muntean Contact Information: Vernon K. Jacobs,
PO Box 8194,
Prairie Village, KS 66208
Phone (913) 362-9667 Fax (913) 432-7174. Send Email to jacobs (at) offshorepress.com
(C) Copyright, 2006, 2007, 2008, 2009
Vernon K. Jacobs, All rights reserved. |
    Offshore Press, Inc. Reliability Seal Information
|
||||||||
