Tuesday, March 31, 2009

Some Thoughts on the IRS Voluntary Disclosure Program for Offshore Accounts (3/31/09)

I have outlined the key points of the IRS' new initiative here. (IRS documents related to the initiative may be accessed here.) I offer some comments below:

1. Taxpayers must meet the traditional voluntary disclosure requirements. Taxpayers already under criminal investigation do not meet those requirements. Since a taxpayer may not know that he or she is already under criminal investigation, the taxpayer's attorney will have to do a careful song and dance with IRS CI so as not to disclose incriminating information only to find out the taxpayer does not qualify for the program. There are ways to do that and mitigate the risk.

2. Practitioners have discussed the possibility that the Department of Justice, the Government agency charged with prosecution of tax crimes, might prosecute even if the taxpayer is accepted into this new IRS initiative. (See here.) I understand that the spector of that possibility may have already surfaced for a taxpayer making a voluntary disclosure under the regular voluntary disclosure program prior to the new initiative. A question I have is whether the Department of Justice is authorized to prosecute a tax crime where the IRS does not recommend or otherwise concur in the prosecution? I have FOIA requests to DOJ Tax that I hope will flush out a definitive answer to that question but at this time I cannot discount the concerns of the practitioners of possible DOJ prosecution even a taxpayer is compliant with this new Voluntary Disclosure initiative.

3. I do have concerns about the message that this initiative sends to the taxpayers of the U.S. Practitioners in this area routinely represent one-off alleged tax cheats whose alleged crimes are systemically not nearly as damaging to the fisc as the systemic raid through offshore accounts. Players in the offshore tax haven abuse area as a group systemically are far more damaging than one-off tax cheats. Yet, all the one-off tax cheats have at best is the old voluntary disclosure program which might give some reasonable assurance against criminal prosecution but gives no assurance of substantially reduced civil penalties. Why are these offshore tax cheats given preferable treatment on the civil penalties? I actually can articulate good reasons for favorable treatment given these offshore tax cheats. My concern is with preferable treatment. I think that just as favorable treatment (substantially reduced penalties) will get the right response for offshore tax cheats, it will also get the right response for one-off tax cheats. I therefore urge that penalty relief be given in all voluntary disclosure situations. Indeed, for much the same reasons as justifying the qualified amended return no penalty relief, I suggest that regular taxpayers doing a regular voluntary disclosure should have no penalties (but an open statute of limitations in cases of fraud for, say, six years, so that the IRS collects substantial tax and interest). The offshore tax cheats subject to the current initiative should not qualify for this extra relief because, as I noted in starting this comment, those cheating offshore did far more systemic damage than did the ordinary one-off tax cheat. The current initiative for those guys seems to get it right, although even here there may be factual circumstances in particular cases that might further penalty relief (perhaps by coming in under the regular voluntary disclosure policy which now permits more nuanced application and, under my proposal above, would not attract penalties at all).


  1. Although this does not have anything to do with voluntary disclosure for offshore accounts, it is at least tangetially related to voluntary disclosure.

    Client comes to attorney with an IRS notice indicating IRS's records show mortgage interest paid by client of $10K (reported to IRS by bank on Form 1098) but IRS has no record of client's tax return being filed for that year. IRS wants return or explanation as to why return not filed. Client has prior unrelated non-tax conviction. His income from illegal sources. Catch-22:

    1. If he files a 5th Amendment Return, he alerts the IRS of possible illegal activity who in turn may alert Probation. Although it is entirely possible IRS has no inforamtion regarding his conviction because it is unrelated and non-tax.

    2. If he does not file a return, he commits tax evasion.

    Is there any good background reading on how the IRS treats 5th Amendment returns procedurally? Does it go in a separate pile? Is there a special group that looks at them and sends them to CI? Etc., etc.


  2. See the blog today title Josephberg #2.

    Josephberg is an extreme case (many bad facts beyond just failing to file the returns), still it does hold that the taxpayer is not relieved from filing a return simply because he or she is under criminal investigation or otherwise fears that the disclosures on a return may incriminate him or her. The Court says that he or she may file a Sullivan return claiming the Fifth as to the items / information that may incriminate.

  3. I have a client who received income from a tax free grant given to a county gov. The county gov. then paid my client. He never received a 1099 from the state and thought the money way a "tax free grant"" to him. He filed tax returns for 03,04,05 and 06 and did not report this income. In 2008 there was a newspaper article to stating this money was not a tax free grant. He subsequently contacted his cpa who determined the money was taxable and filed amended returns reporting the income. Income was about $200,000 per year.

    IRS has never contacted him but he is now concerned about the posibility IRS CI could now come after him.

    Any thoughts on this after the quiet disclosure?

  4. Joe,

    I think this is the classic case for a quiet voluntary disclosure to avoid criminal prosecution. Moreover, the amended returns will likely avoid civil penalties as qualified amended returns unless the IRS were to determine fraud (which may or may not be present in your case).

    Good luck.

    Jack Townsend

  5. Joe,

    Also, just to deal with the civil statute of limitations issue. Keep in mind that the criminal risk is resolved by the quiet voluntary disclosure. Now looking at the civil statute of limitations, under this fact pattern accepting it at face (taxpayer truly believed the income was not taxable), the Government will be unable to prove fraud by clear and convincing evidence. Hence, the unlimited statute of limitations will not apply. Because of the amount, the 6-year statute probably applies (Section 6501(e)). That would make the years now open (assuming timely filing by original due date or even extended due date) only 2004 forward. Most tax practitioners would say, therefore, that the most returns you file would be 6 years back (2004 forward), and some would say that you may even file only 5 or 4 years back. There is inherent uncertainty in choosing less than 6 years, but many good practitioners do that based on the judgment call and feel for the particular case.


  6. Jack,
    Could you please share your thoughts on FBAR mitigation guidance on your blog?Thanks.


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