Monday, May 25, 2009

Get in Line Brother #7 -Further Factors / Incentives to Join the Voluntary Disclosure Program for Offshore Accounts / Entities

Tax practitioners advising taxpayers about the Voluntary Disclosure initiative for foreign accounts and entities in should be able to easily advise them of the immediate costs of entering the initiative as compared to worst case. (For facets of the matters that should be considered, see the past "Get in Line Brother" blogs here and for IRS documents related to the Voluntary Disclosure Initiative see here.) Practitioners should also consider the following (although this is by no means an exhaustive list):

1. The length that the civil and criminal statutes of limitation remain open if taxpayers decide to hunker down and not join the initiative. The criminal statutes of limitation are 6 years for the tax crimes and 5 years for the FBAR crimes. Thus, taxpayers not entering the program during this initiative (which expires 9/23/09) are not out of the woods for a significant time.

2. The criminal statutes of limitation can be extended in certain ways that may not be intuitive to taxpayers but should be to their practitioners. If more than one person is involved in hiding the money (as is usually the case (e.g., the foreign enablers, such as bankers)), their actions in furtherance of that conspiracy can refresh the original criminal statute of limitations. I have discussed a facet of this phenomenon here and, within the next few days should be able to post a more refined article being published in Tax Notes. Indeed, for foreign accounts containing the proceeds of "specified unlawful activity," ("SUA"), certain future actions including the mere failure to file the FBAR report could draw a whopping 20 year criminal penalty and a fine of $500,000. 18 U.S.C. § 1956(a)(1) (and the fine may be even more under 18 U.S.C. § 3571 (sometimes referred to as the Criminal Fine Enforcement Act of 1984 (P.L. 98-596) (“CFEA”)). Even worse, since most of the clients we represent would not be dealing with proceeds of SUA, Congress just this year considered a proposal that would have expanded § 1956(b)(1) -- transportation money laundering -- to include transfers into or out of the United States with the intent to promote SUA or "engage in conduct constituting a violation of section 7201 or 7206" of the Code. Those latter sections, of course, are tax evasion and tax perjury. This proposal, promoted by the Department of Justice and passed by the Senate, was apparently dropped out of the House version and thus out of the final enactment that was signed into law. I have not yet heard precisely why the House dropped the provision, since it passed the Senate easily. So, it may be just a deferral for further consideration. I have heard that Senator Grassley has said that he will promote the proposal "at every opportunity." The prospect of this type of legislation is scary indeed and could well make any movement or use of foreign bank account proceeds -- even from legal activity -- a separate money laundering act with draconian penalties. Taxpayers coming clean under the program now need not face this uncertain risk in the future and can make these funds "visible" and far more useful immediately.

3. Even apart from the money laundering provisions, failing to file the FBARs in the future (commencing on the next due date of 6/30/2009 for the year 2008) and failing to correctly answer the foreign bank account question on schedule B is not a viable alternative, for each are independent crimes. By performing both of those legally required acts, the taxpayer will be increasing the odds of the IRS discovering his or her past sins (crimes) and lowering the boom with significant criminal penalties and draconian civil penalties. Thus, the taxpayer just wanting to fade the heat for the past crimes by not joining the program, is between a rock and a hard place because he or she is on a treadmill that he or she can't easily get off.

4. In this regard, practitioners should consider and advise taxpayers accordingly that among the President's legislative proposals likely to be enacted (effective beginning on 12/31 of the year of enactment) are two proposals related to foreign accounts. First, the foreign bank account information must be included with the tax return, in addition to filing the FBAR as usual. Failure to provide the information on the return will subject the taxpayer to title 31 criminal and civil penalties in addition to the usual criminal tax provisions. Second, a rebuttable presumption is created that a foreign bank account has enough money to require an FBAR filing. This presumption is for civil administrative and judicial proceedings only; it does not apply in criminal proceedings where the Government would be required to show that critical fact beyond a reasonable doubt. (It is unclear to me that the negative presumption means anything in the context of the draconian 50% ad valorem penalty where establishing the amount in the account is necessary for its application.)

5. Practitioners should caution taxpayers to keep in mind the IRS Whistleblower program. The program was relatively informal for a while but now, at least for significant tax, penalties and interest operates under § 7623. Whistleblowers are given substantial incentives to turn in taxpayers. Whistleblowers received from 15% to 30% of the taxes, penalties and interest collected. It is not clear that the "reward" includes the FBAR penalties which can be a major part of the recoveries from a taxpayer or whether the powers that be could be persuaded to negotiate such a reward. Nevertheless, these penalties even just for the income taxes, penalties and interest can substantially incentivize persons to turn over information. It is not clear whether the IRS will walk away from sources such as, say, customer lists from an offshore banker who decides to monetize the information despite violation of foreign law (which he may be able to avoid in some way).

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