Friday, November 27, 2009

Good Summary of IRS Offshore Account Initiative

Some readers may be interested in this post here by Duane Morris, a national law firm, on the status of the IRS' offshore account initiative. I think the material in the post is quite good and recommend it to my readers.

Those of us who practice in this area are currently facing a number of inquiries by UBS account holders (as well as other foreign account holders) who did not get into the program. The iniquiries are most acute for those UBS account holders who have been notified that their account information will be turned over to the IRS. The Duane Morris post discusses this circumstance at the end of the linked page, but I quote the relevant part below. I note that the context is the traditional IRS voluntary disclosure and the requirement that the voluntary disclosure be timely.
How can these restrictions on "timeliness" of a disclosure impact taxpayers with offshore accounts in the current environment? This question may present concerns in the context of the U.S.-Swiss Treaty Request. The request is directed at U.S. account holders, and in some cases account records have already been produced to the SFTA for a determination on whether the account information should be roduced in response to the Treaty Request. Some customers have been notified that their accounts appear to be within the scope of the Treaty Request. If a taxpayer receives this notification, is it too late to make a voluntary disclosure?
The IRS has provided no formal guidance on this issue. However, it appears that a disclosure after the receipt of the notice would be timely. The taxpayer recipient of the notice is not under examination or investigation; the IRS has not yet received any information on the taxpayer from the SFTA, the bank or any criminal enforcement agency; and there is no examination or investigation directly related to the specific taxpayer's noncompliance.8 Voluntary-disclosure coordinators have advised some practitioners that receipt of the notice does not make the disclosure untimely.

Therefore, voluntary disclosure is still available, but not under the same conditions as the OVDP. The primary benefit of "no referral for criminal prosecution" is still present. However, differences exist in the "traditional" disclosure and the now-expired OVDP disclosure:

• The days of "silent" or "stealth" voluntary disclosure appear to be over. Given the protocol for making a disclosure under the OVDP (i.e., direct contact with and disclosure to the IRS) taxpayers will be unable to find comfort in simply filing an amended return and paying the bill—as was frequently the practice before the OVDP was announced.

• The scope of the civil penalties that will be imposed under traditional voluntary disclosure are stiffer than those imposed by the OVDP. Traditional-disclosure taxpayers face civil-fraud penalties of as much as 75 percent of the additional tax liability versus 20 percent under the OVDP. FBAR penalties can also amount to as much as 50 percent of the account value for multiple years, as opposed to 20 percent of the highest value of the account for a single year. Experience shows however that negotiation of these penalties may still be possible.
JAT Comments.
1. I agree that the traditional voluntary disclosure program should still be available generally for foreign account holders.
2. I think also that, provided that there is prompt voluntary disclosure before the SFTA delivers up the names and provided that there are no most unusual wrinkles, the IRS will provide the benefit of the voluntary disclosure program - no criminal prosecution. As noted, of course, the expectation is that the civil penalties imposed (an income tax penalty and an FBAR or in lieu of FBAR) will be higher than available under the special program ending 10/15/09.
3. I speculate that the range of the FBAR or in lieu of FBAR penalty will be from 20% for the highest year (the amount available under the program) and 50% for the highest year (the amount that has been imposed in the criminal cases that have pled to date). In this regard, I wonder whether an IRS attempt to impose a larger penalty, particularly where the income is legal income, not subject to forfeiture, and the amount of income tax evaded is relatively low may have some potential for violating the Constitution's prohibition against excessive fines. See United States v. Bajakajian, 524 U.S. 321 (1998).
4. I wonder whether, unless the IRS makes some public announcement, the days of the quiet disclosure are over. See my earlier discussions of quiet disclosure here. I doubt that it is in the IRS or the country's interests (hopefully they are the same) to shut off (or discourage) quiet disclosures even with respect to foreign bank accounts. Of course, when the CI agent at the service center reviews the amended return reporting foreign bank account income or the delinquent or amended FBAR reporting or correcting reporting for foreign accounts, the process might turn noisy, but I would hope that the IRS would not start criminal prosecutions against those taxpayers who in good faith opened the kimono via amended returns and delinquent or amended FBARs. I just think the IRS (and the country) has more to lose than gain from that tactic. Of course, where the taxpayer has not been totally forthcoming on the amended 1040s or delinquent or amended FBARs or doesn't participate cooperatively in any investigation that may follow, the IRS may decide to launch a full bore criminal investigation and prosecution, but where squeaky clean full and fair quiet disclosures occur, I think it would be counterproductive to do that. But, hay, that's not my call and my skin is not in that game, so these are nothing more than speculations and perhaps idle ones at that.


  1. What do you make of the fact that all of the people named by UBS and making deals with the DOJ are all pleading guilty to the same charge regardless of their actions. The ex Boeing executive, Cittadini, would not seem to have engaged in any overt acts anywhere near the level of Moran/Rubinstein/Chernick, yet he pleaded guilty to the same charge, rather than a couple of misdemeanor charges.

    And if you compare this with the recent plea deal by the Girls Gone Wild founder, Joe Francis, who actively claimed over $20 million in false deductions, but only had to plead to 2 misdemeanors, there seems to be a lack of proportionately in the pleas being required.

    Any thoughts? Maybe a blog by you on your thoughts on the proportionately of recent pleas to the crimes...which seem to be all over the spectrum.

  2. Anonymous:

    I have posted variations on this theme (with the links below), but these topics -- particularly your questions -- are certainly worthy of further comment. Now, let me just find the time.

    Thanks again for your excellent comments.

    Jack Townsend

    The links are (you may have to actually cut and paste these into address section of your browser.


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