Bloomberg reports that there may be some IRS and DOJ activity on this front based principally on the reams of information DOJ is receiving from Swiss Banks under the DOJ Swiss Bank Program and other sources. The following are excerpts from David Voreacos, America’s Offshore Tax Cheats Are Feeling the Heat Once Again (Bloomberg 7/1/16), here.
We’re “taking all of that data and scrubbing it for leads,” Nanette Davis, a trial attorney in the Justice Department’s tax division, said at the New York University Tax Controversy Forum last week. The effort has been fruitful already, she said. With some taxpayers, “we say ‘we could indict this case tomorrow,”’ said Davis, who is overseeing the review.
The risk of being scrutinized falls on those taxpayers who came forward under the government’s so-called streamlined program. Those living in the U.S. paid penalties of 5 percent of their undisclosed offshore assets, while overseas residents paid none.
Another 54,000 Americans took a more arduous route in voluntarily disclosing their offshore accounts to the IRS since 2009, including their dealings with bankers and advisers. They were hit with penalties of as much as 27.5 percent of their assets, in addition to the total of $8 billion in back taxes and other penalties. But the government agreed to never prosecute these taxpayers over the disclosures.
Some tax lawyers were critical of Davis’s warnings about possible prosecutions.
Those statements might have “a chilling effect” on people considering using the streamlined program, said tax attorney Barbara Kaplan, of Greenberg Traurig LLP. That “undermines the IRS interest in bringing as many people as possible” into tax compliance, she said.
But attorney Jeremy Temkin said it’s been clear to tax advisers for the last year that the Justice Department might prosecute people who lied in their declarations. His advice: Clients should disclose any bad facts to the IRS.
“It is important to present both the positive and negative facts and let the IRS decide,” said Temkin of Morvillo Abramowitz Grand Iason & Anello PC.
IRS trial attorney John C. McDougal suggested at the conference that the review of the streamlined submissions isn’t as dire as Davis made it sound because they’re being looked at in the same way as other tax returns. The IRS has begun formal examinations in some of the cases, he said.
Still, the threats to taxpayers who lied may be mounting as more financial institutions step forward. Davis said offshore entities not yet under investigation are voluntarily approaching the U.S. to cooperate.
“We’re getting spreadsheets with U.S. client names, account numbers, details, entity names, account balances,” she said. “It’s a little bit of a dangerous time if you are an offshore account holder and have not gotten right, because there’s just been an avalanche of information that’s come to the department and the IRS.”JAT Comments: I think the "chilling effect" comment may be lawyer hyperbole. The requirement that the certification and narrative be made under oath with penalty of perjury has its own chilling effect, and that is simply a requirement of the program. I think that most -- at least many -- practitioners below that the certification with a robust narrative that is factually accurate and balanced with the good and bad facts (with the bad facts presented in the best light possible) will not create a problem with the certification and narrative. The IRS will not prosecute the improper conclusion of nonwillfulness if the narrative fairly presents the good and bad facts. The IRS may simply determine that the narrative as presented does not support the certification of nonwillfulness but there should not be a prosecution based on the certification and narrative. The problem, of course, is that if the narrative and the facts after investigation do not support the certification, the taxpayer does not get the benefit of the Streamlined Program and its implicit promise to taxpayers that the past is past. The past is then open to any appropriate IRS enforcement efforts -- civil or criminal -- for which the statute of limitations is still open.
One of the problems is that, at least for the more aggressive taxpayers, time is not on their side. Many taxpayers playing the offshore account game learned of the IRS push in this area shortly after the IRS resolved the UBS matter with great fanfare and publicity in 2009. Yet they held back from the initial OVDP, and often moved the offshore deposits from one Swiss bank to another or to tax haven banks outside Switzerland. Many of those taxpayers who have not joined an IRS disclosure program will be on the DOJ and IRS radar screen because of these Swiss bank disclosures. At a minimum, those taxpayers should have come into tax and FBAR noncompliance for the years after they became aware of the DOJ and IRS initiatives, even if they did not join OVDP. I called this a go-forward compliance. However, many of them held out without even go-forward compliance, hoping they would not be discovered. Then, when the more robust Streamlined Programs were announced in 2014, they saw an opportunity to resolve the past simply by claiming nonwillfulness and providing a supporting narrative that may not accurately present a balanced picture of the truth, again hoping that they would not be discovered. For those taxpayers who were aware of the IRS initiatives in years before 2014, however, and particularly those who attempted in the covered years to hide their ownership of foreign accounts, the certification in the Streamlined Programs will expose them to civil and criminal investigation. I had heard of Nanette Davis' statements at the conference. I think she is a straight-shooter, and it does appear that there will be some prosecutions.
Now, John McDougal does moderate Ms. Davis' gloom and doom scenario a bit. I think that is just to say that only the most aggressive certifications and narratives will be audited, the likely first step in any prosecution. Most Streamlined cases will have not further activity by the IRS. But some will. Therein lies the problem for those taxpayers with improper certifications..