THE LAW OFFICES OF ROBERT S. STEINBERG

Practice Limited to Taxation

COME IN FROM THE COLD - OFFSHORE BANK ACCOUNTS

Posted on 06/24/2009

COME IN FROM THE COLD

 

The IRS has announced a revised voluntary disclosure policy for those with un-reported foreign bank accounts who want to come in from the cold.

 

CLIMATE CHANGE FOR OFFSHORE BANK ACCOUNTS

Offshore or foreign bank accounts have always been perfectly legal and U.S. citizens or residents can own them for legitimate reasons such as higher investment yields, creditor protection or to facilitate business dealings abroad.  The owner of a foreign bank account will have no problem with the U.S. government so long as the account is reported to the Treasury on TD 90-22.1 (Foreign Bank Account Report or FBAR) by June 30 of each year and the interest income from the account reported to IRS in a timely filed Form 1040.

Many U.S. persons, however, hiding behind bank secrecy laws of countries like Switzerland and Liechtenstein, have failed to report the account and income earned on the account.  Bank secrecy laws for years frustrated IRS efforts to capture this unreported income estimated to cost the Treasury $100 billion.

For many reasons, including the need to monitor and interrupt the flow of funds to terrorists, the IRS is now aggressively pursuing offshore non-filers. Penalties for getting caught red handed may include:

1.     A fine of at least $10,000 for neglectful non-filing of the FBAR.

2.     A fine, equal to the greater of $100,000 or ½ the value of the account at the time of the non-filing. For accounts of $1 million or more the $100,000 increases to $500,000, for willful non-filing of the FBAR.

3.     A fraud penalty on the income not reported equal to 75% of the underpayment in tax.

4.     A criminal penalty including lengthy jail sentences of up to 10 years for both failing to file the FBAR and failing to report the income.

Evidencing a more aggressive stance the U.S. Department of Justice recently asked a U.S. District Court to order Swiss Bank UBS to turn over the names of some 52,000 customers.  UBS had avoided a criminal trial for its part by paying a $780 billion fine and turning over some 250 names to IRS.  The court may or may not order UBS to turn over other names and UBS may or may not comply with a turn over order.  Never the less, under great pressure from the U.S. and EU Switzerland and several other offshore banking havens have flinched and agreed to cooperate more with U.S. tax authorities.  Many account owners have also been notified that their accounts will be terminated and funds disbursed to them creating an electronic or paper trail.  Not surprisingly, the number of filed Foreign Bank Account Reports has increased by 85% since 2000 undoubtedly due in part to heightened fears of discovery.

 

VOLUNTARY DISCLOSURE MAY AVOID HARSH CONSEQUENCES

While coming forward does not guarantee insulation from criminal prosecution, the IRS offers a process by which one can be reasonably assured.  The coming forward can be accomplished in two ways:

1.     Filing all of the required forms (usually for 6 years) and paying the tax, penalties and interest in full without contacting IRS in advance(quiet filing),

2.     Contacting the local IRS District office Criminal Investigation Division on a no-name basis to proffer the facts and circumstances and determine in advance if IRS will view the coming forward as a voluntary disclosure.  This proffer is not in and of itself a voluntary disclosure and may have little usefulness if IRS views the facts later presented as different from those proffered, or,

3.     Contacting IRS as above by letter presenting the amended returns for the open years, the facts and circumstances, and requesting a conference (noisy disclosure).  If the disclosure fails to meet IRS guidelines the letter will be returned and the reasons for its rejection will be stated.

Which approach is better is a matter of good judgment and depends on the peculiar facts of each case. These decisions should be made with the assistance of legal counsel familiar with these matters.  A CPA should not determine whether and how to make voluntary disclosure to IRS.  A voluntary disclosure, if accepted, is viewed by IRS as a mitigating circumstance against prosecution but is not a legal guarantee of that result. Yet, IRS seeking, as a policy matter to bring more taxpayers into full compliance with the law, will not lightly go back on its word.

What is a voluntary disclosure according to IRS is a disclosure:

1.     Made before the taxpayer is audited or criminally investigated by IRS and before IRS learns about the taxpayer specifically from an informant or other source. UBS account owners would qualify even if they are on the list of names IRS is seeking provided no action has been commenced against them individually.

2.     Not involving income from an illegal activity. Drug dealers need not apply.

3.     Complete and truthful. Misstating the facts or making errors in the amended returns can be deadly.

4.     Includes the filing of accurate amended returns.

5.     Includes the payment of all interest due.

6.     Includes the payment of a 20% accuracy related penalty or 25% delinquency penalty for each year at issue and a penalty of 20% of the highest account value during the 6 year look back period of filing.

7.     By a taxpayer who cooperates with IRS to determine the correct tax liability.  IRS has expanded the cooperation factor to pressuring account owners to provide the names of promoters of the offshore scheme.

IRS CLARIFIES PROCESS

On May 6, 2009 IRS posted 30 Frequently Asked Questions and Answers on its website regarding the program.  The FAQ and prior announcements make clear:

1.      This is not an amnesty program. The disclosure is a mitigating factor in the IRS decision process of whether to recommend prosecution of a tax crime. That being said a truly voluntary and honest disclosure almost always results in no prosecution being recommended.  A tax lawyer with privilege and not a CPA should debrief the account owner to determine if he or she will qualify under the program.

2.      IRS wants you to make a “noisy disclosure” by contacting the local CID office and not by filing amended returns quietly with the service center.  IRS wants an opportunity to question account owners about promoters who advised them or helped them open the account.  Thus, IRS has stated it will not view quiet disclosures as a voluntary disclosure qualifying for the reduced civil penalty scheme discussed in my earlier issue.  That would make filing amended returns on your own far more expensive unless there are “reasonable cause” circumstances present for not having timely filed the foreign bank account reports.  It might also subject you to criminal sanctions although the Department of Justice having the final say on criminal tax prosecutions does not view quiet disclosures as less voluntary than noisy disclosures.

3.      Taxpayers who have a legal excuse for not having timely filed a FBAR are not tax criminals and should not use the noisy disclosure process. Once again a tax lawyer with privilege should vet the taxpayer’s reporting and income history to determine whether the non-filing was due to reasonable cause, willful or wanton neglect  under the civil penalty statute and/or willful under the criminal statute.

4.      IRS will not assess civil penalties on Taxpayer’s who file a delinquent FBAR with an attached explanation for an account on which all income has previously been reported.  Once again a tax lawyer should vet the account owner to ascertain that the funds creating the account originated from a legal non-taxable source, that all income on the account, has, in fact, been reported, and, that there are no other accounts or factors that would render the account owner less than innocent.  A CPA without privilege should not conduct this interview.

IRS REVISES AND ADDS ADDITIONAL FAQS

On June 24, 2009 IRS revised some of the FAQs and added Questions and Answers Numbers 31 to 51.

Question number 43 of the Frequently Asked Questions was posted on the IRS website on June 24 only 6 days before the filing deadline for the Foreign Bank Account Report (FBAR). The answer states that a person who only recently learned of his or her obligation to file a FBAR and had insufficient time to file on time should file the report late but before September 23.  These late reports should be filed and a copy sent to the Philadelphia Offshore ID Unit with an explanation of why the report is late.  IRS will not impose penalties if the above conditions are satisfied.  The above rule is for those having only signature authority over an account but no beneficial interest or those with an interest who properly reported the income earned on the account for 2008.

The above rule would seem inapplicable to taxpayers who have filed FBARs in prior years but have mistakenly waited to file the 2008 report at the same time as their extended Form 1040.  These returns should be filed with the Detroit address in the FBAR instructions and no copy sent to Philadelphia.  It would be wise to attach an explanation as to why the report is being filed late, however.

Most importantly, those who have not reported income on foreign accounts have until September 23 to come in from the cold and participate in the current IRS voluntary disclosure program.  After September 23, IRS will re-evaluate the program and if participation is permitted the toll charge for entry in the form of civil penalties will likely rise substantially.

The Department of Justice has announced an agreement in principal with UBS over name disclosure dispute. Those with undisclosed foreign accounts, especially present or former UBS account owners, who have not yet come forward would be wise to step up to the plate now.

Perhaps the most cogent advantage of coming forward is ending looks over your shoulder or fearing every IRS notice received and achieving peace of mind.

Steinberg Talks Tax (TM) Volume 3, No. 4, June 14, 2009.

© 2009 By Robert S. Steinberg All rights reserved

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