As January 15, 2010 Approaches: Two Weeks Remain for Taxpayers to Provide the Internal Revenue Service with Information Concerning Undisclosed Offshore Accounts
The IRS has given U.S. taxpayers participating in the IRS Offshore Settlement Initiative Program (“the Initiative”) until January 15, 2010 to provide additional information to the IRS concerning offshore accounts. Thus, U.S. taxpayers with accounts in foreign banks have just over 2 weeks to make a complete voluntary disclosure of their accounts to the IRS or risk facing increased monetary penalties – which can exceed the value of the account – and potential criminal prosecution. Taxpayers who failed to enter the Initiative may still potentially take advantage of the reduced penalty framework by filing before January 15, 2010.
In June 2007, the U.S. Department of Justice (“DOJ”) and the IRS launched a highly-publicized civil and criminal investigation into Swiss banking giant UBS AG (“UBS”) and its U.S. accountholders who failed to disclose their interests in offshore accounts. The IRS and DOJ subsequently expanded the investigation to include taxpayers with accounts in many banks, in many countries. It is clear that offshore tax evasion remains a top enforcement priority of the Federal government.
U.S. taxpayers are required to disclose their offshore assets on their individual tax returns as well as file a Foreign Bank Account Report (or FBAR). If IRS agents discover that a taxpayer has not reported an interest in an offshore account or income accruing on such accounts during the course of an audit, the IRS may impose penalties as steep as:
• 50% of the offshore account balance for each year the account was not disclosed.
• Income tax on income earned by the foreign accounts plus interest.
• A fraud penalty of up to 75% of the value of the unpaid taxes.
• A penalty equal to the greater of $100,000 – or 50% of the offshore account balance – for willful failure to file an FBAR, for each offshore account.
• Criminal prosecution on tax evasion charges for intentional failure to disclose.
Offshore Settlement Initiative
In March 2009, the IRS announced the creation of the Initiative to encourage taxpayers to come forward and disclose previously undisclosed offshore accounts in exchange for reduced penalties and the promise not to refer the case for criminal prosecution. By participating in the Initiative, taxpayers potentially limit their liability to:
• Taxes on the income on the accounts from 2003-08 – or the length of time the account was in existence, if less – plus interest.
• A 20% accuracy-related penalty of the unpaid tax for each tax year at issue.
• A single penalty equal to 20% of the amount in the offshore account for the year in which the account had the highest aggregate value – which may be reduced to 5% under special circumstances.
• The IRS will not refer a taxpayers accepted into the program for criminal prosecution.
The IRS gave taxpayers until October 15, 2009 to participate in the Initiative and complete their submissions. The IRS was swamped with applications into the program, receiving more than 14,700 applications. There is a two step application intake process under the Initiative. Voluntary disclosures are first submitted to the IRS Criminal Division, which makes an initial determination as to whether to pursue criminal sanctions based on the sources of income (legal or illegal) and whether there is evidence of willful tax evasion. If not, the matter is referred to the Civil Division, which begins the process negotiating civil penalties with the taxpayer under the Initiative’s reduced penalty framework.
The IRS Criminal Division has set a deadline of January 15, 2010 for taxpayers participating in the Initiative to submit their complete voluntary disclosure – disclosing account information, contacts, taxpayer information, etc. At this stage, the Criminal Division is concerned with gathering complete information from taxpayers. Failure to fully cooperate with the IRS and provide the necessary information could result in greater civil and, potentially, criminal penalties.
Traditional Voluntary Disclosure Program
While it may be too late to apply to the IRS Settlement Initiative, it is not too late to file a voluntary disclosure under the IRS’s normal procedures and potentially take advantage of the terms under the Initiative. There are a number of advantages to filing a voluntary disclosure. Like the Initiative, a traditional voluntary disclosure provides taxpayers with previously undisclosed foreign accounts with a way out. Under the IRS’s traditional Voluntary Disclosure procedures, taxpayers disclose previously undisclosed assets and pay back taxes, interest, as well as a civil penalty. In return, taxpayers avoid the most severe civil penalties, which can often exceed the assets in the account in a given year, and, most importantly, taxpayers avoid criminal prosecution and prison time.
However, timing is critical. It is important to come forward before the government investigates taxpayers and discovers wrongdoing, which could subject the taxpayer to increased civil and criminal penalties than had they disclosed. Furthermore, the IRS has expressed a willingness to negotiate penalties under the terms of the Initiative. However, to potentially take advantage of this stance, taxpayers should come forward before the Criminal Division’s January 15, 2010 information collection deadline.
What’s Next for U.S. Taxpayers?
The benefits of the Initiative are only available to taxpayers who come forward and make a complete voluntary disclosure of their foreign accounts by January 15, 2010 and continue to cooperate with the IRS. Failure to fully cooperate with the IRS could lead to increased civil penalties and, potentially, criminal sanctions.
Care must be taken in determining whether to file a voluntary disclosure with the IRS under the Initiative or the IRS’s traditional procedures. For example, if a taxpayer has already been investigated and contacted by the IRS, it may be too late to file a voluntary disclosure. The voluntary disclosure process is complex and sensitive, thus, taxpayers are best served by contacting a tax attorney who is skilled at resolving disputes with the IRS as soon as possible.