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Missed the IRS Offshore Settlement Initiative Deadline? U.S. Taxpayers Can Still File a Voluntary Disclosure

Posted in Articles & Publications on November 23, 2009 | Share

Taxpayers who missed the deadline for the Internal Revenue Service (IRS) Offshore Settlement Initiative Voluntary Disclosure Program can still file a traditional Voluntary Disclosure under the IRS’s normal filing strictures.  It is clear that offshore tax evasion remains a top enforcement priority for the IRS and the IRS will continue to step up pressure on U.S. taxpayers with undisclosed offshore accounts.  Voluntary disclosure provides U.S. taxpayers with previously undisclosed offshore accounts a way to avoid the harshest penalties and potential criminal prosecution.

UBS Investigation

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.  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.  Failure to do so can result in severe civil penalties—often in excess of the account’s value—and criminal penalties.  

In February 2009, UBS and the DOJ entered into a deferred prosecution agreement (“the Agreement”) whereby UBS agreed to cooperate with the DOJ in its ongoing investigation and DOJ, in return, agreed not to prosecute UBS if certain conditions are met.  In August 2009, as part of a so-called “John Does” Summons action, the IRS, DOJ, UBS and Swiss government reached a settlement agreement whereby UBS agreed to disclose detailed account information on U.S. taxpayers who used UBS offshore accounts to conceal assets and failed to report income related to those assets for the purpose of evading U.S. tax law—thousands of accountholder names. 

In March 2009, the IRS announced the creation of the IRS Offshore Settlement Initiative Voluntary Disclosure Program (“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.  As a result of pressure on UBS and other offshore banks, over 14,700 U.S. taxpayers with previously undisclosed offshore accounts took advantage of the Initiative and applied before the October 15, 2009 deadline.  The deadline to participate in the Offshore Settlement Initiative Voluntary Disclosure Program came and went.  However, it is clear that offshore tax evasion remains a top IRS enforcement priority. 

According to IRS Commissioner Doug Shulman, the U.S. government has information on banks in over seventy countries—not just Switzerland.  The recent release of the UBS Settlement Initiative signals that the IRS and DOJ will likely proceed against other foreign bank accountholders in the United Arab Emirates, Israel, the Bahamas, and elsewhere.  Furthermore, the U.S. Department of Justice has investigated and prosecuted taxpayers regardless of the amount of their assets—even taxpayers with assets of $20,000 or less in offshore accounts.  It is clear that offshore tax evasion remains and will continue to remain a top enforcement priority for the IRS and DOJ for years to come—beyond UBS. 

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.  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.  While the traditional voluntary disclosure program has greater civil penalties than under the Initiative, it still is more favorable treatment than if the taxpayer were discovered by the IRS or DOJ. 

Taxpayers with undisclosed offshore accounts should seriously consider the consequences of continuing nondisclosure.  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 steep penalties—including the greater of $100,000 or 50% of the offshore account balance for willful failure to file an FBAR foreach account for each year the account has been maintained.  These penalties, compounded with interest and fraud penalties, can essentially wipe out the taxpayer’s foreign assets.  Additionally, taxpayers could be subject to criminal prosecution and jail time for tax evasion.

What’s Next for U.S. Taxpayers?

Care must be taken in determining whether to file a voluntary disclosure with the IRS.  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.


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