In what appears to be an intentional leak, Bloomberg reports details of an upcoming deal between the IRS and Switzerland, if true, are sure to cause a lot of pain for thousand of US taxpayers who neglected to ‘come clean’ during the 2009 or 2011 Offshore Voluntary Disclosure Initiatives.
This is a big deal.
Don’t be confused by IRS press releases. For the vast majority of holders of foreign financial accounts, the deadline to file FBAR is June 30, 2011.
My quick take? The IRS was so hungry for an FBAR criminal conviction that it agreed to a plea deal with no jail time, even when the underlying tax evasion charge normally carries a year incarceration. Great result for Defendant (and counsel); great result for the IRS as they got headlines during their push for the 2011 OffShore Voluntary Disclosure (OVDI).
It seems strange. All U.S. Taxpayers are required to report foreign income on their tax returns. So why does the IRS require an additional FBAR form to be filed? If you were going to fail to disclose one, you would fail to disclose the other, right? What possible purpose does the FBAR serve, except to create another hurdle in an already hyper-regulated economy?
The answer lies with the title of the chapter of the various law. You see, the Tax Code is located in Chapter 26 of the US Code. But the strange thing is that all FBAR-related law is located in Chapter 31: Bank Secrecy.
Congress passed the Bank Secrecy Act not only to reduce tax evasion, but other crimes as well — money laundering, terrorism financing, and narcotics and gun trafficking. The FBAR is really for bank secrecy purposes, not tax compliance. The FBAR forms filed let the government know who has money, how much, and where….well, legal money, at least. One would assume that a person involved in money laundering, terrorist financing, narcotic and drug trafficking may not be especially concerned about missing FBAR filing requirements.
Even Washington figured that it would be somewhat onerous to create an IRS equivalent to administer the Bank Secrecy Act. So for many (but not all) provisions, the Secretary of the Treasury (who is the head of the IRS) is in charge of collecting the FBAR information and then assessing penalties, and beginning criminal investigations, if needed.
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Here’s the official line from the IRS. I’ll be talking about this much more in the future. But until then, the IRS press release is in block quote and my (excellent) commentary intermingled in bold.
WASHINGTON — The Internal Revenue Service announced today a special voluntary disclosure initiative designed to bring offshore money back into the U.S. tax system and help people with undisclosed income from hidden offshore accounts get current with their taxes. The new voluntary disclosure initiative will be available through Aug. 31, 2011.
All Amended 1040X’s and amended FBARs must be submitted by August 31st. This is change in procedure form last initiative, when we filed out disclosures first, then months later amended 1040X and FBARs. This round is much more time -sensitive.
“As we continue to amass more information and pursue more people internationally, the risk to individuals hiding assets offshore is increasing,” said IRS Commissioner Doug Shulman. “This new effort gives those hiding money in foreign accounts a tough, fair way to resolve their tax problems once and for all. And it gives people a chance to come in before we find them.”
“Fair” seems to be a judgment call to me. I am doubtful that this initiative is fair. Two reasons; First there is no de minimus (small case) exception. Second, for many taxpayers, the cost to come clean can easily outstrip the present value of the account. And if the offshore accounts represent a substantial portion of the taxpayers total wealth, could even outstrip their entire net worth.
The IRS’ decision to open a second special disclosure initiative follows continuing interest from taxpayers with foreign accounts. The first special voluntary disclosure program closed with 15,000 voluntary disclosures on Oct. 15, 2009. Since that time, more than 3,000 taxpayers have come forward to the IRS with bank accounts from around the world. These taxpayers will also be eligible to take advantage of the special provisions of the new initiative.
The IRS learned A LOT from these previous disclosures…the countries, the banks and the individuals who appear repeatedly are going to get extra attention.
“As I’ve said all along, the goal is to get people back into the U.S. tax system,” Shulman said. “Combating international tax evasion is a top priority for the IRS. We have additional cases and banks under review. The situation will just get worse in the months ahead for those hiding assets and income offshore. This new disclosure initiative is the last, best chance for people to get back into the system.”
The IRS may be squeezing so hard, that people expatriate and leave the US tax system…permanently.
The new initiative announced today – called the 2011 Offshore Voluntary Disclosure Initiative (OVDI) — includes several changes from the 2009 Offshore Voluntary Disclosure Program (OVDP). The overall penalty structure for 2011 is higher, meaning that people who did not come in through the 2009 voluntary disclosure program will not be rewarded for waiting. However, the 2011 initiative does add new features.
Think of “features” as punitive, painful penalties that will depress you. But this depressing reality must be balance that with other depressing reality that federal time is awful time. For example: Prison guards may be respectful or petty and controlling. Expect a mixture of both.
For the 2011 initiative, there is a new penalty framework that requires individuals to pay a penalty of 25 percent of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period. Some taxpayers will be eligible for 5 or 12.5 percent penalties. Participants also must pay back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.
Lower penalties are really for few cases where taxpayer inherited account and never took much of an active participation in it, and never took all that much money from it.
Taxpayers participating in the new initiative must file all original and amended tax returns and include payment for taxes, interest and accuracy-related penalties by the Aug. 31 deadline.
That means don’t decide August 30th that you want to participate. We have established a cut off date of taking any new clients who wish to take this deal of June 1st, 2011.
The IRS is also making other modifications to the 2011 disclosure initiative.
This means the IRS will be making changes that may benefit or harm you….after you made your decision.
Participants face a 25 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty.
Again, exception not likely. This is not the only penalty. This is only the FBAR penalty. Which 25% on highest account value So if your highest value was $10,000,000 in 2005 and the account is now worth only $5,000,000, you have a $2,500,000 FBAR penalty alone.
The IRS also created a new penalty category of 12.5 percent for treating smaller offshore accounts. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the 2011 initiative will qualify for this lower rate.
And you only withdrew a small amount of money.
The 2011 initiative offers clear benefits to encourage taxpayers to come in now rather than risk IRS detection. Taxpayers hiding assets offshore who do not come forward will face far higher penalty scenarios as well as the possibility of criminal prosecution.
We encountered resistance to the last deal which was more favorable. And this deal is not nearly as good. So I expect more resistance and inquiries into other legitimate ways to lower criminal exposure and tax bill. But the worst thing is to do nothing. Or freak out and hastily attempt to flee the country. Any country that does not have a extradition treaty for tax evasion is probably a country you really don’t want to live in.
“This is a fair offer for people with offshore accounts who want to get right with the nation’s taxpayers,” Shulman said. “This initiative offers them the chance to get certainty about how their case will be handled. Just as importantly, those who truly come in voluntarily can avoid criminal prosecution as well.”
There’s that word “fair” again. That is a judgment call.
The IRS is handling processing of the voluntary disclosures in centralized units to more efficiently process the applications.
In round one, we worked with the IRS and suggested ways to streamline the process. We have worked with some incredibly bright, hardworking, and professional revenue agents. We hope I get to work with them again.
The IRS has launched a new section on www.irs.gov that includes the full terms and conditions on the 2011 Offshore Voluntary Disclosure Initiative, including an extensive set of questions and answers to help taxpayers and tax professionals. The web site also includes details on how people can make a voluntary disclosure.
Be sure you talk to a tax attorney who has experience with handling voluntary disclosures. Don’t take advice from a website, there are far too many issues that need to be considered.
In the first voluntary disclosure program in 2009, taxpayers faced up to a 20 percent penalty covering up to a six-year period. Taxpayers came forward with about 15,000 voluntary disclosures in that effort covering banks in more than 60 countries.
The penalties are much higher now . A 25% FBAR penalty, plus an underreporting penalty. Plus 8 years of unreported income, not 6. And interest has been accruing the entire time.
Shulman said IRS efforts in the international arena will only increase as time goes on.
“Tax secrecy continues to erode,” Shulman said. “We are not letting up on international tax issues, and more is in the works. For those hiding cash or assets offshore, the time to come in is now. The risk of being caught will only increase.”
This is so true. The noose is tightening — the IRS is getting more and more powerful every day with additional authorizations from Congress. Illegitimate tax evasion schemes are dead. But, I think an unforeseen consequence will that the cost of compliance is getting so high that every American is at a strategic disadvantage when investing abroad. My guess is that the new enforcement laws will force many to consider whether or not they wish to renounce their citizenship and avoid the IRS entirely.
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The AP is reporting that former Swiss Banker Rudolf Elmer has given WikiLeaks 2000 names of potentially secret account holders at the private bank of Julius Baer. Worried taxpayers with unreported off-shore accounts — not just at Julius Baer — should read on.
First, as long as the IRS has not started a criminal investigation or has commenced an audit for unreported income, Voluntary Disclosure may still be available. The key then, is to act quickly — before the IRS learns the names that WikiLeaks discloses. The terms of Voluntary Disclosure may differ, typically, taxpayers have to pay for at least the last six year’s worth of unreported income, and associated interest, along with one large penalty for failing to file a FBAR. However, the upside is that once accepted into a Voluntary Disclosure program, the taxpayer will have no criminal liability — the case is resolved as a civil matter.
Second, tax evasion is crime of intent. Even if not accepted into a Voluntary Disclosure program, coming clean before the IRS begins an investigation makes it very difficult for the Department of Justice to prove the requisite intent for the crime of tax evasion. A prophylactic strategy like this, would likely cause the DOJ to focus its scarce prosecutorial resources elsewhere — meaning no criminal charges.
Every client we’ve helped with unreported off-shore accounts comes to our office with a difficult decision to make. We’ve found, however, that once our clients fully appreciated the true risks and was able to weigh those risks against the actual costs of compliance, the decision became a lot easier.
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If you are an American taxpayer with an offshore account that you thought was secret, you must bring it into compliance — that is file missing FBARs and include any missing income on amended tax returns. With the off-the-shelf deals previously offered, the terms of the settlement were known and predictable. Now that the 2009 and 2011 offshore voluntary disclosure initiatives (OVDI) have ended, the IRS has not yet issued a new OVDI, so many non-compliant taxpayers are wondering if they should come forward and what the cost of coming forward will be. With that in mind, here are the four options currently available to those wondering what to do.
Previously, I’ve joked, in a casual manner, which is stylish for our times, about what Universal Tax Jurisdiction is.
But how did it start?
So what was the number one criteria the IRS used in determining which names of the 4450 UBS customers it wanted?
The highest individual account holders? Nope.
Sometimes you guess right. Sometimes you guess wrong. I originally thought that IRS would simply want the 4,450 names of accounts with the highest value. Nope. My sources on the inside now inform me that the IRS went after all accounts held by that were held by foreign companies but controlled by US citizens.
