Source: http://www.dunncounsel.com/irs-latest-offshore-accounts-voluntary-disclosure-program-wrong-for-many-taxpayers/
Timestamp: 2017-07-23 04:32:30
Document Index: 725142108

Matched Legal Cases: ['§ 5321', '§ 7201', '§ 7206', '§ 6651', '§ 5321', '§ 5321', '§ 5321']

IRS' Latest Offshore Accounts Voluntary Disclosure Program Wrong for Many Taxpayers - Dunn Counsel PLC
Blog	IRS’ Latest Offshore Accounts Voluntary Disclosure Program Wrong for Many Taxpayers
Posted on: February 20, 2011 | By: dunn_access | Foreign Assets Compliance By Stephen J. Dunn
U.S. tax law taxes U.S. citizens and resident aliens on their worldwide income. Many U.S. taxpayers have attempted to evade U.S. income tax by hiding income-generating assets by hiding in foreign bank accounts. Swiss banks have attracted many such accounts, due to Switzerland’s strict bank secrecy laws and low income tax rates.
The IRS combats such tax evasion by requiring U.S. taxpayers to annually file a Form TD 90.22-1, Report of Foreign Bank and Financial Accounts (“FBAR”). An FBAR is due to be filed each June 30 for foreign accounts owned as of the preceding December 31. 31 U.S. Code § 5321 provides civil penalties for failure to file an FBAR. The penalty is $10,000, unless the failure was due to reasonable cause, and the amount of the transaction or the balance in the account at the time of the transaction was properly reported. But if the failure to file an FBAR was willful, the penalty is the greater of $100,000 or 50% of the balance in the account at the time of the violation. Further, if the failure to report income on the account was willful, and the amount of the unreported income is material, the taxpayer could be prosecuted under Internal Revenue Code (“IRC”) § 7201 for tax evasion or under IRC § 7206 for filing a false tax return. Such prosecutions usually result in conviction, a term of imprisonment, and an order or restitution.
The IRS has long had a voluntary disclosure program. Under it, the IRS will not recommend prosecution for unreported income where the taxpayer (1) makes truthful, timely, and complete disclosure of the income to the IRS; (2) shows a willingness to cooperate (and does in fact cooperate) with the IRS in determining the correct tax liability; and (3) makes good faith arrangements with the IRS to pay in full the tax, interest, and any penalties determined by the IRS to be applicable. Timing is critically important in any voluntary disclosure. A disclosure is timely for this purpose if the IRS receives it before it notifies the taxpayer that it is examining the tax returns in controversy or independently receives information about the taxpayer’s noncompliance. The voluntary disclosure program is not available for illegal-source income.
From March 23 through September 15, 2009, the IRS offered a special voluntary disclosure program for offshore accounts. The IRS expected it to draw 1,000 voluntary disclosures, but it actually drew 15,000.
The IRS recently announced a new voluntary disclosure program for foreign accounts. The 2011 Offshore Voluntary Disclosure Initiative (“OVDI”) expires August 31, 2011. The program is first and foremost a voluntary disclosure program. Significantly, it is not available to a taxpayer once the IRS notifies the taxpayer that it is examining his or her returns, or independently receives information about the taxpayer’s foreign accounts. The other requirements of the program include:
1. File accurate amended income tax returns reporting income from the foreign account(s).
2. File a completed and signed Offshore Voluntary Disclosure Letter (see Exhibit A below).
3. Pay all tax, interest, and, if applicable, accuracy-related penalty under IRC Section 6662(a), and failure to file and failure to pay penalties under IRC § 6651(a), or submit Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-B, Collection Information Statement for Businesses, as appropriate, and enter into an installment agreement to pay same.
4. File Form 872, Consent to Extend Time to Assess Tax, and the IRS’ form extending the time for assessing a penalty under 31 USC § 5321 for failing to timely file and FBAR.
5. Applicants disclosing foreign accounts with a total balance of $500,000 in any year must file copies of financial institution statements for the accounts for all years covered by the voluntary disclosure.
6. Applicants disclosing foreign accounts with a total balance of $1,000,000 or more must complete and file Foreign Financial Institution Statements for said accounts.
7. Pay a penalty, in lieu of the 31 USC § 5321 penalty, equal to 25% of the highest aggregate value of property in the foreign accounts in the years in controversy (12.5% if the highest aggregate value does not exceed $75,000).
Under 31 USC § 5321, the penalty for failing to timely file an FBAR is $10,000. There is no penalty at all if the failure was due to reasonable cause.
But if the failure to timely file an FBAR was due to willfulness, the penalty is the greater of $100,000 or 50% of the balance in the account at the time the FBAR was due. Willfulness is a violation of a known legal duty.
Willfulness must also be proved in a criminal prosecution for tax evasion or filing a false tax return.
Only a taxpayer who willfully failed to timely file an FBAR should consider making an OVDI disclosure. For example, assume that patriarch travels the world on business. He opens an account at Swiss Bank and deposits $1,000,000 into it. Patriarch titles the account in the names of patriarch and his son, and directs Swiss Bank not to issue statements on the account. Patriarch does not report income from the account on his income tax returns or file FBARs for the account. Son is aware of the account, but never makes any withdrawals from it.
After patriarch’s death, son consults tax counsel and learns that the gift of the account from patriarch to son did not become final for U.S. tax purposes—i.e., that U.S. tax law did not regard the account as the son’s property—until patriarch’s death.
Patriarch was willful as to the account, but his liability for unassessed tax and penalties died with him. Son was not willful as to the account. Out of an abundance of caution, son could do a traditional voluntary disclosure as to the account. But son should not do an OVDI disclosure or pay any penalties as to the account.
In sum, if a U.S. taxpayer has a foreign account not previously reported to the IRS, and the IRS has notified the taxpayer that it is investigating the account, it is too late to do a voluntary disclosure of any kind as to the account. If the taxpayer has not been so notified, then without delay the taxpayer should retain tax counsel and make a willfulness determination. If the taxpayer has been willful in failing to disclose the account, then an OVDI disclosure may be appropriate. If the taxpayer has not been willful, then a traditional voluntary disclosure may be appropriate. Time is of the essence.
Exhibit A – IRS Offshore Voluntary Disclosure Letter Form
If taxpayer has domestic issues only, please have them contact their local Criminal Investigation office for a traditional voluntary disclosure. <Date>
ATTN: Voluntary Disclosure CoordinatorPhiladelphia Lead Development Center600 Arch Street, Room 6406Philadelphia, PA 19106
Re: Taxpayer Name
Dear Voluntary Disclosure Coordinator:
To assist in a timely determination of my acceptance into the Voluntary Disclosure Program, (for Voluntary Disclosures involving offshore accounts or assets), I have addressed all of the following items:
Passport Number (and Country):
Taxpayer Representative and his/her contact information.
Explain the source of the funds.
Disclose if you or any related entities are currently under audit or criminal investigation by the Internal Revenue Service or any other law enforcement authority.
Has the IRS notified you that it intends to commence an examination or investigation? Yes No
Are you under criminal investigation by any law enforcement authority? Yes No
Do you believe that the IRS has obtained information concerning your tax liability? Yes No
Please check the box to estimate the annual range of the highest aggregate value of your offshore accounts/assets.
Please check the box to estimate the potential total unreported income from the offshore account(s) during each disclosure period. If known, please enter exact amounts/assets.
For accounts or assets where you have control or are a beneficial owner of the account or asset, list any and all financial institutions and the country where the institution is located. For accounts, please also list the dates the accounts were opened and/or closed. Provide your point of contact at each financial institution.
Explain the purpose for establishing the offshore account or assets. For example: Holocaust Compensation or Restitution; inherited account; account established prior to World War II, etc.; if tax non-compliance – please explain.
List each person or entity affiliated with the account, their formal structure (i.e., if a corporation, foundation, or trust), and the nature of their relationship to the account (i.e. owner, power of attorney, parent entity of corporate account holder, etc.).
Explain all face to face meetings, and any other communications you had regarding the accounts or assets with the financial institution(s). Also include face to face meetings or communications regarding the accounts or assets with independent advisors/investment managers not from the financial institution(s) where the funds are held. Provide the names, locations and dates of these meetings and/or communications.
Under penalties of perjury, I declare that I have examined this document and accompanying statements, and to the best of my knowledge and belief, they are true, correct, and complete.
Signature of Taxpayer Print Name Date