Recent Publications

April 7, 2009
IRS Lures Tax Evaders to Report Offshore Income

For more information, please contact Bob Webb or Chris Coffman.

Overview

On March 26, 2009, the IRS announced an Offshore Income Reporting Initiative (the “Initiative”) to encourage taxpayers with undeclared offshore accounts and assets to come forward and participate in the IRS voluntary disclosure program. IRS Commissioner Doug Shulman announced the new initiative by describing it as a way to establish “a predictable set of outcomes to encourage people to come forward and take advantage of [the IRS] voluntary disclosure practice while they still can.” The proverbial carrot that the IRS is using to encourage voluntary participation is the possibility that taxpayers who comply with the Initiative may be able to avoid criminal prosecution and substantial civil penalties. The Initiative only applies to voluntary disclosure requests related to offshore issues. The Initiative applies to all such requests that have already been submitted to the IRS and that are not yet resolved, and it will remain in effect for six months from the effective date of March 23, 2009.

Brief History

Prior to the announcement of the new Initiative, practitioners and commentators alike expressed uncertainty about the applicability of the IRS voluntary disclosure policy to U.S. taxpayers with undeclared offshore accounts and income. Some of this uncertainty resulted from the fact that it was unclear how the ongoing dispute between the IRS and Swiss based UBS-AG over the disclosure of information regarding U.S. depositors holding foreign accounts and the increased information that the IRS has obtained from other jurisdictions and foreign banks would impact the applicability of the IRS voluntary disclosure policy to individual taxpayers. Further, there was concern that the IRS would impose substantial civil penalties on these taxpayers if they voluntarily came forward. The Initiative, in large part, seems to alleviate much of this uncertainty and concern.

Who Qualifies

To qualify for the new initiative, taxpayers must voluntarily and timely disclose their previously undisclosed foreign bank accounts. A voluntary disclosure occurs when the disclosure is truthful, timely, complete and when the taxpayer cooperates fully with the IRS and makes good faith arrangements with the IRS to pay in full any tax liability, interest and penalties.

Amount You Must Pay

Under the Initiative, the IRS will assess all taxes and interest due as a result of the taxpayer’s offshore issues going back six years. Where an account or entity was formed or acquired during this six year look back period, the IRS will assess taxes and interest starting with the earliest year in which an account was opened/acquired or entity formed. The taxpayer will be required to file or amend all returns, including information returns and Treasury Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, commonly referred to as an “FBAR.”

Penalties Imposed

Moreover, the IRS will assess either an accuracy penalty or a delinquency penalty on all years within the six year look back period.

Finally, in lieu of all other penalties that may apply, such as the penalty for failure to file an FBAR (50% of the total account balance) or the civil fraud penalty (75% of the unpaid tax liability), the IRS will assess a penalty equal to 20% of the amount in the foreign bank account or entity in the year with the highest aggregate account/asset value.

No Criminal Charges

Although the establishment of a set civil penalty framework that is absent under the IRS voluntary disclosure practice is an important part of the Initiative, the opportunity for taxpayers to avoid criminal prosecution is obviously the most critical piece of the Initiative. Historically, the IRS voluntary disclosure practice afforded some comfort to disclosing taxpayers that they would most likely avoid criminal prosecution if they met all of the eligibility requirements. However, the language of the IRS voluntary disclosure practice was clear that a “voluntary disclosure will not automatically guarantee immunity from prosecution.” In contrast, in its public statements discussing the Initiative, the IRS seems to be taking the position that taxpayers who participate in the Initiative will not be criminally prosecuted. For example, Commissioner Shulman recently stated that the Initiative will ensure that “those who hid money offshore pay a significant price, but also allow them to avoid criminal prosecution if they come in voluntarily.”

IRS Enforcement Plan

The announcement of the Initiative is a significant part of the ongoing work of the IRS to increase enforcement efforts to detect and stop unlawful offshore tax avoidance. The IRS recently announced that it will undertake its most ambitious hiring initiative in recent years in order to increase enforcement efforts. Approximately 700 of the more than 3,500 enforcement employees that the IRS intends to hire under this initiative will be tasked to address international issues. Commissioner Shulman recently emphasized that this increased focus on undeclared offshore accounts and income “will only increase under [his] watch.” Thus, those who are unlawfully concealed assets “should come forward now under our voluntary disclosure practice and get right with the government.” Commissioner Shulman cautioned that for “taxpayers who continue to hide their head in the sand, the situation will only become more dire.” He has promised that in those cases where the taxpayer did not come in through the voluntary disclosure process, “the IRS will devote the time and resources needed to fully develop these cases, pursuing both civil and criminal avenues, as appropriate, and will consider all available penalties.”