CLIMATE CHANGE FOR OFFSHORE BANK ACCOUNTS

COME IN FROM THE COLD

The IRS has announced a revised voluntary disclosure policy for those with un-reported foreign bank accounts who want to come in from the cold.

Offshore or foreign bank accounts have always been perfectly legal and U.S. citizens or residents can own them for legitimate reasons such as higher investment yields, creditor protection or to facilitate business dealings abroad. The owner of a foreign bank account will have no problem with the U.S. government so long as the account is reported to the Treasury on TD 90-22.1 (Foreign Bank Account Report or FBAR) by June 30 of each year and the interest income from the account reported to IRS in a timely filed Form 1040.

Many U.S. persons, however, hiding behind bank secrecy laws of countries like Switzerland and Liechtenstein, have failed to report the account and income earned on the account. Bank secrecy laws for years frustrated IRS efforts to capture this unreported income estimated to cost the Treasury $100 billion.

For many reasons, including the need to monitor and interrupt the flow of funds to terrorists, the IRS is now aggressively pursuing offshore non-filers. Penalties for getting caught red handed may include:

1. A fine of at least $10,000 for neglectful non-filing of the FBAR.

2. A fine, equal to the greater of $100,000 or ½ the value of the account at the time of the non-filing. For accounts of $1 million or more the $100,000 increases to $500,000, for willful non-filing of the FBAR.

3. A fraud penalty on the income not reported equal to 75% of the underpayment in tax.

4. A criminal penalty including lengthy jail sentences of up to 10 years for both failing to file the FBAR and failing to report the income.

Evidencing a more aggressive stance the U.S. Department of Justice recently asked a U.S. District Court to order Swiss Bank UBS to turn over the names of some 52,000 customers. UBS had avoided a criminal trial for its part by paying a $780 billion fine and turning over some 250 names to IRS. The court may or may not order UBS to turn over other names and UBS may or may not comply with a turn over order. Never the less, under great pressure from the U.S. and EU Switzerland and several other offshore banking havens have flinched and agreed to cooperate more with U.S. tax authorities. Many account owners have also been notified that their accounts will be terminated and funds disbursed to them creating an electronic or paper trail. Not surprisingly, the number of filed Foreign Bank Account Reports has increased by 85% since 2000 undoubtedly due in part to heightened fears of discovery.

VOLUNTARY DISCLOSURE MAY AVOID HARSH CONSEQUENCES

While coming forward does not guarantee insulation from criminal prosecution, the IRS offers a process by which one can be reasonably assured. The coming forward can be accomplished in two ways:

1. Filing all of the required forms (usually for 6 years) and paying the tax, penalties and interest in full without contacting IRS in advance(quiet filing),

2. Contacting the local IRS District office Criminal Investigation Division on a no-name basis to proffer the facts and circumstances and determine in advance if IRS will view the coming forward as a voluntary disclosure. This proffer is not in and of itself a voluntary disclosure and may have little usefulness if IRS views the facts later presented as different from those proffered, or,

3. Contacting IRS as above by letter presenting the amended returns for the open years, the facts and circumstances, and requesting a conference (noisy disclosure). If the disclosure fails to meet IRS guidelines the letter will be returned and the reasons for its rejection will be stated.

Which approach is better is a matter of good judgment and depends on the peculiar facts of each case. These decisions should be made with the assistance of legal counsel familiar with these matters. A CPA should not determine whether and how to make voluntary disclosure to IRS. A voluntary disclosure, if accepted, is viewed by IRS as a mitigating circumstance against prosecution but is not a legal guarantee of that result. Yet, IRS seeking, as a policy matter to bring more taxpayers into full compliance with the law, will not lightly go back on its word.

What is a voluntary disclosure according to IRS is a disclosure:

1. Made before the taxpayer is audited or criminally investigated by IRS and before IRS learns about the taxpayer specifically from an informant or other source. UBS account owners would qualify even if they are on the list of names IRS is seeking provided no action has been commenced against them individually.

2. Not involving income from an illegal activity. Drug dealers need not apply.

3. Complete and truthful. Misstating the facts or making errors in the amended returns can be deadly.

4. Includes the filing of accurate amended returns.

5. Includes the payment of all interest due.

6. Includes the payment of a 20% accuracy related penalty or 25% delinquency penalty for each year at issue and a penalty of 20% of the highest account value during the 6 year look back period of filing.

7. By a taxpayer who cooperates with IRS to determine the correct tax liability. IRS has expanded the cooperation factor to pressuring account owners to provide the names of promoters of the offshore scheme.

Perhaps the most cogent advantage of coming forward is ending looks over your shoulder or fearing every IRS notice received and achieving peace of mind.