A few months ago the IRS announced a voluntary disclosure program for undeclared foreign accounts. This six months program closes on September 23, 2009. For qualifying taxpayers who come forward and report their undisclosed foreign bank accounts and pay back taxes for six years plus interest and some penalty, the IRS agrees not to bring criminal charges or assess the 75% fraud penalty. What most are not resporting is that the IRS will require disclosure of all who had knowledge of the program and are likily to require you to be a witness in cases against those professionals who had knowledge or helped in the tax avoidance schemas.
On June 30, 2008 a federal court authorized the IRS to serve a “John Doe” civil summons on UBS, demanding the names of approximately U.S. clients who hold off-shore bank accounts. On February 18, 2009, UBS entered into a Deferred Prosecution Agreement with the Department of Justice and agreed to pay $780 million to the U.S. and to disclose the names of between 250-300 of its U.S. clients who had maintained secret accounts at UBS. Now the IRS has sued to enforce the earlier John Doe summons seeking the disclosures of the owners of about 52,000 UBS Swiss accounts. It is estimated that these accounts hold some $17.9 billion in assets. The 52,000 accounts are just at one bank in one country. No one knows how many other accounts in other jurisdictions and financial institutions are unreported.
In addition, UBS has notified many of its U.S. clients that their secret bank accounts will be terminated. Closing the accounts is going to put the account holders in a tight spot. They have two choices: 1) transfer the money to banks in other “bank secrecy” jurisdictions which would create a paper trail discoverable by the IRS, or 2) repatriate the funds to the U.S and come clean with the IRS.
It is not illegal to have a foreign bank account in a bank secrecy jurisdiction (Switzerland, Liechtenstein, Nevis, Anguilla, Panama, the Cayman Islands, or others). What is illegal is failing to disclose the accounts and failing to report the income and pay income tax. In addition to disclosing the existence of the accounts on your 1040 and reporting the income, Foreign Bank Account Reports (“FBARs”) must be filed by any U.S. taxpayer who has signatory or other authority over a foreign account or accounts that have a combined value of more than $10,000 at any time during the calendar year.
For taxpayers who “come clean” under the voluntary disclosure program, they will have to 1) pay back taxes due on the undisclosed assets for the last six years; 2) pay interest on the back taxes; and 3) pay a 20% accuracy penalty or a 25% delinquency penalty for each tax year at issue.
These penalties are high, but much lower than previous penalties. IRS will not pursue charges of criminal tax evasion against taxpayers who voluntarily disclose their offshore assets under this new policy (as long at they comply with disclosure requirements).
The IRS will not pursue other penalties against participating taxpayers, such as the fraud penalty of 75% of the unpaid tax or the statutory penalty for willful failure to file an FBAR, which is the greater of $100,000 or 50% of the foreign account balance. Both of these penalties apply annually to undisclosed accounts and assets during the relevant tax years.
Since a taxpayer’s name may be discovered by the enforcement of the “John Doe” summons against UBS or in Congressional Hearings, it would be prudent for affected taxpayers to begin the process of determining whether the voluntary disclosure policy is available and appropriate for their particular circumstances. As IRS Commissioner Shulman forewarned, “having the IRS find you could mean a much heavier price than coming forward on your own.”
Voluntary disclosure is not a guarantee of no criminal prosecution. Experts recommend that the taxpayer’s attorney contact the local IRS district office. Without disclosing the taxpayer’s name, the attorney should explain the facts and circumstances to the IRS to determine if the IRS will agree not to prosecute. This disclosure should only be done with a high-level IRS official or counsel.
Taxpayers with offshore noncompliance should take advantage of the amnesty and come forward. The situation is going to get worse, not better.