LEGAL GUIDE
Written by attorney Sebastian Gibson | May 22, 2010

History of Voluntary Disclosure Programs in the U.S. to Avoid IRS Penalties and Criminal Prosecution

A Recent History Of How We Got Here From Bank Secrecy to Offshore Account Voluntary Disclosure Panic In this time of financial uncertainty and risk, consulting with a voluntary disclosure attorney is about being smart before it's too late. Those with the ability to protect their families should utilize the options an asset protection lawyer can provide to protect and preserve one's assets and wealth so those assets can be passed down to family members who may need them more than ever in a future without medicare or social security. As bad as the situation has been for taxpayers watching news headlines with intrepidation about foreign accounts and foreign income they have long failed to report to the IRS, the situation is only going to get worse. With each new revelation or prosecution of a foreign bank and with each new tax treaty, each hiring of additional hundreds of IRS agents, and each bank or whistleblower disclosure, such taxpayers lose a little more sleep. So how did we get from the days when taxpayers thought they were safe in sending their assets or investing their money in foreign offshore bank accounts or other entities to where we are now with panicked citizens streaming into law offices emotional wrecks over bank accounts that could not only be wiped out by IRS penalties, but where the taxpayers could wind up owing the IRS millions and be facing criminal prosecution? The whole process really only began to unravel in the early 2000s. Since then, however, it has snowballed. Having suspected for some time that credit and debit cards were being used to provide easy, untraceable access to secret offshore accounts in tax haven countries, the IRS utilized one of their most useful tools in their arsenal, the "John Doe" summons to obtain information and issued the summonses to major credit card companies for account information in approximately thirty different countries for the tax years 1998 to 2001. At the same time, the IRS served the summonses to airlines, hotels, rental car companies and internet providers for information on transactions using such credit and debit cards. It was estimated that up to two million U.S. customers had credit or debit cards issued by banks in offshore countries. Millions of records were turned over to the IRS by the credit card companies alone and as a result it was speculated that thousands of credit card users were given civil examinations by the IRS and dozens of cases referred for criminal investigation. To update its long standing voluntary disclosure program, the IRS implemented an "Offshore Voluntary Compliance Initiative" in 2003 to give individuals with previously undisclosed offshore accounts an opportunity to voluntarily step forward and clear up their tax liabilities with the IRS. To the IRS, voluntary disclosure was a factor in determinations by the Department of Justice as to whether or not to prosecute a taxpayer. While taxpayers voluntarily disclosing their sins to the IRS might be excused of their tax crimes, those who were found by the IRS as a result of their own investigations might find themselves convicted of tax fraud. At the time of the credit/debit card initiative by the IRS and the resulting publicity, the IRS advised that while a voluntary disclosure would not automatically guaranty a taxpayer immunity from criminal prosecution for tax fraud, a completely honest and forthcoming voluntary disclosure would normally result in the IRS not recommending criminal prosecution to the Department of Justice. Even then, there were no guarantees. Over the years, the voluntary disclosure policy again began to have legs and in the early 2000s, it was considered along with other factors in whether or not to recommend criminal prosecution. As a matter of practicality, the IRS viewed taxpayers who voluntarily disclosed their past tax crimes as less important and less likely a prosecution target than those tax cheats they found as a result of their own investigations. The 2003 Voluntary Compliance initiative ended April 15, 2003, but was not as great a success as the IRS had hoped for. As part of that initiative, the IRS agreed to waive the 75% civil fraud penalty, the 75% penalties for failure to file tax returns, and penalties for failing to comply with foreign transactions reporting requirements and for failing to file FBARs, Reports of Foreign Bank and Financial Accounts. Even with such forgiveness, taxpayers still were required to pay all the tax they owed plus interest, a 20% accuracy related penalty, a 25% delinquency penalty or both, in return for a taxpayer avoiding the civil fraud penalties of 75% and the likely avoidance of criminal prosecution. The initiative also applied its penalties only to tax years ending after 1998 unless the IRS found "substantial tax avoidance" had occurred in earlier years and the statute of limitations was still open. Even then, the initiative allowed a taxpayer to file amended returns for the years prior to 1999. As a result of the penalties and the belief of taxpayers with offshore accounts that they could still avoid detection, the number of taxpayers who made voluntary disclosures under the Voluntary Compliance initiative in 2003 was not that large. The IRS collected only $170 million from about 1,300 taxpayers. Comparing this figure to the more than 50,000 taxpayers with accounts at Switzerland's largest bank, UBS alone, in 2003, the number of taxpayers stepping forward to clear up their situations was minuscule. After the terrorist bombings on 9/11, the efforts by the U.S. as well as other countries increased to study the banking activities of possible terrorists and terrorist organizations. In seeking this information, the IRS has also been able to obtain a wealth of information concerning foreign bank accounts of its own citizens in offshore jurisdictions. In a widely publicized event, in February 2009, UBS AG Bank, the largest bank in Switzerland, entered into a deferred prosecution agreement with the U.S. (not approved by Swiss authorities) on charges of conspiring to defraud the U.S. It was alleged that UBS had helped U.S. citizens to evade IRS reporting requirements. About the same time as the UBS situation was unfolding, Credit Suisse, another large bank in Switzerland asked its wealthy U.S. clients with offshore accounts to sign W-9 forms which require Credit Suisse to withhold at a rate of 28% any taxes that could be owed to the IRS. Credit Suisse declined to say if this was its first request of these clients or whether this request had been made of it's account holders on previous occasions as well. Accounts held by U.S. taxpayers who decline to fill out the W-9 forms are considered "undeclared" and must sell any U.S. investments held in those accounts. By requiring its account holders to do this, Credit Suisse can maintain its status as W-9 compliant. The account information requested of UBS was for undisclosed (non W-9) accounts of U.S. domiciled clients who directly held and beneficially owned accounts in excess of one million Swiss Francs at any point in time from 2001 though 2008 and for which a reasonable suspicion of tax fraud or the like could be demonstrated, or U.S. persons who beneficially owned offshore company accounts and for which there was a reasonable suspicion of tax fraud or the like. In 2009 the IRS announced a new amnesty program, the Offshore Voluntary Disclosure Program, which allowed taxpayers who had failed to disclose offshore bank accounts and unreported income to come clean, avoid some of the more hefty IRS fines and penalties and avoid prosecution. That program, after being briefly extended, however ended on October 15, 2009 with 14,000 taxpayers having applied for the program. Thousands more are believed to have made voluntary disclosures even after the program ended. The program provided that the IRS would determine what taxes and interest were due reaching back to 2003, and assess either an accuracy or delinquency penalty for all incorrectly reported periods. In lieu of all the penalties that the IRS could wield against the voluntary disclosing taxpayer, including the FBAR penalties, the IRS would assess an accuracy penalty of 20% of the tax owed, and an additional penalty of 20% of the largest balance in the foreign bank account or entity during the previous six years. The program also provided that the 20% penalty could be reduced to 5% in cases where the taxpayer had not opened any accounts themselves and where there had not been any deposit or withdrawal activity during the period of time that the account or offshore entity was controlled by the taxpayer and where the taxpayer only owed interest and earnings on the assets. As it turned out, such reductions were rare. To avoid such penalties, some taxpayers attempted to perform what was termed, "quiet disclosures" in which taxpayers with such issues wouldn't formally notify the IRS of their past reporting failures and would simply amend their returns and pay additional taxes. In May of 2009, the IRS notified the world at large that it was tracking these "quiet disclosures" and that it had identified and would continue to identify amended tax returns reporting increases in income. The IRS further warned that those taxpayers making quiet disclosures should be aware of the risk of being examined and criminally prosecuted. In compliance with IRS requirements, we must advise you that any U.S. federal tax advice and voluntary disclosure advice contained in this informational article is not intended to be used nor is it published in order for it to be used and you may not use it for the purpose of avoiding penalties or fines under the Internal Revenue Code. It is not intended to be used nor is it being published in order to promote, market or recommend any specific transaction, tax-related matter or estate planning tax scheme to any party.

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