Over the past two years, much attention has been paid to the IRS’s Offshore Account Voluntary Disclosure Program. The program was triggered when Bradley Birkenfeld, a disgruntled Swiss Banker, blew the whistle on a large scale tax evasion scheme that allowed U.S. Citizens to hide income and assets in Swiss bank accounts.
Birkenfeld’s disclosure touched off a wide spread criminal investigation resulting not only in his own conviction – he is currently serving a 40 month prison sentence – but the conviction of several taxpayers who sheltered income and assets in Swiss accounts. More recently, the IRS ran a sting operation on, Renzo Gadola, another Swiss banker who was caught on tape at Miami hotel advising his client not to disclose their Swiss account through the Offshore Voluntary Disclosure Program. Gadola recently pleaded guilty and is awaiting sentencing.
While the Offshore Account Voluntary Disclosure Program allows taxpayers with foreign bank accounts to come into compliance with the tax laws and cap the civil penalties and interest that will be assessed, it may not be a good deal for some taxpayers.
In a nutshell, the Offshore Voluntary Disclosure Program allows taxpayers with undisclosed foreign bank accounts to voluntarily come forward, disclose foreign bank accounts and amend prior tax returns to report foreign source income. Participants pay tax on unreported income, a 20% accuracy penalty on the tax, a one 20% FBAR penalty based on the high value of the foreign bank account over the last three years. In exchange, the IRS maynot refer a the taxpayer for criminal prosecution. While this may seem like a good deal on the surface, there are several factors that practioners and tax payers should consider before entering into the program:
- There are two versions of the Voluntary Disclosure Program, IRS and Department of Justice. The programs have been in place for several years and are not unique to the Offshore Voluntary Disclosure Program.
- The IRS Voluntary Disclosure program does not guarantee that a voluntary disclosure will not result in a criminal referral. A voluntary disclosure may or may not result in a criminal referral depending upon what is disclosed. For example, if a Swiss bank account holds ill-gotten gains or illegal source income, the IRS may very well decide to refer a case for criminal prosecution and use the information gathered through the voluntary disclosure to prosecute the taxpayer.
- The Voluntary Disclosure must be “timely.” Disclosure is not timely if the IRS has initiated a civil exam or criminal investigation or received information from a third party (i.e. Swiss Bankers) alerting the IRS to non-compliance.
- Taxpayer must agree to cooperate with the IRS as to the determination of the tax due and make a good faith effort to pay all tax, penalties and interest due.
- Department of Justice Voluntary Disclosure Program – Voluntary Disclosure is only one factor considered in the evaluation of the case. Even if the tax payer has made a voluntary disclosure, the Tax Division may still authorize prosecution.
- The Offshore Voluntary Disclosure Program may not be a good deal for certain taxpayers. The Offshore Voluntary Disclosure program requires taxpayers to waive their appellate rights and agree to a 20% accuracy penalty plus interest and tax and a one time 20% FBAR penalty based on the high value of the foreign bank account over the last three years.
- The IRS bears of the burden of proving by a preponderance of the evidence that civil penalties are warranted. This would include the 75% fraud penalty – which the IRS is reducing to a 20% accuracy penalty under the program – and the 50% per year FBAR penalty – which the IRS is reducing to a one time 20% penalty.
- Depending on the facts of the case, the IRS may not be able to meet its burden of proving willfulness – a voluntary intentional violation of a known legal duty – or under payment of tax due to fraud.
- In a case where a taxpayer negligently failed to disclose a foreign bank account or report foreign source income, taxpayer may want to hold the IRS to its burden of proof. This may involve litigating a case in U.S. Tax Court – in the case of a civil fraud penalty – or in U.S. District Court – in the case of an FBAR penalty.