Multiple Charges and Maximum Jail time?: UBS and All Unreported Offshore Income

By Ron Cohen, CPA, MST
Partner
Greenstein, Rogoff, Olsen & Co., LLP

Perhaps the title caught your eye, as you’ve been following the Internal Revenue Service (“IRS”) Voluntary Disclosure Program (“VDP”) for taxpayers with unreported offshore income.
See: http://www.groco.com/readingroom/tax_unreported_offshore_income.aspx for the complete story on this issue.

Today, I’m writing to respond to a Wall Street Journal article of 8/14/09 regarding Unreported Offshore income and UBS Swiss Bank Accounts.

According to attorney George Clarke of Miller & Chevalier in Washington, D.C. (a very prestigious law firm) regarding his clients:

"For everyone I have talked to who decided to go forward with a disclosure [VDP], there are five who did not."

FIVE OUT OF SIX…have chosen the “dark side of the Force!”

I just want to comment to blog readers about the five-out-of-six who will not disclose. “THESE PEOPLE ARE NUTS!” Here’s why:

The I.R.S. has wide discretion over prosecuting people and sending them to jail…and for how long. The IRS has so few resources, that only the most criminal actually go to court and jail. However, many others plea-bargain a deal in the process.

In determining who gets jail time or what the plea-bargain will be, the I.R.S. considers whether they can win in court. The most important factor is “Willfulness.” That is, you intentionally broke the law and your intent can be proven.

The tax law is so complex, it is hard to prove willfulness. The issue turns on the old Richard Nixon question: “What did you know, and when did you know it?”…and then, what did you do about it?

Tax prosecutions are normally sad matters with little or no press or attention. Not true, regarding Unreported Offshore Income. This is great theatre to read in the Wall Street Journal. The IRS is promoting news on these cases to motivate others to report their income.

With regards to Unreported Offshore income and “willfulness”, a prosecutor will consider the following:

1. Any reasonably informed person knew they needed to report the income, although some people could honestly be ill-informed.
2. NOW, we’ve had intense news coverage since May, 2009 on the issue. It is much harder to say you were ill-informed.
3. Since May, the IRS has had a comprehensive website review of the issue, giving taxpayers notice of the VDP...so the IRS can say: “We gave you fair notice.”
4. The Wall Street Journal has had no less than 10 articles on the issue since May, 2009.
5. Swiss banks have informed U.S. taxpayers about the issue and their responsibilities. No doubt, banks in other countries have too. Will the bank provide evidence against you showing they advised you of the VDP?
6. Mainstream newspapers, T.V. and radio have reported the issue. Even your friendly, local CPA knows about this issue.
7. If you went to see a lawyer about the issue, that meeting is confidential, but it is clear you KNEW about the VDP in detail after that meeting.
8. If you are trying to avoid jail time, you ARE (believe me) going to cooperate with the IRS and tell them everything you did, and knew and when.
9. More countries and their banks will disclose income to the IRS in the coming years, as the U.S., Germany, France and U.K. are all ganging-up to press the issue of Unreported Offshore Income throughout the world. This issue is now bigger than the I.R.S.!

So, with perfect hindsight, on some future date, after all the news, and international attention up to now, 8/18/09, I can hear the IRS prosecutor asking:

“Please, Sir, explain to me why you CLEARLY DECIDED, MULTIPLE TIMES, OFTEN WITH THE BENEFIT OF COMPLETE ADVICE FROM LEGAL COUNSEL, TO NOT ENTER THE VOLUNTARY DISCLOSURE PROGRAM by September 23, 2009? Tell me?”

Maybe you should STOP READING THIS ARTICLE AND DELETE IT, to avoid evidence you knew and understood what I’m saying, if you are not going to disclose by September 23, 2009…No joke! I don’t want to contribute to your willfulness.

Again, the IRS has great discretion over whom to send to jail versus charging only interest and penalties.

Assuming they decide to prosecute your case… will they pursue one charge or multiple charges? That could be the difference between months or years in jail.

May I say, after September 23, 2009, if you are “caught” with a significant unreported offshore account, you can expect multiple charges and a long jail sentence. The time for compassion and mercy ends September 23, 2009.

Update: On-Going

Interested to see who is being prosecuted and going to jail?

See: http://www.irs.gov/newsroom/article/0,,id=110092,00.html?portlet=6

I’m no cheerleader for the I.R.S. I’m just telling you the reality of what you can expect.

After September 23, 2009, you are betting on a lack of cooperation between banks, foreign countries and the IRS. You are also betting the I.R.S. won’t have the time, manpower or resources to find you.

Maybe you’re not thinking correctly about this. Maybe you’re not thinking about anything at all. Maybe you’re petrified with fear and just can’t make any type of decision. Maybe the money is in a secret account in the Cook Islands, and you just don’t think you’ll get caught, ever.

Make no mistake: this confluence of events is being orchestrated, in part, by the IRS in Washington, DC to help them prosecute those caught in the future. I don’t blame them. If you didn’t pay your taxes, and ignore the VDP…that’s their job on behalf of other U.S. taxpayers.

I was surprised it is five out of six. That means 83% are going to throw the dice and see what happens.

Oh, oh, oh…don’t forget your state tax authority. The IRS will give any info they obtain to the state tax authority, many of whom have similar VDPs that should be considered…and they often also prosecute people for tax evasion. I’m in California. The California authority is often more aggressive than the I.R.S. once they “lock-on” to a target and have a good case.

I am always available for questions or comments at (510) 797 8661 x237

Note: Please be advised, we are a CPA firm, not a law firm. Anyone in this situation is strongly advised to immediately seek the counsel of a qualified tax attorney who specializes in criminal issue (since most don’t).

Update: 2/8/11

Second Special Voluntary Disclosure Initiative Opens; Those Hiding Assets Offshore Face Aug. 31 deadline

WASHINGTON — The Internal Revenue Service announced today a special voluntary disclosure initiative designed to bring offshore money back into the U.S. tax system and help people with undisclosed income from hidden offshore accounts get current with their taxes. The new voluntary disclosure initiative will be available through Aug. 31, 2011.

“As we continue to amass more information and pursue more people internationally, the risk to individuals hiding assets offshore is increasing,” said IRS Commissioner Doug Shulman. “This new effort gives those hiding money in foreign accounts a tough, fair way to resolve their tax problems once and for all. And it gives people a chance to come in before we find them.”

The IRS decision to open a second special disclosure initiative follows continuing interest from taxpayers with foreign accounts. The first special voluntary disclosure program closed with 15,000 voluntary disclosures on Oct. 15, 2009. Since that time, more than 3,000 taxpayers have come forward to the IRS with bank accounts from around the world. These taxpayers will also be eligible to take advantage of the special provisions of the new initiative.

“As I’ve said all along, the goal is to get people back into the U.S. tax system,” Shulman said. “Combating international tax evasion is a top priority for the IRS. We have additional cases and banks under review. The situation will just get worse in the months ahead for those hiding assets and income offshore. This new disclosure initiative is the last, best chance for people to get back into the system.”

The new initiative announced today – called the 2011 Offshore Voluntary Disclosure Initiative (OVDI) -- includes several changes from the 2009 Offshore Voluntary Disclosure Program (OVDP). The overall penalty structure for 2011 is higher, meaning that people who did not come in through the 2009 voluntary disclosure program will not be rewarded for waiting. However, the 2011 initiative does add new features.

For the 2011 initiative, there is a new penalty framework that requires individuals to pay a penalty of 25 percent of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period. Some taxpayers will be eligible for 5 or 12.5 percent penalties. Participants also must pay back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.

Taxpayers participating in the new initiative must file all original and amended tax returns and include payment for taxes, interest and accuracy-related penalties by the Aug. 31 deadline.

The IRS is also making other modifications to the 2011 disclosure initiative.

Participants face a 25 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty.

The IRS also created a new penalty category of 12.5 percent for treating smaller offshore accounts. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the 2011 initiative will qualify for this lower rate.

The 2011 initiative offers clear benefits to encourage taxpayers to come in now rather than risk IRS detection. Taxpayers hiding assets offshore who do not come forward will face far higher penalty scenarios as well as the possibility of criminal prosecution.

“This is a fair offer for people with offshore accounts who want to get right with the nation’s taxpayers,” Shulman said. “This initiative offers them the chance to get certainty about how their case will be handled. Just as importantly, those who truly come in voluntarily can avoid criminal prosecution as well.”

The IRS is handling processing of the voluntary disclosures in centralized units to more efficiently process the applications.

The IRS will also launch a new section on www.IRS.gov that includes the full terms and conditions on the 2011 Offshore Voluntary Disclosure Initiative, including an extensive set of questions and answers to help taxpayers and tax professionals. The web site also includes details on how people can make a voluntary disclosure.

In the first voluntary disclosure program in 2009, taxpayers faced up to a 20 percent penalty covering up to a six-year period. Taxpayers came forward with about 15,000 voluntary disclosures in that effort covering banks in more than 60 countries.

Shulman said IRS efforts in the international arena will only increase as time goes on.

“Tax secrecy continues to erode,” Shulman said. “We are not letting up on international tax issues, and more is in the works. For those hiding cash or assets offshore, the time to come in is now. The risk of being caught will only increase.”