Unreported Offshore Income? Take Action. EXTENDED Deadline October 15, 2009!

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

Update: 1/28/10

Swiss Halt Deal with U.S. that IDs Americans with Secret UBS Bank Account:

http://www.washingtonpost.com/wp-dyn/content/article/2010/01/27/AR2010012703556.html

Update: 11/18/09

Wall Street Journal Article of 11/18/09:

By Laura Saunders And Anita Greil

The Swiss government said it would turn over to U.S. authorities by August 2010 the names of U.S. taxpayers with UBS accounts of more than 1 million Swiss francs ($993,000), and also those holding suspicious accounts as low as 250,000 francs.

Internal Revenue Service officials said the same standards apply to other Swiss banks and could be used to identify U.S. taxpayers holding secret accounts elsewhere in the country. "These criteria can be used to make requests of the Swiss authorities about other banks and we reserve the right to do so," said IRS Commissioner Doug Shulman.

The IRS's special Voluntary Disclosure Program for all offshore account holders with undeclared income was "flooded" with applicants during its final days, bringing the total number of confessions to 14,700, Mr. Shulman said. That was almost double the preliminary estimate of 7,500 made when the program ended Oct. 15 after a three-week extension. He said the agency has no estimate of the revenue raised by the program, other than "billions of dollars."

The IRS still accepts those who step forward to confess and is less likely to prosecute them criminally. Officials have declined to specify what civil penalties will apply to offshore confessors in the future. Those who turned themselves in before Oct. 15 will typically have to pay 40%-50% of their current balance in taxes, interest and penalties, although few cases have been concluded under the special program.

The IRS's recent efforts to pursue offshore evaders have been effective compared with earlier efforts, but the agency remains under pressure by Congress. Sen. Carl Levin (D., Mich.), who chairs a committee that has revealed offshore banking secrets, called the annex "very disappointing." He added that "the many limitations in this annex show that the Swiss government is trying to preserve as much bank secrecy as it can for the future, while pushing to conceal the names of tens of thousands of suspected U.S. tax cheats."

The criteria released Tuesday were contained in a previously secret annex to an Aug. 19 settlement agreement between U.S. and the Swiss government. The agreement was an effort to end a bruising battle over the secrecy of thousands of accounts held by U.S. taxpayers at UBS, which admitted its participation in a scheme to defraud the U.S. The settlement represented a major crack in the long-vaunted tradition of Swiss bank privacy.

Mr. Shulman said the criteria released were aimed at uncovering those accounts that were "largest, hardest to find, and had the most egregious behavior." Attorney George Clarke of Miller & Chevalier in Washington called the just-released information "both more detailed and more complex than some expected."

The criteria specify that the Swiss will identify U.S. taxpayers with UBS accounts who had, among other things:

• Direct ownership of an undisclosed account with 1 million or more Swiss francs at any time from 2001 to 2008, even if the account is now closed.
• Direct or indirect ownership of an undisclosed account with 250,000 or more Swiss francs at any point during the same period, if there was a "scheme of lies" in connection with the account. This includes those holding accounts through entities such as trusts, corporations or foundations, especially if they had special cellphones or credit cards attached to the accounts that eased access and helped ensure secrecy. It might also include a direct account holder with more than 250,000 francs at any point during the period who, for example, did not disclose a U.S. citizenship when opening the account.
• Indirect ownership of an undisclosed account that generated an average of 100,000 Swiss francs per year in interest, dividends and capital gains for any three years from 1998 to 2008.

Experts note the agreement exempts from disclosure one large group of U.S. taxpayers. It consists of those who have long lived outside the U.S. and hold Swiss accounts directly, not though corporations or trusts. An IRS spokesman called this interpretation "technically correct," but warned that its "investigation continues," and urged these taxpayers to confess.

Attorneys for offshore account holders say many have yet to step forward, despite the IRS's amnesty program earlier this year. They expect some to change their minds once they see the criteria. "It takes very little to trip the wire," says Barbara Kaplan of Greenberg & Traurig in New York. "The Swiss keep great records, and taxpayers are finding out that far more is in their files than they guessed."

More than 14,700 U.S. taxpayers took advantage of a special U.S. Internal Revenue Service amnesty program that offered reduced penalties to those who voluntarily revealed their previously undisclosed offshore bank accounts, the IRS and U.S. Justice Department announced Tuesday.

Delinquent taxpayers came forward in droves after U.S. tax authorities reached two landmark settlements with UBS AG in which the Swiss bank agreed to reveal the identities of some of its American clients who are suspected of evading U.S. taxes. The voluntary program ended last month.

"We were flooded with people coming in during the final days of the program," IRS Commissioner Doug Shulman said.

Update: 10/22/09

Wall Street Journal Article of 10/17/09, Page B7.

A good review of what to do now if a taxpayer has not already made a voluntary disclosure by the 10/15/09 due date…

By ARDEN DALE

NO AMNESTY, BUT EVADERS STILL WELCOME

The end of a limited-amnesty deal isn't expected to stop Americans with secret Swiss bank accounts from coming in from the cold. They may just find the reception a little chillier.

A program offering more-lenient terms, including less chance of criminal prosecution, lured in 7,500 account holders before it ended on Thursday. But a longstanding Internal Revenue Service program for people who turn themselves in remains in place.

Thousands of account holders who didn't take advantage of the IRS deal will probably get letters from UBS AG warning them that they could be in the agency's sights; their names are being provided by Switzerland to U.S. tax authorities under a tax-evasion settlement between the countries with the Justice Department. Even if they fight disclosure in Swiss courts, their records almost certainly would be turned over to the IRS, say tax lawyers.

"Realistically, they have no choice but to make a voluntary disclosure before that happens or they run a serious risk of criminal prosecution and jail," says Scott D. Michel, an attorney at Caplin & Drysdale in Washington, D.C.

Still, some people are likely to try to stay under the radar, says Dean Zerbe, a lawyer representing former UBS banker Bradley Birkenfeld in his whistleblower claim at the IRS. "The real bad actors -- the big fish -- they are definitely going to keep at it and hope the IRS doesn't find them," he says.

For those who decide to come clean, making a disclosure now is akin to diving into uncertain waters, as the IRS will have wide leeway in imposing penalties. Mr. Michel says he hopes the IRS will supply new guidance, so people know what they may be facing.

Edward M. Robbins Jr., a partner at the law firm Hochman Salkin Rettig Toscher & Perez in Beverly Hills, Calif., says account holders can expect to "see their civil price tag go up." At a minimum, he says, they could lose as much as 20% or more of their savings just for failing to file a standard Report of Foreign Bank and Financial Accounts. In a worst-case scenario, he says, they could lose half the account value.

Among those who turned themselves in before Thursday, accounts ranged in size from just above $10,000 to more than $100 million and were in several hundred banks in 70 countries, according to the IRS.

The IRS remains willing to work with any taxpayer who wants to come forward and make a voluntary disclosure, even though the special program is over, says agency spokeswoman Michelle Eldridge.

Update: 10/12/09

Exception to the 20% FBAR penalty when a 5% penalty MIGHT apply:

See Page 2 of the IRS Letter at this link:
http://www.irs.gov/pub/newsroom/memorandum_authorizing_penalty_framework.pdf

From the IRS:

“If, (a) the taxpayer did not open or cause any accounts to be opened or entities formed, (b) there has been no activity in any account or entity (no deposits, withdrawals, etc.) during the period the account/entity was controlled by the taxpayer, and (c) all applicable U.S. taxes have been paid on the funds in accounts/entities (where only account/entity earnings have escaped U.S. taxation), then the penalty in (3) [From Ron: that’s the 20% of the highest account balance penalty] is reduced to 5%.”

In other words, the principal/investment funds in the account must be after-tax money for U.S. tax purposes. If money went into the account on which U.S. was owed, but not paid, the taxpayer does not qualify under (c), and the 20% penalty will apply rather than the 5%, even if (a) and (b) apply.

Update: 9/20/09

IRS EXTENDS DEADLILNE TO 10/15/09:

See: http://online.wsj.com/article/SB125348992214426433.html#mod=WSJ_hpp_MIDDLTopStories

Update: 8/25/09

This is the most updated revised FAQs on this issue from the IRS... Read This First!

http://www.irs.gov/newsroom/article/0,,id=210027,00.html

Update: 6/30/2009

URGENT! IMPORTANT, PLEASE READ!

The IRS issued Frequently Asked Questions ("FAQs") on May 6, 2009. See: http://www.irs.gov/pub/irs-utl/faqs-revised_6_24_checked_v2.pdf If you have an Unreported Offshore Income issue, please stop reading this blog and slowly read all the pages of that link, first. It is very well-written and authoritative with shocking info. Then come back to read my comments.

As of 7/30/09:
The I.R.S. is swamped with submissions under this program per the Wall Street Journal 7/30/09, page A1... so they created this new form for taxpayers to submit with their info under the Voluntary Disclosure Program.
See: Offshore Voluntary Disclosures - Optional Format

Please see our videos on this subject:

Part 1 of 3: http://www.youtube.com/watch?v=xSISKcn_zf0
Part 2 of 3: http://www.youtube.com/watch?v=XZbETlevTAw
Part 3 of 3: http://www.youtube.com/watch?v=ni2PoMbp1W4

Then be sure to come back and read the rest of this blog.

1) As mentioned on Page 2, #5 of the FAQs, a Voluntary Disclosure is processed with the "CI" division of the I.R.S.

Folks, that's the Criminal Investigations Division. That's the people in the I.R.S. that wear badges and sometimes carry guns.

Why is that important to know? I have been a tax advisor for 28 years and have never had to meet or deal with a member of the CI group. We always work with the administrative divisions of the I.R.S. who process returns and sometimes audit returns. The CI group is made up of people with police powers. Their job is not so much to collect unpaid taxes, as others in the IRS have that job. Rather, their job is to develop criminal prosecutions that can (and do) lead to jail sentences. So please be advised that dealing with these folks can lead to a loss of your freedom and liberty...not just a loss of significant sums of money.

So while the FAQs politely says to call "215 516 4777 or your local CI office" like you're just ordering a pizza, don't take that step lightly. I would never recommend making that phone call without a qualified, experienced, criminal tax attorney on the phone with you, or better yet, let the attorney call for you! Once you call, they will ask for all your contact info and your Social Security Number. You will have then disclosed you have unreported offshore income (why else would you be calling?) and have "incriminated" yourself with that first friendly phone call. My point is that since the rules of engagement per the above FAQs are to contact the CI division right off the bat, this is not a "do-it-yourself" project.

A CPA, EA or other tax preparer should only serve as an advisor to your attorney in this type of matter and not work with the IRS directly in criminal cases due to "attorney-client privilege" issues. For example, in my firm, we don't do "criminal" cases for clients, and therefore, as a matter of professional ethics, must abstain from direct contact with the IRS in such matters, and refer the case and defer to a criminal tax attorney. It is too bad the IRS couldn't allow taxpayers to process a Voluntary Disclosure case without working directly, and at the outset, with the CI division.

2) See the example at #12, page 4 and 5 of the FAQs. In summary, the I.R.S. is threatening that the tax and penalties will be almost six times higher ($2,306,000 / $386,000 in their example) if a taxpayer is later caught and did not make a Voluntary Disclosure. Six Times! And they threaten it could be even more plus criminal prosecution.

In their example, the taxpayer had a $1M interest-bearing account and earned $300,000 of interest income over 6 years. So the taxpayer's total offshore account was about $1.3M. Note that the threatened cost, without a Voluntary Disclosure is +$2.3M or +$1M MORE THAN THE OFFSHORE ACCOUNT BALANCE. Note, these amounts do not include interest on the unpaid tax!

The percentages are (excluding interest):

With a Voluntary Disclosure: 129% of the unreported Income ($386,000 / $300,000) or 29% of the account value ($386,000 / $1,300,000)

Without a Voluntary Disclosure: +769% of the unreported Income (+$2,306,000 / $300,000) or 178% of the account value (+$2,306,000 / $1,300,000)

Well, I don't know what else to say about the mind-blowing 769% and 178% for the situation with no Voluntary Disclosure. Are these percentages are confiscatory? Are they reasonable? Do they "fit the crime?" Basically, the I.R.S. is telling tax evaders that if they don't voluntarily disclose, the I.R.S.'s goal is to financially destroy the taxpayer, plus a high probability of criminal prosecution. Yikes!

I believe what we are seeing here is the fact that criminal prosecutions are long and expensive to pursue...and sometimes unsuccessful. So rather than pursue prosecution when it is well deserved, the I.R.S. will now pursue a policy of very high penalties as "rough justice."

But that's not all. Remember, the I.R.S. will pass-on the information to your state tax authority. If you live in California, there is a whole additional set of tax, interest and penalties to pay, and to avoid State prosecution for tax evasion.

Legally, a taxpayer has a duty to inform the Franchise Tax Board of any changes to their federal returns. So, even if the I.R.S. fails to pass-on the information about Offshore Income, it is another illegal act if the taxpayer does not quickly amend returns and inform the Franchise Tax Board of the Voluntary Disclosure to the I.R.S.

3) A "Quiet Disclosure" directly to the I.R.S. Service Center is not effective. See #10 on Page 3 of the FAQs.

Tax practitioners will often advise taxpayers to send in an amended return to the I.R.S. Service Center just like they were filing a regular tax return. This is usually no problem and resolves any non-filing or underreporting. Not in this case. Again, to qualify for a Voluntary Disclosure, the filing has to go through CI, as discussed above. If amended returns have already been filed with a Service Center, they have to be resubmitted to CI. If you have to resubmit under this requirement, do so with a qualified, criminal tax lawyer, for all the reasons mentioned above. The I.R.S. is also on the look-out for taxpayers trying to file a Quite Disclosure for Offshore Income and will send those returns on to the CI division for further processing.

4) If you paid tax on the offshore Income and just forgot or didn't know to file the FBAR (Form TD F 90-22.1), you can follow the procedure in #9, file the FBAR and have no penalties. This is a very good result. Be sure to use the current version of Form TD F90-22.1. Old versions of the Form ask fewer questions about the offshore account, and are no longer acceptable, even though your tax software will not tell you that.

5) I have now heard this from many sources, so I'll pass it on. YOU WILL BE ASKED TO DISCLOSE THE NAMES AND CONTACT INFO OF THE PEOPLE WHO ESTABLISHED YOUR OFFSHORE ACCOUNT. Make no mistake about it. This will be just like an episode of "Law and Order" on T.V. To save yourself, you will be pressured about your advisors and the I.R.S. will pursue them. At that point, other peoples' professional careers and financial assets are involved, not just yours.

6) ARE YOU MARRIED? Did you file tax returns using the "Married Filing Jointly" filing status?...and/or is your spouse's name on the Unreported Offshore Accounts or does she have indirect ownership through a trust or other entity? Does your spouse know about the existence of the accounts? If so, she/he is in the same trouble and could face the same obligation for the tax, penalty and interest if the other spouse does not or can't pay it (this is known as "joint and several liability") plus, they have the same risk of criminal prosecution. Make no mistake about it...they can send both spouses to jail. There is an "innocent spouse" procedure in the I.R.S. rules, but it is hard to qualify for -- the innocent spouse must be completely ignorant about the family tax situation...even though they sign a joint tax return-- and I certainly would not count of the application of "innocent spouse relief" to keep your spouse from having to pay (if the other spouse does not or can't) and to avoid being arrested with you if you have a big issue with Unreported Offshore Income. So please consider the Voluntary Disclosure Procedure, if not for yourself, at least for your spouse if you have Unreported Offshore income.

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

Update: 8/21/09

Comments from IRS Commissioner Doug Shulman on the UBS Swiss Bank Settlement:

http://www.usdoj.gov/tax/txdv09_IRS_Commissioner_Remarks.htm

Update: 8/20/09

See Wall Street Journal on UBS Swiss Bank Settlement:

UBS to Give 4,450 Names to U.S.

Update: 8/19/09

Source: IRS.gov

IRS to Receive Unprecedented Amount of Information in UBS Agreement

WASHINGTON — The Internal Revenue Service and the Department of Justice today announced the successful negotiation of an agreement that will result in the IRS receiving an unprecedented amount of information on United States holders of accounts at the Swiss bank UBS.

As a result of this agreement, the IRS will receive substantially all of the accounts that it was interested in when it initiated the John Doe summons against UBS.

Under the agreement, the IRS will submit a treaty request to the Swiss government describing the accounts for which it is requesting information. The Swiss government will then direct UBS to initiate procedures to turn over information on thousands of accounts to the IRS. The IRS will receive information on accounts of various amounts and types, including bank-only accounts, custody accounts in which securities or other investment assets were held and offshore company nominee accounts through which an individual indirectly held beneficial ownership in the accounts.

Also, the agreement retains the U.S. Government’s right, if the results are significantly lower than expected and other measures fail, to seek appropriate judicial remedies, including resuming actions to enforce the John Doe summons.

The agreement involves a number of simultaneous legal actions:

• The judicial enforcement of the John Doe summons will be dismissed. While this enforcement motion will be withdrawn, the underlying summons remains in effect.
• Upon receiving the treaty request, the Swiss government will direct UBS to notify account holders that their information is included in the IRS treaty request. It is expected that these notices will be sent on a rolling basis with some being sent over the coming weeks and others over the coming months. Receipt of this notice will not by itself preclude the account holder from coming into the IRS under the Voluntary Disclosure Program.

In addition, the Swiss Government has agreed to review and process additional requests for information for other banks regarding their account holders to the extent that such a request is based on a pattern of facts and circumstances equivalent to those of the UBS case.

Information provided to the IRS through this process will be thoroughly examined for all potential civil and criminal tax violations. The IRS will assess any additional tax, interest and a number of applicable penalties. This includes the penalty for the willful failure to file an FBAR. This penalty can be up to 50 percent of the value of the account for each year an FBAR was not filed.

The IRS will also recommend criminal prosecution in those cases where the facts warrant such an action. To date, the IRS and the Department of Justice have successfully prosecuted four United States customers of UBS whose information was provided to the IRS by UBS as part of the Deferred Prosecution Agreement.

Individuals whose information is obtained by the IRS through this process will, by longstanding policy, not be eligible for the voluntary disclosure program.

Related Items:

• U.S.-Swiss Government Agreement
• Declarations
• Bank Agreement
• Offshore Tax Avoidance and IRS Compliance Efforts

Update: 8/22/09

And now a few words from the California Franchise Tax Board:
California taxpayers should not forget about our good friends in Sacramento!

http://www.ftb.ca.gov/aboutFTB/press/2009/Release_34.shtml

Update: 7/20/09

The Thirty Questions

Although the IRS has said there is no standard set of questions it asks those who come forward under the current Voluntary Disclosure program to reveal offshore accounts and income, advisers say their clients usually asked the same thirty questions. Here they are:

Source: George Clarke, Miller & Chevalier (a large Washington, D.C. law firm)

1. Is it your statement that the tax payers are willing to comply with the IRS and make a good faith arrangement to pay all taxes, penalties, fees and interest?
2. Where are the funds held regarding the disclosure?
3. Do you have any records? If not, whom are you working with at the bank? (Note: If the taxpayer is a UBS client and if they don't have the records, IRS will attempt to assist them in record retrieval).
4. When was the account opened?
5. How was the account opened?
6. Who assisted you with the account opening?
7. Who told you about the bank and how to initiate opening of the account?
8. Do you have a trust set up relating to the account or the funds?
9. How did you deposit money into the account?
10. How did you withdraw money from the account?
11. Did you have any credit or debit cards associated with the account?
12. How did you correspond with the bank? Do you have records relating to the correspondence?
13. Who is your current point of contact at the bank?
14. Did you ever meet face to face with anyone from the bank? If so, where? When?
15. Did you travel outside of the U.S. to conduct business relating to your account and or tax activities?
16. Where was your bank statements sent?
17. Who has ownership of the account? Is it a joint account?
18. What is the source of the funds?
19. Do you have tax returns?
20. Have you prepared amended tax returns? If so, have you submitted them to the IRS?
21. Who prepared your returns?
22. When were your returns prepared?
23. Did they know about the issues discussed today?
24. Did you file FBARS? If not, why not?
25. (For those who inherited the account) when did you take control of this account? And, all the related questions a 'yes' answer makes us ask.
26. Did you trade US and/or foreign securities with this account? If yes, describe the mechanism for doing that (buy/sell orders, etc.)?
27. Did you file returns?
28. Do your or have you directly or indirectly controlled any foreign entities? Did you file the required returns for them?
29. For UBS clients in particular – Have you been notified that the US requested information relating to your accounts?
30. What countries do you have accounts in?

Update 7/9/09:

Video New Report: Good Summary of On-Going court process on Swiss Bank Accounts:

http://www.smartbrief.com/news/cpa/videos.jsp;jsessionid=4F31CE65F6149633F782F3EA3EFC5DBA.web1?location=http%3A%2F%2Fwww.clipsyndicate.com%2Fvideo%2Fplaylist%2F478%2F1010646%3Fcpt%3D8%26wpid%3D282

Update: 6/23/09

THIS IS THE IMPORTANT PART:  UBS (a major Swiss bank) has pledged to transfer all its U.S. offshore clients to onshore accounts in the United States.

Switzerland and the United States have reached agreement on a double taxation treaty, the Swiss finance ministry said on Friday, a key step toward removal from a list of tax havens.

Switzerland, whose private banks manage around $2 trillion of foreign wealth, aims to secure 12 new bilateral tax deals by the end of 2009 which could allow it to be removed from an OECD "grey list" of states which need to improve tax cooperation and avoid possible sanctions from G20 nations.

Talks with Washington are particularly crucial for Berne as U.S. authorities have accused Swiss bank UBS of helping rich clients to hide money in secret Swiss accounts. UBS is losing clients because of the bad publicity.

The U.S. Treasury confirmed it reached a deal with the Swiss government to revise a two-way income tax treaty to boost an information exchange aimed at combating tax evasion through offshore accounts.

"This treaty will increase our ability to enforce our tax laws and will help bring an end to an era of offshore accounts and investments being used for tax evasion," U.S. Treasury Secretary Timothy Geithner said in a statement.

Ron Cohen’s Comment: Note: "The decision will permit an exchange of information on tax matters in individual cases where a specific and justified request has been made, the Swiss Finance Ministry said in a statement.”  That normally means that information will be provided on a case-by-case basis as issues arise.  It is not clear to me whether UBS will have to provide a specific list of names and information of the 50,000 U.S. account holders that the IRS had previously requested.  Clearly, the agreement to transfer the secret Swiss bank accounts to a U.S. branch of UBS (that is subject to all the normal Form 1099 tax reporting requirements) ends an era of secret Swiss bank accounts.  It is not clear to me at this point whether all Swiss banks are doing the same, but surely the IRS will now use this precedent to pursue other Swiss banks with accounts held by U.S. taxpayers.

More later as we find out more.

Update: 6/23/09

THE DEPARTMENT OF JUSTICE IS STILL PURSUING 52,000 U.S. CUSTOMERS WITH SWISS BANK ACCOUNTS:

From Ron Cohen: There was speculation the Justice Department would drop their case to pursue the names and info on 52,000 Swiss bank account holders since the U.S. and Switzerland concluded on an information exchange treaty around June 20, 2009. While the information exchange treaty may avoid future issues, it appears there is no relief for past tax evaders as the Justice Department is pushing forward. This is further reason to consider the Voluntary Disclosure program is you have Unreported Offshore income. See info above on the Voluntary Disclosure program.

WASHINGTON/ZURICH (Reuters) - The U.S. Justice Department said it was not planning to drop its lawsuit seeking to force UBS AG to disclose thousands of the Swiss bank's U.S. customers with secret accounts.

"There is no basis for the report in The New York Times," a Justice Department spokesman said in a statement Tuesday after the newspaper reported the case might be dropped, citing an unnamed U.S. official briefed on the matter.

The U.S. government sued UBS in February in U.S. District Court in Florida, seeking the names of 52,000 Americans suspected of using the bank to hide nearly $15 billion in assets and evade U.S. taxes.

"While the department is always willing to consider settlement in any case, the suggestion that the department is planning to drop this suit is simply untrue. The department is continuing with the case against UBS and will file its brief asking the court to enforce the summons on June 30," spokesman Charles Miller said.

Full Reuters article at:

http://www.reuters.com/article/businessNews/idUSTRE55M1EZ20090623?pageNumber=1&virtualBrandChannel=0

Original Blog: 4/30/2009

The world is changing.  A tax evader should seriously consider what may be the only way to stop an illegal bad situation from becoming a life-destroying criminal prosecution.  Consider a Voluntary Disclosure to clean-up the past.

Based on tax law precedent going back to the 1940s, the I.R.S. and many state tax authorities have a standing policy that, generally, they will NOT pursue criminal prosecution of tax evasion in cases where the tax evading taxpayer comes forward BEFORE they are contacted by the tax authority.

As an I.R.S. District Counsel (prosecuting attorney) once told me after a 13 week course on I.R.S. internal procedures as part of my Masters Degree program in Taxation:  “If you learn nothing else in this class, remember this:  If your client is in tax trouble, you need to find me before I find you.”

He went on to explain that the I.R.S. wants people to be able to come back from the non-filing and non-paying underworld and get clean without fear of criminal prosecution…otherwise, tax evaders have no way to re-enter the tax system without the threat of losing not only large sums of money but also lose their liberty and living standard if they suffer criminal prosecution, versus civil (money) penalties.

Alternatively, if the I.R.S. finds or contacts a taxpayer via an audit, non-filing notices,  the Form 1099 Matching Program, referrals from other non-tax prosecutions or otherwise becomes aware of significant criminal tax violations, then, their frame of mind changes.  They often try to make a public example of the taxpayer and pursue criminal prosecution and jail sentences to the extent allowed by law.

It is my experience that taxpayers have to almost force the I.R.S. (by repeated bad behavior) to prosecute, as the I.R.S. has a lack of resources.  They would much rather use civil penalties, liens, levies and wage garnishments which can quickly be triggered by the I.R.S. computer system to collect unpaid tax and force the taxpayer back into filing returns.  But when the taxpayer ignores I.R.S. letters, disappears or is non-responsive, is under other criminal prosecution (like an arrested drug dealer) or argues the tax system is illegal or unconstitutional, the case gets elevated to where I.R.S. lawyers and criminal investigators are assigned.

At that point, the I.R.S. people involved, like all of us, want to be successful in their work; and success for them is often a criminal prosecution and a conviction.  A taxpayer in that situation needs the immediate help of qualified legal counsel specializing in tax cases.

Specifically, regarding unreported offshore Income, in my opinion, you are running out of time.

Technology, the Federal and State deficits and the political winds are now all working against tax evasion with regards to unreported offshore income.

The technology is improving to catch tax evaders who often establish an offshore bank account in a country that does not share account information with the I.R.S.  An A.T.M. card is often used allowing access to the funds at any A.T.M. machine in the U.S. that is in the offshore bank’s A.T.M. network.  The U.S. bank through which the A.T.M. withdrawal is processed becomes a legal party to the transaction. The I.R.S. has a significant project underway to drill-through the U.S. bank and find the offshore account and the U.S. taxpayer/evader.

Banks are being required to increase internal audit controls to stop inadvertently assisting tax evaders.

Recently in the news, the I.R.S. is pressuring Liechtenstein and Swiss banks to provide information on U.S. taxpayers suspected of tax evasion.  Banks in the Cayman Islands and Bermuda continue to come under pressure from U.S. and European tax authorities.

Now, with the economic crisis of the last 6 months, the U.S. President and Congress and the tax authority of many countries and states see unreported income of tax evaders as “low-hanging fruit.”  As voters have no sympathy for offshore tax evaders, it is clear more laws and resources will be applied to pursue this unreported income.

As a result, the world is changing.  A tax evader should seriously consider what may be the only way to stop an illegal bad situation from becoming a life-destroying criminal prosecution.  Consider a Voluntary Disclosure to clean-up the past.

How Does A Taxpayer make a “Voluntary Disclosure?”

With regards to the I.R.S., a specific process exists for taxpayers who approach the I.R.S. with the intent to clean-up old returns.   I provide five comments:

1. It will take many months to resolve unfiled, unreported income. Be patient!
2. Use complete honesty and complete disclosure in every contact with the I.R.S. or any tax authority.  Remember, you are trying to avoid CRIMINAL PROSECUTION.   This is not a game.  Don’t try playing games with partial disclosures.  The worst thing you can do is hold back information at this point and be accused of lying.  They have seen it all before, and they know what you are thinking, often before you do.  You are coming to them for help, so provide complete cooperation.  They are usually very cooperative with people who take this approach.
3. Keep a copy of everything you give the I.R.S. and keep a written record of every telephone conversation.
4. Consider getting assistance from a C.P.A., Enrolled Agent or Tax Attorney.
5. Don’t forget the state taxes that might be involved.  The I.R.S. WILL communicate the information you provide to the state tax authorities.

The starting point for a Voluntary Disclosure is no surprise.  Put together your tax information for each taxable year just as if you would to originally file your tax return.   Again, consider consulting with a C.P.A., and Enrolled Agent and/or a bookkeeper if you need help to get your information together.

If you can’t find records, then call banks, or businesses, etc. to collect as much documentation as you can.  YOU DON’T NEED TO BE PERFECT OR HAVE EVERYTHING IF IT DOES NOT EXIST.   The I.R.S. understands that records from years ago may be unavailable.  Reasonable estimates are fine if there is no alternative.   Don’t get caught in the mental trap of not filing, or waiting longer just because you can’t find every record, Form 1099, receipt, bank statement or invoice.

If your return was originally filed, however, offshore (or any other type of income) was not reported, an amended tax return needs to be prepared.  That is I.R.S. Form 1040X for individual taxpayers.

Update as of 5/26/2009: For a Voluntary Disclosure of offshore income, you must follow the procedure outlined above.

When you are as ready as you can be (and sooner is always better than later) to contact the I.R.S., mail everything to the I.R.S. Service Center, just as if you were filing a normal tax return, but with a cover letter.  Absolutely mail it certified mail, return receipt requested and keep copies of everything and all  postmarked documents (seriously) for the rest of your life.  I’ll skip explaining why, here.

Under Internal Revenue Manual Sec. 9.5.3.3.1.2.1, a voluntary disclosure occurs when:

The communication (tax return and/or related letter) is truthful, timely and complete.  This includes:

1. the taxpayer shows a willingness to cooperate (and  does in fact cooperate) with the IRS in determining his or her correct tax liability; and

2. the taxpayer makes good faith arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable.

You can read more about this at: http://www.irs.gov/newsroom/article/0,,id=104361,00.html

At this point, the I.R.S.sends the tax return[s] to a special unit that deals with amended or late returns. Over two months may pass before the taxpayer receives any reply.  Pay in as much of the estimated tax, interest and penalties as possible with the returns.  Make sure to indicate what year each payment should be applied to. Otherwise, it will be applied to the current tax year – which is a hassle to correct.

The I.R.S. has additional triggers they consider when evaluating the situation. 

1. How many tax years are involved?
2. What is the amount involved?   Clearly, a $1 million unreported amount may get a different response than a $10,000 unreported amount.
3. What prior filing history does the taxpayer have?   Is this the first issue, or part of a long history of problems?

Often, if no special issues come up, the taxpayer will receive a straightforward letter simply saying the return was received and the following tax, interest and penalties is owed.  In all my experiences, if the taxpayer pays any amount due within the 30 days allowed after receiving that letter, it is very normal to never again hear from the I.R.S. with regards to that tax return for that particular year.  However, nothing in this article guarantees this result.  

The moral to this story is that I.R.S. policy and case law clearly MOVES TO THE SIDE OF THE TAXPAYER toward avoiding criminal prosecution the moment the taxpayer mails the unfiled or amended tax returns and pay as much of the unpaid balance due as possible.

NOTE: The Voluntary Disclosure policy does NOT apply to illegal source income.   For example, unreported drug trafficking income will not qualify for the Voluntary Disclosure procedure, as that type of income is illegal under other (non-tax) laws. In contrast, there is nothing illegal about earning interest income from a Swiss bank account, so it is not illegal “source” income.  However, the failure to report such income on your tax return can be a tax crime.  Therefore, the Voluntary Disclosure policy can apply to the Swiss interest income.

WHEN IS THE VOLUNTARY DISCLOSURE POLICY NOT AVAILABLE?

It is important to note when a taxpayer is considered “contacted” by the I.R.S.:  Again from Internal Revenue Manual Sec. 9.5.3.3.1.2.1 

A disclosure is timely if it is received before:

1. the IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation;

2. the IRS has received information from a third party (e.g., informant, other governmental agency, or the media) alerting the IRS to the specific taxpayer’s noncompliance;

3. the IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer; or
4. the IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena).

If the above has occurred, please consult a tax attorney.  You may actually do more harm than good by sending in a tax return (or amended return) to the IRS Service Center at this point, as the I.R.S. may consider that an attempt to work around the tax examiner who contacted you, to gain a legal advantage.

A tax evader never knows when a, b, c, or d above may occur or when an I.R.S. letter will show up in their mail box.  At that moment, the opportunity to avoid criminal prosecution may be lost forever.  It is an “on/off” switch for which there is precedent in I.R.S. policy and case law.

So please, if you are in this situation, get to them before they get to you, and please consider seeking competent tax advice before doing so.

The policy of most state, local and European tax authorities is similar, although you should seek competent advice in the policy of each tax authority before taking any action.

Also, assuming you have legally avoided criminal prosecution, many people try to negotiate unpaid taxes, interest and penalties.  Please be very skeptical of companies that promise to negotiate your tax liability. In reality, only the bankrupt or near bankrupt qualify for these programs, and many, many people have given me feedback on how some firms take an upfront fee and then do nothing, or even make matters worse.  Please be careful.

With regard to penalties to be assessed, a complete review is beyond the scope of this article except to say, they will be very significant.

Please see the attached from Doug Shulman, Commissioner of the IRS, from 3/26/09:  http://www.irs.treas.gov/newsroom/article/0,,id=206014,00.html.

FYI, the United Kingdom announced a similar program for underreported offshore income.
See: www.hmrc.gov.uk/budget2009/compliance-proposals.htm for more information.

I am always available for questions and comments at 510 797 8661 x237.

To get the complete story right from the I.R.S. and see the arsenal of penalties they can impose on offshore income, please see this link and read through the various Memorandums.  The I.R.S. is internally preparing to seriously attack unreported offshore income.  See:  http://www.irs.gov/newsroom/article/0,,id=206012,00.html