IRS Announces Reduced-Penalty Program for Taxpayers Who Voluntarily Disclose Offshore Accounts
March 31, 2009
Summer Ayers Le Pree- Miami
On March 26, 2009, the Internal Revenue Service announced a six-month reduced-penalty voluntary compliance initiative available to U.S. taxpayers with unreported offshore income.
Background: The UBS Case
In connection with the U.S. government’s investigation of and legal case against Swiss-based UBS AG, since July 2008, the IRS has been encouraging U.S. taxpayers to come forward voluntarily to disclose their offshore accounts. Such disclosures generally permit taxpayers to avoid criminal prosecution; however, disclosure continues to trigger taxpayer liability for taxes, interest, and civil penalties, which can be very substantial.1 In addition, voluntary disclosure is not possible if a third party (e.g., UBS) has already disclosed a taxpayer’s identity to the IRS.
As part of a deferred prosecution agreement entered into in February by UBS with the Department of Justice, UBS agreed to provide the U.S. government with the identities of and account information for certain U.S. account holders. The government has continued to press UBS for the release of such information, and sued the company in federal court in Miami in late February 2009 for enforcement of a previously issued summons.
The IRS Announcement Encouraging Voluntary Disclosure
The March 26 announcement by the IRS accompanied the public release of several internal memoranda that were released to IRS personnel on March 23 explaining how the agency intends to treat and process such voluntary disclosure claims under the new initiative.
“As we continue to step up our international enforcement efforts, this is a chance for people to come clean on their own,” IRS Commissioner Douglas Shulman said in a conference call with reporters. “For taxpayers who continue to hide their head in the sand, the situation will only become more dire ... those who truly come in voluntarily will pay back taxes, interest, and a significant penalty, but can avoid criminal prosecution,” Commissioner Shulman added, saying that the IRS believes the plan “represents a firm but fair resolution of these cases.”
The IRS has distributed guidance outlining the new rules to IRS examiners handling voluntary disclosure requests involving unreported offshore income. The guidance instructs agents handling those cases to resolve them “in a uniform and consistent manner,” Commissioner Shulman said. “The goal is to have a predictable set of outcomes to encourage people to come forward and take advantage of our voluntary disclosure program while they still can.”
The IRS has also provided guidance to examiners handling cases of unreported offshore income in which the taxpayer did not come in through the voluntary disclosure program. In those cases, according to the commissioner, the IRS is instructing its agents to “fully develop the case pursuing both civil and criminal avenues and to consider all available penalties, including the maximum penalty for the willful failure to file the FBAR report and the fraud penalty.” The civil penalties for failing to file a required Foreign Bank Account Report (FBAR) are generally up to the greater of $100,000 or 50 percent of the total balance of the foreign account in question. In addition, failure to file a FBAR can trigger criminal penalties of up to $500,000 and up to 10 years’ imprisonment. Both civil and criminal penalties may be imposed together for FBAR filing failures.
Offshore Cases Are “Highest Priority”
The reduced penalty scheme will be available only to taxpayers whose disclosure meets the “voluntary” requirements set out in Internal Revenue Manual 9.5.11.9. Disclosures that pass the initial screening with the Criminal Investigation division will be forwarded to an offshore identification unit in Philadelphia. In one of the memos, the IRS affirmed that offshore cases sent to the field are work “of the highest priority.”
According to the internal memorandum setting out the new penalty framework, effective as of March 23, 2009, the IRS examiners responsible for processing the voluntary disclosure claims are authorized to execute closing agreements to resolve the tax liabilities related to offshore accounts, as follows:
- Assess all taxes and interest due going back six years (an exception: where an account/entity was formed or acquired within the six-year look-back period, taxes and interest will be assessed starting with the earliest year in which an account was opened/acquired or entity formed), and require the taxpayer to file or amend all returns, including information returns and Form TD F 90-22.1 (FBAR).
- Assess either an accuracy or delinquency penalty on all years (no reasonable cause exception may be applied).
- In lieu of all other penalties that may apply, including FBAR and information return penalties, assess a penalty equal to 20 percent of the amount in foreign bank accounts/entities in the year with the highest aggregate account/asset value. This penalty is reduced to 5 percent 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 the accounts/entities (where only account/entity earnings have escaped U.S. taxation).
The terms outlined above are only applicable to taxpayers who make voluntary disclosure requests, and who fully cooperate with the IRS, both civilly and criminally.
The terms of the voluntary disclosure initiative thus cap civil penalties at a rate much lower than would potentially be applicable in the absence of the initiative. In addition, they allow taxpayers to avoid criminal penalties with respect to the various requirements that are covered under the initiative.
For more information, contact:
Jeffrey Rubinger
954.468.7862
jeffrey.rubinger@hklaw.com
Summer Ayers LePree
305.789.7609
summer.lepree@hklaw.com
toll free: 1.888.688.8500
1 One of the IRS memos issued on March 23 provides the following list of potentially applicable information reporting requirements and civil penalties: (1) penalties for failing to file FBARs (as high as the greater of $100,000 or 50 percent of the account value, plus criminal penalties); (2) fraud penalties (75 percent of the unpaid tax); (3) penalties for failure to file (5 percent per month of the net tax required to be reported, with a maximum of 25 percent; if fraudulent failure to file, 15 percent per month, with a maximum of 75 percent); (4) penalties for failure to pay (.5 percent of late payment for each month, with a maximum of 25 percent); (5) accuracy-related penalties (20 percent of any underpayment attributable to negligence or substantial understatement; 40 percent for substantial valuation misstatement); (6) penalties for failure to file certain information related returns – (i) Form 5471 ($10,000 per return with additional $10,000 for each month failure continues, beginning 90 days after taxpayer is notified of delinquency, with a maximum of $50,000 per return); (ii) Form 5472 ($10,000 per return with additional $10,000 for each month failure continues beginning 90 days after taxpayer is notified of delinquency, with a maximum of $50,000 per return); (iii) Form 926 (10 percent of value of property transferred, with a maximum of $100,000 per return, but no limit if failure to file was intentional); (iv) Form 3520 (35 percent of gross reportable amount, or a maximum of 25 percent for gifts); (v) Form 3520-A (5 percent of gross value of trust assets owned by the U.S. person required to file); and (vi) Form 8865 ($10,000 per return with additional $10,000 for each month failure continues, beginning 90 days after the taxpayer is notified of delinquency, with a maximum of $50,000 per return, plus 10 percent of any asset transferred of the value of any transferred property that is not reported, with a maximum of $100,000).
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