OFFSHORE VOLUNTARY DISCLOSURE UPDATE – JANUARY 2013

LEVEL OF PARTICIPATION IN PROGRAMS

On June 26, 2012 the IRS had released IR-2012-64, which stated:

 Shulman (IRS Commissioner Doug Shulman) said the IRS offshore voluntary disclosure programs have so far resulted in the collection of more than $5 billion in back taxes, interest and penalties from 33,000 voluntary disclosures made under the first two programs. In addition, another 1,500 disclosures have been made under the new program announced in January.

According to National Taxpayer Advocate (TA) Nina Olsen in her 2012 Annual Report to Congress, the tally of funds collected is now up to $5.5 billion and the number of actual participants through September 29, 2012 is as follows:

CATEGORY

2009 OVDP

2011 OVDI

2012 OVDP

Total Applicants

11,161

11,941

4,095

# Certified[i] / closed

10,723

1,463

0

Avg. # days to close certified case

307.3 days

116.6 days

n/a

# Opted-out

280

30

0

# Opt-outs closed

235

8

0

Avg. days to close opt-out case

548.4 days

176.5 days

n/a

What does the chart reveal?

  • The number of applicants is 27,197, including those who have to date entered the 2012 program, somewhat less than the 34,500 applicants reported by the former commissioner.
  • Most cases from the 2009 program have been resolved.
  • Most cases from the 2011 program are still in the process of being resolved.
  • Opt-out cases which are subject to a complete audit, not merely certification take substantially longer to close than do submissions resolved within the 2009 OVDP or 2011 OVDI.
  • No cases have been certified or closed as yet under the 2012 OVDP.

TAXPAYER ADVOCATE CRITICISM OF OVDP

The TA report is highly critical of the Opt-out process.  The TA correctly points out that the programs lump together egregious tax criminals (i.e., those who from the get-go intended to evade U.S. taxes) with many who are more benign non-reporters, who may include:

  • Those ignorant of the FBAR reporting requirement.
  • Those living abroad in high tax countries who did not know they were citizens or did not realize that U.S. income tax returns were required even if they pay tax to a foreign country and would owe little U.S. tax. The Report notes that 5 to 7 million U.S. citizens live abroad but only 741,249 FBARS were filed in 2011. The TA computes that only about 1% of those not filing required FBARS have entered the programs.
  • Those who may have been misadvised that FBAR reporting was not required.
  • Those living in the U.S. who for one reason or another did not file FBARS but owe little additional tax.
  • Those who established foreign accounts before becoming a U.S. citizen or resident and through inertia, oversight or neglect never commenced to report the accounts after becoming a citizen or resident.
  • Others who could establish that their failure to timely file was due to reasonable cause (no penalty) or was not willful (reduced penalty of up to $10,000 for each violation) (e.g., perhaps the non-immigrant visa holder who becomes a resident alien under the substantial presence test, unaware that excessive days in the U.S. triggers tax return and FBAR filings).

Because IRS threats of criminal prosecution and draconian FBAR penalties scare people to death (see 2012 OVDP FAQS 15, 4 and 6 ), many have entered the offshore programs despite likely being eligible for or deserving of more gentle treatment for their filing oversights.  Instead of culling the herd into groups of varying culpability all are driven by IRS into the single OVDP corral and forced to bear its rigid penalty scheme, file eight years of returns (instead of three or six) and pay substantial professional fees to shepherd each through the course of hoops IRS requires participants to jump through. 

IRS instead offers the opportunity to opt-out, preserving criminal immunity, if one feels he or she is being treated unfairly under the OVDP.  The problem with this solution is that opting-out:

  • Subjects one to a complete audit of all years for which IRS can legally assess tax.  If IRS successfully asserts a civil fraud penalty, there is no limitation on how far back IRS can audit.  Some might owe little tax for the OVDP 8 year period but have great exposure to additional tax assessments in earlier years when the income was earned that caused the foreign account to be established. 
  • Requires one to trust that IRS will be reasonable in applying FBAR penalties.  Although closed opt-out cases from 2009 have resulted in average penalties of only about $15,000, the number of cases closed is very small.  Moreover, IRS has won a recent court victory that characterized failure to read one’s tax return as “willful blindness” triggering the most serious FBAR penalties (up to 300% of the value of foreign accounts over the six-year FBAR statute of limitations period).
  • Requires one who is not a tax criminal to make a voluntary disclosure through the OVDP and then opt-out.  IRS has announced alternatives for U.S. citizens living abroad who are deemed not high risk taxpayers (whatever that means) and will owe little tax (less than $1,500 on each return although IRS has now indicated $1,500 is not a hard number).  Again, failure of IRS to provide clear guidelines leaves taxpayers uncomfortable about whether IRS will treat them as not high risk or subject them to a full-blown audit.

MORE NEWS TO MAKE CONTINUED NON-FILERS WORRY

The IRS continues its all-fronts assault on tax scofflaws hiding funds abroad. The Wall Street Journal reported on January 31, 2013 that the government is “casting a wider net, for example:

  • Federal prosecutors are believed to be conducting at least 100 criminal investigations against suspected tax evaders.
  • The U.S. is putting more pressure on smaller banks that may have assisted U.S. taxpayers to hide money offshore.
  • A federal judge has approved a summons seeking more records from UBS regarding accounts with smaller Swiss Banks without U.S. branches that assisted clients through a UBS account in Stamford, Connecticut.
  • Grand-jury’s are issuing subpoenas without warning to individuals requiring production of offshore financial records which several courts have now held are not protected by the Fifth Amendment privilege against self-incrimination due to the so-called “required records exception.”
  • Government indicating strongly that age will not protect violators from prosecution in obtaining a guilty plea from Mary Estell Curran, a 79-yhear-old widow, well-known for her charitable work. Ms. Curran had tried to enter the 2009 OVDP but learned that her name had already been obtained by IRS and that she was therefore ineligible for the program.  She had inherited the UBS account, was not advised she had to report the account, had only a high school education, had not worked outside the home and lacked knowledge of business affairs. Yet, she pleaded guilty fearing conviction far worse potential maximum sentence had she elected to go to trial.  Given her circumstances, might wonder what facts will be necessary to exculpate a non-filer from FBAR criminal and civil sanctions.  Of course, two daunting other facts were that the account was $40 million and tax not paid amounted to $668,000. Her case exemplifies the dangers inherent in waiting to enter the OVDP as well as the risks in coming forward. 

Despite problems and risks, Offshore Voluntary Disclosures continue to be a most viable path to resolving FBAR and income tax violations.  The course to a safe harbor, however, traverses some uncharted waters because IRS continues to lump all taxpayers, regardless of culpability, into one pool. 

© 2012 by Robert S. Steinberg, Esquire
All rights reserved


[i] Certified means that the submission has been reviewed and amounts of tax due and penalties determined and approved for closing.

This entry was posted in 2012 OVDP, AUDITS, FBARS, NEW OVDP, TAX, TAX CRIMES, VOLUNTARY DISCLOSURE and tagged , , , , , , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s