2011 OVDI – Offshore Voluntary Disclosure Initiative
The Increasing Risk of Detection of Income Tax Evasion from Foreign Bank Accounts
There are two very good reasons to consider making a 2012 offshore voluntary disclosure regarding your foreign accounts if you have not already done so.
1. The IRS is actively investigating foreign banks that are suspected of promoting income tax evasion by U.S. citizens via promising not to report the existence of a foreign account or the income that is generated by, or run through the account, to the U.S. Government to induce deposits being made to the foreign bank. This is the complained of behavior that led to the UBS investigation and lawsuit. A tremendous amount of leads were generated by all of the proceeding voluntary disclosures surrounding foreign accounts for the 2008 and 2011 versions of the program.
2. Recently enacted legislation called FACTA will basically coerce all foreign banks starting in 2014 into reporting the existence of U.S. account holders or be faced with only receiving 70% of the funds transferred to them by U.S. banks from U.S. residents rather than 100%. The difference will be back up withholding of 30% for not offering transparency to the U.S. Government. Moreover, the United Kingdom has finalized a FATCA pact, pending approval by parliament while France, Germany, Italy, Spain, Switzerland and Japan have pending agreements and the Treasury is negotiating with at least 40 other countries for FATCA agreements.
Most modern countries are interested in income tax evasion committed by their own residents and are cooperating with the U.S. Government to exchange information in a manner designed to detect offshore income tax evasion. This is illustrated by the fact that the Organization for Economic Co-Operation and Development (OECD) recently announced that all 87 countries member countries have agreed to adopt the OECD model agreement on Tax Information Sharing. It’s notable that some of the most notorious tax havens in the world have pledged to no longer allow their bank secrecy laws to be used to shield or encourage international tax evasion. Recently an article in Reuters titled “U.S. Obtains Data From 10 Swiss Banks in Tax Dodging Probe” was reported on the Huffington Post.
According to the article’s author, 10 major Swiss banks under now under investigation by Depart of Justice and have already provided detailed statistical information to the US government concerning US citizens with secret accounts with them. The banks have until September 23 to hand over more specific information.
The Justice Department has also served a target letter on Credit Suisse, Switzerland’s second-largest bank, notifying it that it was the focus of a criminal investigation. As of April 2012, the Bank’s CEO announced that the bank has provided names of account holders to the IRS, pursuant to a treaty request. American authorities also are probing HSBC and smaller Swiss private banks and cantonal banks, including Basler Kantonalbank, Wegelin and Julius Baer.
The IRS has publicity stated on numerous occasions that it is highly likely that the U.S. citizens that refused and or failed to come forward in not one or two, but now three highly publicized voluntary disclosure programs, the inclusion of form 8938 in the 2011 personal tax return and surrounding publicity, that have the following three badges of fraud in their fact patterns will face criminal prosecution.
- Unreported foreign income – this could consist on interest, dividends or capital gains related to investments in the foreign account, earnings in a foreign business, or foreign rental property or unreported taxable foreign income of any kind.
- Unfiled FBARS – or TDF 90-22.1
- A failure to report the existence of the account under schedule B of their personal tax return.
It is important to note of the 24 reported cases where taxpayers were criminally prosecuted over a foreign account, a pattern of skimming was also apparent. Skimming in this context is where the taxpayer commits income tax evasion by underreporting income on their U.S. returns, unusually by claiming false deductions, and then ships the underreported income to an offshore account in order to hide its existence. Moreover – only one of the prosecuted taxpayers participated in an offshore voluntary disclosure program but did not comply with the terms of the program by only disclosing one foreign account that he knew had been under investigation while failing to disclose the rest of his foreign accounts.
Prerequisites to Entering the 2011 OVDI Program
If you still have not made a voluntary disclosure concerning your foreign account or income generating assets or entities it is still possible to come forward and report both your domestic and foreign income tax and information reporting non-compliance as long as the following is true:
- All income is from legal sources. i.e. Illegal source income may come from extortion, prostitution, and drug sales. Income tax evasion is legal source income for this purpose.
- The government has not already received your name from a whistleblower or from its own sources. If you believe they might already have your name you still might be able to avoid criminal prosecution by coming forward before they act on the information they already have. A Pre-Check on your ability to enter the program will quickly dispatch any fear you may have and qualifies as your entry date into the program before any disclosures are made other than you may have a generalized foreign or domestic reporting problem.
- A whistleblower has not turned in your name.
- The IRS has not already opened up an audit against you.
The first step would be to obtain a pre-check by fax which includes your social security number, birth date and address to see if you qualify. Contact our offices if you would like to fully discuss this issue.
The Civil and Criminal Consequences of Failing to Make a Voluntary Disclosure
Taxpayers who do not submit a voluntary disclosure run the risk of detection by the IRS and the imposition of substantial penalties (delineated below), including the fraud penalty and foreign information return penalties, and an increased risk of criminal prosecution.
Taxpayers who fail to make a voluntary disclosure risk being subjected to a myriad of civil penalties both under the IRC and Title 31. The application of a specific penalty depends on the particular facts and circumstances. Applicable penalties could include, but are not limited to:
- A fraud penalty equal to 75% of the underpayment due to fraud.
- A penalty for fraudulent failure to file a return of up to 75% of the amount of tax required to be shown on a return.
- A penalty for failing to file the FBAR form, Form TD F 90-22.1.
- A penalty for failing to file information returns for foreign trusts and for receipt of certain foreign gifts as required by IRC §§ 6048 and 6039F.
- A penalty for failing to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations under IRC §§ 6035, 6038 and 6046.
- A penalty for failing to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business, as required by IRC §§ 6038A and 6038C.
- A penalty for failing to file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation as required by IRC § 6038B.
- Failure to file, failure to pay and accuracy related penalties could also be assessed against a taxpayer who does not participate in the initiative.
The biggest hammer that the IRS can hold over the head of taxpayers who do not participate in the OVDI is the prospect of criminal prosecution if the IRS learns that a taxpayer had unreported offshore income. To wield this hammer effectively the IRS remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts. Moreover, increasingly this information is available to the IRS under tax treaties, through submissions by whistleblowers, and will become more available as the Foreign Account Tax Compliance Act (FATCA) and Foreign Financial Asset Reporting (new IRC § 6038D) becoming effective and the accompany Form 8938. Congress has armed the IRS with the a penalty regime that could easily result in a multiple of the offshore account and offshore assets being assessed in addition to the potential of doing 5 years in federal prison per count (up to five counts possible for a total of 25 years in jail), and having to pay for the cost of prosecution.
Generally, there is no de minimis unreported income exception to the offshore penalty. If an account generated even minimal unreported offshore income during the disclosure period, it is subject to the offshore penalty. However!!!!
Note: An apparent exception to this de minimis rule is noted where the IRS recently announced that Non-Resident U.S. Taxpayers with less than $1,500 of unreported income will be given an alternate program to enter that offers less harsh terms than those included within the OVDI.
A taxpayer makes a voluntary disclosure if the disclosure is a timely, truthful and complete, if the taxpayer cooperates with the IRS to determine his correct tax liability and makes good faith arrangements to pay in full the tax, interest and any penalties the IRS determines is due. Participating taxpayers who cooperate with the IRS will generally eliminate the risk of criminal prosecution. Because of the risk of criminal prosecution I do not advise anyone to enter the program without proper legal counsel from an experienced OVDI attorney.
WARNING: Your CPA or accountant can be compelled to be a witness against you and thus only an attorney is in the proper position to advise you on these matters because of the need for Attorney Client Privilege. Do not discuss your foreign or domestic non-compliance problems with your CPA or Tax Preparer if they have possible criminal implications!!!
Participating taxpayers will be subject to a 20% accuracy related penalty, failure to file and pay penalties (if applicable), and a reduced “offshore” penalty in lieu of the penalties for failing to file FBARs. The offshore penalty under the 2012 OVDI is 27.5% of the highest aggregate value in the offshore accounts (which may in certain circumstances also include foreign assets) during the covered period, as compared to a 25% penalty under the 2011 OVDI and 20% under the 2009 OVDP. The offshore penalty may be either 5% or 12.5% in limited circumstances.
National OVDI, FBAR and Foreign Asset Attorney
The Tax Law Office of David W. Klasing has developed national practice as to federal income tax issues administered by the IRS, so no matter what state you are from, if you are presently out of compliance concerning Foreign Accounts or income generating assets, we can help bring you back into compliance. It is sometimes said that while the focus of an accountant is accuracy, the focus of an attorney is advocacy. Our Office’s expertise and training in OVDI combines both fields: We place a premium on both accuracy and client advocacy.
Questions About OVDI?
- 2011 Offshore Voluntary Disclosure Initiative FAQ
- Key Features of Initiative
- Eligibility For This Initiative
- 2011 OVDI Process
- Calculating The Offshore Penalty
- Statute of Limitations
- FBAR Questions
- Taxpayer Representatives
- Case Resolution
- What not to do!
- What to do!
- FBAR Reporting and Expired Voluntary Disclosure Program as of October 15, 2009
- How the Tax Law Offices of David W. Klasing Can be of Assistance
- I have a bank account overseas that I did not report on my income tax return.
- Am I required to maintain information on my overseas bank accounts? What sort? And is there a penalty for failing to maintain such information?