An offshore bank account is utilized by tens of thousands of Americans and is legal as long as certain laws and regulations are followed. The laws require that a person with offshore bank accounts with a balance of more than $10,000.00 file a yearly disclosure form called Report of Foreign Bank and Financial Accounts (FBAR: Treasury Form 90-22.1). In addition, income earned on an offshore account must be included on the tax return and the appropriate disclosure of the foreign bank account on the tax return must be made.
The failure to file the yearly FBAR and to disclose the account on the tax return are crimes which can result in prosecution and incarceration, even for a person who has never before been arrested.
In 2009 the I.R.S. announced an amnesty program in which taxpayers with offshore bank accounts and unreported income relating to offshore transactions were granted an opportunity to come clean with the I.R.S. and avoid criminal prosecution and hefty fines that would otherwise apply. This program closed on October 15, 2009.
Background: In March 2009, the Commissioner of the Internal Revenue Service testified before the Senate Finance Committee and provided an update on offshore tax evasion legislation. In this testimony he described an "unprecedented focus" that the I.R.S. has placed on "detecting and bringing to justice" the taxpayers who hide assets overseas to avoid paying taxes. The Commissioner stated, "My advice to those taxpayers is very simple. The I.R.S. has been steadily increasing the pressure on offshore financial institutions that facilitate concealment of taxable income by U.S. citizens. That pressure will only increase under my watch. Those who are unlawfully hiding assets should come and get right with their government through our voluntary disclosure process." Clearly, offshore issues are a high priority with the I.R.S. and significant resources have been directed to the area of international tax compliance.
Following 911, the United States and countries around the world, have aggressively sought to learn of bank accounts used by terrorists. As a result, the government is pursuing the disclosure from banks of foreign bank account holders including U.S. citizens with no ties to any terrorist or other alleged activity.
Government Actions: In January, 2009 Lloyds TSB Bank entered into a deferred prosecution agreement with the U.S. government. Lloyds had falsified outgoing U.S. wire transfers that involved countries/persons on the U.S. sanctions list. In February 2009 UBS AG Bank, Switzerland's largest bank, entered into a deferred prosecution agreement with the U.S. government on charges of conspiring to defraud the U.S. by impeding the I.R.S. To evade the reporting requirements, UBS personnel helped U.S. taxpayers open UBS accounts in the names of nominees/sham entities to conceal their identities and assets from the I.R.S.
These cases are examples of the pressure brought by the I.R.S. to gain access to offshore bank accounts. UBS is in the process of disclosing certain U.S. taxpayers/ clients who had accounts at UBS.
Voluntary Disclosure: Since 2004, the I.R.S. has had in place what is called a Voluntary Disclosure Practice. According to Voluntary Disclosure Practice guidelines, if a taxpayer voluntarily discloses previously unreported income, and if all of the criteria for a "voluntary disclosure" are met (the criteria are numerous and stringent), then criminal prosecution may be avoided. This Voluntary Disclosure Practice does not apply to illegal source income, nor does it provide any guarantees that, after an evaluation of the facts and circumstances of a particular case, criminal prosecution will be avoided. This Voluntary Disclosure Practice is still available for those who did not take advantage of the Amnesty Program that ended on October 15, 2009.
The Amnesty Program: On March 23, 2009, I.R.S. officials, in response to the Commissioner's statement to the Senate Finance Committee, issued specific guidelines relating to Voluntary Disclosure Requests regarding unreported offshore accounts and entities. I.R.S. civil examiners are now authorized to resolve tax liabilities related to offshore issues of taxpayers who make voluntary disclosure requests in the following manner.
- Assess all taxes and interest due from 2003 (unless the offshore account(s) have been in existence for less than six years-then the shorter period will apply). This means that returns, or amended returns, must be filed for the relevant period. Additionally, Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), for all relevant periods must be filed.
- Assess either an accuracy or delinquency penalty for all relevant periods.
- In lieu of all other penalties that could apply, including FBAR and information return penalties, assess a penalty equal to 20% of the amount in foreign bank accounts/entities in the year with the highest aggregate account/asset value.
- In those cases in which certain other requirements are met, relating to the opening of foreign accounts, activity in these accounts, and payment of taxes on the funds in these accounts, the penalty will be reduced from the 20% mentioned in number 3 above, to 5%.
However, the terms outlined above are applicable only to taxpayers that make voluntary disclosure requests and who fully cooperate with the I.R.S.
Those Who Missed The Amnesty Deadline: There are still many people who did not take advantage of the Voluntary Disclosure/Amnesty Program for offshore accounts. Reasons vary, from a lack of knowledge of the program or its termination date, to uncertainty as to the IRS's good faith.
Whatever the reason for not entering the program, its time has passed. The potential, however, still exists that the government may learn of undisclosed offshore accounts.
The long established Voluntary Disclosure Practice is still in existence and should be considered as a method of complying with the law and avoiding criminal prosecution.
Successful Completion of I.R.S. Amnesty Program: The purpose of taking advantage of the Amnesty Program is to successfully avoid criminal prosecution and substantially reduce penalties. A person must understand that amended tax returns will be closely examined and therefore, extreme care must be exercised in the preparation of amended income tax returns, as well as in all contacts with the I.R.S.
If a person has entered the Voluntary Disclosure/Amnesty Program without the benefit of an attorney, certain important facts must be remembered.
- In a criminal I.R.S. matter, there is no accountant-client privilege and therefore an accountant, even a CPA, will be required to disclose everything learned from the client. In order to avoid this possible outcome, a person should retain an attorney experienced in criminal tax matters. That attorney may retain an accountant to advise the client on the proper preparation of the returns. The attorney-client privilege will also cover the accountant who is working for the attorney.
- The preparation of amended returns must be done with utmost care to ensure that the amended return does not give rise to a crime such as a false statement on the tax return, or tax evasion due to omitted income or false deductions. If this occurs, the person will be excluded from the Amnesty Program.
- While the I.R.S. Amnesty Program will require providing information to the I.R.S. and may result in an audit, the person can and should, deal with the I.R.S. though a representative.
The I.R.S. Amnesty Program for those with foreign bank accounts provides an opportunity to avoid criminal prosecution. In order to achieve this goal, the I.R.S. Amnesty Program must be carefully complied with. This firm, with the assistance of a forensic CPA, advises clients of their statutory and constitutional rights and works to achieve successful completion of the Amnesty Program so as to avoid criminal prosecution.
If you have applied for the Voluntary Disclosure/Amnesty Program within the deadline of October 15, 2009 and wish to speak with this firm about successfully completing the program, call or email Mark Horwitz at 407-401-7224 or firstname.lastname@example.org.
If you did not enter the program, you can contact this firm to discuss becoming compliant with offshore reporting requirements through the remaining Voluntary Disclosure Practice Program.