Quiet Disclosure of Foreign Bank Accounts Still Causes Noise
by Asher Rubinstein, Esq.
Many people have asked our advice lately regarding their undeclared offshore accounts and the IRS’ “Voluntary Disclosure” Program. Under this program, a US taxpayer with an undeclared foreign bank account who approaches the IRS before the IRS otherwise becomes aware of the account, can pay back taxes, interest and penalties but avoid a criminal prosecution and jail sentence for tax fraud.
Taxpayers with undeclared foreign accounts have shown interest in the program because recent events point toward the IRS discovering non-complaint accounts on its own: the IRS suing UBS to reveal the identities of 52,000 account holders; IRS investigations of Credit Suisse and HSBC; the erosion of Swiss banking secrecy; the OECD initiative against “tax havens”; virtually all offshore jurisdictions announcing they will exchange tax information with the U.S.; President Obama’s recently announced legislation targeting foreign accounts, and increasing IRS budget and manpower to pursue undeclared money offshore, and the IRS hiring 800 special agents to investigate foreign accounts.
The problem is that once we calculate the back taxes, interest and penalties associated with the Voluntary Disclosure, the clients balk at handing that money over to the IRS. Under the Voluntary Disclosure program, the IRS would seek: (a) income tax on any undeclared foreign income, going back six years; (b) an “accuracy” penalty of twenty percent (20%) of the tax due; (c) an additional penalty, usually from five percent (5%) to twenty percent (20%) of the highest amount in the account during the past six years; and (4) interest on the tax and accuracy penalty. This often results in one-half (½) of the foreign account going to the IRS, and one-half (½) remaining for the client, and the client’s file is “closed”. Although fifty percent (50%) of the account is significant, it is much less than the high penalties the IRS would apply if the IRS discovered the foreign account on its own – – income tax on any undeclared foreign income; plus a penalty equal to fifty percent (50%) of the value of the account, every year (so that a $1 million account would give rise to a $3 million penalty after six years); plus seventy five percent (75%) of the unpaid tax (in addition to the tax itself) as a “fraud” penalty; plus an “accuracy” penalty of twenty percent (20%) to forty percent (40%) of the total underpayment. The total would very likely bankrupt most taxpayers. In addition, such taxpayers face the prospect of criminal prosecution for tax fraud. Nevertheless, some clients are still choosing not to come forward.
Attorneys such ourselves with offshore clients have told representatives of the IRS that the penalties are having a negative effect. Rather than encouraging disclosure and compliance, they are keeping taxpayers away. The IRS has responded that it is not changing its terms.
Some US taxpayers with foreign accounts are hoping to “sneak by” by amending their past years tax returns quietly, without formally submitting a Voluntary Disclosure. This is known as a “Quiet Disclosure”.
On May 7, 2009, the IRS announced that Quiet Disclosures will not work. The IRS is examining amended tax returns reporting increases in income, to determine if enforcement action is appropriate. Even though tax returns are amended and back taxes paid, account holders will still face penalties and criminal charges.
We’ve continually counseled our clients that “quiet disclosures” may not suffice. Now the IRS has confirmed our advice.
There are other problems with “quiet disclosures”. They only address payment of back taxes and interest, but not penalties. Also, they leave open the issue of the taxpayer not having complied with reporting requirements, i.e., filing U.S. Treasury Form TD F 90-22.1, Report of Foreign Bank and Financial Account (the “FBAR”), and 1040 “check the box”. If the foreign account was in the name of a foreign trust, then an IRS Form 3520 was probably due also. Quiet disclosure does not correct those past non-reporting issues.
Beneficial owners of undisclosed foreign bank accounts (including accounts held in the name of companies, trusts or nominees) must evaluate their options and take immediate steps to minimize the risk of I.R.S. criminal prosecution for tax fraud.
Option A: Convert to a Tax-Compliant Structure
Our firm has long counseled proper tax disclosure with respect to foreign accounts and the use of tax-compliant strategies to minimize U.S. taxation on foreign assets. We also advise clients on the legitimization of non-compliant offshore assets. We counsel clients with regard to transforming a non-compliant offshore account into one that complies with current U.S. law. Although we cannot erase a non-compliant past, we can ensure full compliance going forward.
Option B: Pre-emptive Negotiation and Disclosure
If you currently have an interest in a non-compliant offshore account, you should consider voluntary disclosure of that interest before the I.R.S. discovers it. Such a pre-emptive disclosure is best made by qualified legal counsel, experienced in offshore compliance and in I.R.S. negotiations. We can approach the I.R.S. on your behalf, demonstrate proper current compliance and negotiate to avoid criminal prosecution and reduce fines and penalties for past non-compliance. Although fines and penalties may be significant, they pale before the consequences of an I.R.S. criminal prosecution. We have a very successful track record with the I.R.S.
If you are one of the thousands of American taxpayers with a foreign account that you thought was secret, you have very little time to bring it into compliance. Given that UBS has caved in and already revealed the identities of some U.S. account holders, we can expect that UBS, Credit Suisse, HSBC and other banks will provide a complete list of U.S. account holders in the near future. If the IRS gets your name, it will be too late to take advantage of the Voluntary Disclosure Program. In any event, the Voluntary Disclosure Program ends on September 23, 2009.
Regardless of which strategy you pursue, failing to remedy a non-compliant offshore account puts you at serious risk of harsh penalties, including I.R.S. criminal prosecution, in the event of discovery. As recent events have proven, discovery is very likely. The window of opportunity is closing fast.