IRS Offshore VDP -- Last Opportunity For Taxpayers To Avoid Criminal Prosecution And Penalties?

Originally published in The Legal Intelligencer

As a result of the current state of the economy and recent calls

for more regulation on international finance, it should come as no

surprise that the federal government is seeking ways to close tax

havens and increase collections from taxpayers. Taxpayers who have

offshore accounts (e.g., foreign trusts, corporations, bank, mutual

funds, hedge funds, life insurance policies, annuities and debit

and prepaid credit card accounts) are required to disclose annually

such assets and accounts via Form TD F 90-22.1 Report of Foreign

Bank and Financial Accounts, or FBAR, and to report annually income

earned from those accounts on their U.S. income tax return.

The U.S. Tax Code makes no distinction between interest earned

from U.S.-based accounts and interest earned abroad. Although many

offshore banks, tax havens and clearing houses may decide not to

report income to U.S. tax authorities, and may have no legal

obligation to do so, businesses, individuals, estates or trusts

that are subject to U.S. income tax are required to report, under

the penalties of perjury, earnings from these accounts.

The penalties for failure to file FBARs or supply information,

including filing a false or fraudulent report, can be up to

$500,000 and imprisonment of up to five years. The penalties for

failure to report earnings include charges of criminal tax evasion,

as well as fraud and filing penalties up to 75 percent of the

unpaid tax.

The Program

The Treasury Department has implemented a Voluntary Disclosure

Program, or VDP, for taxpayers with offshore assets. On March 23,

the Internal Revenue Service issued a series of internal

memorandums from the Criminal Investigation Division, or CID,

services and enforcement unit, the small business/self-employed

division and large and midsize business divisions regarding the

high priority treatment of offshore account earnings and related

reporting. The memoranda stress the IRS's commitment to develop

and utilize a full range of information gathering tools for

properly identifying offshore-based income. These memoranda further

address the high-priority objective of the Treasury Department to

process any voluntary disclosure requests and the ridged penalty

framework associated with the program.

On March 26, IRS Commissioner Doug Shulman, following his March

17 testimony to the Senate Finance Committee whereby he committed

to aggressively pursue individuals and institutions that facilitate

unlawful tax avoidance, formally announced the new voluntary

disclosure program in connection with unreported foreign income and

accounts. The program, unofficially known as the IRS Voluntary

Disclosure Program for Offshore Accounts, is available until Sept.

23, although legislation granting extensions may occur.

Additionally, in May, the IRS issued a series of frequently asked

questions and answers in an effort to give taxpayers some guidance

regarding program compliance, which may help to limit

taxpayers' exposure to additional and increased penalties.

The practice of voluntary disclosure is not a new concept, but

one where increasing attention is being focused. Taxpayers have the

opportunity to become compliant, resolve their tax liabilities and

reduce their chance of criminal prosecution. The IRS will not

recommend criminal prosecution under the current VDP for offshore

account disclosure as long as the taxpayer complies with all

provisions of the VDP.

Qualification

To qualify for the program, taxpayers have until Sept. 23 to

disclose unreported income and undisclosed foreign accounts. Prior

to this deadline, taxpayers must make full disclosure to their

nearest special agent in charge of the IRS Criminal Investigation

Division Office. It is strongly advised that taxpayers do not make

any disclosure before securing qualified tax representation.

The program is open to...