IRS Announces New Voluntary Disclosure Program for Offshore Accounts and Assets
On January 9, 2012, the Internal Revenue Service (“IRS”) reopened an Offshore Voluntary Disclosure Initiative (“OVDI”) to give U.S. taxpayers with offshore accounts an unprecedented third opportunity to disclose such accounts, pay any taxes and penalties due, and avoid criminal prosecution. The IRS decided to reopen the program based on continued interest in voluntary disclosure after the close of the most recent OVDI in September 2011. Under the previous two OVDI programs in 2009 and 2011, the IRS collected $4.4 billion from 33,000 taxpayers.
Similar to the prior programs, the 2012 OVDI enables a taxpayer with undisclosed foreign accounts to come forward and pay any unpaid tax due on the earnings of those accounts as well as a fixed penalty. In exchange, the taxpayer avoids potentially significant higher civil and criminal penalties should the IRS discover the undisclosed foreign accounts on its own. In order to participate in the program, individuals must file all original and amended tax returns and pay any tax due on income associated with the foreign accounts for a look-back period of eight years. The taxpayer must also disclose all foreign accounts on Form TD F 90-22.1, “Report of Foreign Bank and Financial Accounts”, commonly referred to as an FBAR, for those eight years.
U.S. Authorities Continue Vigorous Pursuit of Offshore Tax Evasion
With the opening of this third OVDI, the IRS remains committed to identifying taxpayers who have undisclosed offshore accounts. IRS Commissioner Douglas Shulman warned that “Our focus on offshore tax evasion continues to produce strong, substantial results for the nation’s taxpayers. We have billions of dollars in hand from our previous efforts, and we have more people wanting to come in and get right with the government. This new program makes good sense for taxpayers still hiding assets overseas and for the nation’s tax system. As we’ve said all along, people need to come in and get right with us before we find you. We are following more leads and the risk for people who do not come in continues to increase.”
Along these lines, the IRS is currently conducting a civil investigation of at least 11 confirmed Swiss banks, and some sources estimate the number is closer to 21. The Department of Justice (“DOJ”) has joined the IRS in pursuing criminal charges against these Swiss banks.
As part of this effort, the DOJ notified certain Swiss banks and identified them as targets of a criminal investigation into allegations that their advisors assisted U.S. clients in avoiding payment of U.S. income tax. In response to the investigation, some institutions plan to disclose the names of U.S. clients to Swiss tax authorities. The Swiss tax authorities will then forward this information to the IRS and the DOJ.
Some institutions have started contacting their U.S. clients, giving them various options:
- Agree to let the Swiss tax authorities obtain their account information for the purpose of disclosure to the U.S. authorities;
- Hire Swiss attorneys to contest account information disclosure; or,
- Close their accounts.
The Swiss government has been rumored to have proposed a multi-billion dollar settlement to the U.S. authorities in an effort to achieve an all-encompassing solution which would include all Swiss banks. Switzerland has reached similar agreements this year with Germany and the U.K. on untaxed assets; however, in those agreements, the identity of clients was not disclosed. The DOJ is rumored to be opposed to any deal that involves only money and does not include disclosure of client names and information.
It is very possible that the Swiss banks currently under investigation will follow some institutions in disclosing U.S. clients while others will attempt to jettison accounts held by U.S. taxpayers. Further, it is reasonable to believe that additional banks around the world are being investigated by the IRS for similar activities. To facilitate these investigations, it is believed the IRS has opened field offices in Australia, Panama, China, Singapore and Hong Kong.