Form 5472 Basics

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Form 5472 (“Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business”) occupies a place of special importance for an international tax attorney. The chief reason is because, unlike most other international tax forms familiar to an international corporate tax attorney, Form 5472 deals with corporate activities directly in the United States. In particular, the Form is used to provide the IRS with required information (under Internal Revenue Code (IRC) Sections 6038A and 6038C) when a reporting corporation had reportable transactions with a foreign or domestic related party.

Form 5472 is also a form that is often overlooked by the taxpayers; this is why an international corporate tax attorney must be especially vigilant when it comes to U.S. corporations which are partially or fully owned by foreign persons. This is especially important for an international corporate tax attorney, because failure to file Form 5472 can lead to substantial penalties and the IRS has not been shy about imposing these penalties.

In this article, we will explain the basics of Form 5472, and the various penalties that may be imposed on corporations that fail to file the form or do not comply with other requirements. This article is not intended to convey tax or legal advice. U.S. international tax compliance and planning frequently involve many complex areas, and you are advised to consult an experienced tax attorney in these matters. Sherayzen Law Office, Ltd. can assist you in all of your tax and legal needs.

Reporting Corporation

Defining the “reporting corporation” is the first step in the analysis of an international corporate tax attorney. In general, for the purposes of Form 5472, a corporation is defined as “reporting corporation” if it is either: (1) a 25% foreign-owned U.S. corporation, or (2) a foreign corporation engaged in a trade or business within the U.S.

As an international corporate tax attorney, I can tell you that this is not where the issue ends. In addition to direct ownership, the IRC constructive ownership provisions will apply for determining Form 5471 ownership percentages. According to the IRS, a related party is defined to be, “Any direct or indirect 25% foreign shareholder of the reporting corporation, any person who is related (within the meaning of section 267(b) or 707(b)(1)) to the reporting corporation, any person who is related (within the meaning of section 267(b) or 707(b)(1)) to a 25% foreign shareholder of the reporting corporation, or any other person who is related to the reporting corporation within the meaning of section 482 and the related regulations.” However, a related party does not include any corporation that is filing a consolidated tax return with the reporting corporation.

An international corporate tax attorney should be consulted in determining whether your corporation is a “reportable corporation” for Form 5472 purposes.

Reportable Transactions

As noted above, reporting corporations must file Form 5472 if they had a reportable transaction with a foreign or domestic related party. In general, a reportable transaction may cover a wide array of possible transactions.

First, reportable transactions include any type of transactions listed in Part IV of Form 5472 for which monetary consideration was the only consideration paid or received during the reporting corporation’s tax year for any of the following items: sales of stock in trade (inventory); rents or royalties received (for other than intangible property rights); sales, leases, licenses, etc., of intangible property rights; interest received; commissions received, and other categories.

Second, a reportable transaction also includes any type of transaction (or group of transactions) listed in Part V, if any part of the consideration paid or received was not monetary consideration, or in cases where less than full consideration was paid or received.

Whether you have a reportable transaction is a very complex topic; this is why you need to consult an international corporate tax attorney to deal with this issue. I strongly advise against a “do it yourself” attitude in this matter.

Form 5472 Penalties

Several penalties may be imposed for failure to meet various requirements for Form 5472. First, the IRS may assess a failure to file penalty of $10,000 on any reporting corporation that fails to file Form 5472 when due and under the proper compliance requirements (this is the most common penalty that an international corporate tax attorney is likely to see). Note, filing a substantially incomplete Form 5472 will also constitute a failure to file Form 5472 for the purposes of the penalty.

Furthermore, failure by a reporting corporation to maintain records (as required under IRS Regulations section 1.6038A-3), will be deemed to be a failure to file. As an international corporate tax attorney, I often see this penalty imposed in conjunction with other Form 5472 penalties.

There is a further complication: each member of a group of corporations filing a consolidated information return is treated as a separate reporting corporation subject to a separate $10,000 penalty, and each member is jointly and severally liable for such penalty.

Third, if a reporting corporation fails to file Form 5472 for more than 90 days after notification by the IRS, an additional penalty of $10,000 will apply. According to the IRS, “This penalty applies with respect to each related party for which a failure occurs for each 30-day period (or part of a 30-day period) during which the failure continues after the 90-day period ends.”

Finally, in addition to the civil penalties, criminal penalties under IRC sections 7203 (“Willful failure to file return, supply information, or pay tax”), 7206 (“Fraud and false statements”), and 7207 (“Fraudulent returns, statements, or other documents”), may also apply if the reporting corporation fails to submit required information or files false or fraudulent information.

Contact Sherayzen Law Office for Professional Help With Forms 5472

As you can see, filing Form 5472 is not a trivial matter and requires the expertise of an international corporate tax attorney. If you are required to file Form 5472, contact the experienced international corporate tax law firm of Sherayzen Law Office.

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International Tax Planning Lawyers: Importance of Business Purpose Doctrine

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It is surprising how often international tax planning lawyers ignore the importance of business purpose doctrine to international tax planning. It seems that a lot of U.S. accountants and, to a smaller degree, attorneys have been limited to the parochial view of the application of the doctrine within the borders of the United States, whereas they seem to lose caution in the context of international business transactions. In this article, I urge the readers to consider the very important role of the business purpose doctrine to international tax planning.

International Tax Planning Lawyers: Business Purpose Doctrine; Combination with the Economic Substance Doctrine

This short writing does not pretend to do justice to the complex analysis of the history, development and interpretation of the business purpose doctrine. I will merely attempt to broadly sketch some important points and the general meaning of the doctrine to provide the necessary background to the discussion below.

The Business Purpose Doctrine (“the Doctrine”) is often cited to have originated in the old Supreme Court case Gregory v. Helvering, 293 U.S. 465 (1935) (even though, upon detailed consideration, it appears that this case stands for a much more limited proposition than the current Doctrine). In reality, the modern Doctrine received a much broader development in the seminal case of Goldstein v. Commissioner, 364 F.2d 734 (2d Cir. 1966), which incorporates the economic substance doctrine into the Doctrine.

The combined effect of both legal developments can be summarized as a two-prong test which says that the IRS will respect a business transaction if: (1) the transaction has objective economic substance (i.e. whether transaction affected the taxpayer’s financial position in any way); and/OR (2) the taxpayer has a subjective non-tax business purpose for conducting the transaction (i.e. whether the transaction was motivated solely by tax avoidance considerations to such a degree that the business purpose is no more than a facade). Notice, the capital “OR” – there is a disagreement among the courts on whether the both, subjective (business purpose doctrine) and objective (economic substance doctrine) prongs should be satisfied, or is it enough that one of them is satisfied.

International Tax Planning Lawyers: the Doctrine is Relevant to International Tax Planning

The application of the Doctrine has been extremely important to International Tax Planning, and international tax planning lawyers should take care to make sure that their tax plans are not merely done for tax avoidance purposes, but reflect the real business purpose behind engaging into the transaction. Moreover, the international tax planning lawyers should impress upon their clients this understanding of importance of the Doctrine to the tax consequences of their business transactions.

A recent IRS victory stand as a stark reminder of the importance of the Doctrine and why international tax planning lawyers must not ignore it. In Chemtech Royalty Associates , L.P. v. United States of America (February of 2013), the federal district court in Louisiana rejected two separate tax shelter transactions entered into by The Dow Chemical Company (“Dow Chemical”) that purported to create approximately $1 billion in tax deductions.

The first transaction rejected by Chief Judge Jackson was created by Goldman Sachs and basically allowed Dow Chemical to claim royalty expense deductions on its own patent through a scheme called Special Limited Investment Partnerships (“SLIPs”). The basic idea behind SLIPs is to create a tax shelter known as a “lease-strip” – the U.S. taxable income is stripped away to a non-US partnership. In the process, some small Swiss tax was paid, but only minor U.S. tax consequences were triggered on Dow Chemical’s US tax return.

The second transaction that was rejected by Chief Judge Jackson involved depreciation by Dow Chemical of a chemical plan asset that had already, for the most part, been fully depreciated. The second scheme (created by King & Spalding) arose due to changes in U.S. tax law which made the first transaction unprofitable from the tax standpoint.

While the economic substance was not the only doctrine discussed by court (the Sham Partnership Doctrine played a large role in the decision as well), it certainly occupied the central role in the decision.

The end result for Dow Chemical – disallowance of $1 billion of deductions and an imposition of 20% penalty (i.e. $200 million) plus interest. As the readers can see, it is highly important for international tax planning lawyers to pay attention to the Doctrine.

Contact Sherayzen Law Office for Professional Help with International Tax Planning

While the precedent-setting cases usually involve large corporations, international tax planning concerns any company that does business internationally. Equally important for all companies is to make sure that they comply with all of the numerous complex U.S. tax reporting requirements concerning international business transactions.

If you have a substantial ownership interest in or an officer of a small or mid-size company that does business internationally, contact Sherayzen Law Office for professional help with international tax planning and compliance. Attorney Eugene Sherayzen will thoroughly analyze your case, create an ethical business tax plan to make sure that you do not over-pay taxes under the Internal Revenue Code provisions, and prepare all of the tax and legal documents that are required for your U.S. tax compliance.

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Swiss Accounts IRS Tax Lawyer News: US v. Victor Lipukhin

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On March 20, 2014, the politics and FBAR criminal enforcement met again in a new case, U.S. v. Victor Lipukhin – a case of continuous interest for a Swiss Accounts IRS Tax Lawyer. While the timing is most likely driven by politics, this case also resulted from the fallout of the UBS 2009 settlement; under the settlement, the UBS paid a fine and disclosed a large number of the secret Swiss bank accounts held by U.S. persons.

In U.S. v. Victor Lipukhin, Mr. Lipukhin was charged with an attempt to interfere with the administration of the internal revenue laws and filing false tax returns. Specifically, obstruction charges under IRC Section 7212(a) and filing of false tax returns charges under Section 7206(1) were mentioned. According to the U.S. Department of Justice (DOJ) and the IRS, the “charges relate to Lipukhin hiding millions of dollars in several Swiss bank accounts held at UBS AG.” While it is not expressly spelled-out by the DOJ, it appears that there are multiple counts of violations under both IRC sections.

Swiss Accounts IRS Tax Lawyer News: Facts of the Case

According to the indictment, Mr. Lipukhin kept between $4,000,000 and $7,500,000 in assets in two bank accounts with UBS in Switzerland from at least 2002 through 2007. The first account was opened in 2002 under the name of a Bahamian entity, “Old Orchard”. The account was initially funded with over $47,000,000 transferred into the account from a previously maintained UBS account in the Bahamas. The second account was maintained at UBS in Switzerland in the name of another Bahamian entity, “Lone Star”.

DOJ alleges that Mr. Lipukhin directed virtually all transactions in the accounts, typically through a Bahamian national who served as the nominee director of the Old Orchard and Lone Star entities. The DOJ also alleges that, “in order to further conceal his ownership of the undisclosed UBS accounts, Lipukhin utilized fictitious mortgages through an entity called Dapaul Management, controlled by a Canadian attorney, to conceal his purchase of real estate in the United States with funds from the UBS accounts.” The assets include a purchase of a historic building for $900,000 in the name of Charlestal LLC, a domestic entity controlled by Lipukhin. He also transferred funds from his UBS accounts to the Canadian attorney for the ultimate transfer to a domestic Charlestal bank account in order to conceal the source of the funds. Mr. Lipukhin then used the funds in the Charlestal account to pay for various personal expenses and to withdraw cash for personal use.

The final charge in the indictment is a curious one: “Lipukhin impeded the administration of Internal Revenue laws by attempting to prevent an automobile dealer from filing a Form 8300 – which is required for certain cash transactions over $10,000 – with the IRS in order to report Lipukhin’s cash payment to purchase an automobile.”

According to DOJ, Mr. Lipukhin failed to report his ownership of these accounts (on Schedule B and the FBARs) and failed to report any income earned in these accounts on his tax returns.

Swiss Accounts IRS Tax Lawyer News: Potential Penalties

According to the indictment, Mr. Lipukhin is charged with committing a crime. He faces a potential maximum sentence of three years of imprisonment on each count.

Swiss Accounts IRS Tax Lawyer News: Peculiar Facts

Some of the facts of the case here are of a very high interest to a Swiss Accounts IRS Tax Lawyer and U.S. taxpayers with undisclosed Swiss accounts.

The first important feature of the case is the fact that Mr. Lipukhin was never a U.S. citizen. He is a citizen of the Russian Federation and a former lawful permanent U.S. resident. While it may be true that the current political context had a lot to do with the timing of the charges being filed by the DOJ, this is another example that negates the false myth that is being propagated by some tax preparers (especially in the ethnic communities – particularly Indian and Chinese) that IRS would not criminally charge a non-citizen permanent resident. Nothing in my practice suggests that the citizenship of a U.S. taxpayer has any serious impact on the IRS enforcement of FBAR criminal penalties.

The second important feature to notice are the years involved in the indictment: 2002 through 2007. This case is bound to have an interesting development with respect to the Statute of Limitations (although, it will be difficult to get around IRC Section 6501(c) except by negating the charge of the “false tax return”) and it partially explains why there were no FBAR charges filed against Mr. Lipukhin (see below).

Third, notice the use of third parties and the various offshore entities to conceal the ownership of UBS Swiss accounts. As any experienced Swiss Accounts IRS Tax Lawyer would confirm, this is a highly negative set of facts and has tremendously contributed to the filing of criminal charges against Mr. Lipukhin. U.S. taxpayers with undisclosed Swiss accounts owned by sham offshore entities should be aware of the criminal implications of such an action. On the other hand, if they were advised incorrectly to do so for purely asset protection purposes, this fact should be analyzed by their Swiss Accounts IRS Tax Lawyer.

Fourth, it is important to consider the circle of transactions that led the money back to the United States with the purchase of U.S. real estate. There are very important implications of these moves in the voluntary disclosure context, but, here, I just want to mention that this case is another example of the falsehood of another myth – that, as long as the money is back in the United States, the IRS will not conduct a criminal investigation of the formerly non-compliant U.S. taxpayers. I am not sure where this myth originated, but I have seen some foreign-born U.S. taxpayers being trapped in this misconception.

Finally, the last charge of impeding the filing of Form 8300 for cash purchase of a car is highly unusual for a Swiss Accounts IRS Tax Lawyer to see in this context. It also appears that Mr. Lipukhin’s attempt to prevent the filing of Form 8300 was not successful and Form 8300 was actually filed. If this is the case, it seems that this charge is probably more politically motivated; though, it could have been used to buttress the case for criminal non-compliance further. Nevertheless, it is important to remember that an interference with a third-party tax compliance is a federal crime and may be prosecuted by the DOJ.

Swiss Accounts IRS Tax Lawyer News: Why FBAR Charges Were Not Included

For a Swiss Accounts IRS Tax Lawyer, U.S. v. Lipukhin is also an interesting case from another perspective – the statute of limitations with respect to filing an FBAR. The statute of limitations can be found in IRC 5321(b)(1). Generally, it is six years from the date of transaction (i.e. the IRS has six years from the date of transaction to assess FBAR penalties). For the purposes of the FBAR filing violations, the date of the transaction is the due date for filing the FBAR (i.e. formerly June 30 of the calendar year following the year to be reported).

This explains why the FBAR charges were not filed by the IRS for the years 2002-2006; the assessment period has expired for these years. However, it should be noted that 2007 statute of limitations is still open until June 30, 2014; it is unclear why the IRS chose not to pursue the FBAR criminal penalties with respect to 2007 (perhaps, the accounts were already closed or had an insignificant balance by that time).

Contact Sherayzen Law Office for Help With Respect to Foreign Bank and Financial Accounts

If you have undisclosed Swiss bank accounts; if you are facing civil FBAR penalties; or if you are facing other IRS penalties; contact Sherayzen Law Office experienced international tax law firm for professional help.

Swiss Bank Letters Cause Legal Complications for U.S. Taxpayers

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The Swiss Bank letters continue to pour into the mailboxes of U.S. taxpayers with bank and financial accounts in Switzerland as the April 30th deadline approaches for many Swiss banks that participate in the ongoing U.S. Department of Justice (“DOJ”) The Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks (the “Program”). In an earlier article, I already discussed what the Swiss Bank letters contain, and the importance of the need for the comprehensive analysis of the offshore voluntary disclosure options. In this article, I would like to concentrate on another aspect of Swiss Bank letters – the top three legal complications that these Swiss Bank letters cause to U.S. taxpayers.

1. Swiss Bank Letters Provide Notice of Non-Compliance with the FBAR and Other International Tax Compliance Requirements

The first problem with the Swiss Bank Letters is that they provide the notice of non-compliance with the FBAR and other important international tax requirements (depending on the Bank, it can include such Forms as 5471, 8865, 926, 3520 and so on). The issue here is not so much that the Banks are making their U.S. taxpayers aware of the U.S. tax reporting requirements, but the context in which this is done.

If the Swiss Bank letters were to arrive upon the opening of a Swiss bank account or, at least, prior to the Program, it would be a huge benefit to the unsuspecting U.S. taxpayers. However, this is not the case. Rather, the notice of these requirements is given after a potentially substantial period of non-compliance with these requirements.

Moreover, the Swiss Bank letters provide a notice of non-compliance in the context of forced disclosure under the terms of the Program. Such notice has a potential to taint disclosures outside of the OVDP with the same air of the taxpayer being “forced” to disclose as opposed to doing it voluntarily (at the very least, the argument that the taxpayer is doing this disclosure without any pressure from the IRS definitely loses credibility).

Finally, the Swiss Bank letters provide a Notice of non-compliance with requirements, without even attempting to educate their audience about these requirements or suggesting to contact an international tax attorney to see if these taxpayers are really in violation of these requirements. For example, how would a taxpayer know whether Form 3520 requirement actually applies to him?

2. Swiss Bank Letters Start the Clock for Disclosure Under Extreme Time Pressure

The second problem with Swiss Bank letters is that they start the clock for the taxpayer to be able to disclosure his accounts voluntarily under an enormous time pressure. A lot of the banks that send these Swiss Bank letters will disclose by April 30, 2014. This means that the taxpayers who receive the Notice today have less than two months to disclose their accounts voluntarily before they run an enormous risk of prior disclosure of their accounts by Swiss banks to the IRS (with the effect on potentially preventing these taxpayers from entering into the OVDP). Even the taxpayers who received notices at the end of last year and January of this year are not much better off.

This is a very big problem, because time pressure may not allow the taxpayers to choose the right type of voluntary disclosure. Moreover, even if they wanted to do one type of disclosure rather than another, their options may be limited due to insufficient time to implement the strategies necessary to make their preferred choice of the voluntary disclosure successful.

3. Swiss Bank Letters May Mislead U.S. Taxpayers in Believing that OVDP is the Only Option

Swiss Bank letters uniformly advise their clients to enter into the OVDP without ever mentioning any alternatives. It is as if the assumption of willful failure to file FBARs is already written into the Swiss Bank letters. Theoretically, one could even argue that, by advising taxpayers to enter the OVDP instead of consulting an international tax attorney about their options, some of the Swiss Bank letters over-step their boundaries and enter the world of giving legal advice without a license.

At the practical level, the problem is even more profound. The Swiss Bank letters have the potential to mislead U.S. taxpayers with undisclosed accounts into believing that OVDP is the only option available to them and they have to take this option because their bank will soon disclose their accounts to the IRS. While, undoubtedly, OVDP may be the best option in many cases, this may not be true in other cases. The problem is that, the way Swiss Bank letters are drafted, the U.S. taxpayers may never be even given the choice.

Contact Sherayzen Law Office for Help If You Received Swiss Bank Letters

Sherayzen Law Office is here to help you with the voluntary disclosure of your Swiss bank and financial accounts. Owner Eugene Sherayzen is an international tax attorney and expert in this field who can analyze the facts of your case and explain to you the available voluntary disclosure options. After you choose the voluntary disclosure option, our firm can prepare all legal documents and tax forms required for your voluntary disclosure, fully implement the ethically available strategies and rigorously defend your position against the IRS.

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Quiet Disclosure: The Russian Roulette of FBAR Disclosures

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There used to be a time when quiet disclosures with respect to offshore income and accounts were routinely recommended by accountants and even attorneys. Even as the tide turned against non-compliant U.S. taxpayers with offshore accounts in 2008-2009 with the spectacular IRS success in the UBS case and the announcement of the 2009 Offshore Voluntary Disclosure Program, these tax professionals persisted in advising their clients to follow the “quiet” course of action. Amazingly enough, even in March of 2014, I still see clients who have been advised to conduct quiet disclosures without adequate assessment of risks that such course of action entails.

In this article, I will argue that the era of quiet disclosures is over and a non-compliant taxpayer who embarks on this course is assuming the risks comparable to engaging in a game of a Russian Roulette with the IRS.

Definition of “Quiet Disclosure”

The definition of what constitutes “quiet disclosure” has changed over time; at some point, there were tax professionals who used it in such as a broad manner as to include something that we would not consider as quiet disclosure today but rather “reasonable cause disclosures” (also known as “modified voluntary disclosures” or “noisy disclosures”).

Today, the term generally refers to disclosures where a taxpayer would file amended returns, pay any related tax and interest (oftentimes, the payment of accuracy-related penalties is included in such a disclosure) for previously unreported offshore income, and file the current year’s information returns without otherwise notifying the IRS.

Note the two critical aspects of this definition that differentiate quiet disclosures from any other types of voluntary disclosures. First and foremost – “without otherwise notifying the IRS”. This is the “quiet” aspect of the disclosure. At no point is the taxpayer notifying the IRS about his non-compliance; he just simply hopes to pay the tax with interest without attracting IRS attention to his prior non-compliance.

The second critical aspect of quiet disclosures is compliance with current year’s information returns (such as FBARs, Forms 5471, et cetera), but not prior years’ information returns. Filing prior years’ information returns would imply providing IRS with evidence of prior non-compliance and, without adequate explanation, a set of penalties may be imposed on the taxpayer. This is why, in a quiet disclosure, the non-compliant taxpayer only files the current year’s FBAR.

Current International Tax Enforcement of FBAR Compliance; Impact of FATCA

It is my argument that, in the current international tax enforcement environment, the quiet discloser strategy is likely to have a counter-productive effect and may actually lead to disastrous results later. So, what is so different about today’s world versus the one in 2007?

Two words summarize the difference: “UBS” and “FATCA”. The IRS victory in the UBS case in 2008 marked a radical change to the worldwide tax compliance and completely overthrew the traditional conception of the bank secrecy laws (at least, with respect to U.S. taxpayers). The IRS proved that it can get to U.S. taxpayers wherever they have their accounts despite the sovereign objections of other countries; most shockingly, the IRS proved it in a country the name of which was synonymous with “bank secrecy” for centuries. This is one of the reasons why the 2009 OVDP, 2011 OVDI and the current 2012 OVDP, 2014 OVDP programs (now closed) proved to be such a success.

If the UBS case seriously crippled the bank secrecy laws in Switzerland, the enaction of the Foreign Account Tax Compliance Act (“FATCA”) by the U.S. Congress in 2010 dealt a death blow to the bank secrecy laws worldwide with far reaching consequences. FATCA not only swept away the bank secrecy considerations in Switzerland, but the great majority of other jurisdictions such as Liechtenstein, Monaco, Jersey Islands, Lebanon, Panama, the various Caribbean islands, and other places where bank secrecy laws protected non-compliant U.S. taxpayers.

Moreover, by turning foreign banks into U.S. reporting agents who voluntarily report information on all of their U.S. accountholders, the IRS is gradually achieving its long-term goal of worldwide tax compliance with only a fraction of the costs that would otherwise be necessary if the IRS were to investigate each bank in the world individually (something that the IRS simply would not have the resources to do).

In such a tax enforcement environment, it is dangerously naive to expect prior FBAR non-compliance would not be discovered by the IRS – an assumption that forms the core of the quiet disclosure strategy.

Swiss Program for Banks; Willful and Criminal Penalties

In addition to the tectonic shifts in the international tax compliance as a result of the UBS Case and FATCA, the U.S. government pushed the concept of the “voluntary compliance” to the extreme through the U.S. Department of Justice (“DOJ”) Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks (the “Program”). In essence, this is a voluntary disclosure program for the Swiss Banks, where the Swiss Banks have to disclose information with respect to U.S. taxpayers in exchange for the DOJ”s promise not to sue them.

There is one particular aspect of the Program that I want to emphasize because of its relevance to the quiet disclosure strategy – the disclosure of U.S. accountholders goes back to August 1, 2008. This means that if a U.S. taxpayer with unreported Swiss accounts from 2008 made a quiet disclosure in the tax year 2009, his former non-compliance will be exposed by the Program.

Not only that, but, at this point, his prior non-compliance is likely to be considered willful and the prospect of gigantic willful civil and criminal penalties becomes almost imminent (especially, if his ability to enter the OVDP is hindered for one reason or another). See, for example, this passage from the FAQ instructions to OVDP: “When criminal behavior is evident and the disclosure does not meet the requirements of a voluntary disclosure under IRM 9.5.11.9, the IRS may recommend criminal prosecution to the Department of Justice” (see FAQ 16).

It is important to note that there are very good reasons to believe that the “Swiss Program for Banks” scenario is likely to be repeated elsewhere with uncertain look-back periods.

FBAR Quiet Disclosure Is Likely to Lead to Untenable Willful FBAR Non-Compliance in the Event of IRS Discovery

Now, we are approaching the core reasoning behind my earlier argument that quiet disclosure is similar to playing a Russian roulette. We have already established that the possibility of the IRS discovery of prior non-compliance has become increasingly likely under FATCA. We have also determined that willful failure to file an FBAR under the quiet disclosure strategy may lead to the imposition of willful civil and, possibly, criminal penalties. Finally, we also considered that a third-party disclosure (most likely, a bank that discloses under FATCA or the Program) is likely to prevent the taxpayer from entering the OVDP.

The effect of putting these three propositions together is obvious and explosive at the same time: engaging in a quiet disclosure policy may result in the discovery of prior FBAR non-compliance, such non-compliance is likely to be considered by the IRS as willful, and the taxpayer is likely to lose the safe harbor of the OVDP. The end result may be absolutely disastrous: FBAR willful civil penalties of up to $100,000 per account per year with potential FBAR criminal penalties (huge monetary penalties and incarceration).

The IRS has stated this openly in its FAQ instructions to the OVDP: “Taxpayers are strongly encouraged to come forward under the OVDP to make timely, accurate, and complete disclosures. Those taxpayers making ‘quiet’ disclosures should be aware of the risk of being examined and potentially criminally prosecuted for all applicable years” (see FAQ #15).

Contact Sherayzen Law Office of Professional Help With Your Offshore Voluntary Disclosure of Foreign Assets and Foreign Income

If you have undisclosed foreign account or other assets, do not fall prey to the Russian Roulette quiet disclosure solution.

Rather, you should contact the international tax law firm of Sherayzen Law Office. We are a team of experienced tax professionals who have an expertise in the offshore voluntary disclosure of offshore assets and income. We can help you.

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