offshore voluntary disclosure lawyers Minneapolis

Offshore Accounts Disclosure and John Doe Summons

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If a taxpayer is about to conduct a voluntary disclosure of his offshore accounts, a question arises about his eligibility to do so in a situation where the IRS already served a “John Doe” summons or made a treaty request seeking information that may identify a taxpayer as holding an undisclosed foreign account or undisclosed foreign entity. The answer is that it depends on the timing of the disclosure.

Background Information

In an earlier article, I discussed the Offshore Voluntary Disclosure Program (OVDP) now closed eligibility requirements. Specifically, I discussed the timeliness eligibility requirement of IRM 9.5.11.9 and how a failure to satisfy this requirement will prevent the taxpayer from conducting a voluntary disclosure.

Under IRM 9.5.11.9, a voluntary disclosure is timely if it is received by the IRS before either of the following events occurs:

(a) the IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation. Notice, it is not relevant whether the IRS has initiated a civil examination which is not related to undisclosed foreign accounts or undisclosed foreign entities – either of the two, civil examination and criminal investigation, will prevent OVDP participation;

(b) the IRS has received information from a third party (e.g., informant, other governmental agency, or the media) alerting the IRS to the specific taxpayer’s noncompliance;

(c) the IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer; or

(d) the IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena).

General Analysis

For the purposes of this essay, John Doe summons and treaty requests most likely fit the situation described in paragraph (b). Hence, the main criteria regarding the taxpayer’s eligibility to conduct voluntary disclosure of his offshore accounts in such situations would be whether the IRS already received information under the John Doe summons, treaty request or other similar action and whether the information is sufficiently specific.

For example, the mere fact that the IRS served a John Doe summons, made a treaty request or has taken similar action does not make every member of the John Doe class or group identified in the treaty request or other action ineligible to participate.

On the other hand, if the IRS or the U.S. Department of Justice already obtained information under a John Doe summons, treaty request or other similar action that provides evidence of a specific taxpayer’s noncompliance with the tax laws or FBAR reporting requirements, that particular taxpayer will become ineligible for OVDP and Criminal Investigation’s Voluntary Disclosure Practice.

Contact Sherayzen Law Office for Help With Offshore Voluntary Disclosure

Based on the analysis above, it is evident that a taxpayer concerned that a party subject to a John Doe summons, treaty request or similar action will provide information about him to the IRS should apply to make a voluntary disclosure as soon as possible.

This is why you should contact Sherayzen Law Office. Our experienced international tax law firm can help you with the entire voluntary disclosure process, including initial assessment of your FBAR liability, determination of available voluntary disclosure options, preparation of all of the required legal and tax documents, and rigorous representation of your interests during your negotiations with the IRS.

Failure to Conduct Voluntary Disclosure and Potential Penalties: 2013 Update

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Failure to conduct voluntary disclosure may mean heavy penalties for U.S. taxpayers are not in compliance with international tax laws established by U.S. government. In this article, I summarize some of the key penalties that such non-compliant U.S. taxpayers may face once the IRS finds them.

Penalties in General

In general, if the IRS verifies that a taxpayer failed to disclose his offshore financial accounts and foreign entities (and the income from these sources), the taxpayer may be subject to severe civil and criminal penalties. In addition to income-related accuracy related penalties, the IRS may also assess additional fraud-related penalties, FBAR penalties and foreign asset reporting penalties (with interest). Combined, all of these penalties and interest may exceed the actual value of nondisclosed assets and foreign bank accounts. In the worst-case scenario, a criminal prosecution may be initiated against such noncompliant taxpayers.

Finally, the voluntary disclosure process – which would otherwise be a far less painful way to deal with this problem – is automatically unavailable for taxpayers as soon as they are subject to IRS investigation.

Let’s discuss the penalties in more detail.

Accuracy-Related and Failure to File and Pay Penalties

An accuracy-related penalty on underpayments is imposed under IRC § 6662. Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty.

If a taxpayer fails to file the required income tax return, a failure to file (“FTF”) penalty may be imposed pursuant to IRC § 6651(a)(1). The penalty is generally five percent of the balance due, plus an additional five percent for each month or fraction thereof during which the failure continues may be imposed. The total penalty will not exceed 25 percent of the balance due.

If a taxpayer fails to pay the amount of tax shown on the return, a failure to pay (“FTP”) penalty may be imposed pursuant to IRC § 6651(a)(2). The penalty may be half of a percent of the amount of tax shown on the return, plus an additional half of a percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding the total of 25 percent of the balance due.

Fraud Penalties

Fraud penalties may imposed under IRC §§ 6651(f) or 6663. Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that may essentially amount to 75 percent of the unpaid tax.

FBAR Penalties

The most severe civil penalties are likely to come from non-compliance with FinCEN Form 114 formerly Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts, commonly known as an “FBAR”) non-compliance. Generally, the civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign account per violation (see 31 U.S.C. § 5321(a)(5)). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation. For more detailed discussion of the FBAR civil penalties, I refer you to this article.

Form 8938 Penalties

Form 8938 is a newcomer to the world of tax penalties. The Form was born out of the HIRE and came into existence only starting the tax year 2011. Generally, failure to file Form 8938 carries a penalty of $10,000; however, other additional penalties may be applicable (for more detailed discussion of Form 8938 penalties, please read this article).

Penalties for Failure to File Other Information Returns

In addition to these common penalties, additional penalties may apply depending on the particular circumstances of the non-compliant taxpayer. I will summarize a few key penalties here.

Form 5471

If the taxpayer belongs to one of the four categories of required filers of Form 5471 (Information Return of U.S. Persons with Respect to Certain Foreign Corporations) and he fails to do so, he generally faces a penalty of $10,000 for each return. For a more detailed discussion of Form 5471 penalties, review this article.

Form 8865

Where the taxpayer is required to file Form 8865 (Return of U.S. Persons With Respect to Certain Foreign Partnerships) and he fails to do so, the non-compliant taxpayer generally faces a $10,000 per each unfiled return with additional penalties possible. If the taxpayer transferred property to a controlled foreign partnership and he fails to file Form 8865, he faces additional penalties of 10 percent of the value of any transferred property; the penalty is limited to $100,000. Please, review this article for a more detailed discussion of Form 8865 penalties.

Other Common Information Returns

Depending on a taxpayer’s situation, he may face additional penalties for failure to file Forms 926, 3520, 3520-A, 5472 and other forms.

Criminal Prosecution

In the worst-case scenario, a criminal prosecution may be conducted by the IRS. Huge penalties and potential jail time are the possible in case of tax evasion.

Possible criminal charges related to tax returns include tax evasion (26 U.S.C. § 7201), filing a false return (26 U.S.C. § 7206(1)) and failure to file an income tax return (26 U.S.C. § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322 (see this article for discussion of the FBAR criminal penalties)

A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.

Contact Sherayzen Law Office for Help With Offshore Voluntary Disclosure

If you have undisclosed offshore accounts or foreign entities, contact Sherayzen Law Office for help as soon as possible. We are an international tax law firm that specializes in helping U.S. taxpayers in the United States and throughout the world to avoid the nightmare scenario and properly conduct disclosure of offshore assets, foreign bank accounts, foreign entities and unreported foreign income to the IRS.

If you believe that you may not be in full compliance with U.S. tax laws, the worst course of action is to do nothing and wait for the IRS to discover your noncompliance. Once this happens, your options are likely to be severely limited and the penalties a lot higher. Therefore, contact us so that we can help you with your international tax problems. Remember, all calls and e-mails are confidential.

2012 OVDP: Principal Purpose of the Program

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As 2012 OVDP (Offshore Voluntary Disclosure Program) now closed enters its second tax season, it is important to review once again the reasons behind the existence of the program, what it offers to the IRS and how it may benefit currently non-compliant U.S. taxpayers.

Focus on International Tax Compliance

Since 2003, the IRS has conducted a number of voluntary disclosure programs for U.S. taxpayers with undisclosed foreign accounts or entities and undisclosed income. It is important to emphasize that these programs were not part of the traditional IRS voluntary disclosure program with respect to domestic income. The focus of each offshore voluntary disclosure program is on international tax compliance, particularly Report on Foreign Bank and Financial Accounts (the “FBAR”) and other informational returns such as Forms 5471, 8865, 8868 and so on.

It is important to note that with each new program the rules are becoming more and more stringent as well as complex. The idea behind the tougher terms of each succeeding program is to reward early disclosure and induce taxpayers to enter a voluntary disclosure program as soon as possible.

2012 OVDP

The 2012 OVDP came into existence less than half a year after the tremendous success of the 2011 OVDI (which also came two years after a very profitable 2009 OVDP). It is obvious that the IRS considered the existence of such voluntary disclosure programs a vital part of its international tax compliance efforts.

As expected, 2012 OVDP came in with tougher terms (for example, the highest penalty category is 27.5% instead of 25% as it was under 2011 OVDI rules), closed some 2011 OVDI loopholes and created a more complex and detailed set of rules. However, 2012 OVDP also has some unique features.

The most prominent of these features is that there is no official end to the program – this is the very first time in the history of the voluntary disclosure programs. At the time, the IRS warned that it can end the program at any time, creating a great sense of uncertainty and urgency for the taxpayers who wish to enter the program.

Why the IRS Created the 2012 OVDP

The most obvious reason (and the most repeated one in various articles by commentators) for why the IRS wants a voluntary disclosure program like 2012 OVDP in place is money – these programs brought in billions of dollars to the U.S. treasury. While this is an important reason, I believe that the reasoning behind the 2012 OVDP is much more complex.

In addition to bringing more money to the cash-starved U.S. government and allowing people to become tax-compliant with the understanding that their penalties will be definite and limited, there are two other primary reasons behind the 2012 OVDP and all other similar voluntary disclosure programs. First, the voluntary disclosure programs have a tremendous collateral impact on the overall international tax compliance. The collateral effect is reflected not only in assuring that the persons who go through the voluntary disclosure are likely to continue to comply with U.S .tax laws in the future, but also in the tremendous publicity of the program and the U.S. tax laws.

However, the most curious collateral product of the 2012 OVDP is the fear that induces wider tax compliance and more entrees into the voluntary disclosure program. It seems paradoxical that a voluntary disclosure would create this apprehensive feeling, but it is very logical once you understand that this is not a fear of the 2012 OVDP itself, but the terror of seeing widespread compliance which singles out the non-compliant taxpayers more and more with each new OVDP participant.

The second reason behind the voluntary disclosure programs is information gathering. Each 2012 OVDP participant brings a treasure trove of information about where they keep their money, the level of complicity by foreign banks, the particular foreign and domestic advisors involved in promoting international tax non-compliance, and other valuable information. This information allows the IRS to establish the overall patterns of non-compliance (both geographic and with respect to particular individuals and organizations), identify the next investigation targets and amass evidence for future prosecutions.

IRS is currently sitting on a mountain of data and it is inevitable that this information will be used in the future against non-compliant U.S. taxpayers and their foreign advisors. Already in 2012, we observed aggressive IRS moves in Liechtenstein and Israel as well as engagement of over 50 jurisdictions around the world regarding FATCA compliance. My prediction is that this trend of expanded enforcement into other countries will continue in 2013 and will result in larger number of prosecutions.

What is the Benefit of 2012 OVDP for U.S. Taxpayers

The 2012 OVDP does not only benefit the IRS, but also certain U.S. taxpayers. The benefit is at least three-fold. First, for certain U.S. taxpayers 2012 OVDP is the only way to avoid tremendous penalties and criminal prosecution by the IRS. Equally important is the fact that a taxpayer enters the OVDP program with an ability to calculate(with reasonable degree of certainty) the total cost of resolving all offshore tax issues. However, the decision to enter the OVDP must be made after all of the facts are analyzed and the taxpayer is aware of the consequences of entering the 2012 OVDP.

Second, while generally very rigid, the 2012 OVDP program has a certain degree of flexibility built into its penalty structure. The number of penalty categories and the various rules of the program allow international tax attorneys to determine the best mode of the voluntary disclosure and develop the strategies to implement this particular voluntary disclosure scenario.

Finally, 2012 OVDP allows international tax attorneys to determine the alternative voluntary disclosure ways. For example, Q&A #17 officially supports the long-standing unofficial policy of the IRS that no FBAR penalties are likely if there is additional U.S. tax liability as a result of voluntary disclosure. Moreover, the very fact that 2012 OVDP delineates certain analytical categories places additional tools for strategy development in the hands of the attorneys who seek alternative ways of bringing U.S. taxpayers into full compliance with U.S. tax laws under the existing legal structure outside of the 2012 OVDP.

Contact Sherayzen Law Office for Help with Voluntary Disclosure

If you have undisclosed foreign account or foreign entities, contact Sherayzen Law Office for help with your voluntary disclosure. Our experienced international tax firm will thoroughly analyze your case, assess your FBAR liability as well as other applicable penalties, identify the options available in your case, and work with you every step of the way until your voluntary disclosure is finished. We have helped taxpayers around the world to do various types of voluntary disclosures, including the official Offshore Voluntary Disclosure Programs and Initiatives.

IRS Increases Criminal Prosecutions for Willful Failure to File FBARs: U.S. v. Jacques Wajsfelner

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In U.S. v. Jacques Wajsfelner, the IRS’s criminal prosecution of the defendant for willful failure to file FBARs was completed when the defendant, Mr. Jacques Wajsfelner, decided to plead guilty. Mr. Wajsfelner pled guilty to willful failure to file the FBAR in Manhattan federal court and he now faces civil penalties of $2.84 million and restitution of $419,940. Under advisory guidelines, he faces 30 months to 37 months in prison at sentencing scheduled for December 20, 2012.

Basic Facts

Mr. Wajsfelner, an 83-year old Holocaust survivor, fled the Nazis as a teenager and became a U.S. citizen, working in real estate and advertisement in New York and Boston. He admitted that he held an account in his own name at Credit Suisse in 1995. In 2006, his advisor helped him open an account in the name of Ample Lion Ltd. At the end of 2007, the account held almost $5.7 million. In 2008, as Credit Suisse started to wind down its U.S. cross-border banking business, Mr. Wajsfelner opened an account with Wegelin and transferred the money from Credit Suisse to the new account. In the later years, the value on this account went down to only $4 million.

In addition to moving money among two accounts, Mr. Wajsfelner also made a huge error of not telling the truth to the IRS about the account, Ample Lion Ltd. (A Hong Kong corporation), and his advisor (Beda Singenberger’s corporation Sinco Treuhand AG) during an interview conducted by the IRS after the investigation commenced. As part of his plea agreement, the IRS agreed not to prosecute him for these statements.

In the end, Mr. Wajsfelner plead guilty to knowing and willful failure to file the FBARs from 2006 through 2011 with the IRS.

Additional Considerations

It is possible that the misleading and untruthful statements to the IRS alone may have been the cause for Mr. Wajsfelner to plead guilty. However, there was another highly unfavorable fact – moving the money between the accounts would have been considered as circumstantial evidence of conspiracy to conceal the money from U.S. government. Also, Mr. Wajsfelner maintained very close contact with the account and directed various transactions to and from the accounts.

Another important consideration is to understand that this is a case of pure willful failure to file the FBARs; there was no associated pleading with respect to tax evasion. This is a very important because it shows that the IRS is willing to prosecute FBAR cases criminally even without tax evasion charges.

US v. Jacques Wajsfelner is Part of a Wave of Prosecutions

U.S. v. Jacques Wajsfelner is not an isolated case or limited only to specific facts of Mr. Wajsfelner.

In addition to Mr. Wajsfelner, the IRS also indicted his former Swiss adviser, Beda Singenberger, on a charge of conspiring to help more than 60 U.S. taxpayers hide $184 million from the Internal Revenue Service in offshore accounts. Wegelin, the 270-year-old Swiss bank, was also indicted February 2, 2012, on charges of helping U.S. taxpayers hide money from the IRS. Also, Credit Suisse said in July of 2011 that it was a target of a U.S. criminal probe. On July 21, 2011, seven of Credit Suisse’s bankers were indicted on charges of helping U.S. clients evade taxes through secret accounts.

In fact, since 2009, U.S. prosecutors have criminally charged about fifty U.S. taxpayers and more than twenty offshore bankers, lawyers and advisers.

FBAR Criminal Prosecutions Will Increase Due to Voluntary Disclosure Programs

It is critically important for non-compliant U.S. taxpayers to understand that, instead of subsiding, this wave of IRS criminal prosecutions regarding the FBARs will only increase.

The primary reason for this growth of FBAR prosecutions are the voluntary disclosure programs, like 2009 OVDP, 2011 OVDI AND 2012 OVDP (now closed). For many years now, the IRS has been collecting detailed information from the participating taxpayers regarding their advisors, banks and other U.S. taxpayers. This mountain of information allows the IRS to identify high-risk banks, advisors as well as specific taxpayers who are likely to be non-compliant with U.S. tax rules. The end-product of this analysis are targeted investigation and, ultimately, criminal prosecutions of non-compliant U.S. taxpayers and their advisors.

Contact Sherayzen Law Office for Legal Help With FBARs

If you have undisclosed foreign financial accounts that should have been reported to the IRS, contact Sherayzen Law Office as soon as possible. Our experienced tax firm will analyze the facts of your case, identify you potential FBAR liability and propose a specific course of action to deal with your specific situation. Sherayzen Law Office will guide you though your entire voluntary disclosure, including the preparation of all of the necessary tax documents and rigorous IRS representation.

United Kingdom Signs Bilateral Agreement to Combat Offshore Tax Evasion and Implement FATCA

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On September 14, 2012, the U.S. Department of the Treasury announced that it has signed a bilateral agreement with the United Kingdom to implement the information reporting and withholding tax provisions commonly known as the Foreign Account Tax Compliance Act (FATCA). Enacted by Congress in 2010, these provisions target non-compliance by U.S. taxpayers using foreign accounts. The bilateral agreement signed this week is based on the model published in July of this year and developed in consultation with France, Germany, Italy, Spain, and the United Kingdom and marks an important step in establishing a common approach to combatting tax evasion based on the automatic exchange of information.

“Today’s announcement marks a significant step forward in our efforts to work collaboratively to combat offshore tax evasion,” said Treasury Assistant Secretary for Tax Policy Mark Mazur. “We are pleased that the United Kingdom, one of our closest allies, is the first jurisdiction to sign a bilateral agreement with us and we look forward to quickly concluding agreements based on this model with other jurisdictions.”

The Treasury Department is in communication with several other governments who have expressed interest in concluding a similar bilateral agreement to implement FATCA and expects to sign additional bilateral agreements in the near future.

Contact Sherayzen Law Office for Help With Disclosing Offshore Financial Accounts

If you have undisclosed foreign bank and financial accounts, contact Sherayzen Law Office for legal help. Our experienced international tax firm will examine your case, suggest the proper course of action, prepare all of the documentation necessary for your voluntary disclosure and defend your interests during negotiations with the IRS.