Another IRS Offshore 'Amnesty' Program Coming?

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The IRS has
never granted a general tax amnesty. However, it has periodically
announced “limited amnesties” for U.S. taxpayers with
offshore investments or other arrangements not reported on their
tax returns.

During these
limited amnesties, the IRS has pledged not to impose criminal penalties
if a taxpayer meets certain requirements. The most important condition
is for taxpayers to provide complete information about any person
or entity that promoted any offshore scheme in which they participated.
This helps the IRS shut down promoters of offshore tax evasion schemes,
and also investigate the offshore banks involved in them.

Provided these
requirements are met, the IRS has also agreed not to pursue other
penalties against participating taxpayers, such as the statutory
penalty for willful failure to file Form TD F 90-22.1, the “foreign
bank account reporting form” (FBAR). This penalty is the greater
of $100,000 or 50% of the foreign account balance that applies annually
to undisclosed accounts and/or assets in them during the relevant
years the accounts weren’t disclosed. However, all back taxes
and interest still apply, along with possible civil penalties (discussed
momentarily).

The first limited
amnesty relating to offshore tax compliance ended April 15, 2003.
In 2004, the IRS reported the program, had yielded over $170 million
in taxes, interest, and penalties. Subsequently, the IRS shut down
numerous promoters engaged in what the IRS believed to be tax evasion
schemes and seized their client lists.

The second
limited amnesty ended Oct. 15, 2009. Nearly 15,000 taxpayers took
advantage of the opportunity to avoid potential criminal prosecution.
As with the 2003 amnesty, a key condition for participation was
to identify the specific individuals and institutions that helped
taxpayers evade U.S. taxes.

In the 2009
limited amnesty, the IRS assessed a civil penalty equal to 20% of
the amount in foreign bank accounts and/or entities in the previous
six years. The 20% was calculated on the basis of the highest aggregate
account and/or asset value during that six-year period.

Unfortunately
for many delinquent taxpayers, the six-year period from 2002–2008
coincided with a huge drop in equity values worldwide. For instance,
an unreported offshore account worth a value of $1 million in 2007
might have been worth only $600,000 at the end of 2008. Yet, the
20% penalty would be assessed against the entire $1 million, increasing
the effective sanction to one-third of its value ($200,000 of $600,000).

I believe the
IRS is likely to declare another limited amnesty in coming weeks.
As with the 2009 amnesty, any future voluntary disclosure program
will likely require taxpayers with unreported offshore accounts
to come forward with full details of the arrangements, identify
banks and promoters involved, and pay all back taxes and interest.
The IRS is also unlikely to issue a binding guarantee that t criminal
charges won’t be filed. Rather, this will be evaluated on a
case-by-case basis, depending on whether the taxpayer fully cooperates
in the investigation.

Why would the
IRS declare another amnesty? Primarily because the sheer number
of taxpayers with unreported accounts is so large. In addition,
the publicity generated by the successful efforts of the IRS to
pry information out of Swiss banking giant UBS and possibly other
offshore banks will likely lead to an avalanche of “quiet disclosures”
by U.S. taxpayers. (In a quiet disclosure, a taxpayer simply files
amended returns and files the necessary forms, and pays all back
taxes and interest, as applicable.)

After a taxpayer
makes a quiet disclosure, thanks to the recently enacted “Foreign
Account Tax Compliance Act” (FACTA), the IRS has six years
to audit the amended return or returns. While the IRS will no doubt
audit many such returns in the next six years, it seems unlikely
it will be able to audit all or even most of them. The only realistic
alternative for the IRS to audit the large number of taxpayers “coming
in from the cold” is to offer some sort of limited relief from
the awe-inspiring penalties it has the authority to impose for unreported
offshore accounts and/or untaxed offshore income.

If the IRS
initiates another voluntary disclosure program, should you participate?
The answer is maybe, but only after you consult with a qualified
tax attorney (not an accountant). This arrangement provides attorney-client
privilege for your discussions. The tax attorney can then retain
an accountant to prepare the necessary returns, and decide whether
or not you should participate in the program.

Here are some
factors that you and your attorney should consider:

  • What additional
    taxes (if any) are due? Many taxpayers paid all taxes due on their
    offshore income and merely failed to file the relevant forms.
    In the case of the FBAR, in the most recent voluntary compliance
    initiative, the IRS pledged not to impose penalties for mere failure
    to file the FBAR, if no “tax loss” to the U.S. Treasury
    occurred.
  • Did you
    fail to make additional filings for, e.g., information reporting
    forms for foreign mutual funds, foreign corporations, and foreign
    trusts? Additional penalties apply for failure to file these forms,
    and the IRS hasn’t pledged to waive penalties for failure
    to file these forms.
  • How likely
    is it that the IRS can prove that you “willfully” failed
    to file the relevant forms? This may be more difficult to prove
    than you might think in light of a recent
    court decision
    in which a judge ruled that the IRS failed
    to meet the “willfulness” requirement.
  • How much
    of a loss did your account experience between its peak value in
    the last six years and the year in which you plan to make a voluntary
    disclosure? If the loss exceeds 50%, you may be no worse off making
    a quiet disclosure than participating in any future voluntary
    disclosure.

What if I’m
wrong and the IRS doesn’t declare another limited amnesty?
If you have unreported offshore accounts and/or other delinquent
offshore reporting obligations, you still need to deal with them.
The IRS is ratcheting up the pressure, and Congress has given it
greater and greater resources to ferret out untaxed and unreported
offshore accounts, income, and business relationships.

Reprinted
with permission from The Sovereign
Society
.

December
24, 2010

Mark Nestmann is a journalist with more than 20
years of investigative experience and is a charter member of The
Sovereign Society's Council of Experts. He has authored over a dozen
books and many additional reports on wealth preservation, privacy
and offshore investing. Mark serves as president of his own international
consulting firm, The Nestmann Group, Ltd. The Nestmann Group provides
international wealth preservation services for high-net worth individuals.
Mark is an Associate Member of the American Bar Association (member
of subcommittee on Foreign Activities of U.S. Taxpayers, Committee
on Taxation) and member of the Society of Professional Journalists.
In 2005, he was awarded a Masters of Laws (LL.M) degree in international
tax law at the Vienna (Austria) University of Economics and Business
Administration.

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