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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 werent 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.
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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 20022008 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 wont 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.)
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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 hasnt 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 Im wrong and the IRS doesnt 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