The federal Offshore Voluntary Disclosure Initiative (OVDI) ended on September 9, 2011.  This means that taxpayers with unreported foreign bank accounts have to make some tough choices about how to proceed if they intend to voluntarily disclose those accounts to the IRS. 

2011 OVDI Recap

OVDI offered immunity from criminal liability for a taxpayer’s noncompliance with the Report of Foreign Bank and Financial Accounts (commonly known as “FBAR”) in exchange for automatic penalties of 25 percent, 12.5 percent or 5 percent of the amount held in the foreign account depending the taxpayer’s particular situation.  While the IRS did not extend the OVDI deadline beyond September 9, 2011, taxpayers with undisclosed foreign bank accounts can still apply for relief under the Traditional Voluntary Disclosure Program at any time. 

Traditional Voluntary Disclosure Program

For decades, the IRS has followed essentially the same general policy regarding criminal and civil penalties for failing to disclose a foreign bank account pursuant to FBAR.  With regard to the criminal side, that policy holds that the voluntary disclosure of a foreign bank account will not itself guarantee criminal immunity but will be considered, along with all the other factors in the case, in deciding whether to recommend criminal prosecution.  In the overwhelming majority of cases, the IRS does not criminally prosecute taxpayers who willingly disclose information about their foreign account before they are discovered by the IRS.

Criminal penalties aside, the IRS can levy a wide array of civil penalties under the Traditional Voluntary Disclosure Program.  For instance, a taxpayer who comes forward for negligently failing to disclose his or her offshore account may be responsible for paying an assessment of $10,000 for each tax year beginning in 2005.  Additionally, the IRS can impose an assessment as high as the greater of $100,000 or 50 percent of the value of the undisclosed foreign account per violation and per year against a taxpayer who willfully fails to disclose his or her foreign bank account. 

Benefits of the Traditional Voluntary Disclosure Program

The fact that there is no formal OVDI-like penalty schedule under the Traditional Voluntary Disclosure Program may actually benefit a disclosing taxpayer.  Because there are no set penalties under the Traditional Voluntary Disclosure Program, the IRS must review the taxpayer’s particular situation and levy what they consider to be the appropriate tax assessments allowed under the FBAR.  If the taxpayer disagrees with this outcome and refuses to pay the FBAR assessment, the IRS must file a civil action in Federal District Court and pursue a judgment to recover from the taxpayer.  The IRS wants to avoid litigation because it is time consuming and expensive so they may be willing to offer a reasonable settlement following a refusal to pay an assessment.  Additionally, a recent case out of the Eastern District of Virginia (United States v. Williams found here: http://docs.justia.com/cases/federal/district-courts/virginia/vaedce/1:2009cv00437/241710/55/0.pdf) illustrates that that the IRS may encounter considerable resistance from the courts in pursuing the current FBAR assessment formula related to the willful failure to disclose a foreign bank account.  This case might also persuade the IRS to offer a more favorable assessment or settlement, or it might encourage the IRS to charge more people criminally.  

Drawbacks of the Traditional Voluntary Disclosure Program

The Traditional Voluntary Disclosure Program lacks the predictability of no criminal prosecution and civil penalties found in the 2011 OVDI.   However, with the right combination of strategy, experience and representation, the IRS may offer settlement packages that are far more attractive than the OVDI program. 

It is vital that you seek advice from an experienced tax attorney before disclosing a foreign bank account through the Traditional Voluntary Disclosure Program.  Every client’s facts and circumstances are unique and there are no easy cases in this post-OVDI world.  Call the Law Offices of Stephen Moskowitz, LLP today and get a team of experienced attorneys to advise and represent you. 

On August 26, 2011, the IRS extended the deadline for new applicants to the
OVDI program and to those previously admitted to the program but seeking
extension to:   September 9, 2011.    For those admitted to the program but
need more time to gather required documents, including but not limit to,
bank records, amended tax returns, FBAR forms, etc. for tax years 2003
through 2010, an extension until up to November 29, 2011 is possible.   It
is important to note there are specific steps to take to request an
extension and that the extension offered is not an automatic extension.   As
such, absent an approved IRS extension for the OVDI program or completion of
the program by the September 9, 2011 deadline, your rights may be affected.

The decision as to whether an individual should participate in the OVDI is
difficult; seek the assistance of a qualified attorney immediately.

Introduction

The recent crackdown by the Internal Revenue Service (IRS) on United Sates taxpayers with previously undisclosed foreign bank accounts and unreported foreign income has resulted in an unprecedented wave of criminal prosecutions. The IRS’ initiative may also result in criminal convictions and deportations of many United States noncitizen taxpayers.

This article discusses the immigration consequences of a tax crime conviction associated with failing to disclose an offshore account and failing to disclose foreign interest income.

This article begins with a brief history of federal prosecutions of U.S. citizens with unreported foreign accounts foreign accounts; it then discusses the typical federal tax crimes U.S. citizens and noncitizen taxpayers could be charged with when foreign bank accounts and foreign source income is not disclosed on a U.S. tax return; the article goes on to discuss how noncitizen taxpayers could potentially face deportation in connection with failing to disclose an offshore account and any applicable foreign interest. The article concludes with the importance of selecting a competent criminal tax attorney and potential strategies that may be utilized by a defense counsel to reduce the risk of deportation of a noncitizen in the context of an undisclosed foreign accounts and undisclosed foreign income.

Background

In July of 2008, the IRS issued a John Doe summons on United Bank of Switzerland AG (UBS) in Switzerland. The summons was a demand to UBS to receive information on United States taxpayers who held foreign accounts with that bank. On February 18, 2009, UBS entered into a deferred prosecution agreement with the U.S. Department of Justice. As part of the agreement, UBS has agreed to turn over in regards to approximately 500 U.S. holders of UBS accounts. The United States Department of Justice has opened criminal investigations of many of these account holders. On August 19, 2009, the United States and the Swiss government entered into an agreement in which to turn over information relating to additional U.S. holders of UBS accounts. The agreement reach on August 19, 2009 interprets the current United States and Switzerland tax treaty to allow the Swiss Government to turn over to the Department of Justice information in cases of “continued and serious tax offenses.” This agreement was approved by the Swiss Parliament and is expected to result in the disclosure of an additional 4,450 U.S. holders of UBS accounts.

During the 2010 calendar year, the IRS and the Department of Justice announced it will begin to pressure other foreign banks to disclose the names of U.S. account holders. The turnover of this information will likely result in the criminal prosecution by the U.S. Department of Justice of many individuals who previously failed to properly disclose offshore accounts and foreign source income.

On March 24, 2011, California’s “Voluntary Compliance Initiative II” was enacted as part of Bill 86, which was signed by Governor Jerry Brown. Under the terms of the Voluntary Compliance Initiative II, certain taxpayers with “hidden or disguised offshore accounts” are encouraged to amended their previously filed state tax returns and pay all tax interest in exchange from relief of certain California civil and criminal penalties. California residents who fail to participate in the amnesty program and are ultimately caught with unclosed foreign accounts or income are subject to criminal prosecution.

Reporting Requirements and Federal Tax Obligations of Noncitizens along with Potential Criminal Penalties

We will begin by discussing the income tax obligations of all noncitizen residents in the United States. Internal Revenue Code Section 7701(a)(30) provides a broad definition of the term “United States persons.” Section 7701(a)(30) provides that “United States persons” shall include all citizens of the United States as well as all residents of the United States. If a noncitizen of the United States resides in the United States, he or she can be characterized for federal income tax purposes as a “United States person.” The Internal Revenue Code goes on to say that all “United States persons” are required to disclose all their worldwide income, including income from all foreign sources. This includes interest income earned from foreign bank or financial accounts.

The Internal Revenue Code requires “United States persons” to disclose interests in foreign bank accounts and foreign source interest income on a Form 1040. For example, Part III of Schedule B of Form 1040 requires “United States persons” to check a box “yes” or “no” in regards to whether the individual at any time during the calendar year had “an interest in or signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account. This question then directs the individual to the form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR).

If a “United States person” fails to report income from a foreign financial account and fails to report the existence of an offshore financial account either on the Form 1040 and/or the FBAR, he or she is subject to a list of potential criminal penalties. First, an individual could be prosecuted for federal tax evasion. Tax evasion is defined as the willful attempt to defeat or evade a federal tax due and owing, or evasion of the payment of a tax assessed.¹ (Later in this article we will discuss the immigration law consequence if it is determined that the tax loss to the United States Government exceeds $10,000).

Second, the filing of a false tax return or making a false statement on a tax return may result in prosecution for filing a false tax return.² In order to be convicted of filing a false tax return, the IRS or Department of Justice must prove that an individual willfully signed and filed a tax return, or other document such as an FBAR that he or she did not believe to be true and correct in a material matter.³ A defendant may also be prosecuted for filing of a false tax return if the prosecution proves that the individual willfully aided or assisted in the preparation of a tax return, affidavit, claim, or other document that is fraudulent or false as to any material matter with knowledge that the document would be submitted to the IRS.⁴

Third, an individual could be charged in a conspiracy to defraud the United States. An individual can be charged in a conspiracy to defraud the United States if two or more persons agree to commit a substantive offense against the United States or to defraud the United States, and if the commission of the overt act was in furtherance of the conspiracy.⁵

Fourth, an individual may be criminally prosecuted for the willful failure to file an FBAR.⁶ If the failure to file occurs during the violation of another law or is part of a pattern of any illegal activity involving more than $100,000 in a 12-month period, there are increased criminal penalties.⁷

Finally, nonresident taxpayers that fail to disclose offshore income are subject to various penalties determined under state law.

Immigration Consequences of Federal Convictions for Tax Offenses

Individuals who are not United States citizens, including those lawfully admitted for permanent residence (green card holders) are subject to deportation from the United States based on certain criminal convictions, including a conviction for “aggravated felony.”⁸ An “Aggravated felony” is defined to include offenses that “(i) involves fraud or deceit in which the loss to the victim or victims exceeds $10,000; or (ii) is described in section 7201 of Title 26 (relating to tax evasion) in which the revenue loss to the Government exceeds $10,000.”⁹ Aliens in the United States, regardless of status, who are convicted of an aggravated felony are not eligible for review from deportation or asylum.¹⁰

As discussed above, a nonresident or alien residing in the United States must disclose their offshore account and income generated from that account on a U.S tax return annually. Failure to do so may result in the alien being convicted of at least one federal or state tax crime. If an alien were to suffer a criminal conviction for not disclosing a foreign account and/or foreign source income, not only could the alien face incarceration and serious fines, such a criminal conviction can result in loss of child custody, termination of pension benefits, and even deportation from the United States. Clearly, there are far broader implications for an alien convicted of a tax crime than for U.S. citizens. Consequently, it is crucial for all noncitizens with previously undisclosed foreign bank accounts or foreign source income to have proper competent legal counsel that can advise them about the immigration consequences of a criminal conviction associated with a tax crime.

Importance of Competent Counsel

Unfortunately, in many cases, criminal attorneys representing noncitizen taxpayers are not properly equipped with knowledge of immigration law to competently assist their clients. Such a case was highlighted in Padilla v. Kentucky, 130 S Ct. 1473 (2010). In Padilla v. Kentucky, a long-time lawful permanent resident was charged with drug offense. The defendant was charged with the transportation of marijuana in Kentucky state court. The defendant accepted a plea bargain after the defendant’s attorney assured that he did not have to worry about immigration status since he had been in the country so long.¹¹ In reality, the defendant’s plea bargain rendered him deportable with no opportunity for relief. The defendant attempted to challenge his guilty plea. The Kentucky court refused to allow the defendant to change his guilty plea and concluded that deportation was collateral to the plea and refused to allow the defendant to change his plea. The United States Supreme Court disagreed and overturned the lower state court.

What needs to be taken away from the Padilla is an attorney representing a noncitizen in felony type case needs to be well versed in immigration law. This is particularly the case when such an attorney is negotiating a plea agreement for his or her client and is advising the client in regards to a guilty plea. There are legitimate practical objections which require a defense counsel to tell noncitizen clients about when making a decision to plead guilty. These consequences tend to be scattered randomly throughout a jurisdiction’s code and regulations, and all too many criminal attorneys are unfamiliar with them. Justice Stevens, writing for a five-justice majority, held that “our law has enmeshed criminal convictions and the penalty of deportation… And, importantly, recent changes in our immigration law have made removal nearly an automatic result for a broad class of noncitizen offenders.”¹² As such, there is now a duty imposed on every criminal defense attorney representing noncitizen clients that pending criminal charges may result in deportation from the United States. Preserving the “client’s right to remain in the United States may be more important to the client than any potential jail sentence.”¹³ Criminal attorneys that represent noncitizens in matters involving the failure to properly disclose offshore bank accounts or foreign income must have a full understanding of immigration law.

Only criminal defense attorneys with an understanding of immigration law can best serve assure a positive outcome of such a case. Such an attorney can bring in the potential consequence of deportation in the process so the interests of his client are best served. In particular, defense counsel “may be able to plea bargain creatively with the prosecutor in order to craft a conviction and sentence that reduces the likelihood of deportation.”¹⁴

The lesson learned from the Padilla case is that all attorneys representing clients before the IRS, department of justice, or state taxing agency in matters involving previous undisclosed offshore accounts or foreign source income should inquire about the citizenship of their clients. In cases where an attorney is representing a noncitizen, the attorney should either be well versed in immigration law or associate with counsel who is competent in immigration law. The attorney must be prepared to immediately discuss the consequences of a criminal conviction with his or her client.

Defining Aggravated Felony

As discussed above, an aggravated felony results in automatic removal from the United States without any possibility of discretionary review by the immigration court. Generally, in the past, the immigration court was limited to looking to the language of the statute under which the defendant was convicted to determine whether the offense is an aggregated felony. The immigration court could not consider the underlying facts and circumstances of the case in which the defendant was convicted. Such a review was known as the “categorical approach.”¹⁵ Recently, the United States Supreme Court seemed to have relaxed this rule somewhat in Nijhawan v. Holder, 129 S. Ct 2294, 2300 (2009). In Nijhawan v. Holder, the United States Supreme Court discussed whether a defendant’s conviction for conspiracy to commit fraud was an aggravated felony under 8 U.S.C. Section 1101 Section 1101(a)(43)(M)(i). The Court ultimately decided that it was appropriate to examine the specific circumstances surrounding the defendant’s crime to determine the amount of the loss to the victim. The Court went on to say “the requirement that the offense was “in which was appropriate to examine the specific circumstances surrounding the defendant’s crime to determine the amount of the loss to the victim.¹⁶ Accordingly, in decided whether to remove a noncitizen, the immigration court will now look to the statutory language of the offense to determine whether it involved “fraud or deceit,” and then will analyze the record of the criminal proceeding to determine whether the offense involved a loss to the government of more than $10,000.

Applying this view of statutory interpretation, the Supreme Court has unambiguously classifies a conviction under Section 7201 in which a loss to the government exceeds $10,000. Consequently, if a noncitizen is convicted of the tax crime of willful attempt to defeat or evade tax due and owing, or evasion of the payment of a tax assessed, the immigration court will determine that the noncitizen committed an “aggravated felony.” With that said, the Supreme Court is silent as to whether any other tax crimes could be classified as an “aggravated felony. The Ninth Circuit Court of Appeals has weighed in on this controversy.

In Kawashima v. Holder, 593 F.3d 979, 985 (9th Cir. 2010), the Ninth Circuit Court of Appeals stated that the filing of a false return or the willful aiding or assisting in the preparation of a return or any other material matter to the IRS under Sections (1) and (2) of 26 U.S.C. Section 7206 necessarily involves fraud or deceit “because the provisions require the government to prove either that the defendant ‘willfully’ subscribed to a statement in a tax return he did not believe to be true, or that the defendant ‘willfully’ aided and assisted in the making of a false or fraudulent return”¹⁷ Given that 8 U.S.C. Section 1101(a)(43)(M)(i) has defined an “aggravated felony” to include an offense that involves “fraud or deceit,” noncitizens that are convicted under 26 U.S.C. Section 7206 which involves a loss of $10,000 or more in the 9th Circuit will likely be found guilty of an aggregated felony in the 9th Circuit.

Following the Ninth Circuit Court of Appeal’s position in Kawashima v. Holder, in the offshore context, the offense of failure to file an FBAR under 31 U.S.C. Section 5322 may also appear to involve fraud or deceit. The mens rea required for a conviction under Section 5322 is willfulness.¹⁸ The element of 8 U.S.C. Section 1101(a)(43)(M)(i) is likely satisfied of “fraud or deceit” because the knowing and intentional failure to file an FBAR can be characterized as the deceitful attempt to hide information from the government. Given that the mens rea required under Section 5322 seems to be in line with Section 1101(a)(43)(M)(i), it is possible a court in the Ninth Circuit will find a conviction under Section 5322 amounts to a aggravated felony.

How is Counsel to Proceed in Tax Cases?

The first step defense counsel should ask when representing nonresident in potential prosecution of a tax crime or the failure to disclose a foreign bank account is does the loss to the government exceed $10,000. If the tax loss involves tax loss to the government that exceeds $10,000 and relates to an offense described in Section 7201 or Section 7206 in the Ninth Circuit, counsel should be prepared to engage the prosecution early may attempt to structure a plea accordingly to avoid removal. Parties frequently agree on tax loss during plea negotiations, and under appropriate circumstances may be able to stipulate to a tax loss of not more than $10,000.¹⁹

Defense counsel will face a far more difficult task in representing a noncitizen defendant accused of other federal or state tax crimes that could be characterized as Section 1101(a)(43)(M)(1) offense. This is because defense counsel must be prepared to determine if the charged offense could be classified as an “aggravated felony.” In order to determine which if any federal or state tax crimes could be classified as an “aggravated felony” under 8 U.S.C Section 1101(a)(43)(M), we must look more closely at the statutory language of subsection (M). The Third Circuit Court of Appeals took the position determining whether any tax offense can be classified as an “aggravated felony” cannot “be answered solely by looking at the language (of subsection (M) itself.”²⁰ The Third Circuit went on to say subsection (M)(ii) clearly and unambiguously classifies a conviction under Section 7201 as an aggravated felony, but is silent as to any other tax offenses.

The Appeals Court than asked:

Why does subsection (M) include both a general provision encompassing “fraud and deceit” and a specific provision directed solely at the offense of federal tax evasion? If subsection (M)(i) applies to tax offenses(s), what is the purpose of subsection (M)(ii)? Does the juxtaposition of subsections (M)(i) and (M)(ii) signal an intent to exclude other tax offenses from the definition of aggravated felonies in (M)(i).²¹

The Third Circuit of Appeals determined that subsection (M)(i) is a general provision and subsection (M)(ii) is a specific provision that only applies to federal tax offenses. Under this analysis, specific provisions of the statute govern the general provisions of the statute. The majority in Third Circuit Court of Appeals stated in no uncertain terms tax evasion is the “capstone” of tax law.²² Consequently, in the view of the Third Circuit, only a Section 7201 offense could be characterized as an aggravated felony.²³

Then Appeals Court Judge Samuel Alito dissented from the majority on the ground that he believed subsection (M)(i) was unambiguous and that the offense of filing a false return is an act involving fraud or deceit. Judge Alito stated if Congress had not intended subsection (M)(i) to apply to tax offenses, Congress would have provided so in the statute. The Ninth Circuit Court of Appeals went on to follow Judge Alito’s dissent and determined that the filing of false tax returns under Section 7206 is an aggravated felony under subsection M(i). The Ninth Circuit Court of Appeals explained that “Congress has often realized its inability to anticipate every possible type of case, and may have added subsection (M)(i) to ensure that no tax evasion case fell outside subsection (M)’s definition of an aggravated felony.”

The lesson to be learned from Judge Alito’s dissent and the Ninth Circuit’s recent opinion in Kawashima v. Holder opinion is simple, unless defense counsel is representing a noncitizen taxpayer in the Third Circuit, counsel must be cognizant of the fact that any federal or even state tax crime involving a tax loss of over $10,000 can be determined to be an aggravated felony. As such, defense counsel should carefully consider whether the particular offense charged involves fraud or deceit and a tax loss of $10,000. This is the case for both federal and state tax crimes charged. In cases where the defendant has been charged with willfully failing to file an FBAR, defense counsel should attempt to avoid an aggravated felony designation by arguing that the act itself did not cause any loss to the government.

Only after defense counsel has closely examined all the facts of the case, should defense counsel begin meaningful dialogue with the prosecution. If possible, defense counsel should be prepared to distinguish the mens rea of the offenses that his or her client faces from that of Sections 7201 and 7206 of Title 26. Only after defense counsel has adequately prepared his or her defense should begin negotiations with the government.

1. See 26 U.S.C. Section 7201.
2. Unlike tax evasion under Section 7201, this federal tax crime does not have an element requiring a tax deficiency.
3. See 26 U.S.C. Section 7206(1).
4. See 26 U.S.C. Section 7206(2).
5. See 18 U.S.C. Section 371.
6. See 31 U.S.C. Section 5322(a).
7. See 31 U.S.C. Section 5322(b).
8. See 8 U.S.C. Section 1227(a)(2)(A)(iii).
9. See 8 U.S.C. Section 1101(a)(43)(M).
10. It should be noted that an alien may also be subject to deportation from the United States if he or she committed a felony involving moral turpitude within five years after the date of admission to the United States. See 8 U.S.C. Section 1227(a)(2). Some federal courts have held that tax fraud or tax evasion involves moral turpitude. However, unlike in situations of an aggravated felony, there is a specific date upon which an alien may no longer face deportation. In addition, an alien may petition the immigration court requesting a “cancellation of removal.”
11. 130 S.Ct at 1478.
12. 130 S. Ct. at 1481.
13. 130 S. Ct. at 1483.
14. 130 S. ct. at 1486.
15. See Singh v. Ashcroft, 383 F.3d 144, 147-48 (3d Cir. 2004).
16. 130 S. Ct. 736 (2009).
17. Id. At 983.
18. Willfulness means that the defendant acted with the knowledge that the conduct in question was unlawful.
19. This approach is limited by the need for the stipulation of facts accompanying a plea agreement to accurately portray the facts underlying the offense. See U.S.S.G. Section 6B1.4(a) (Stipulation of facts must “not contain misleading facts”). 
20. Lee v. Ashcroft, 368 F.3d 218 (3d Cir. 2004).
21. Id. At 222.
22. Id at 224.
23. Kawashima v. Holder, 593 F.3d 979, 985 (9th Cir. 2010).

For those taxpayers who are still considering whether to apply for amnesty under the 2011 Offshore Voluntary Disclosure Initiative (OVDI) or who have not yet completed the program, you should be aware that the August 31st deadline is not only to file the initial application to the program but also to submit the complete civil package that includes the amended income tax returns, delinquent FBAR's (Form TD F 90.22-1), bank statements, etc.

Recognizing that many people would have trouble meeting the deadline, in June 2011, the IRS announced an extension for compliance with the OVDI Program. The extension must be in writing by Aug 31, the taxpayer must have made a "good faith" attempt to comply by the deadline, and certain detailed information must be included.

It is important to note that the extension offered is not an automatic extension. As such, absent an approved IRS extension for the OVDI program, your rights may be affected.

The decision as to whether an individual should participate in the OVDI is difficult; seek the assistance of a qualified attorney immediately.

also see, http://stevemoskowitz.com/taxnews/post/2011/08/26/August-26-2011-IRS-extended-the-deadline-for-new-applicants-to-the-OVDI-Program.aspx

The Disclosure Dilemma

With the 2011 Offshore Voluntary Disclosure Initiative coming to a close on August 31, 2011, many U.S. citizens, green card holders, visa holders and other residents with undisclosed overseas accounts are wrestling with whether to disclose their foreign bank account(s) and other foreign financial activity. This includes those who have filed so-called “quiet disclosures” in the hopes that they will be overlooked by the IRS. Still yet, some people are deciding to gamble on the chance that the IRS will not ever discover their offshore accounts. But the civil and criminal penalties are severe for both non and quiet disclosure and taxpayers should understand these risks before passing on the benefits of the 2011 Offshore Voluntary Disclosure Initiative before it ends on August 31, 2011.

Quiet Disclosure

The IRS treats a quiet disclosure as a crime. A quiet disclosure occurs when a taxpayer files an amended return and pays taxes and interests on a previously unreported offshore account and otherwise does not notify the IRS. In past years, the IRS has not prosecuted taxpayers who file amended returns voluntarily through a quiet disclosure. However, the IRS has made it clear this time around that a quiet disclosure is not a disclosure at all. In fact, the IRS recently announced in a voluntary disclosure question and answer publication the following about quiet disclosures:

"Taxpayers are strongly encouraged to come forward under the Voluntary Disclosure Practice 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."

Local Disclosure

A local disclosure allows protection to taxpayers who have partial information required by the IRS for participating in the 2011 Offshore Voluntary Disclosure Initiative or otherwise have a case for forgiveness without paying the OVDI penalty of 25% of the highest balances. The tax lawyers at Law Offices of Stephen Moskowitz, LLP have helped many clients make local disclosures by providing what limited information the client has to the local IRS Criminal Investigation Division in an act of good faith. Depending on the situation, local disclosures of this nature may result in discounted penalties and fines. More importantly, local disclosure affords the taxpayer all the constitutional protections normally provided a person in a criminal proceeding.

Do Nothing?

Deciding not to participate in the 2011 Offshore Voluntary Disclosure Initiative is an extremely risky tactic. While you might save some money upfront in IRS taxes and penalties by not disclosing, ask yourself, is it worth the worry of being caught and facing a costly prosecution? Remember, willful failure to pay taxes on a qualifying offshore account could result in imprisonment of up to 10 years and financial penalties which could be far in excess of your investments and assets.

If you have unreported offshore income, stop “whistling past the graveyard” thinking you will not be discovered by the IRS. Let the experienced tax lawyers at the Law Office of Stephen Moskowitz, LLP assess your personal situation and explain to you your options so that you can make an educated decision. Call us today for a free, no obligation, attorney-client privileged consultation.

Can the IRS Automatically Assess a Penalty against a U.S. Taxpayer who Innocently or Mistakenly Failed to Disclose a Foreign Bank Account?

What happens in cases where a U.S. taxpayer innocently or mistakenly failed to disclose a foreign account and mistakenly failed to report foreign source income? Is such a taxpayer doomed to pay the 25 percent OVDI penalty? And if this taxpayer does not participate in the OVDI and notwithstanding potential criminal matters, is this taxpayer subject to a willful failure to report a foreign account penalty? The willful failure to disclose a foreign account penalty provides that a taxpayer could be penalized for 50 percent of the value of the undisclosed foreign account per year of omission. The statute of limitations on this penalty is six years. This means that the IRS could in theory assess a penalty that is three times the value of the foreign account or accounts against a U.S. taxpayer.

Before we begin our discussion on this matter, it is important for all our readers to understand that the 50 percent penalty for willfully failing to disclose a foreign account is not automatic. If a U.S. taxpayer innocently or mistakenly failed to properly disclose a foreign account, the maximum penalty is $10,000 per year starting in 2005, and there is a reasonable cause exception to remove or abate this penalty.

If a U.S. taxpayer deliberately established a foreign account to evade U.S. taxes, he or she could be subject to the 50 percent willful penalty or year. In order to avoid this draconian penalty, the taxpayer should elect to participate in the 2011 OVDI immediately. In other cases, whether a taxpayer chooses to apply for the OVDI may depend on whether there has been a willful violation of the law with respect to the non-filing of FBARS or failure to disclose and pay taxes on the foreign income. The decision on whether a taxpayer should or should not participate in the OVDI should be predicated for the most part on whether the failure to disclose the foreign account or accounts can be classified as willful. 

Willful is a legal concept, one which requires an affirmative act to evade or avoid a known legal requirement. Inadvertence negligence is not willfulness. In a recent case, United States v. Williams, 2010 Dist (ED VA 2010), a taxpayer sent $7.0 million to a Swiss bank account, checked the box “no” on Schedule B of Form 1040 stating that he did not have an interest in a foreign bank account. The taxpayer pled guilty to one count of tax fraud. The IRS claimed the taxpayer willfully violated the FBAR filing requirement and attempted to assess the 50 percent penalty. The court disagreed.

The court stated the willfulness meant a knowing or reckless violation of a standard, not just a couple instances of inadvertent neglect. The lesson to be learned from Williams is the failure to report a foreign account does not necessarily mean a taxpayer will be subject to the 50 willful penalty even if the taxpayer specifically checked a box on a tax return denying the existence of a foreign account. The decision in Williams represents an important first step toward imposing discipline to a government seeking to wrongful extract money from hardworking U.S. citizens who established or inherited foreign accounts and did not know of the requirements to disclose the account. Williams offers important protections for these individuals. Now since the IRS can no longer simply assess a 50 percent penalty against taxpayers for merely not disclosing a foreign bank account, in certain cases it may not make much sense to participate in the OVDI.

The decision as to whether an individual should participate in the OVDI is difficult. The individual should seek the assistance of a qualified attorney who can assist the individual in this process. In any case, whether or not the individual decides to enroll in the 2011 OVDI, the individual must amend his or her tax returns and report any previously undisclosed income. The returns should not merely be filed with the IRS, but in cases where the individual decides against participating in the program, this individual should request a traditional voluntary disclosure through a local IRS criminal investigation division. The disclosure should report all foreign source income that was previously omitted and a detailed written statement as to why all applicable FBAR or offshore penalties should not be assessed. Finally, the U.S. taxpayer making such a disclosure should be prepared to immediately satisfy all tax, interest, and penalties from the failure to disclose foreign source income. Remember, the Williams case offers a compelling defense against penalties associated with not disclosing a foreign account. However, Williams does not excuse a U.S. taxpayer from disclosing foreign source income that is required to be disclosed and paying all applicable tax on the previously undisclosed income.

If you searched for IRS OVDI, you are aware that the Department of Justice and the Internal Revenue Service have instituted massive campaignes in the last couple of years to find and collect tax on worldwide income, ivnestment, and assets.     As a result of these campaigns the DOJ and IRS designed the 2011 Offshore Voluntary Disclosure Initiateive.     The State of California has recently developed its own program.   

The federal program offers benefits to encourage taxpayers to disclose foreign accounts now, including but not limited to ownership interests in foreign entities such as corproations, partnerships, trusts, wire transfers, annuitities or life insurance plans, etc.  By participating, individuals may avoid the risk of IRS detection and criminal prosecution and mitigate severe monetary penalties.  The deadline for particiaption in this program is August 31, 2011.     

This 2011 OVDI may provide an excellent opportunity for individuals to come into ttax compliance and void serious punishments.   However, participation in the program may also result in an investigation and/or audit by the criminal investiagtion division of the IRS, in which full and complete dislosure and ooperation is essential in order to utilize this OVDI and not invite other possible criminal and civil actions.    Note that participation in OVDI does not offer amnesty for other crimes uncovered in the investigation.     Further absent full and complete disclosure and cooperation, the government may find cause for failure to supply information, false statements, etc.    Finally, while non-participation in the program may be a calculated avenue for some, it potentially leaves individuals vulnerable to criminal prosectuion for counts including but not limited to, FBAR violation, consipiracy, perjury, tax evasion, failure to supply information, etc.  

We are currently representing many individuals in light of the offshore disclosure inititatives and we invite you to contact us.

The U.S. Department of Justice has a mission statement:  To enforce the law and defend the interests of the United States according to the law; to ensure public safety against threats foreign and domestic; to provide federal leadership in preventing and controlling crime; to seek just punishment for those guilty of unlawful behavior; and to ensure fair and impartial administration of justice for all Americans.

While the intention of the Department of Justice is to protect American citizens, many honest U.S.  residents may be targeted for criminal tax fraud.  The Tax Division of the Department of Justice is pursuing  U.S. foreign account holders as criminal tax evaders, regardless of their intent to defraud the government of owed taxes.  In 2008, a report from the Senate determined that these unreported accounts cost the U.S. Treasury in excess of $100 billion annually.

In August 2009, an agreement was negotiated between the Swiss government and the U.S. Tax Division that eliminated the secrecy of foreign accounts held by U.S. taxpayers in Swiss banks. Under the agreement, the IRS will receive information on accounts of various amounts and types, including bank-only accounts, custody accounts in which securities or other investment assets were held, and offshore company nominee accounts through which an individual indirectly holds beneficial ownership in the accounts. Continuing the crackdown on secret accounts, in April 2011 the U.S, government received permission to authorize the IRS to request information from HSBC Bank USA, N.A. about U.S. residents who may be using accounts at The Hong Kong and Shanghai Banking Corporation in India (HSBC India) to evade federal inc ome taxes.  HSBC Bank will continue to be  closely scrutinized, as account holders living in the U.S. have entered tax evasion guilty pleas in recent weeks.

Published statistics from the Justice Department show that approximately 150 grand jury investigations of offshore-banking clients have been initiated, of which 30 cases have been charged, with 24 guilty pleas having been entered, 2 convicted after trial, and 4 awaiting trial. Those who assisted clients with hiding assets are not immune to the law and many been indicted, charged, and await trial.  Further, the governement is uncovering additional cases by investigating and prosecuting OVDI cases and hold outs.

All of the civil and criminal litigation publicity has not gone unnoticed by U.S. taxpayers with foreign bank accounts.  With Swiss bank secrecy gone, a voluntary initiative to “come clean” brought in close to 18,000 taxpayers in 18 months and hundreds of millions of dollars to the U.S. Treasury. The success of that initiative ending in February 2011 prompted the IRS to announce a second voluntary disclosure program that will end on August 31, 2011.  

The voluntary disclosure programs combined with the Tax Division’s civil and criminal litigation efforts have given the IRS the opportunity to procure significant additional information about tax fraud and those that promote it. The government is aggressive and will only be increasing efforts to find those who believe they are above the law in tax matters.

Individuals and companies in the United States are required to account for income and pay appropriate taxes on foreign investments.  This is not a new tax requirement, just one that readily enforced by the Internal Revenue Service. The Department of Justice is seeking maximum enforcement.  

The Commissioner of the IRS continues to reiterate that combating international tax evasion is of top importance and that pursuit of those who use international borders to cheat honest taxpayers will continue.  The tax treaty between the U.S. and Swiss governments finalized in August 2009 disabled the secrecy of many foreign banks thus making account holder information readily available to the U.S. Treasury and IRS.  

As a result, on February 8, 2011, the Internal Revenue Service (IRS) announced the 2011 Offshore Voluntary Disclosure Initiative (OVDI) for taxpayers with unreported foreign financial accounts, entities, or income. This initiative is the second compliance program administered by the IRS; the previous amnesty successfully brought in hundreds of millions of dollars and over 1500 particapants avoided criminal prosecution.

Taxpayers that wish to participate in the 2011 OVDI have only until August 31, 2011 to complete all requirements of the program. Participants in the OVDI will be required to disclose all foreign income, foreign bank accounts, and ownership interests in foreign entities to the IRS for the 2003 through 2010 tax years. There is a formal disclosure process, including but not limited to, filing amending tax returns and filing all required information tax returns. The information returns must disclose all foreign bank accounts and interests in foreign entities such as corporations, partnerships, and trusts. The participant must also pay the tax, interest, and penalties by August 31, 2011. If an individual cannot pay all tax, interest, and penalties for the 2003 through 2010 tax years, in certain circumstances, the IRS may be willing accept monthly payment arrangements. 

There are many requirements to qualify for this program, including but not limited to, a timely disclosure.   This 2011 OVDI is not for all U.S. individuals with foreign bank accounts and assets.  Upon consultation we can determine if participation would be beneficial and further advise you as to your situation.  

We have many years of substantial experience with the voluntary disclosure program, international tax issues, and related matters in advice, execution, and legal defense. If you have any questions or concerns regarding foreign business or investments, foreign bank accounts, reporting issues and amnesty programs please contact us.

IRS TARGETS HSBC

Recently, the Justice Department requested a federal court to force the London-based bank, Hongkong and Shanghai Banking Corporation (HSBC), to disclose the names of account holders who they suspect are evading taxes by hiding their money in offshore accounts in India. The Justice Department wants information regarding 9,000 U.S. residents holding high-value accounts through HSBC India from 2002 to 2010. The federal district court granted the Justice Department’s request on April 7th and the IRS was given permission to serve a “John Doe” summons on HSBC Bank USA. A John Doe summons is used when the government does not know the true name of the taxpayer under investigation and therefore substitutes his name for John Doe.

Other Banks the Target of IRS

HSBC is not the only foreign banking institution being currently scrutinized by the IRS and Justice Department. Swiss Cantonal Banks and Credit Suisse are also on the government’s list, and we believe that there are more to come. Due to the loss of tax revenue owed to the recession, the IRS has recently expended more resources to enforce disclosure and tax payments from foreign account holders.

UBS was Focus of IRS in 2009

Swiss bank UBS was the target of the IRS’ legal action in 2009. UBS paid $780 million in a legal settlement after the IRS accused it of assisting thousands of Americans with committing tax fraud. It also furnished information regarding thousands of its account holders. Some of those and other account holders were given the opportunity to participate in voluntary disclosure programs rather than be subject to investigation and/or prosecution.

Offshore Accounts Must Be Disclosed

Residents of the United States are not committing a crime by keeping their wealth in offshore accounts. However, offshore account holders are violating the law if they do not make the appropriate annual disclosures to the IRS and fail to pay annual taxes on any income from such accounts. Specific accounts holding certain amounts of money must be disclosed, generally on IRS Form 90-22.1 (Report of Foreign Bank and Financial Accounts, “FBAR”), and any person with money in a foreign bank account should be sure to know what is required of them to avoid any wrongdoing.

In addiition to the filing of the FBAR (see what is an FBAR), the US Department of Treasury also requires individuals holding interests in certain foreign assets with an aggregate value of over $50,000 will have to attach to their tax returns an addtional disclosure statement.  Additional penalties will be assessed for failure to make the required disclosures.

Amnesty Programs for Offshore Holdings

One option that foreign account holders have is taking advantage of the 2011 Offshore Voluntary Disclosure Initiative (see Unreported Offshore Accounts post) created by the IRS, which will run through the end of August 2011. California’s Franchise Tax Board was also given authority to institute a voluntary compliance initiative (see Voluntary Compliance Initiative) for the months of August, September and October of this year. California’s initiative will have important differences from the federal 2011 Offshore Voluntary Disclosure Initiative and disclosure under both programs should be completed only after extensive research or consultation with a legal tax professional.

We have represented and currently represent hundreds of clients with offshore accounts. Special reporting and disclosure requirements exist for offshore investments. The IRS is currently offering an Amnesty Program (2011 OVDI). The 2011 OVDI may limit criminal prosecution and civil penalty exposure to taxpayers with undisclosed offshore accounts and assets. Absent a disclosure agreement, taxpayers discovered with unreported foreign bank accounts, unreported foreign income, and certain undisclosed foreign assets face the possibility of paying harsh penalties such as: 1) a penalty for failing to report a foreign account which could be as high as the greater of $100,000 or 50 percent of the total balance of a foreign account in each year held; 2) a fraud penalty equal to 75 percent of an unpaid tax; and 3) penalties for the failure to file information returns. Furthermore, individuals with undisclosed foreign income and accounts face the possibility of criminal prosecution. Relevant processes and procedures seem to change frequently and timing is critical as certain programs will likely not be available after August 31, 2011.

Many taxpayers will decide to participate in the OVDI based on a personal desire to come into compliance now that they are aware of the FBAR and other foreign account reporting requirements. Others recognize an opportunity to repatriate stagnant foreign funds into a domestic recessionary economy or may simply want to move on with their lives. The ability to properly advise a client regarding participation in the 2011 OVDI requires an understanding of the potentially applicable foreign-related penalties for nonparticipants, the historic IRS and Department of Justice voluntary disclosure practice and policies, and a healthy respect for the ongoing governmental international tax enforcement efforts within a shrinking global community.

Understand and benefit from your rights. If you have any questions or concerns regarding foreign income, foreign bank account(s), reporting issues, the amnesty program, or any other legal issue, we urge you to call (415) 394-7200 and schedule a complimentary attorney-client privileged consultation.