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Voluntary Disclosure
Guidance on helping US clients with unreported ―offshore‖ accounts and entities

Hong Kong


Milan K. Patel, Esq.


New Haven

Overview with some questions to consider
 What are the issues?

 What is the IRS position?
 What is voluntary disclosure?  What are the differences between a ―noisy‖ and ―quiet‖ voluntary disclosure?  What are the risks?


The Issue


The US, which taxes its citizens and residents on their worldwide income, is concerned that US persons could use non-US financial accounts and financial structures to shelter assets from US taxation Since 1970, US law has required US persons to disclose their interests in non-US bank or financial accounts – but only recently has the US increased enforcement The US has long standing reporting requirements and anti-deferral tax regimes related to non-US fiduciary structures, business entities, and investments The investigations of UBS AG and LGT have sparked significant interest in uncovering unreported offshore accounts and entities beneficially owned by US taxpayers Many US taxpayers are now looking for advice to ensure that they are US tax compliant; in many instances, taxpayers may be seeking the most favorable way to redress previous noncompliance

   


Excerpts of Statement from IRS Commissioner Doug Shulman on Offshore Income - March 26, 2009

 My goal has always been clear — to get those taxpayers hiding assets offshore back into the system. We recently provided guidance to our examination personnel who are addressing voluntary disclosure requests involving unreported offshore income. We believe the guidance represents a firm but fair resolution of these cases and will provide consistent treatment for taxpayers. The goal is to have a predictable set of outcomes to encourage people to come forward and take advantage of our voluntary disclosure practice while they still can.
 For taxpayers who continue to hide their head in the sand, the situation will only become more dire. They should come forward now under our voluntary disclosure practice and get right with the government.

Voluntary Disclosure
 The IRS voluntary disclosure program permits US taxpayers to redress previous US tax non-compliance  Taxpayers who pursue a voluntary disclosure do so with the objective of avoiding criminal prosecution  The IRS has promulgated its voluntary disclosure practice in its Tax Crimes IRM  Initiating and executing a voluntary disclosure must be done with extreme caution  Voluntary disclosure should be done with the advice of a US qualified attorney who is familiar with the process, has experience in negotiating with the IRS, and can hire a forensic accountant under a ―Kovel‖ letter to preserve the attorney-client privilege


Voluntary Disclosure Requirements
 The taxpayer must communicate with the IRS in a manner that is truthful, timely, and complete  The taxpayer must willingly cooperate with the IRS in determining the taxpayer‘s correct tax liability  The taxpayer must make good faith arrangements with the IRS to pay in full the tax, interest, and any penalties the IRS determines to be applicable


Timeliness Requirement
 A voluntary disclosure is timely if it is received before
• 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 • • • The IRS has received information from a third-party alerting the IRS to the

taxpayer‘s non-compliance
The IRS has initiated a civil examination or criminal investigation of the taxpayer that is directly related to the specific liability of the taxpayer The IRS has acquired information regarding non-compliance of the taxpayer as the result of a criminal enforcement action


 Example of qualifying voluntary disclosure
• A letter from an attorney that encloses amended returns from a client, which are complete and accurate (reporting legal source income omitted from the original returns), which offers to pay the tax, interest, and any penalties determined by the IRS to be applicable in full, and which meets the timeliness requirement

 Example of non-qualifying voluntary disclosure
• A letter from an attorney stating his/her client, who wishes to remain anonymous, wants to resolve his/her tax liability. This is not a voluntary disclosure until the identity of the taxpayer is disclosed and all the elements of a voluntary disclosure are met


Voluntary Disclosure Limitations
 The IRS places several limitations on the ability of taxpayers to rely on the voluntary disclosure process
• A voluntary disclosure creates no substantive or procedural rights for taxpayers; rather, voluntary disclosure is a matter of IRS practice with informal internal guidelines


A voluntary disclosure does not automatically guarantee immunity from
prosecution However, a voluntary disclosure may result in prosecution not being recommended provided that the taxpayer has not derived income from illegal sources


Voluntary Disclosure for ―Unreported Offshore Accounts and Entities‖
 ―Amnesty‖ Program implemented as of March 23
• Through September 23, 2009

• •

Provides predictable outcomes
Minimizes criminal risks Taxpayer must be identified up front

 Taxpayer pays:

Taxes, Interest, and Accuracy or Delinquency Penalties (20% or 25%) for
past six years In lieu of all other penalties that may apply, a penalty of 20% on the highest aggregate account or asset value in the past six years

Reduced in certain limited instances to 5%

Noisy Procedure
Taxpayers can conduct a negotiated walk-through with an IRS Criminal Investigation Special Agent

 Allows taxpayer to take advantage of amnesty program  The noisy procedure involves direct contact by a taxpayer‘s attorney with an IRS Criminal Investigation Special Agent  The objective is to obtain assurance that if the taxpayer cooperates, the IRS will not recommend criminal prosecution or impose the maximum civil penalties, which could be imposed for civil fraud and ―willful‖ failure to file an FBAR  Resolution under the noisy procedure provides a high level of certainty that criminal prosecution will not be recommended  No longer anonymous


Steps in Noisy Procedure
 The taxpayer‘s attorney will run a social security number check with IRS to determine if taxpayer is eligible to initiate voluntary disclosure, i.e. timely  The taxpayer‘s attorney will complete due diligence and present to the IRS Special Agent all material facts regarding the non-compliance

 IRS reserves the right to interview taxpayer and related parties, although suggested IRS format letter signed by the taxpayer under penalties of perjury may in most cases be sufficient
 Receive recommendation of no criminal prosecution (typically, in the form of a written IRS Criminal Investigation clearance letter)  Once accepted into voluntary disclosure program, the case is referred to the civil side of the IRS for examination and resolution (typically, in the for of a civil Closing Agreement)


Obtaining recommendation of non-criminal prosecution
 The IRS carefully evaluates whether it will recommend a voluntary disclosure

submission for criminal tax prosecution
 Several factors the IRS will consider include
• • • • • Whether a dual or successive prosecution exists Whether solicitation of tax returns has already occurred The nature and extent of unreported income and the historical non-compliance The taxpayer‘s motive and intention for having engaged in non-compliance and for now seeking redress of past non-compliance The taxpayer‘s age, health, and mental condition

 Generally, recommendation for no criminal prosecution is being offered under

the current offshore amnesty program which ends 23 September 2009


Quiet Procedure
Taxpayers can make amended US tax return filings and wait for IRS action  The quiet procedure involves filing amended or unfiled US tax return filings along with additional forms, including FBARs  Typically, taxpayer submits statement regarding reasonable cause and penalty abatement  The objective is to ―quietly‖ provide complete and accurate amended or previously unfiled US tax filings to the IRS for the prior six (6) years, sometimes three (3) years, of non-compliance  The taxpayer must then wait and see if and how the IRS will respond to the amended filings


Selecting a Procedure
A taxpayer must carefully determine which is the better procedure  Some factors to consider include
• • • • Whether the chosen procedure can eliminate the possibility of criminal investigation and the client‘s level of risk aversion The length of time and amount of fees incurred in the procedure If and when the procedure will provide final resolution of the taxpayer‘s non-compliance Whether the chosen procedure exposes the taxpayer to investigation on other matters before the IRS


Increased IRS scrutiny in the future


Costs and Benefits of Noisy Procedure
 Benefits:
• • Higher level of certainty Taxpayer gets closure

 Costs:
• •

Longer negotiation period
Attorney involvement is greater More costly to pursue

 Taxpayers must be very selective in choosing an attorney to handle the matter; inadvertent disclosure of sensitive taxpayer information may be incredibly damaging


Costs and Benefits of Quiet Procedure
 Costs:
• Greater risk - taxpayer remains exposed to possibility of criminal investigation and any and all applicable civil penalties; in fact, filing amended (or unfiled) returns and FBARs may actually alert the IRS to the non-compliance (see next slide) • No closure for 6 years

 Benefits:
• Less time consuming initially (if not examined) • Less costly for the client initially (if not examined)


Risks of ―Quiet‖ Voluntary Disclosure
 Those taxpayers making ―quiet‖ disclosures should be aware of the risks of being examined and potentially criminally prosecuted for all applicable years
 The IRS is reviewing amended (previously unfiled) returns and could select any such return for examination  If a return is selected for examination, the 20 percent offshore penalty would not be available and all applicable penalties (including information return and FBAR penalties) will be imposed, which could be substantially greater than the 20 percent penalty

 When criminal behaviour is evident and the disclosure does not meet the requirements of a voluntary disclosure under IRM, the IRS may recommend criminal prosecution to the Department of Justice.

Risks of not taking advantage of September 23rd amnesty
• IRS Commissioner:
• Stressed that IRS agents have been instructed to fully develop all cases where taxpayers have not voluntarily disclosed by the

• After the deadline, IRS intends to pursue all civil and criminal avenues • Potential for higher penalties after September 23 is greatly


The Risks
Non-compliance may have serious consequences

 Possible civil penalties for failure to file an FBAR

Non-willful failure to file may result in a penalty of $10,000 for each
violation, imposed on a per-year, per-account basis Willful failure to file may result in a penalty of the greater of $100,000 or 50 percent of the account balance, imposed on a per-year, per-account basis

 Possible criminal penalties for failure to file an FBAR
• • Willful failure to file may give rise to felony charges resulting in a maximum prison sentence of five (5) years and/or a maximum penalty of $250,000 If the violation is part of a pattern of criminal activity both the maximum prison sentence and fine may be doubled


Other Civil Penalties

 Taxpayers may be also subject to other civil penalties under US tax law
• • • •

Sec. 6651(a)(1) Failure to File Penalty up to 25% of tax due (75% for Fraudulent Failure to File Penalty)
Sec. 6651(a)(2) Failure to Pay Penalty up to 25% of tax due Sec. 6654 Failure to Pay Estimated Tax Penalty Sec. 6662 Accuracy-Related Penalty (i.e., negligence or substantial understatement) equal to 20% or 40% of underpayment Sec. 6651(f) or 6663 Civil Fraud Penalty equal to 75% of underpayment

 US anti-deferral regime may capture deferred income and impose a deferral ―penalty‖ in the case of Controlled Foreign Corporations, Passive Foreign Investment Companies, and non-US fiduciary structures, i.e. trusts or foundations


Other Criminal Penalties

 Taxpayers may also be subject to other criminal penalties under US tax

law, which can result in significant fines and prison sentences
 Possible charges include
• • Attempt to Evade or Defeat Tax Willful Failure to Collect or Pay over Tax

• •

Willful Failure to File
Fraud and False Statements Attempts to Interfere with IRS Administration


Some further considerations
 US authorities are taking non-US financial account and fiduciary structure reporting very seriously and show no signs of backing down  State and further political subdivision voluntary disclosure programs  USA Patriot Act  Qualified Intermediary Agreements  G-20 Meeting (OECD Progress Report)  US Proposed Legislation (Levin and Baucus Proposals)

 New exchange of information tax treaties (OECD standards)


Criminal Investigation Program
By Status or Disposition, Fiscal Year 2008
Status o r dispo sitio n To tal (1 ) Investigatio ns initiated Investigatio ns disco ntinued Referrals fo r pro secutio n Indictments and info rmatio ns [4] Co nvictio ns Sentenced Incarcerated [5] P ercentage o f tho se sentenced who were incarcerated [5] 3'749 1 '259 2'785 2'547 2'1 44 1 '957 1 '583 80.9 Legal so urce tax crimes [1 ] (2) 1 '531 684 893 757 666 645 498 77.2 Illegal so urce financial crimes [2] (3) 1 '441 409 1 '204 1 64 '1 958 864 696 80.6 Narco tics-related financial crimes [3] (4) 777 1 66 688 626 520 448 389 86.8

(1) Legal source tax crimes involve legal industries, legal occupations, and, more specifically, legally earned income associated with the violation of Title 26 (tax violations) and Title 18 (tax-related violations) of the U.S. Code. The Legal Source Tax Crimes Program also includes those cases that threaten the tax system, such as Questionable Refund Program (QRP) cases, unscrupulous return preparers, and frivolous filers/nonfilers who challenge the legality of the filing requirements. Excise tax and employment tax cases are also important elements of the Legal Source Tax Crimes Program. (2) Illegal source financial crimes involve proceeds derived from illegal sources other than narcotics. These encompass all tax and tax-related violations, as well as money laundering and currency violations under the following statutes: Title 26 (tax violations); Title 18 (tax-related and money-laundering violations); and Title 31 (currency violations) of the U.S. Code. The utilization of forfeiture statutes to deprive individuals and organizations of illegally obtained assets is also linked to the investigation of criminal charges within this program. (3) Under the Narcotics Related Financial Crimes Program, IRS Criminal Investigation seeks to identify, investigate, and assist in the prosecution of the most significant narcotics-related tax and moneylaundering offenders. IRS derives this authority from the statutes for which it has jurisdiction: Title 26 (tax violations); Title 18 (tax-related and money-laundering violations); and Title 31 (currency violations) of the U.S. Code. IRS Criminal Investigation devotes resources to high-level multi agency narcotics investigations warranting Organized Crime Drug Enforcement Task Force (OCDETF) designation in accordance with OCDETF Program reimbursable funding. (4) Both ‘indictments’ and ‘informations’ are accusations of criminal charges. An ‘indictment’ is an accusation made by a Federal prosecutor and issued by a Federal grand jury. An ‘information’ is an accusation brought by a Federal prosecutor without the requirement of a grand jury. (5) The term ‘incarcerated’ may include prison time, home confinement, electronic monitoring, or a combination thereof. NOTE: Investigations may cross fiscal years. Therefore, the disposition of investigations shown in this table may be related to investigations initiated in prior years. SOURCE: Criminal Investigation, Communications and Education Division SE:CI:CE


Milan K. Patel
Office: DD: Email:
Hong Kong

New York

Geneva +41 (0)22 593 77 05

Milan provides legal advice to individuals, families and businesses on cross-border tax, trust and estate planning matters with a particular emphasis on US inbound and outbound tax planning.

He advises financial institutions, private banks, trust companies and other fiduciaries on strategic planning, compliance and internal procedures involving US and multi-jurisdictional tax issues.

Milan also assists clients with tax controversies, investigations and audits involving the US Internal Revenue Service including voluntary disclosures and qualified intermediary matters.

He is a former senior trial attorney at the US Internal Revenue Service and acted as co-manager
of the regional ‗Offshore Credit Card Project‘.
New Haven

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