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New York

            Voluntary Disclosure
            Guidance on helping US clients with unreported ―offshore‖
Hong Kong

            accounts and entities


            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
 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 non-

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
 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

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
    •   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
    •   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

• 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
   • 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
                                                                                     Legal so urce tax          Illegal so urce       Narco tics-related
                  Status o r dispo sitio n                         To tal               crimes [1]           financial crimes [2]    financial crimes [3]

                                                                     (1)                     (2)                      (3)                      (4)

 Investigatio ns initiated                                          3'749                    1'531                    1'441                     777
 Investigatio ns disco ntinued                                       1'259                    684                      409                       166
 Referrals fo r pro secutio n                                       2'785                     893                     1'204                     688
 Indictments and info rmatio ns [4]                                 2'547                     757                      '1
                                                                                                                      1 64                      626
 Co nvictio ns                                                       2'144                    666                      958                      520
 Sentenced                                                           1'957                    645                      864                      448
 Incarcerated [5]                                                    1'583                    498                      696                      389
 P ercentage o f tho se sentenced
 who were incarcerated [5]                                           80.9                     77.2                     80.6                     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 money-
laundering 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:      Geneva
New York

            DD:          +41 (0)22 593 77 05

Hong Kong

            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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