Frank Akef & Co. 8350 Wilshire Blvd., Suite 250 Beverly Hills, California 90211 Tel. (323) 556-2777 Fax (323) 556-2788 IRS VOLUNTARY DISCLOSURE PROGRAM The Internal Revenue Code states that every US Citizen or Resident shall be taxed on all worldwide income, regardless of it’s source, unless the IRC exempts that income by statute. This requirement includes all income, interest, dividends, etc., generated by foreign entities, including foreign bank accounts. Additionally, US Citizens and Residents who are the beneficial owners of such accounts that have an aggregate balance of $10,000 or more must make an annual declaration in writing to the Internal Revenue Service stating the location, account number, and approximate balance of each account. Unfortunately, some people were unaware of these requirements, or simply ignored the requirements. The Internal Revenue Service announced in March of this year that taxpayers who are not in compliance with these requirements may voluntarily disclose the information, and pay the tax owed, along with reduced penalties. The offer the IRS is making requires taxpayers to make a voluntary disclosure of previously unreported foreign income for tax years 2003 through 2008, inclusive, by no later then September 23, 2009. If accepted into the VDP Program the taxpayer must pay: (1) the tax on the unreported income; (2) interest on the tax; (3) an accuracy related penalty of 20% of the tax due; (4) an additional 20% penalty on the highest aggregate foreign account balance in the six years. For those taxpayers who may qualify for this program, we strongly encourage you to retain an experienced tax attorney, who will be necessary to provide an understanding of the ramifications of the VDP, protect privileged communications, manage the disclosure, provide counsel regarding whether you enter into it, and any related state law issues and risks. However, for your information, and consideration, we have compiled a short list of advantages, and disadvantages, of the program. Frank Akef & Co. 8350 Wilshire Blvd., Suite 250 Beverly Hills, California 90211 Tel. (323) 556-2777 Fax (323) 556-2788 ADVANTAGES 1) If the client chooses the disclosure program, they will be in complete compliance with the IRS requirements for reporting interest in a foreign account. As Tax Professionals, we have consistently recommended to our clients that they be in tax compliance on this issue. As a result, for the clients that we are aware of the existence of foreign bank accounts, we have kept them in compliance. Of the rest, we can recommend this program, and once it is done, the taxpayer only has the additional burden of annual disclosures. 2) The potential penalties involved are draconian. In the example attached, the high balance is $1,300,000 with annual income of $50,000, and with the voluntary disclosure option the tax and penalties come out to $386,000, and without disclosure the potential could be $2,306,000. The FBAR penalty alone is the greater of $100,000 or 50% of the highest account balance annually. 3) If you use the program, and supply complete compliance, the Internal Revenue Service will not bring you up for criminal investigation. If the taxpayer is discovered by the IRS, and the amount of undisclosed income is significant enough, the IRS can refer the taxpayer for criminal penalties. These penalties could be as high as ten years in jail and a $500,000 fine ($250,000 for not filing the FBAR alone), and that is on top of the taxes and civil penalties. 4) If you do not have a taxable event, and your only problem is the FBAR has not been filed, the program will allow you to file those without danger of penalties during this period. 5) Already, UBS has turned over their list of Americans holding funds in that institution, and it is apparent that the IRS will be digging deeply into other institutions in order to enforce compliance. The risk of discovery of an account is far greater then it has been for many years, and this discovery would result in examination of any open tax year that they may have by statute. Frank Akef & Co. 8350 Wilshire Blvd., Suite 250 Beverly Hills, California 90211 Tel. (323) 556-2777 Fax (323) 556-2788 DISADVANTAGES 1) This program contains complete compliance with declaring the foreign account, which includes disclosing the source of the funds. Needless to say, our clients are not involved in any criminal activities, and generally the source of the original funds is through the inheritance process. The point is that the discovery process may be problematic, as it is unknown what evidence is necessary to prove that the funds were inherited from a relative or other deceased person. 2) A part of this program involves the requirement of filing amended tax returns to correct the underreporting for the prior six years. Normally, the IRS has three years after the filing of the tax return in order to examine the return, after which time the filing period is closed. If we file amended returns, this would open up the statutory examination period to restart, and the IRS may open any issue on the returns, not exclusively for the purpose of amendment. 3) If the taxpayer amends the Federal return, we would need to file the amended returns with the State of California. This is not only an additional expense, but the statute of limitations for California is four years from the date of filing. I may add that the State of California is desperate for revenue at this time, and this program may be abused by the Franchise Tax Board in order to open up tax years that have been closed already, in order to garner any additional funds. 4) Part of the penalties that would be charged would be a Alternative FBAR penalty of 20% of the gross value of the account(s). This is a one time penalty, and is less then the standard FBAR penalty, but it is a lot of money, and people might balk at paying this penalty. Abatement might be a possibility, however, we do not have sufficient information on when and where such abatement would be applied. 5) The compliance issued is not settled until the IRS is satisfied with the results. Some of the information that may be asked for is contacts with the foreign bank, where the statements are sent, reason for original funding of the account, and reason for not complying before this time. The discovery stage of this voluntary disclosure could be very intrusive, and a private individual may have trouble answering all the questions, and supplying the documentation on the accounts.