As of 7/1/14 the IRS changed their 2012 Offshore Voluntary Program in a stealth manner which greatly increased both the costs and the risks.
Effective 7/1/14, the OVDP requires:
1) Payment up-front with the OVDP Application of all Tax, Penalty and Interest due which includes the Offshore Penalty (Title 26 Misc. Penalty), which is either 27.5 % or 50% of account balances of undeclared offshore accounts (based on whether the foreign financial institution is a listed institution by the IRS), tax on unreported earnings (on offshore accounts), a 20% accuracy-related penalty (based on the underpayment of tax), failure to pay penalty/failure to file penalty (up to 25% of tax due). In short the payment up front may wipe out all (or more) of the offshore account balances:
2) The taxpayer must submit all account statements for the offshore accounts since inception;
3) The OVDP requires all tax and other requested information for the prior 8 tax years.
Although not obvious from their public pronouncements, the IRS/OVDP as of 2016 is fraught with risk and perils including:
1) The IRS at their sole election may increase penalties, limit eligibility in the OVDP for all or some US Taxpayer, or defined classes of taxpayers (see Case of Israel’s Bank Leumi where the entire US taxpayer class was thrown out of the OVDP program);
2) 95 Swiss Banks have been designated as Listed Foreign Financial Institutions (Julius Baer is #95 as of 2/4/16), see IRS OVDP/FAQ #7.2 for complete list, which means as of the IRS 8/4/14 date, US Taxpayers with accounts at these 95 Swiss banks face a 50% Offshore penalty plus other taxes and penalties.
3) The 50% offshore penalty is imposed if either the Foreign Financial Institution (with the US Taxpayer Account) or the Facilitator who established the account is either: publicly identified as being under US investigation, cooperating with a government investigation, identified in a court-approved issuance of a summons seeking information about US taxpayers who may hold financial accounts (“John Doe Summons”), or settled with the US government.
4) The IRS/OVDP application is screened by the IRS criminal investigation division which receives the following taxpayer information: Name, Social Security #, List of accounts, banks, related entities, account balances, account statements and amended tax returns.
All of this evidence is submitted without either transactional or use immunity so it may be used against taxpayer.
5) Once the IRS/OVDP application is submitted, the taxpayer “flies right into the radar” and if for any reason their application is rejected (i.e. the IRS does not have to give a reason but they include: the IRS already has their name from either the foreign financial institution or facilitator, the application is incomplete/untruthful et al.), they are subject to criminal prosecution for their willful tax evasion, conspiracy to commit tax evasion (with their 3rd party advisors/facilitators) and jeopardy assessments i.e. pre-audit asset seizures.
6) Under the IRS/OVDP FAQ it states that the OVDP disclosure “generally eliminates the risk of criminal prosecution” but there is no guarantee (see cases Ty Warner, billionaire founder of Beanie Babies whose IRS/OVDP application was rejected because the IRS had his name, he paid a nearly $70m penalty and plead guilty to a felony; and Conn. Industrialist George Landegger who suffered a similar fate). The evidence submitted by the US taxpayers to the IRS was used against them to successfully criminally prosecute them.
7) The 50% penalty for the US Taxpayer who fails to file the FBAR (Fincen Form 114) i.e. Report of Foreign Bank and Financial Report is an aggregate yearly penalty and can be more than 100% of the account balance. See the Case of Carl Zwerner, Florida taxpayer who in May 2014, lost a jury trial on the civil FBAR 50% penalty, was found willful for his failure to file (for tax years 2004,2005,2006) and his penalty was 150% of the account balance (i.e. Swiss ABN/AMRO account held $1.69m and the penalty was $2.24m plus other tax, interest and penalty was due).
Zwerner made an IRS voluntary disclosure in 2008 which was not accepted. He later made an application for the 2011 IRS/OVDI which was not accepted (because by then he was under audit based on his prior documents submitted).
The jury found “willful blindness” i.e. taxpayer conscious effort to avoid learning about his FBAR filing obligations under the law. The civil FBAR penalty for willful failure to file the FBARs (31 USC 5322(b) is now confirmed as an annual penalty which may be over 100% of the account balance as upheld by a jury after a federal court trial. The Zwerner case is the largest FBAR penalty on record and may be cited by the IRS as legal precedent.
In addition each year, the FBAR remains unfiled, the Taxpayer is subject to 10 years in jail for each tax year not filed (see Criminal Penalty 31 CFR Sec. 103.59(c).
8) For those US taxpayers who first enter the OVDP and then withdraw and enter the IRS Streamlined procedure, they face the following risks: withdrawals from the OVDP often triggers an IRS tax audit, the IRS may criminally prosecute taxpayers for tax evasion and/or FBAR violations i.e. there is no waiver of prosecution by the IRS.
9) Tax evasion often leads to the “sister trilogy” of other felonies: wire fraud, mail fraud and money laundering (each 20 year felonies). See US Supreme Court case, Pasquantino (544 US 2005) where the Court held tax evasion was and the use of the interstate wires to wire transfer the tax evasion proceeds was a violation of the federal wire fraud statute (18 USC 1343) i.e. a 20-year felony. Under this case, any taxpayer who wire transfers tax evasion proceeds may be subject to criminal prosecution for wire fraud. If the tax evasion proceeds are used to purchase assets it may be subject to criminal penalties for up to 20 years for money laundering (18 USC 1956 and 1957).
Tax Evasion is a Specified Unlawful Activity (an “SUA”) which may generate criminal prosecution for money laundering and wire fraud/mail fraud. Since these are each 20-year felonies, when you add in the criminal liability for tax evasion (5 years in jail/IRC 7201), obstruction of tax collection ( 3 years in jail/IRC 7212), conspiracy to commit tax evasion (5 years in jail/18 USC 371) and filing a false tax return (3 years in jail/IRC 7206) the taxpayer may face over 70 years in jail, forfeiture of all of their assets, and certain disgrace.
So what to do?
In my practice I do an intensive due diligence review of all of taxpayers affairs for prior years (up to 6 years which is the criminal statute of limitations). I seek to devise a strategy to pay all income taxes (with interest) with either minimum or no penalties (with the exception of the failure to pay or file penalties which is up to 25% of the underpaid income tax due).
For federal tax evasion, willfulness is required. The IRS has a high burden of proof i.e. beyond a reasonable doubt.
If the Taxpayer can demonstrate a “good faith mistaken belief” that he was not required to file tax returns it may negate criminal “intent” i.e. willfulness (“scienter”) and pre-empt both criminal tax evasion as well as civil tax fraud (See US Supreme Court Case: Cheek v. US (1991) 498 US 192.