In March 2013, media outlets (e.g. Reuters, Accounting Today) disclosed that the IRS has revoked the Voluntary Disclosure Program for many U.S. taxpayers (including dozens of U.S. taxpayers with accounts at Bank Leumi in Israel).
The IRS has expanded their investigation into U.S. taxpayers with Undisclosed Offshore Accounts (unreported income), “widening the net” from Switzerland to now include: Israel, India, Hong Kong and Singapore. Previously, IRS investigation has led to prosecution of two Swiss Banks: UBS (who paid a $780m fine and disclosed 4735 U.S. taxpayers with undisclosed offshore accounts), Wegelin Bank (Switzerland’s oldest bank, since 1741) pled guilty to a felony (i.e., conspiracy to commit tax evasion) paid $74m in fines and penalties, and is going out of business. They are the first Swiss bank to plead guilty to a felony for “tax evasion’. Their Managing Director, Otto Bruderer, publicly stated in New York Federal District Court that “The Swiss Banking Industry is based on tax evasion.”
For those U.S. taxpayers with undisclosed offshore accounts (and unreported income) in 2009 and 2011, the IRS created the Offshore Voluntary Disclosure Program (“OVD”) for U.S. taxpayers to “clean up their tax evasion” by filing amended tax returns, paying penalties and interest to avoid harsh civil and criminal penalties. The 2009 and 2011 OVD netted over $4.4 billion in back taxes, including more than 30,000 U.S. taxpayers. Since 2012, a new OVD program is open to U.S. taxpayers.
The IRS disqualification of U.S. taxpayer participants in the OVD program has both criminal and civil implications for those disqualified. Prominent criminal tax attorney Sanford Passman, Esq. explained that there is no “immunity” for those entering the IRS OVD program so all the evidence submitted in support of the U.S. taxpayer OVD may be used by the IRS for both civil and criminal prosecutions.
For those U.S. taxpayers, with either undisclosed offshore bank accounts, unreported income or who were disqualified from the IRS OVD program, they should immediately seek legal counsel and prepare their own due diligence “checklist” in order to present their evidence to legal counsel to evaluate their civil and criminal tax issues.
For those U.S. taxpayers who participated in the IRS OVD, based upon advice of counsel, they now find themselves in a precarious position. They disclosed (previously undisclosed) foreign bank accounts, unreported income and, in some cases, both filed amended tax returns and paid taxes, all without any IRS release from either civil liability or criminal liability (i.e. the evidence was disclosed, taxes were paid without any settlement or release agreement with the IRS). Now the very evidence that the U.S. taxpayers submitted in support of a settlement and release agreement with the IRS under the OVD, may be used against them for both civil fraud and criminal tax evasion.
Certain tax attorneys have stated that the OVD was “a trap by the IRS” to uncover the foreign banks that were facilitating U.S. tax evasion by establishing their unreported, undisclosed foreign bank accounts.
Clients who filed the OVD application and submitted evidence without the benefit of either “immunity” from criminal prosecution, or a settlement and release agreement negating penalties for civil tax fraud, now potentially face both criminal and civil penalties. If the attorneys (or other advisors) who recommended the OVD to clients did not disclose the risks of an IRS rejection of the initial application (which would happen after the U.S. taxpayer disclosed their name and ID number). They face malpractice allegations.
After the initial acceptance by the IRS of a taxpayer into the OVD program, the IRS’s receipt of confidential taxpayer evidence, (which evidence may prove both civil tax fraud and criminal tax evasion) and the IRS’s subsequent disqualification of the U.S. taxpayer from the OVD program, then the U.S. taxpayer may review potential causes of action for malpractice against their counsel, including:
1. Waiver of their Fifth Amendment rights against self-incrimination;
2. Disclosure of their name and taxpayer ID number related to their unreported offshore accounts;
3. Submission of confidential evidence, which was never directly summoned by the IRS, related to their unreported offshore accounts, offshore assets and income, all of which may be used against them by the IRS/U.S. Department of Justice for civil and criminal prosecution for civil tax fraud and criminal tax evasion.