Two recent cases demonstrate the great risk attendant to the IRS offshore Voluntary Disclosure Program (2012-forward) (“OVDP”).
In the Bank Leumi case, dozens of U.S. taxpayers with accounts at Bank Leumi were in 2013 peremptorily disqualified from the IRS OVDP without explanation. The IRS has recently reversed this position and according to tax counsels have readmitted the disqualified U.S. taxpayers. Although the various tax counsels appear satisfied with the IRS reversal of position their “sighs of relief” fail to address the dangers of the OVDP:
1) As of the 2012 OVDP a 27 1/2% penalty based on the value of the undisclosed offshore assets (in addition to the original income tax due plus interest plus penalties of up to 70% of the tax due.)
2) Waiver of Constitutional Protections against: self-incrimination (5th amendment), unreasonable search and seizure (4th amendment), excessive fines (8th amendment).
These “trifecta” of constitutional protections disappear once a U.S. taxpayer enters the IRS OVDP disclosing : their names, social security numbers, undisclosed income, undisclosed assets, names of the advisors/colleagues/3rd parties who facilitated their “offshore tax evasion.”
It is a risky strategy to voluntarily contact the IRS to disclose multiple tax crimes (felonies which if prosecuted may lead to over 25 years in jail with additional 20 year sentences for each instance of money laundering, wire fraud, mail fraud, total jail time over 85 years, if the prosecutor “throws the book” at the taxpayer. If you commit federal crimes, is it advisable to go to the U.S. Attorney to confess your crimes and beg for leniency? If not, then why confess federal tax crimes to the IRS (who may refer the case to the U.S. Attorney since the taxpayer’s voluntary disclosure has neither transactional or use immunity.
In the case of Ty Warner (Beanie Babies founder, a member of the Forbes 400 richest Americans, with $2.6 billion net worth) he entered the IRS OVDP only to be rejected (for unknown reasons).
The risk for Ty Warner is best exemplified by his recently disclosed IRS settlement $53million for 2002 taxes (on unreported income from undisclosed UBS/Swiss Bank accounts). Ty Warner has agreed to pay $53million on an unreported $3.1million in income which tax would have been $885k (nearly 60x the amount of the original tax due). In addition, he faces charges of criminal tax evasion, with up to a 5 year jail sentence (he awaits arraignment).
The $53million in settlement was due to imposition of a 50% “FBAR” penalty on the $93million he held in his UBS Swiss Bank account.