Offshore Accounts in Dangerous Waters

According to "IRS: Offshore account holders told fess up to lower penalties" (03/27/09) by Kevin McCoy, published in USA Today, the Internal Revenue Service finally is claiming its tax stake in unreported offshore accounts owned or controlled by U.S. citizens, under severe penalties if voluntary compliance is not forthcoming.

Trying to lure wealthy Americans to disclose assets hidden offshore, the IRS on Thursday announced a six-month program that offers lower penalties to those who come forward and pay taxes due on the secret holdings.

The offer includes clients of UBS, the Swiss banking giant that last month gave federal investigators the names of American owners for about 300 accounts in a continuing federal court showdown.

Along with lower tax penalties, those who comply are expected to avoid criminal prosecution.

"This is a chance for people to come clean on their own," said IRS Commissioner Douglas Shulman.

"For taxpayers who continue to hide their heads in the sand, the situation will only become more dire." * * *

The IRS Commissioner commented on the 2009 Amnesty Program in a posted Press Release entitled "Statement from IRS Commissioner Doug Shulman on Offshore Income" (03/26/09).

In a posting on his Tax Prof Blog, Professor Paul L. Caron noted "IRS Offers Amnesty to Those Who Evaded Tax Through Offshore Accounts" (03/26/09); and he listed articles published about the IRS foreign holdings amnesty program. I've added the articles' titles and authors, and noted some substantive points:

• "IRS increases pressure on Swiss bank clients" (03/26/09) by Devlin Barrel, published by Associated Press, who noted: "[Taxpayers] coming forward are now confronting a list of nearly 30 detailed questions, asking not just about financial documents, but any travel to conduct banking business, documents and correspondence related to the accounts, and which bank employees helped them manage the accounts." * * *
  
• "UBS Offshore Customers Offered Eased Tax Penalties" (03/26/09) by Ryan J. Donmoyer, published by Bloomberg, who noted: "It is legal for Americans to have money in offshore accounts, which many do for legitimate reasons such as when they own a home or business overseas. The accounts must be disclosed to the Treasury Department when they hold more than $10,000, and U.S. taxes must be paid on any income earned."* * *
  
• "IRS aims to reel in offshore-account holders --Penalties reduced, criminal prosecution unlikely for those who come clean" (03/26/09) by Andrea Coombes, posted on MarketWatch, who noted: "The U.S. loses an estimated $100 billion in tax revenue every year because of money stashed offshore, according to Sen. Carl Levin, D-Mich., who with other lawmakers introduced the Stop Tax Haven Abuse Act in March. * * *
• "I.R.S. to Ease Penalties for Some Offshore Tax Evaders" by Lynnley Browning, published by The New York Times, who noted: " In another shift, the I.R.S. will generally not prosecute taxpayers who come forward voluntarily, provided they are not drug dealers, arms merchants or others with ill-gotten gains. And it will not assess a 35 percent penalty on money secretly transferred to foreign trusts — a common method of tax evasion. The goal, Douglas Shulman, the I.R.S. commissioner, said during a briefing 'is to get taxpayers who have been hiding assets offshore back into the system.'" * * *
  
• "IRS launches crackdown on offshore tax evasion" (03/26/09) by Corbett Daley, published by Reuters, who noted: "IRS memos sent to agency examination staff said offshore tax cases should 'receive priority treatment.' 'Offshore cases sent to the field are work of the highest priority," said one document, which was made public by the IRS. "Examiners should utilize the full range of information gathering tools in properly developing offshore issues with special emphasis on detecting unreported income. This includes interviewing taxpayers, making third-party contacts and timely issuing summonses to taxpayers and third parties." * * *
• "IRS Cuts Penalties to Lure Tax Evaders" (03/27/09) by Evan Perez & Tom Herman, published by The Wall Street Journal, who noted: "A key part of the program, IRS officials said, is 'developing intelligence' on bankers, lawyers, accountants and others who help the rich hide assets from tax authorities. This raises the likelihood that the IRS and the Justice Department could take aim at major financial firms, as they have against UBS AG, the Swiss bank that admitted in a settlement last month that some of its bankers had helped U.S. clients evade taxes." * * *
  

Clearly, past tax law and current tax return forms require that a U.S. citizen who has an interest in, or signature or other authority over, a financial account in a foreign country with assets in excess of $10,000 are required to disclose the existence of such account on Schedule B, Part III of their individual income tax return.

The IRS has made various tax amnesty offers as recently as 2005 and 2003 to enforce these rules. But the political and economic climates have chilled sufficiently to steel the IRS' intentions towards non-reporting citizens.

For those U.S. citizens who have continued to ignore the legal requirements of reporting and paying income tax, the "amnesty" program may be viewed as harsh, but it may be their last chance before criminal prosecution.

This program and the alternative enforcement routes are now supported politically by the new federal law. And it is consistent with prior initiatives by the IRS. See: Abusive Offshore Tax Avoidance Schemes -- An Abusive Scheme Toolkit for External Stakeholders, updated in April, 2009.

Offshore accounts and trusts have been utilized by some Pennsylvanians to avoid both federal and state income tax, as evidenced by a prosecution in Pennsylvania announced recently by the IRS on its website in a posting entitled "Pennsylvania Father and Sons Sentenced in Tax Fraud Scheme."

On March 26, 2009, in Scranton, Pa., Wendall Sollenberger was sentenced to 42 months in prison and ordered to pay $1,274,615 in restitution to the Internal Revenue Service (IRS).

Last week, Avery Sollenberger, Wendall's father, was sentenced to 44 months in prison and Gary Sollenberger, Wendall's brother, was sentenced to 42 months in prison. In September 2008, a jury found Avery, Wendall, and Gary Sollenberger guilty of conspiracy to defraud the IRS. According to court documents, the Sollenbergers own and operate a house framing business in Hanover, Pennsylvania.

Evidence introduced at trial stated that beginning in 1994, Wendall, Gary and Avery began to employ a deceptive scheme consisting of bogus trusts, a foreign corporation and an off-shore bank account in Cyprus to conceal assets from the IRS. The three men have not paid any income tax on their business earnings since 1994.

During the trial, the government also introduced evidence of defendants expenditures including the purchase of a $100,000 race car, a $40,000 custom made motorcycle, a motor boat, gold, silver, rental properties, a second home in Altoona, Pennsylvania, and hunting trips to Idaho. * * *

See also: Press Release, "UBS Client Charged with Filing False Tax Return Boca Raton, Fla. -- Resident Hid Income and Assets in Secret Swiss Bank Account" (04/02/09).

CCH summarized the terms of the amnesty program in its Tax News posting on March 27, 2009 entitled "Voluntary Disclosure Terms."

[The IRS Commissioner] emphasized that the terms being offered for the disclosure of offshore accounts are an outgrowth of current policy and carry penalties at a level consistent with voluntary disclosure programs in the past. Within this framework, Shulman enumerated the amounts that would need to be paid by taxpayers with heretofore undisclosed offshore accounts who "come clean" under the program:

• Back taxes due on newly disclosed assets for the last six years;
• Interest due on these back taxes for the last six years;
• A 20-percent accuracy-related under Code Sec. 6662 or a 25-percent delinquency penalty under Code Sec. 6651 for each tax year at issue;
• Looking to the past six years, a 20-percent penalty on the total balance of all the taxpayer's foreign bank accounts or assets during the year among the past six in which the accounts had their highest aggregate value. * * *
  

In the past, Pennsylvania did not elect to participate in the IRS' Offshore Voluntary Compliance Initiative, and, may not participate in this latest program. Therefore Pennsylvania residents intending to participate in this IRS amnesty program should consider their future interactions, too, with the Pennsylvania Department of Revenue.