New Program is Open “Indefinitely”

After operating two separate Offshore Voluntary Disclosure Initiatives (OVDI), the first in 2009 and the second in 2011, the IRS has reopened the program yet again. Through those two prior programs, more than 33,000 people were able to disclose previously undisclosed offshore bank and securities accounts they had been sitting on for years. The IRS has collected more than $3.4 billion from the 2009 program and, so far, $1 billion from the 2011 program. That number will grow as those cases are worked to completion.

The success of these programs from the IRS’s point of view is the driving force behind the agency’s decision to reopen the program. In testimony to the House Ways and Means subcommittee on Oversight in March of this year, Commissioner Doug Shulman stated:

Our decision to reopen the OVDI was a result of continued strong interest from taxpayers and tax practitioners after the closure of the previous programs. People still wanted to come in and get right with their government.

What Shulman didn’t address was the sword of Damocles that hangs over the heads of those with undisclosed offshore accounts. As I have reported in this newsletter several times, the IRS has been, and continues to be very aggressive about pursuing those responsible for tax evasion through the use of offshore bank and investment accounts. Enforcement actions include criminal penalties, not only for tax evasion, but also for not disclosing the offshore assets in the first place.

The Offshore Battle Heats Up

In recent months, the U.S. government has brought two more substantial criminal cases in the offshore battle. Late last year, two financial advisors, believed to be working with Julius Baer Group, Ltd, a Swiss banking giant, were indicted by a grand jury in New York City. The two are alleged to have helped U.S. citizens evade U.S. income taxes by hiding up to $600 million in accounts in Switzerland. The advisors allegedly helped the clients set up accounts using code names, fictional names and sham corporations. The advisors also apparently made sure that the U.S. citizens did not receive any mail from the bank and specifically advised them not to make a voluntary disclosure to the IRS of the accounts.

The second criminal indictment in the offshore battle is unprecedented. In February of this year, the Department of Justice announced that Swiss Bank Wegelin was indicted by a grand jury in connection with its alleged actions of helping U.S. citizens hide more than $1.2 billion in funds from the IRS. Note that this is not an indictment of individuals associated with the bank (as in the case above), but of the bank itself. This is the first time any offshore bank anywhere was charged by the U.S. government with facilitating tax fraud.

The government’s attack was not limited just to the indictment. While Bank Wegelin does not have a U.S. branch bank, it did have a “correspondent” bank account in the U.S. That account was located at a UBS branch bank in Connecticut. The U.S. seized more than $16 million from that account as part of a civil forfeiture complaint and seizure warrant. The UBS connection turned out of Wegelin’s downfall.

As for UBS, in 2009, it turned over the details of more than 4,000 accounts it held on behalf of U.S. citizens. It paid a $780 million fine under the threat of having its operating license in the United States revoked. Wegelin allegedly came in behind UBS’s departure from the market for helping U.S. citizens avoid income taxes by hiding assets in Switzerland, assuring its U.S. clients that it would not disclose any account information to U.S. authorities. As such, Wegelin worked to pick up the clients that UBS was losing by assuring those clients that it would not do what UBS was in the process of doing – giving them up to the U.S. government.

To assist with the alleged tax evasion, Wegelin is accused of helping U.S. citizens:

The successful attack on Wegelin is significant because it was Switzerland’s oldest bank, established in 1741. Shortly before the indictment, it sold its non-U.S. business to Raiffeisen, another Swiss banking giant.

Here’s Another Opportunity to Come Forward

As foreign banks succumb to IRS pressure to report the accounts held by U.S. citizens, we can only expect more of these cases, and more disclosure of the names of citizens holding foreign bank accounts. For example, the IRS at this moment is in the process of working with the Swiss Federal Tax Authority to get the names of U.S. citizens with accounts at Credit Suisse. The majority of the names have not yet been turned over, but it’s just a matter of time.

By participating in the OVDI now, you can potentially avoid criminal prosecution in connection with the activities in the offshore account. Moreover, you can avoid the egregious civil penalties associated with not disclosing the account. And, you can put the matter behind you, without fear that you might be blindsided at some later date.

How This Program Differs from the Others

As stated, this is now the third disclosure program the IRS has operated. The key difference between this program and the others is that this program has no specific termination date. Under each of the first two programs, if you didn’t make your application for inclusion in the program by a fixed date, you didn’t qualify – period. This fact has caused much consternation for those who learned about the program only after the deadline passed, or who may be second-guessing their decision not to participate. Frankly, as the IRS puts more and more pressure on offshore banking centers to disgorge the names of U.S. citizens, it’s becoming increasingly difficult to defend a decision to ignore the issue.

The other difference between this program and the first two is the penalty structure. Under this program, the highest potential penalty goes from 25% to 27.5%. Otherwise, the penalty structure (detailed below) that existed under the 2011 program continues to apply.

What are the Potential Penalties?   

The 27.5% Penalty. The key penalty imposed under this program is 27.5% of the dollar amount of offshore assets or accounts. This is the penalty for failure to disclose the offshore assets by filing the so-called FBAR Form, Report of Foreign Bank and Financial Accounts, Treasury Form TD 90-22.1. This penalty is up from 25% under the 2011 program, but significantly less than the maximum, which can be up to 50% of the value of the account. This penalty is discussed in more detail later. In the limited situations explained below, a person may be subject to a lesser penalty of 12.5% or 5%, as was the case under the 2011 program. 

The 12.5% Penalty. The 12.5% penalty applies to those citizens with offshore assets or accounts that never exceeded $75,000 in value during the 2004 through 2011 period.

The 5% Penalty. The 5% penalty is even more limited. It applies when one of two situations exist. The first situation applies when all four of the following conditions are met:

          1. The citizen did not open, and did not cause the opening of the account (i.e., he inherited the account),

2. The citizen had only minimal contact with the account (i.e., he infrequently checked the account balance and did not direct any of the investments),

    3. He did not withdraw more than $1,000 from the account for the entire period between 2004 through 2011, with limited exceptions, and

    4. Only the account earnings escaped U.S. taxation. That is, the funds deposited where already taxed in the U.S. 

The second situation applies to even more limited cases. For the second situation to apply, the individual must be a foreign resident and be unaware that he is a U.S. citizen. For example, suppose you were born in the U.S. to parents of foreign citizenship. You grew up in a foreign jurisdiction, unaware that you were a U.S. citizen. You have an account in the foreign jurisdiction. You never filed U.S. returns or FBARs. You became aware that you are a U.S. citizen when you had to get a birth certificate in order to obtain a passport from the foreign jurisdiction where you live. In this case, you are entitled to the reduced 5% penalty. 

And You Have to Pay the Tax

In addition to conceding the penalty as outlined above, you also have to file amended tax returns and report the income that was avoided on the offshore assets. The next step: pay the tax.

What are the Potential Consequences of the “Wait-and-See” Approach? 

The OVDI is most definitely a carrot and stick program. The carrot is the reduced penalties the IRS offers for participating. On the other hand, as Commissioner Doug Shulman stated regarding the 2011 program, the worse-case scenario is that “[t]axpayers hiding assets offshore who do not come forward will face higher penalty scenarios as well as the possibility of criminal prosecution.”

If you have overseas assets that have not been reported, you should consider coming forward under the OVDI. The sooner you act, the less likely it is that the IRS will already have your information due to a bank disclosure. In that case, you could be in jeopardy of potential criminal prosecution.

According to Section of the Internal Revenue Manual (IRM), if a person decides to make a voluntary disclosure, the disclosure must be “truthful, timely, and complete.” IRM The most important factor here is the issue of “timeliness.” This means that the IRS has no information concerning what is being disclosed. In the case of disclosing overseas assets, the IRS must not have any information that you have the assets. That is to say, the agency didn’t already obtain the information about your account from the bank itself or from some other source. Given the IRS’s aggressiveness on this issue, there is no way to know whether or when the IRS might come into possession of information revealing your account. That’s why it’s important to act now.

If the IRS does have the information prior to your disclosure, your disclosure is not considered “timely.” Therefore, the disclosure is, in turn, not considered “voluntary.” But even if the above three requirements are met,  “[a] voluntary disclosure will not automatically guarantee immunity from prosecution; however, a voluntary disclosure may result in prosecution not being recommended.” IRM Thus, failing to disclose offshore assets in connection with this program carries a serious risk of criminal prosecution, which in turn carries the possibility of serious jail time and further financial penalties.

In addition to potential criminal prosecution, the IRS has various civil penalties at its disposal with respect to offshore assets. The main one, as mentioned above, is the penalty for failing to file the FBAR Form. U.S. citizens and residents must report any direct or indirect interest in a financial account located in a foreign country when the aggregate value of all accounts (not just a single account) exceeds $10,000 during any particular year. 31 USC 5314; 31 CFR 103.24.

The willful failure to file an FBAR form can result in a penalty of up to $100,000 or 50% of the total balance of the foreign account. 31 USC 5321(a)(5)(C). If the failure was non-willful, the penalty is up to $10,000 for each account, for each year in which the non-reporting occurs. 31 USC 5321(a)(5)(B). There are also other civil penalties relating to foreign income received from foreign trusts, gifts, corporations, and partnerships. Keep in mind that the FBAR penalty is in addition to any civil tax penalties that apply, including potentially, the civil fraud penalty under code section 6663, which is up to 75% of the income tax liability attributable to fraud.

As you can no doubt see, the severity of the above penalties make the OVDI option look much more attractive than taking a “wait-and-see” approach—hoping the IRS never discovers the account.

How to Participate in the OVDI 

If you wish to participate in the OVDI, you must follow three steps. They are:

1) The “Pre-Clearance,”

2) Mailing an “Offshore Voluntary Disclosure Letter,” and

3) Mailing the “Complete Voluntary Disclosure Package.”

These three steps are outlined more thoroughly below.

It should be noted that all steps must be satisfied before you will be accepted into the program. Successful participation in the program means you’ll be able to bring your money back into the U.S., avoid criminal prosecution and the more severe civil penalties that apply if you opt for the “wait-and-see” approach.

Step 1:  The “Pre-Clearance”

This initial step requires you or your representative to send your identifying information (name, address, SSN, DOB) to the IRS’s Criminal Lead Development Center. After the IRS receives it, you will be notified whether you can make a voluntary disclosure under the OVDI. You can choose to skip this step by simply sending the “Offshore Voluntary Disclosure Letter” to the IRS instead.

            Step 2: The “Offshore Voluntary Disclosure Letter”

Regardless of whether you complete step 1, you must mail the “Offshore Voluntary Disclosure Letter” to the IRS’s Criminal Investigation Unit. If you did complete Step 1, you have thirty days from receipt of your notification to complete the disclosure letter. This letter requires you to disclose certain information, including the source and value of the funds, whether you believe the IRS has information on the funds already, why the funds were deposited overseas and the meetings you had with anyone who suggested that the funds be deposited overseas.

This gets mailed to the following address:

Internal Revenue Service
Criminal Investigation
ATTN: Offshore Voluntary Disclosure Coordinator
Philadelphia Lead Development Center
600 Arch Street, Room 6405
Philadelphia, PA 19106


            Step 3: The “Complete Voluntary Disclosure Package”

This package consists of various disclosures and supporting documents. What must be included depends on the type of offshore asset. However, there are disclosures that apply to all persons wishing to participate in the OVDI.  They are:

The above discussion of the OVDI should give you enough preliminary information to make an informed decision whether to participate in the initiative. Based on the severity of the voluntary foreign asset disclosure rules, it is highly recommended that anyone with unreported offshore assets participate in the OVDI. If you’re still not sure, you need to get counsel sooner than later to discuss your options

*This article was originaly published in the May 2012 Issue of Pilla Talks Taxes

Don’t Go it Alone

It is also true that given the severity of the situation and the potential risk, it is vital that you get counsel before proceeding. You need to evaluate all your options before making decisions that could have a profound affect on your life. For help with this, you can contact my office at 800-346-6829 to discuss this with me, or you can contact the Tax Freedom Institute Consulting Member nearly you. Go to for a complete list of our TFI Consulting Members. 



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