If your clients haven't come forward yet, now's the time
According to a 2008 U.S. Senate report, the use of secret offshore
accounts to evade U.S. taxes costs the U.S. Department of the
Treasury an estimated $100 billion annually. The U.S. Department of
Justice's Tax Division's current offshore program began in 2008,
when it opened an investigation into UBS AG. As a result of the
investigation, UBS agreed to enter into a deferred prosecution
agreement by February 2009, admitting guilt on charges of
conspiring to defraud the United States, agreeing to turn over the
names of approximately 4,500 account holders and paying $780
million in fines.
On the heels of this investigation, the Internal Revenue Service
announced its Offshore Voluntary Disclosure Initiative (OVDI),
which set forth a means for disclosing previously unreported
accounts with a fixed program for civil penalties. This program ran
from March to Oct. 15, 2009. A second offshore program was
announced in February 2011, ending in September 2011, and a third
and continuing program was announced in January 2012. With each
successive program, the penalties were increased. The OVDI programs
have so far been responsible for the collection of more than $5
billion in tax, interest, and penalties, and have brought forward
more than 40,000 foreign account holders.
Despite their success, the voluntary disclosure programs have come
under criticism for the draconian manner in which taxpayers are
penalized. Taxpayer advocate Nina Olsen, in her 2013 Annual Report,
faulted the programs as "a good deal for 'bad actors' but not for
'benign actors.'" According to Olsen, the penalties paid under the
programs have averaged more than double the unpaid tax and interest
associated with the unreported accounts. Yet for those with
accounts valued in the lowest 10 percent ($87,145 or less), the
penalties were a higher multiple of the unpaid tax, and for pro se
taxpayers, the multiple was even higher. The severe penalty regimes
have led many account holders to consider other means for coming
into compliance.
While many taxpayers have come forward through the programs to
report their previously unreported bank accounts, some have become
current simply by correcting their returns, paying additional tax
and interest (but not under the programs' penalty regime) in what
are called quiet disclosures. Some have also simply begun reporting
their foreign accounts prospectively. It is yet to be seen whether
these individuals will face additional penalties in the
future.
In continuation of its efforts, the DOJ announced a special
voluntary disclosure program aimed at a large group of Swiss
financial institutions in August of last year. The program was made
possible by a U.S.-Swiss agreement of enhanced information
exchange. While the Swiss government (along with many other
governments) agreed to comply with the Foreign Account Tax
Compliance Act (FATCA), which began on Jan. 1, 2014, under which
both the United States and Switzerland will automatically exchange
foreign account information, the special program announced in
August would allow an eligible Swiss financial institution to avoid
prosecution in the United States in exchange for detailed
disclosures for years prior to 2014. Upon announcing the special
program, the DOJ also announced that it would place a moratorium on
investigations of Swiss financial institutions until Jan. 1, 2014.
Beyond that date, the DOJ may determine any bank not in the program
to be the target of an investigation, and therefore ineligible to
enter the program. Some institutions may postpone applications into
the program until as late as Oct. 31, 2014. On Jan. 25, the DOJ
announced that 106 Swiss entities have applied to enter into the
program.
As we have seen in our practice over the past five years,
taxpayers with undisclosed offshore accounts have faced significant
pressure to come forward through the voluntary disclosure programs.
Now, with the special voluntary program aimed at their financial
institutions, the pressure will be coming from their banks, as
well. Many financial institutions have begun sending letters to
account holders they believe are U.S. citizens stating that they
will be releasing their information to the DOJ. If taxpayers have
thus far been holdouts on coming forward with unreported accounts,
now is the time to seriously consider doing so.