US taxpayers urged to come clean

Dubai: In March 2009, the US tax authorities (IRS) announced a voluntary disclosure programme (VDP) for Americans to come forward and pay back taxes due on unreported offshore accounts offering a lower civil penalty framework and the possibility of escaping criminal prosecution. The VDP deadline expired on October 15.

While this VDP was specially geared toward offshore accounts, the IRS has had a general voluntary disclosure practice in place for years. Many taxpayers were reluctant to use it due to uncertainty about potentially severe penalties, that could result in payments exceeding the value of the entire account.

Now that the deadline has passed, what has transpired since the inception of the VDP? What are taxpayers doing who did not enter it? What have practitioners been experiencing in presenting VDP cases to the IRS?

Aftermath

It has been reported that the IRS has received about 14,700 disclosures from taxpayers under the special VDP for offshore accounts.

There are some indications from practitioners that the IRS is acting reasonably with regard to such VDP taxpayers, although this has not been standard across the board, with some relating difficult times. Based on anecdotal evidence I have gathered, no criminal prosecutions have been recommended by the IRS for those who entered the VDP.

Some practitioners have understood from the IRS on a very informal basis (meaning it cannot be relied on), that the agency will possibly take an easier stance in assessing penalties in certain cases (perhaps for example, where the taxpayer had only signature authority over the account; inherited accounts; or accounts in which the taxpayer did not withdraw or deposit funds).

The IRS has received numerous disclosure filings under the general voluntary disclosure programme subsequent to the expiration of the special programme deadline and apparently many taxpayers are still looking at this disclosure option.

Many persons who did not enter the special VDP are now opting to come forward and disclose their accounts. Some of these taxpayers were unaware of the special programme; simply misunderstood the deadline; others received inaccurate information about it.

Without a doubt, others adopted a "wait-and-see" approach in the hopes the IRS would back down as the UBS case gained momentum. The UBS matter, which involved the Swiss bank's role in encouraging tax evasion by Americans with offshore accounts, was closely watched. Since the IRS ultimately prevailed in having UBS disclose the names of some Americans, taxpayers have serious concerns the IRS will issue summons to other offshore banks — perhaps, indeed, their bank.

This fear is not unfounded. The IRS has publicly stated that it is using information gained through the now-closed special VDP to assist in continued enforcement efforts. Currently, I understand that certain other foreign banks are being closely scrutinised, and it may just be a matter of time before the next "John Doe" summons is issued by the IRS requesting a foreign bank reveal its US account holders.

A senior agent at the Treasury Department has told me that the UBS initiative is "only the beginning" and the IRS intends to take its offshore account enforcement efforts "throughout the world".

Coming Clean

What are the criteria for making a timely, voluntary disclosure as required under the general voluntary disclosure programme The criteria, set out in the IRS Manual, are in the box below. If a taxpayer is otherwise eligible to make a voluntary and timely disclosure under the general programme, should he come clean about the yet undisclosed accounts?

Assuming the taxpayer meets the criteria, the most significant issue is the amount of possible civil penalties. The tax due plus interest for at least the past six years, plus a possible 20 per cent negligence penalty on the unpaid tax are likely.

Unlike the special VDP, nothing certain is known about further penalties, such as the FBAR penalty. A wilful failure to file the FBAR can result in a penalty as high as 50 per cent of the account for the year the FBAR was due, and jail time. It would make sense that for taxpayers coming forward now, the IRS cannot automatically apply the terms of the framework penalty set forth in the now expired VDP.

It would make equal sense, however, that the IRS will not want to be too punitive since this could repel further taxpayers from voluntarily disclosing offshore accounts. Additionally, equity mandates should be considered for many taxpayers who were simply ignorant of reporting obligations, lacking intent to hide funds or evade tax.

Despite this uncertainty, there are some distinct advantages to coming forward voluntarily. A taxpayer greatly reduces the potential for criminal prosecution. In addition, making a voluntary disclosure now may mean that the actual audit process could be faster simply because the IRS has been flooded with an unexpectedly large amount of disclosures.

The IRS may have little choice but to streamline matters, lacking excess capacity. This could possibly work in a taxpayer's favour if the IRS wants to settle cases quickly. Fin-ally, of course, taxpayers with unreported accounts have the opportunity to solve a messy problem that will undoubtedly become worse with time as the IRS, the US tax laws and treaty networks crack down harder on non-compliance.

What are the criteria?

A disclosure is "timely" if it is received before the IRS has:

The writer is a Dubai-based American attorney specialising in US and international taxation planning as well as international commercial transactions. She can be reached at vjeker@eim.ae The information provided does not constitute tax or legal advice and is of a general nature only.