Foreign Bank Account Reporting

Update: Tax Amnesty for Non-Reporting of Foreign Bank Accounts

As you may recall from my last in a series of articles on tax amnesty, U.S. taxpayers who failed to file disclosure forms were alerted by the U.S. Treasury on September 21, 2009 of a one-time extension of time to October 15, 2009 to comply with the special voluntary disclosure requirements of the Internal Revenue Service for Americans with unreported income from bank accounts situated outside the United States. As a result, after the deadline passed, many amnesty filings were made with the U.S. Treasury.

According to the latest information from the U.S. Treasury, more than 15,000 amnesty filings were made on or before the 15th day of October 2009. The IRS and the IRS Commissioner, Douglas Shulman, disclosed that even after the above deadline, an additional 3,000 taxpayers came forward to be in compliance with America’s tax laws in relation to foreign bank accounts. The total amount of tax, interest and penalties assessed and collected were so significant to the Treasury that another voluntary tax amnesty program and period would be offered with less favorable terms.
IRS Commissioner Shulman stated:

“As I’ve said all along, the goal is to get people back into the U.S. tax system. Combating international tax evasion is a top priority for the IRS. We have additional cases and banks under review. The situation will just get worse in the months ahead for those hiding assets and income offshore. This new disclosure initiative is the last, best chance for people to get back into the system.”

“As we continue to amass more information and pursue more people internationally, the risk to individuals hiding assets offshore is increasing…This new effort gives those hiding money in foreign accounts a tough, fair way to resolve their tax problems once and for all. And it gives people a chance to come in before we find them.”

“As I’ve said all along, the goal is to get people back into the U.S. tax system…Combating international tax evasion is a top priority for the IRS. We have additional cases and banks under review. The situation will just get worse in the months ahead for those hiding assets and income offshore. This new disclosure initiative is the last, best chance for people to get back into the system.”

The voluntary amnesty program will be termed the “2011 Offshore Voluntary Disclosure Initiative” (OVDI) and, from what I have seen to date, will incorporate many of the items of the 2009 amnesty, both good and bad.

OVDI has increased the penalty to 25% of the amount in the foreign bank accounts in the year with the highest aggregate account balance while looking at a 7-year period, from 2003 through 2010. This 25% penalty will apply to most filers of the OVDI amnesty. In addition, amnesty filers will be required to accept and pay back any and all taxes, interest and accuracy related penalties with a total payoff of these taxes, and interest and penalties on or before the August 31, 2011 deadline. Taxpayers participating in the new initiative must also file all original and amended tax returns and include payment for taxes, interest and accuracy-related penalties by the Aug. 31 deadline.

Now, when I was in law school, our tax professor would always make reference to a particular tax rule and continue to state that the rule had so many exceptions that it was like “the tail wagging the dog.”

1. The above 25% penalty may be reduced to 5% in very special situations;

2. If your offshore accounts (and assets!) are less than $75,000 in any tax year from 2003 through 2010, then that year will face a reduced penalty from 25% to 12.5%. However, the tax, interest and accuracy related penalties will still apply in full, please see immediately below on the interest and accuracy related penalty.

3. As mentioned in the 2009 amnesty, the IRS continues to solicit compliance with the threat of “possible” criminal prosecution for taxpayers who do not come forward in the 2011 amnesty offering.

4. The 2011 initiative offers clear benefits to encourage taxpayers to come in now rather than risk IRS detection. Taxpayers hiding assets offshore who do not come forward will face far higher penalty scenarios as well as the possibility of criminal prosecution.

IRS Interest Rates for Individuals relating to the amnesty period are as follows:

Jan. 1, 2011 — Mar. 31, 2011 3%

Oct. 1, 2010 — Dec. 31, 2010 4%

Jul. 1, 2010 — Sep. 30, 2010 4%

Apr. 1, 2010 – Jun. 30, 2010 4%

Jan. 1, 2010 — Mar. 31, 2010 4%

Oct. 1, 2009 — Dec. 31, 2009 4%

Jul. 1, 2009 — Sep. 30, 2009 4%

Apr. 1, 2009 – Jun. 30, 2009 4%

Jan. 1, 2009 — Mar. 31, 2009 5%

Oct. 1, 2008 — Dec. 31, 2008 6%

Jul. 1, 2008 — Sep. 30, 2008 5%

Apr. 1, 2008 — Jun. 30, 2008 6%

Jan. 1, 2008 — Mar. 31, 2008 7%

Oct. 1, 2007 — Dec. 31, 2007 8%

Jul. 1, 2007 — Sep. 30, 2007 8%

Apr. 1, 2007 — Jun. 30, 2007 8%

Jan. 1, 2007 — Mar. 31, 2007 8%

Oct. 1, 2006 — Dec. 31, 2006 8%

Jul. 1, 2006 — Sep. 30, 2006 8%

Apr. 1, 2006 — Jun. 30, 2006 7%

Jan. 1, 2006 — Mar. 31, 2006 7%

Oct. 1, 2005 — Dec. 31, 2005 7%

Jul. 1, 2005 — Sep. 30, 2005 6%

Apr. 1, 2005 — Jun. 30, 2005 6%

Jan. 1, 2005 — Mar. 31, 2005 5%

Oct. 1, 2004 — Dec. 31, 2004 5%

Jul. 1, 2004 — Sep. 30, 2004 4%

Apr. 1, 2004 — Jun. 30, 2004 5%

Jan. 1, 2004 — Mar. 31, 2004 4%

Oct. 1, 2003 — Dec. 31, 2003 4%

Jul. 1, 2003 — Sep. 30, 2003 5%

Apr. 1, 2003 — Jun. 30, 2003 5%

Jan. 1, 2003 — Mar. 31, 2003 5%

Note: Although the above interest rates are determined on a quarterly basis (tied into the Federal short-term interest rate plus 3 percentage points) the interest calculation is compounded “daily.”

The Accuracy Related Penalty is 20% of any underpayment due to negligence or disregard of rules or regulations, or substantial understatement of income tax. Remember that the accuracy related penalty is entirely separate from any other penalty, such as the failure to file penalty.

To bring this together, IRS Commissioner Shulman remarked before the 23rd Annual Institute on Current Issues in International Taxation in Washington, DC that:

“If you add all of our offshore compliance efforts together, perhaps the most important outcome is the deterrent effect. Today, banks are much less willing to facilitate offshore evasion than they were in the past… advisors are asking more questions of their clients regarding offshore accounts… and taxpayers understand that their chances of getting away with hiding assets overseas have diminished. While very difficult to measure, this deterrent effect has important, lasting, multi-billion dollar consequences for our tax system.”

Now armed with the above information from the IRS, U.S. Treasury and Commissioner Shulman, let us apply this to an actual tax case. The case just concluded in September of 2010 at the United States District Court for the Eastern District of Virginia with the United States of America in the favor of Mr. Williams as the plaintiff and J. Bryan Williams as the defendant.

It is probably best to give some background to which neither the taxpayer, Mr. Williams, or the IRS disagree:

Our test case plaintiff, Williams, opened two bank accounts at Credit Agricole Indosuez, SA, in the name of ALQI Holdings, Ltd., a British Corporation. In the tax years 1993 and 2000, Williams deposited more than $7,000,000 in assets in the two above bank accounts, which produced bank interest income exceeding $800,000. Schedule B, Part III of Williams’ 2000 income tax return instructed Williams to indicate whether he had an interest in financial accounts in a foreign country by checking “Yes” or “No” in the appropriate box and directed him to Form TDF 90-22.1, the now globally know “Foreign Bank Account Report.”

If you look at your federal form 1040 that we as individuals file each on or before April 15th of the following year, you will see an innocent bottom part of Schedule B, part III with a few lines of questions with simple check-the-box questions without any place for amounts or dates that is generally deemed important on a tax return. However, this innocent bottom area with boxes to be checked as “yes” or “no” is now essentially lethal Pandora’s boxes.

The year 2000 was not a good year for Williams. On Williams’ 2000 tax return, Schedule B, Part III, the box was checked “No.” as to foreign bank accounts. Williams also missed the of the TDF 90-22.1 filing. This is, in my view, easy to miss since the tax return is due April 15 of the following year and the TDF 90-22.1 is due June 30 of the next year win no extensions allowed. Also in the year 2000, Williams was interviewed, pursuant to a Swiss government official request on these offshore bank accounts base on requests made by the U.S. government. Williams did, fortunately, retained legal U.S. and Swiss tax counsel prior to the interview date of November 13, 2000. The very next day after this interview, the U.S. Treasury requested that the Swiss government freeze Williams’ two Swiss bank accounts. That same day, the Swiss government did indeed freeze any and all funds in those two offshore bank accounts. Therefore, Williams was, I suspect, then severely handicapped in subsequent years attempting to pay his attorney fees and costs as well as massive penalties to the IRS.

Williams’ tax attorneys and accountants, subsequent to the freezing, advised him to make a series of complete disclosures to Swiss and U.S. authorities. In January 2002, Williams disclosed the offshore accounts to John Manton of the IRS in Washington, D.C even though the IRS already knew of these accounts well before requesting the Swiss freeze in November 2000.

On October 15, 2002, Williams again disclosed the accounts by filing his income tax return for the tax year 2001. Then a third time, Williams made full disclosure of the ALQI accounts on February 14, 2003, as part of his application to participate in the Offshore Voluntary Compliance Initiative.

In February 2003, Williams filed Amended Returns for 1999 and 2000, which, for the fourth time, disclosed details about his offshore accounts. Thereafter, in May 2003, Williams agreed to plead guilty to tax fraud and for a fifth time, fully disclosed all information about the ALQI Swiss bank accounts. On June 12, 2003, Williams pleaded guilty to one count of conspiracy to defraud the United States and to one count of criminal tax evasion in connection with funds held in the Swiss bank accounts during the years 1993 through 2000. And now, if you are keeping count, a sixth time, on January 18, 2007, Williams filed the TDF 90-22.1 forms for all years going back to 1993, including tax year 2000.

Even with at least six disclosures of his two originally unreported offshore bank accounts, the U.S. government charged Williams with, amongst other violations, Title 31, § 5314 of the U.S. Code, which requires qualifying individuals to disclose their interests in foreign bank accounts. The Internal Revenue Code Section 5314(b) permits the U.S. Secretary of Treasury to delegate additional findings of fact by enforcing the filing of TDF 90-22.1 if the following conditions exist:

1. The individual was a resident or a person doing business in the United States;

2. The individual had a financial account or accounts that exceeded $10,000 during the calendar year;
3. The financial account was in a foreign country; and

4. The U.S. person had a financial interest in the account or signatory or other authority over the foreign financial account.

Williams told the court that he did fall under the first three of the above conditions, but the civil penalties for willful violations of IRC § 5314, carrying maximum assessment of $100,000 did not apply to him because he did not act in a “willful” manner.

The court found that the U.S. government had failed to prove its case on the matter of a “willful” violation. The court also found that the Government’s case did not adequately account for the difference between failing and willfully failing to disclose an interest in a foreign bank account pursuant to IRC Section 5321(b)(l). Be careful here, because the court’s findings were based on acts prior to 2004! Since 2003, the U.S. government has legislated new statutory language addressing willful violations in an expanded sense for acts falling below the willfulness standard.
CONCLUSION:

We are entering a new era of foreign bank account voluntary compliance program. There is now a solid history of IRS voluntary programs referencing foreign bank accounts. By watching this current program take regulatory form and taking into account lessons learned from the past programs, we hope to use this as an advantage in counseling clients who are seeking a resolution to the current, and even past, dilemma of having a bank account or securities overseas and of making the delicate decision to come forward and be compliant with the U.S. government. It is important to note that, as with past amnesty programs, if the IRS discovers the non-reporting of foreign bank account before you apply for amnesty, the amnesty application will not apply to you. There are many more factors to consider which I have taken extraordinary efforts to point out in my latest publication offered by Asset Protection World. If you have read this publication and have self-evaluated your position, and now wish, under attorney/client privileged protection, to arrange for a private consultation, I am more than happy to discuss your particular concerns and question.