Igor S. Drabkin, Former IRS Attorney

The National Taxpayer Advocate (NTA) has issued a Taxpayer Advocate Directive, complaining about unfair treatment of certain participants in the 2009 Offshore Voluntary Disclosure Program (OVDP).  It appears that the NTA shared the same frustration with the OVDP that many tax practitioners, including our tax attorneys, have felt over the infamous Q&A 35 published by the IRS in the Frequently Asked Questions and Answers for the 2009 program.

To remind everyone, FAQ #35, which was released by IRS in June of 2009 in association with the 2009 OVDP, asks whether examiners will have any discretion to settle cases. The answer reads as follows:

“Voluntary disclosure examiners do not have discretion to settle cases for amounts less than what is properly due and owing. These examiners will compare the 20 percent offshore penalty to the total penalties that would otherwise apply to a particular taxpayer. Under no circumstances will a taxpayer be required to pay a penalty greater than what he would otherwise be liable for under existing statutes. If the taxpayer disagrees with the IRS’s determination, as set forth in the closing agreement, the taxpayer may request that the case be referred for a standard examination of all relevant years and issues. At the conclusion of this examination, all applicable penalties, including information return penalties and FBAR penalties, will be imposed. If, after the standard examination is concluded the case is closed unagreed, the taxpayer will have recourse to Appeals.”

On March 1, 2011, an IRS memo limited the instances in which examiners could exercise discretion in imposing a less-than-20% penalty. This change in the IRS position effectively eliminated any consideration of whether taxpayers in the 2009 OVDP would qualify for lesser penalties under existing statutes on the basis of non-willfulness or reasonable cause.   Rather, such taxpayers could either agree to pay 20% penalty on the value of their foreign accounts, which often was more than they believed they owed, or withdraw from the program and potentially face stiff civil penalties and criminal prosecution.  According to the NTA, a memo issued by IRS on March 1, 2011 was inconsistent with earlier guidance from 2009 regarding examiners’ discretion to settle cases and the applicability of the 20% offshore penalty for nonwillful violations.

The NTA characterized the March 1 memo as essentially presuming that all taxpayers who avail themselves of the OVDP are tax cheats, and thus was a switch from IRS’s more nuanced original position. According to the NTA, this left those who were merely trying to correct honest mistakes, who were perhaps encouraged to participate in the program based on the earlier guidance, effectively unable to pursue a reasonable cause defense.

In Taxpayer Advocate Directive 2011-1, dated August 16, 2011, the NTA directed that the Commissioners of the Large Business and International (LB&I) and the Small Business/Self-Employed (SB/SE) divisions take the following actions within 15 business days and, within 10 business days, provide the NTA with a written response describing the planned actions and any intent to appeal:

1. Disclose the Mar. 1, 2011 memo for OVDP examiners that addresses the use of discretion in 2009 OVDP cases on irs.gov (whether or not it is revoked, see (2), below).
2. Revoke the Mar. 1, 2011 memo and disclose such revocation.
3. Direct all examiners that, when determining whether a taxpayer would be liable for less than the offshore penalty under “existing statutes” as required by FAQ #35, they should not assume the violation was willful unless the taxpayer proves it was not. Direct them to use standard examination procedures to determine whether a taxpayer would be liable for a lesser amount under existing statutes (e.g., because the taxpayer was eligible for the reasonable cause exception) without shifting the burden of proof onto the taxpayer.
4. Commit to replace the Mar. 1, 2011 memo and all OVDP-related FAQs on IRS.gov with guidance published in the Internal Revenue Bulletin, incorporating comments from the public and internal stakeholders (including the NTA). It should reaffirm that taxpayers accepted into the 2009 OVDP will not be required to pay more than the amount for which they would otherwise be liable under existing statutes, as currently provided by FAQ #35, and direct OVDP examiners to use standard examination procedures to make this determination.
5. Allow taxpayers who agreed to pay more under the 2009 OVDP than the amount for which they believe they would be liable under existing statutes the option to elect to have IRS verify this claim (using standard examination procedures), and in cases where IRS verifies it, offer to amend the closing agreement to reduce the offshore penalty.

In other words, the NTA asserted that IRS failed to properly implement FAQ #35, which practitioners had interpreted as suggesting that an examiner could consider a taxpayer’s argument that his noncompliance was not willful or was otherwise deserving of reduced or no penalties. In turn, this resulted in inequitable treatment of taxpayers, in that it fails to distinguish between true tax evaders and those who made honest mistakes.

In their response dated August 30, 2011, Commissioners of the LB&I and SB/SE divisions, agreed to disclose the March 1, 2011 memo referenced in (1) but otherwise appealed the Taxpayer Advocate’s Directive.  In her September 22, 2011 response to the appeal, the NTA re-asserted her primary concerns with the 2009 OVDP.  She stated that, without FAQ #35, the OVDP penalty structure essentially assumes that all participants are tax evaders hiding money overseas, and doesn’t account for those who are seeking to correct honest mistakes. She further expressed skepticism at IRS’s “opt-out” option described in a June 11, 2011 memo, which provides that those who opt out will be subject to a complete examination of all relevant years and issues, then subject to all applicable penalties. In the end, the NTA characterized IRS’s actions as a miscommunication and called on IRS to create a “fair process” to evaluate willfulness and reasonable cause, with the burden of proof on IRS.

On Oct. 14, 2011, Steven T. Miller, Deputy Commissioner for Services and Enforcement, sent a memorandum to the NTA stating that the relief generally sought by the NTA was provided in the existing opt-out procedures, which expressly state that it may be preferable for certain taxpayers to opt out of the 2009 or 2011 OVDP.  Deputy Commissioner Miller’s memorandum now elevates the issue to IRS Commissioner Doug Shulman. It remains unclear how he will respond, although his public pronouncements on the OVDP have been overwhelmingly positive.  We hope that the IRS makes the right decision and reinstates discretion with the agents in the OVDP to consider all the available penalties, and make a determination based on the facts of each particular case.

Author: Igor S. Drabkin, J.D., Former IRS Attorney.

Copyright (c) 2012 Igor S. Drabkin.  All Rights Reserved.

Michael Berlinka, Urs Frei And Roger Keller allegedly conspired with some U.S. taxpayers and others to hide Swiss bank accounts and the income generated from them while working as client advisers for a Swiss bank.  The three allegedly worked on dozens of undeclared bank accounts in 2008 and 2009 in an effort to pick up business lost by UBS and another Swiss bank, following the reports that the IRS is investigating UBS.

The three bankers allegedly helped U.S. clients open using sham corporation names in other countries as well as used code names and numbers on undeclared accounts to minimize references to the clients’ actual names. In addition, they allegedly made sure that any mail related to the accounts wasn’t sent to clients at their U.S. addresses and communicated using their personal email accounts to avoid detection, among other allegations, according to the release.

You an read the full text of the U.S. Attorney’s release here.

This case continues the trend that we’ve been covering and discussing lately.  The IRS and the Department of Justice will continue prosecution and audits of the offshore accounts.  Information gathered by the governments from the 2009 and 2011 Offshore Voluntary Disclosure programs will assist the IRS and DOJ to identify potential targets and areas of non-compliance.

Our attorneys will continue assisting taxpayers with foreign account compliance issues.

Former IRS Attorneys of Holtz, Slavett & Drabkin can assist you with questions about foreign bank accounts, unreported income and FBARs. We can be reached at (310) 550-6200.

Igor S. Drabkin, Former IRS Attorney

As reported by Reuters and many other news agencies, Credit Suisse AG,  the second largest bank of Switzerland, has notified some of its U.S. clients that it will disclose their identities and account details to the Internal Revenue Service. In a letter dated November 2nd, Credit Suisse says the IRS made a formal request for the information through the Swiss Federal Tax Administration (SFTA). The letter states that the SFTA has issued an order directing the bank to supply the account information. According to Reuters, who obtained a copy of the letter, it says: “This order is immediately executable and Credit Suisse, as an information holder, has no right to appeal”.

The IRS request apparently involves accounts maintained at any time from January 1, 2002, through December 31, 2010.  Recipients of the letter are offered two options: either give a written permission for the data to be handed over to Swiss tax authorities, which will then turn it over to the IRS; or hire an attorney in Switzerland to contest the request.  The number of U.S. clients due to receive the letter is uncertain.  Credit Suisse declined to comment on the matter.

The IRS request for information follows an investigation into claims that Credit Suisse bankers helped dozens of American clients evade taxes. Two current and three former Credit Suisse bankers were indicted earlier this year.  This follows the much-publicized 2009 case against UBS, which ended in the bank paying $780 million to settle federal allegations that it helped tens of thousands of American clients hide assets from the IRS.  UBS also agreed to disclose the names of about 4,500 U.S. account holders to the IRS.

As we wrote recently, the Swiss government is attempting to reach a global agreement with the U.S. that would cover all Swiss banks.

If you have or had your accounts at Credit Suisse AG, or other foreign banks, Former IRS Tax Attorneys of Holtz, Slavett & Drabkin can assist you with this issue.  We can be reached at (310) 550-6200.

Author: Igor S. Drabkin, J.D., Former IRS Attorney.

Copyright (c) 2011 Igor S. Drabkin.  All Rights Reserved.

Former IRS Tax Attorneys at Holtz, Slavett & Drabkin are avilable to to assist you with your unpreported offshore accounts. 

Below is the information provided by the IRS on their website.

Taxpayers that fully comply with the 2011 OVDI will avoid criminal prosecution and will be able to determine, with a reasonable degree of certainty, the total cost of resolving all offshore tax issues. Taxpayers who do not participate in the voluntary disclosure, face the risk of being detected by the government, an increased risk of criminal prosecution, and the imposition of bigger penalties, including a fraud penalty and foreign information return penalties.

Specifically, under the 2011 OVDI:

• All taxes and interest due for 2003 – 2010 are to be assessed.  The taxpayer also must file or amend all returns, including information returns and Form TOF 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR).
• An accuracy-related penalty is to be assessed on all years (no reasonable cause exception may be applied), and failure-to-file and failure-to-pay penalties also must be assessed, where applicable.
• Instead of all other penalties that may apply, including FBAR and information return penalties, an offshore penalty is to be assessed equal to 25% (or 12.5% or 5% if required conditions are met) of the amount in foreign financial accounts and the value of foreign assets acquired with untaxed funds or producing untaxed income in the year with the highest aggregate account and asset value.
• The 25% penalty is reduced to 12.5% if the taxpayer’s highest aggregate account balance (including the fair market value of assets in undisclosed offshore entities and the fair market value of any foreign assets that were either acquired with improperly untaxed funds or produced improperly untaxed income) in each of the years covered by the 2011 OVDI is less than $75,000.
• The 25% penalty is reduced to 5% if the taxpayer: (a) did not open or cause the account to be opened (unless a new account had to be opened upon the death of the owner of the account); (b) exercised minimal, infrequent contact with the account (e.g., to request the account balance); (c) didn’t, except for a withdrawal closing the account and transferring the funds to a U.S. account, withdraw more than $1,000 from the account in any year covered by the voluntary disclosure; and (d) can establish that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. tax).  For funds deposited before Jan. 1, 1991, if no information is available to establish whether such funds were appropriately taxed, it will be presumed that they were. The penalty is also reduced to 5% for taxpayers who are foreign residents and who were unaware that they were U.S. citizens.

Please note that although the IRS has previously indicated that it will provide an extension of up to 90 days to the August 31st deadline in order to prepare and submit necessary documentation, this postponement will apply only if the taxpayer makes a good faith effort to comply with the original deadline.  At the very least, the taxpayers must make the initial disclosure by August 31, 2011, in order to take advantage of the terms of the 2011 OVDI.

Former IRS Tax Attorneys at Holtz Slavett & Drabkin are available to assist you with 2011 OVDI questions and may be reached at (310) 550-6200.

Author: Igor S. Drabkin, J.D., Former IRS Attorney.

Copyright (c) 2011 Igor S. Drabkin.  All Rights Reserved.

You can read about the standards in this article.

According to the indictment, Dr. Ahuja, a board-certified neurosurgeon, wire transferred and maintained millions of dollars in bank accounts in India and the Bailiwick of Jersey at The Hongkong and Shanghai Banking Corporation Ltd. (HSBC).  In 2009, the HSBC bank account in India had a balance of $8,733,785.   The indictment alleges that Dr. Ahuja failed to report these bank accounts to the IRS on his 2006-2009 tax returns. The indictment further alleges that Dr. Ahuja failed to report more than $1.2 million in interest income that he earned from his HSBC India account and failed to pay the taxes due on that income.  For the 2006-2009 tax years, Dr. Ahuja also failed to file FBARs to report his foreign bank accounts to the Department of the Treasury.

As alleged in the indictment, U.S. citizens has an obligation to report to the IRS on Schedule B of their U.S. Individual Income Tax Return, Form 1040, whether they had a financial interest in, or signature authority over, a financial account in a foreign county in a particular year by checking “Yes” or “No” in the appropriate box and identifying the country where the account was maintained.  They further have an obligation to report all income earned from foreign financial accounts on the tax return and to pay the taxes due on that income.  Separately, U.S. citizens with a financial interest in, or signatory authority over, a foreign financial account worth more than $10,000 in a particular year, must also file an FBAR form with the Department of the Treasury disclosing such an account by June 30 of the following year.

Each false tax return charge carries a maximum penalty of three years in prison and a $250,000 fine. The failure to file FBAR charges each carry a maximum penalty of 10 years in prison and a $500,000 fine.

The IRS currently is offering taxpayers with undisclosed income from offshore accounts the opportunity to participate in a new, voluntary disclosure initiative in order to get current on their tax returns and reporting requirements.  The 2011 Offshore Voluntary Disclosure Initiative (OVDI) will be available only through August 21, 2011.

If you have any questions regarding an offshore account and/or the IRS 2011 OVDI, please contact a former IRS tax attorney at Holtz, Slavett & Drabkin at (310) 550-6200.

Igor S. Drabkin, Former IRS Attorney

With the deadline to participate in the 2011 Offshore Voluntary Disclosure Initiative (OVDI) approaching, the U.S. government decided to prosecute a taxpayer who made a so-called “quiet disclosure” of his offshore account at HSBC.  The U.S. filed a criminal information in the U.S. District Court for the District of Massachussets against Michael Schiavo, a Boston banker.

According to the information filed in court, Mr. Schiavo failed to report his interest in several offshore accounts for the tax years 2003 through 2008.   After the news and widespread coverage of the UBS case and its decision to provide account information to the U.S., Mr. Schiavo decided to amend his tax returns and submitted Foreign Bank Account Returns (FBARs) to the IRS and Department of Treasury. A situation whre the taxpayer files amended returns and pays any related tax and interest for previously unreported offshore income, but without first notifying the IRS or participating in a voluntary disclosure program is known as “quiet disclosure.  Mr. Schiavo decided to do a quiet disclosure of his offshore account rather than participate in the voluntary disclosure program.

The government alleges that he hid more than $90,000 from a partnership that invested in medical devices, in an undeclared account at HSBC Bank Bermuda.  According to the information, Mr. Schiavo’s partner, Peter Schober, transferred the funds to HSBC in 2006 from a UBS account in Switzerland, which was also undisclosed.

The court document claims that Mr. Schiavo willfully failed to file FBARs with the Department of Treasury for the tax years 2003 to 2008. Additionally, his tax returns failed to include his interest in a foreign financial account or the income from partnership. The government claims that the failure to include such income deprived the IRS of $40,624.

On October 6, 2009, Mr.  Schiavo made a quiet disclosure by preparing and filing FBARs and amended tax returns for the 2003 through 2008 tax years. He did not participate in the 2009 Offshore Voluntary Disclosure Program, although his disclosure was made nine days prior to the end of the amnesty period. In his October 6 disclosure, he revealed to the IRS that he had an interest in an HSBC account in Bermuda, but he failed to report his income on his 2006 tax return from his partnership.   Later, Mr. Schiavo prepared and executed a second amended return for the 2006 year where he reported the income he earned from his partnership that was ultimately deposited into his HSBC account in Bermuda.

The Schiavo case leaves open a possibility that the government can prosecute quiet disclosure cases, especially if the disclosure is incomplete or misleading.  It is possible that had Mr.  Schiavo fully disclosed his income in his first amended return in his quiet disclosure, the government would not prosecute him.  However, this case still raises some serious question about doing a disclosure quietly.  What is certain, that a disclosure must be complete and truthful.

The 2011 OVDI program provides for a significant penalty of 25% of the value of the offshore accounts, and seemingly applies the penalty regardless of whether the taxpayer willfully evaded tax obligations or not.  For many taxpayers, it poses a question of whether the OVDI penalty is excessive.  Those taxpayers who seek the IRS to consider the willfulness and reasonable cause arguments, would need to opt out of the program, leaving all the penalties and all the years on the table.   For those taxpayers who consider whether to participate in the 2011 OVDI program, or to make a quiet disclosure, the  Schiavo case brings another issue to consider and think about.

Former IRS Tax Attorneys at Holtz Slavett & Drabkin are available to assist you with your offshore account tax issues and may be reached at (310) 550-6200.

Author: Igor S. Drabkin, J.D., Former IRS Attorney.

Copyright (c) 2011 Igor S. Drabkin.  All Rights Reserved.

An indictment identified the four bankers as Marco Parenti Adami of Italy, Emanuel Agustino, Michele Bergantino and Roger Schaerer (all three of Switzerland).  It was not clear if any were under arrest or even in the U.S.

The indictment said they worked for “one of the biggest banks in Switzerland and largest wealth managers in the world. ” Although the document did not specifically identify the bank, calling it only “international bank”, internet research of the names of the four indicted bankers indicated links with Credit Suisse.  A Credit Suisse spokesman in New York provided a short statement in response to the indictment: “We are cooperating with the authorities in their investigation of these individuals.  Credit Suisse is not a target of the investigation.”

According to the indictment, the defendants were in a conspiracy to help U.S. citizens avoid income taxes.  The charges indicated that the bank serviced unreported foreign accounts at its New York office, and told account-holders to travel when necessary to Switzerland and the Bahamas. Other schemes mentioned in the indictment included limiting withdrawals to less than the mandatory reporting level of $10,000,  using charge and debit cards from other countries, and keeping records overseas.  The indictment also said that the indicted defendants “discouraged U.S. customers from disclosing their undeclared accounts through the Volunteer Disclosure Program” and then  helped to move assets to other financial institutions in Switzerland and Hong Kong.  Based on the indictment, much of the alleged tax evasion took place in Southern California, but the indictment also mentioned New York, New Jersey, Virginia, Pittsburgh and Miami.

In a press release, the full text of which you can read here, the U.S. Justice Department said the maximum punishment each defendant faced is five years in prison and a $250,000 fine.

On February 8, 2011, the IRS announced a new Offshore Voluntary Disclosure Initiative for taxpayers with undisclosed offshore accounts.  Pursuant to the terms of the program, those taxpayers who voluntarily come forward, disclose their hidden foreign accounts and cooperate with the IRS, will avoid criminal prosecution and pay reduced penalties.

If you have questions about tax issues related to foreign bank accounts, or the IRS Voluntary Disclosure Initiative, please contact Former IRS Tax Attorneys at Holtz Slavett & Drabkin at (310) 550-6200.

Author: Igor S. Drabkin, J.D., Former IRS Attorney.

Copyright (c) 2011 Igor S. Drabkin.  All Rights Reserved.