Igor S. Drabkin, Former IRS Attorney

The U.S. Government is stepping up its efforts against secret foreign accounts and offshore tax fraud.  On February 2, 2012, the Department of Justice announced that Wegelin & Co., the oldest Swiss private bank, was indicted for conspiring with U.S. taxpayers and others to hide more than $1.2 billion in secret accounts and the income these accounts generated from the Internal Revenue Service .   This is the first time an overseas bank has been charged by the United States for facilitating tax fraud by U.S. taxpayers.  The U.S. government also seized more than $16 million from Wegelin’s correspondent bank account in the United States, in accordance with a civil forfeiture complaint and seizure warrant. Wegelin is charged in a superseding indictment with Michael Berlinka, Urs Frei and Roger Keller, three private client advisers at the bank who were previously charged with the same conspiracy.

The U.S. government accuses Wegelin, acting through Berlinka, Frei, Keller and/or others, with the following:

·          Opening and servicing undeclared accounts for U.S. taxpayer-clients in the names of sham corporations and foundations formed under the laws of Liechtenstein, Panama, Hong Kong and other jurisdictions for the purpose of concealing some clients’ identities from the IRS;

·          Accepting, as part of Wegelin’s client files, documents that falsely declared that the sham entities were the beneficial owners of certain accounts, when in fact the accounts were owned by U.S. taxpayers;

·          Permitting certain U.S. taxpayer-clients to open and maintain undeclared accounts at Wegelin using code names and numbers to minimize references to the actual names of the U.S. taxpayers on Swiss bank documents;

·          Ensuring that account statements and other mail for U.S. taxpayer-clients were not mailed to them in the United States;

·          Communicating with some U.S. taxpayer-clients using their personal email accounts to reduce the risk of detection by law enforcement; and

·          Issuing checks drawn on, and executing wire transfers through, its U.S. correspondent bank account for the benefit of U.S. taxpayers with undeclared accounts at Wegelin and at least two other Swiss banks.   In doing so, the bank sometimes separated the transactions into batches of checks or multiple wire transfers in amounts that were less than $10,000 to reduce the risk that the IRS would detect the undeclared accounts.

The case was filed in the U.S. District Court for the Southern District of New York.  Wegelin is faces a fine of the greatest of $500,000, or twice the gross gain derived from the offense or twice the gross loss to the victims.   Berlinka, Frei, and Kelle face a maximum term of five years in prison, a maximum term of three years of supervised release and a fine of the greatest of $250,000, or twice the gross gain derived from the offense or twice the gross loss to the victims.

In another recent new development, the Swiss Finance Ministry said on January 31st that it handed over a few days ago secret banking data related to tax investigations to the U.S.  Approximately 20,000 pages of encrypted data on Swiss banking practices, clientele and employees in the U.S.   The key to unlocking the encrypted information, however, remains in the hands of the Swiss, said Eveline Widmer-Schlumpf, the Swiss finance minister. The Swiss insist that in order to obtain unencrypted data, they would like to reach a comprehensive bilateral solution with the U.S. and ensure that before the data is provided two conditions are met: (1) a request must be made pursuant to double taxation treaties; and (2) the individual named must have violated Swiss law.

With the government increasing its efforts to fight offshore tax evasion, taxpayers with foreign bank accounts are advised to consult with knowledgeable tax counsel.  Former IRS Trial Attorneys of Holtz, Slavett & Drabkin are available to assist you with the issues related to offshore assets and foreign accounts.  To arrange for a consultations, please contact us at (310) 550-6200.

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

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

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.

Igor S. Drabkin, Former IRS Attorney

Today, January 9, 2012, the IRS announced that they reopened the Offshore Voluntary Disclosure Program for taxpayers with undeclared foreign accounts.  The new program follows two previous Offshore Voluntary Disclosure Initiatives in 2009 and 2011, which were deemed by the IRS as a big success, bringing more than 33,000 taxpayers into compliance and generating $4.4 billion for U.S. Treasury. You can read the full text of the announcement here.

The program is similar to the 2011 program in many ways, but with a few key differences. Unlike last year, there is no set deadline for people to apply.  However, the IRS said that the terms of the program could change at any time going forward.  For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers, or decide to end the program entirely at any point.

The overall penalty structure for the new program is similar to the 2011 OVDI, except that the taxpayers in the highest penalty category will be required to pay 27.5% of the highest aggregate balance in foreign bank accounts and foreign assets, rather than 25%.  Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.  As a general rule, the taxpayers participating in the OVDI will face a 27.5% penalty, but taxpayers in limited situations can qualify for a 5% penalty (e.g. inherited accounts).  Taxpayers whose offshore accounts and assets do not exceed $75,000 will face a 12.5% penalty.  As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.

Additional information and Questions & Answers are expected to be posted by the IRS within a month.  We will continue to monitor all the announcements and updates.  Our tax attorneys at Holtz, Slavett & Drabkin will continue to assist taxpayers with offshore compliance and participation in the voluntary disclosure programs.  Please feel free to contact us at (310) 550-6200 with any questions.

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.

Following the comments made last week by the U.S. Ambassador to Canada David Jacobson, the Internal Revenue Service posted on its website Information for U.S. Citizens or Dual Citizens Residing Outside the U.S. The fact sheet largely confirms that no penalties will be imposed on late returns where no tax is due and failure to file required bank account information will also be forgiven for “reasonable cause.”

It should be noted that the IRS does not grant a blank forgiveness of the penalties, but discusses what may constitute “reasonable cause”.

With respect to a failure to file or failure to pay, reasonable cause is based on a consideration of all the facts and circumstances.  Reasonable cause relief is generally granted by the IRS when you demonstrate that you exercised ordinary business care and prudence in meeting your tax obligations but nevertheless failed to meet them.  In determining whether you exercised ordinary business care and prudence, the IRS will consider all available information, including:

• The reasons given for not meeting your tax obligations;
• Your compliance history;
• The length of time between your failure to meet your tax obligations and your subsequent compliance; and
• Circumstances beyond your control.

Reasonable cause may be established if you show that you were not aware of specific obligations to file returns or pay taxes, depending on the facts and circumstances.  Among the facts and circumstances that will be considered are:

• Your education;
• Whether you have previously been subject to the tax;
• Whether you have been penalized before;
• Whether there were recent changes in the tax forms or law that you could not reasonably be expected to know; and
• The level of complexity of a tax or compliance issue.

You may have reasonable cause for noncompliance due to ignorance of the law if a reasonable and good faith effort was made to comply with the law or you were unaware of the requirement and could not reasonably be expected to know of the requirement.

If you fail to file an FBAR, in the absence of reasonable cause, you may be subject to either a willful or non-willful civil penalty.  Generally, the civil penalty for willfully failing to file an FBAR can be up to the greater of $100,000 or 50 percent of the total balance of the foreign account at the time of the violation.  See 31 U.S.C. § 5321(a)(5).  Note that this penalty is applicable only in cases in which there is willful intent to avoid filing.  Non-willful violations that the IRS determines are not due to reasonable cause are subject to a penalty of up to $10,000 per violation.  There is no penalty in the case of a violation that IRS determines was due to reasonable cause.

Factors that might weigh in favor of a determination that an FBAR violation was due to reasonable cause include reliance upon the advice of a professional tax advisor who was informed of the existence of the foreign financial account, that the unreported account was established for a legitimate purpose and there were no indications of efforts taken to intentionally conceal the reporting of income or assets, and that there was no tax deficiency (or there was a tax deficiency but the amount was de minimis) related to the unreported foreign account.  There may be factors in addition to those listed that weigh in favor of a determination that a violation was due to reasonable cause.  No single factor is determinative.

Factors that might weigh against a determination that an FBAR violation was due to reasonable cause include whether the taxpayer’s background and education indicate that he should have known of the FBAR reporting requirements, whether there was a tax deficiency related to the unreported foreign account, and whether the taxpayer failed to disclose the existence of the account to the person preparing his tax return.  As with factors that might weigh in favor of a determination that an FBAR violation was due to reasonable cause, there may be other factors that weigh against a determination that a violation was due to reasonable cause.  No single factor is determinative.

Current IRS procedures state that an examiner may determine that the facts and circumstances of a particular case do not justify asserting a penalty and that instead an examiner should issue a warning letter.  See IRM 4.26.16, Report of Foreign Bank and Financial Accounts (FBAR).  The IRS has established penalty mitigation guidelines, but examiners may determine that a penalty is not appropriate or that a lesser (or greater) penalty amount than the guidelines would otherwise provide is appropriate.  Examiners are instructed to consider whether compliance objectives would be achieved by issuance of a warning letter; whether the person who committed the violation had been previously issued a warning letter or has been assessed the FBAR penalty; the nature of the violation and the amounts involved; and the cooperation of the taxpayer during the examination.

If you have questions about FBARs and reporting obligations of US taxpayers, Former IRS Attorneys of Holtz, Slavett & Drabkin can assist you. 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.

According to the IRS, $2.2 billion has been collected so far from the 2009 program representing closure on about 80% of the cases.  The IRS also said that it has collected an additional $500 million in taxes and interest as down payments for the 2011 program, a figure which will increase significantly after the applicable offshore and FBAR penalties are paid.  IRS Commissioner Doug Shulman noted that global tax enforcement has been a top priority and that progress has been made on multiple fronts, including ground-breaking international tax agreements and increased cooperation with other governments.

The full text of the news release can be viewed on the IRS website at http://www.irs.gov/newsroom/article/0,,id=245768,00.html.

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You can read about the standards in this article.

90-Day Extension to Submit Documents

In Q. 25.1, the IRS said that it will allow taxpayers to ask for a 90-day extension for the August 31, 2011, deadline in order to complete their submission of the required documents.  The postponement will apply only if the taxpayer makes a good faith effort to comply with the original deadline.  Taxpayers may request an extension of the deadline to complete their submission if they can demonstrate a good faith attempt to fully comply, on or before August 31, 2011, with the information disclosure required under the 2011 OVDI. The good faith attempt to fully comply must include the properly completed and signed agreements to extend the period of time to assess tax (including tax penalties) and to assess Report of Foreign Bank and Financial Accounts (FBAR) penalties.

Written requests for up to a 90-day extension must include a statement of those disclosure items that are missing, why they are not included, and the steps taken to secure them.  The new FAQ does not provide for any extension to enter the 2011 OVDI Program.

Opting Out of OVDI Program

New FAQ 51.1 explains that under certain circumstances a taxpayer may be better off opting out of the civil settlement structure of the 2011 OVDI, and illustrates the point with three examples.  Under the 2011 OVDI, a taxpayer must pay a global offshore penalty of 25% of the highes account balance. The FAQ explains that under certain circumstances electing to opt out would subject the taxpayer to a much smaller FBAR penalty than the penalty that would be due under the 2011 OVDI, or possibly no penalty at all, if the taxpayer’s violation was due to reasonable cause.

New FAQ 51.2, however, carries two examples, which show that certain taxpayers may be disadvantaged by opting out of the 2011 OVDI, and new FAQ 51.3 shows how a taxpayer’s case may be referred to IRS’s Criminal Investigation division if he opts out of the 2011 OVDI, is audited, and is found to have under-reported income and made false statements.

You can find Frequently Asked Questions and Answers here.

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.

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.