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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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.

Igor S. Drabkin, Former IRS Attorney

On Tuesday, February 8, 2011, the Internal Revenue Service announced a new amnesty program for taxpayers with hidden offshore bank accounts.  The new Voluntary Disclosure Initiative is intended to bring people with unreported offshore income and undisclosed offshore accounts back into compliance.

This new program, called the 2011 Offshore Voluntary Disclosure Initiative (OVDI), follows the 2009 Offshore Voluntary Disclosure Program, which was considered a success by the IRS and tax community, bringing over 15,000 taxpayers into compliance and generating over $400 million for the government.   The terms of the new initiative are tougher, meaning that people who did not come in through the 2009 voluntary disclosure program will not be rewarded for waiting.  The 2011 initiative also adds new features.

The program makes clear that taxpayers who voluntarily come forward will not to face prosecution for tax evasion.  The program will require individuals to pay a penalty of 25% of the amount in their foreign bank accounts in the year with the highest aggregate account balance over eight years from 2003 through 2010.  Under the regularly applicable penalties, a taxpayer could pay up to 50% of the highest amount in each account for each year over six years.  The taxpayers will also be required to amend their tax returns, and pay back taxes and interest for up to eight years, as well as delinquency and accuracy-related penalties.

Some taxpayers may be eligible for reduced penalties of 5% or 12.5%.  People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the 2011 initiative will qualify for the 12.5% penalty.  In certain circumstances, such as inherited offshore accounts, taxpayers may qualify for the 5% penalty.

The deadline for participating in the new Voluntary Disclosure Program is August 31, 2011.

You can read the full text of the IRS announcement here: http://www.irs.gov/newsroom/article/0,,id=235695,00.html

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.

Igor S. Drabkin, Former IRS Attorney

U.S. prosecutors have charged an ex-UBS banker with tax fraud for encouraging his wealthy American clients not to disclose to U.S. tax authorities that they had money in offshore accounts.  Renzo Gadola, an investment adviser based in Switzerland, faces charges of conspiracy to defraud the United States, the U.S. attorney’s office in Miami said in a statement on December 15, 2010.  Gadola, a Swiss citizen who worked at UBS AG from 1995 to 2008, was arrested on November 8, 2010, two days after meeting a client at a Miami hotel and attempting to persuade the person from disclosing offshore account information to U.S. officials.  In court documents filed in the District Court, prosecutors charged that Gadola worked with another unidentified former UBS banker to hide clients’ money from U.S. tax authorities by shifting their undeclared funds from UBS accounts to Switzerland-based Basler Kantonalbank.  The unnamed ex-UBS bank executive was described by prosecutors as a former executive director for UBS’s North America International business who left the bank seven years ago taking 150 clients with him to set up an independent investment group in Switzerland.

In the Gadola case, prosecutors said the unidentified Swiss banker had received some $445,000 from a Mississippi client who had kept the money in a safe deposit box before transferring it first to UBS and then to a Basler Kantonalbank account. The client later told the bankers he wanted to declare the money under a voluntary disclosure program launched by the IRS, but was advised against it because his account was too small.  During the November meeting, according to prosecutors, Gadola told the client “you have nothing to worry about” because there was “no paper trail” tied to his Basler Kantonalbank account since the money had been withdrawn and placed in a safe in his office.

The case comes after U.S. authorities recently ended a probe into UBS, which was charged by federal prosecutors with helping roughly 17,000 clients with $20 billion of assets hide their accounts from the Internal Revenue Service. As part of a settlement, Zurich-based UBS paid $780 million, handed over names of more than 250 client accounts, agreed to disclose names of additional 4,450 clients, and ended its U.S. cross-border banking business.

Igor S. Drabkin, Former IRS Attorney

In a recent case of United States v. J. Bryan Williams, the U.S. District Court for the Eastern District of Virginia found that the government had failed to meet its burden to establish by a preponderance of the evidence that a taxpayer willfully failed to report his interest in a foreign bank accounts that were omitted from the individual’s 2000 tax return.

In 1993, the defendant, J. Bryan Williams, opened up two Swiss bank accounts in the name of ALQI Holdings, Ltd., and over the course of seven years deposited in excess of $7 million in assets to the Swiss account. Williams did not disclose the foreign accounts on his 2000 tax return, nor did he file a Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts) (FBAR).

In January 2002, based on advice received from his tax attorneys and accountants, the defendant disclosed his financial interests in the offshore accounts to an IRS agent.  Furthermore, Williams disclosed the existence of the foreign accounts by the following:

• Upon the filing of his 2001 tax return (October 2002);
• In an application to participate in the Offshore Voluntary Compliance Initiative (February 2003);
• In amended returns for 1999 and 2000 (filed February 2003);
• While pleading guilty to tax fraud (May 2003) as well as to conspiracy charges and tax evasion for the offshore funds from 1993 to 2000 (June 2003); and
• Upon filing his filing of form TD F 90-22.1 for tax years 1993 through 2000 (January 2007).

The facts also indicated that Williams met with Swiss authorities in 2000 and learned that his Swiss accounts were frozen on November 14, 2000, “at the behest of the U.S. government.”

The government sought to enforce its assessment of two FBAR penalties against the defendant for willfully failing to report his interest in his offshore accounts for the tax year 2000.   Penalty for willful failure to file an FBAR is the greater of $100,000, or 50% of the amount in the account at the time of the violation.  See31 U.S.C. § 5321(a)(5)(C) and 31 U.S.C. § 5322(a).

The government argued that the defendant’s signature on his Form 1040 was prima facie evidence that Williams knew the contents of his tax return and willfully failed to disclose his Swiss bank accounts.  The court found, however, that while Williams had in fact not disclosed his offshore account on his original tax return, Form 1040, for the 2000 tax year, it occurred after he found out that the U.S. and Swiss authorities found out about the accounts. In the court’s view, Williams was aware that the authorities knew about his offshore accounts by the fall of 2000, long before the FBAR deadline of June 30, 2001. The court said that such evidence demonstrated that Williams lacked any motivation to willfully conceal his offshore accounts on his 2000 tax return, and thereafter.

“Williams’ subsequent disclosures throughout 2002 and 2003 corroborate his lack of intent,” the court said. “Though made after the June 30, 2001 deadline, Williams’ disclosure of the ALQI accounts to the IRS in January 2002 indicates to the Court that Williams continued to believe the assets had already been disclosed. That is, it makes little sense for Williams to disclose the ALQI accounts merely six months after the deadline he supposedly willfully violated.”

The Williams case shows that it may not be easy for the government to meet its burden of proof in order to establish the “willfulness” element.  The courts will review all the facts and circumstances, including the taxpayer’s motives and actions, in order to determine if there was requisite willful intent. Nevertheless, it also shows that the government aggressively tries to enforce the FBAR penalties and will continue to pursue cases of undisclosed foreign accounts.

This case, as well as other cases and recent developments, should give those with undisclosed offshore accounts some incentive to seek legal counsel and consider if voluntary disclosure is necessary.  Former IRS attorneys of Holtz, Slavett & Drabkin, can assist you with evaluating your options and dealing with this type of tax issues.

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

Copyright (c) 2010 Igor S. Drabkin.  All Rights Reserved.