Irs Voluntary Disclosure (update)

MEMORANDUM RE:

IRS VOLUNTARY DISCLOSURE (UPDATE)

On March 23, 2009, the IRS issued a series of three memoranda to update voluntary disclosure policies, primarily in connection with offshore transactions. According to IRS Commissioner Douglas H. Shulman, “The goal is to have a predictable set of outcomes to encourage people to come forward to take advantage of (IRS) voluntary disclosure practices while they still can.” The Commissioner set a 6-month deadline for disclosures under the forms of the guidance (i.e., thru September 2009) at which time the program will be re-evaluated. Under the IRS new policy, the following tax rules apply: 1. Payment of back taxes for up to the last 6 years (with interest) on the newly disclosed assets; 2. Either a 20% accuracy-related penalty under IRC §6662, or a 25% delinquency penalty under IRC §6651 for each Tax Year at issue; 3. During the past 6 years, a 20% penalty on the total balance of all the Taxpayer’s foreign bank accounts or assets during the year (among the past 6 years) in which the account had their highest aggregate value. The IRS Commissioner stated: 1. The IRS will not pursue charges of criminal tax evasion against Taxpayers who voluntarily disclose their offshore assets under this new policy; 2. The IRS will not pursue other penalties against participating Taxpayers, such as IRC §6663 fraud penalties (75% of the unpaid tax) or the statutory penalty for willful failure to file a TD F 90-22.1 Report of Foreign Bank and Financial Accounts (FBAR) (the greater of $100,000 or 50% of the foreign account

1

balance) that apply annually to undisclosed accounts (and assets) during the relevant Tax Years; 3. The IRS advises field personnel that they should give priority treatment to offshore transactions and entities during examinations, with a special emphasis on detecting unreported income. More troubling is an SBSE 3/23/09 memorandum, Subject: Routing of Voluntary Disclosure Cases, which addresses a change in the processing of voluntary disclosure requests containing offshore issues. 1. Such requests will continue to be initially screened by Criminal Investigation to determine eligibility for voluntary disclosure, and, if involving only domestic issues will be forwarded to Area Planning and Special Programs for Civil Processing; 2. Voluntary disclosure eligibility for offshore issues will be initially screened by Criminal Investigation and forwarded to the Philadelphia Offshore Identification Unit (POIU) for processing. The IRS 3/23/09 memo is ambiguous. It distinguishes between domestic issues (which will be subject to civil processing) and offshore issues which will be screened by Criminal Investigation for processing. It appears offshore issues may have a higher risk of criminal prosecution (contrary to the IRS Commissioner’s statements). The IRS policy may “spotlight” unreported offshore income (which if not a domestic issue, may be referred for criminal prosecution). Voluntary Disclosure risks include: 1. Heightened risk of criminal prosecution (since initial screening is by the IRS Criminal Investigation Division); 2. A voluntary disclosure may be used as an evidentiary admission of Taxpayer’s unreported income; 3. A voluntary disclosure may waive Taxpayer’s Amendment right against self-incrimination;

5th

2

4. While a voluntary disclosure is pending the IRS may request more information, commence an audit or initiate criminal prosecution. As an alternative strategy to a voluntary disclosure, the “quiet filing” (for the Tax Years at issue) of an amended tax return (or original tax return) may instead: 1. Pre-empt criminal charges for both failure to file tax returns and failure to pay tax; 2. Pre-empt a 75% civil tax fraud penalty, for failure to file or pay tax; 3. If the income is properly reported (i.e., no substantial understatements), the tax filing will commence the 3 year statute of limitations (for each year) for IRS audit. Gary S. Wolfe A PROFESSIONAL LAW CORPORATION 9100 Wilshire Blvd., Suite 530 East Beverly Hills, CA, 90212 Tel: 310-274-8847 Fax: 310-274-3118 http://www.gswlaw.com email: [email protected]

3