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BRIEFING CENTER RESOURCES
IRS Offshore Voluntary Compliance Initiative
On Tuesday, January 14, 2003, the Internal
Revenue Service announced its Offshore Voluntary Compliance Initiative. Under
the OVCI, taxpayers evading the payment of income tax by using offshore credit
cards other offshore financial arrangements (trusts, foreign companies, foreign
foundations, etc.) have until April 15, 2003 to avoid criminal charges and most
civil penalties if they come forward and voluntarily comply with tax payment and
reporting requirements.
After April 15, the IRS will
pursue criminal charges and more significant civil penalties against
non-complying taxpayers. As part of the initiative, the IRS also will watch the
filing of amended tax returns. Taxpayers attempting to disclose their offshore
income this way without going through the OVCI still will be prosecuted.
While offshore credit cards,
offshore bank accounts, trusts, companies, foundations, etc. are all perfectly
legal, U.S. taxpayers must report their existence to the IRS and pay taxes on
most income and gains earned offshore through such arrangements, including in
nearly all cases, investment income and gains.
Since October 2000, the IRS
has issued a series of summonses to a variety of financial and commercial
businesses to obtain information on U.S. residents who held credit, debit or
other payment cards issued by offshore banks. Investigators have been using
records from these summonses to trace the identities of those whose use of these
payment cards may be related to hiding taxable income. In its initial steps, the
IRS has identified thousands of offshore payment card holders for potential
examination. A number of cases have already been referred to the IRS Criminal
Investigation Division for possible action.
The OVCI is designed to allow
taxpayers to withdraw from involvement in abusive offshore activities and become
compliant with federal tax laws with a high degree of certainty as to the
overall cost of compliance. Anyone involved in an offshore financial
arrangement is eligible for the OVCI, whether or not the arrangement involved an
offshore payment card. Even if a taxpayer does not have the ability to pay
taxes, interest and accuracy related penalties now, it is possible to submit a
request that includes other payment arrangements acceptable to the IRS.
Although taxpayers who
voluntarily comply under the OVCI likely will be subject to an accuracy-related
penalty and a failure to file/failure to pay penalty, these penalties are
substantially smaller than the penalties that would apply to taxpayers who do
not participate in the OVCI, which include:
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Fraud
penalties of 75%
-
Penalties for
failure to file foreign corporation information returns (Form 5471 and or Form
5472) of up to $50,000 per return
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Penalties for
failure to report transfers of property to a foreign corporation (For 926) of
up to $100,000 per return
-
Penalties for
failure to file foreign trust transaction reporting forms (Form 3520) of up to
35% of the amount transferred
-
Penalties for
failure to file foreign trust information reporting forms (Form 3520-A) of up
to 5% of the gross value of trust assets, per return.
-
Penalties for
failure to file foreign partnership information returns (Form 8865) of up to
$50,000 per return, plus up to $100,000 of the value of property transferred
to the foreign partnership
-
Penalties for
failure to file a Report of Foreign Bank and Financial Accounts (FBAR)
Treasury Form TD F 90-22.1, which is used to report the existence of foreign
bank or financial accounts, under any name, over which the U.S. person has
actual control, through any means, if such accounts total over $10,000 at any
time during the year. The penalty for failing to file an FBAR is the total
amount in the account up to $100,000, or $25,000, whichever is greater.
Furthermore, and most
importantly, taxpayers who participate in the OVCI will not be criminally
prosecuted. Taxpayers who do not participate in the OVCI will be subject to
criminal prosecution, which the IRS promises will be vigorous.
So, for example, a taxpayer
who transferred $100,000 on January 1, 1999 to a structure that used a foreign
trust and a foreign corporation to avoid income taxes on $10,000 of income per
year in 1999, 2000 and 2001, but who did file a tax return (albeit inaccurate)
would be facing interest charges of about $2,000 dollars, plus an
accuracy-related penalty of about $2,000, if he participated in the OVCI, and
would not face criminal prosecution.
The same taxpayer, if he did
not participate in the OVCI, would be faced with the same interest and
accuracy-related penalty, plus:
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A fraud
penalty of about $8,500
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A penalty of
at least $30,000 and as much as $150,000 for failure to file Form 5471 for
1999, 2000 and 2001
-
A penalty of
$10,000 for failure to file Form 926 in 1999
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A penalty of
$35,000 for failure to file Form 3520 in 1999
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A penalty of
$16,500 for failure to file Form 3520-A in 1999, 2000 and 2001
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A penalty of
$100,000 for failure to file Form TD F 90-22.1
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Criminal
prosecution
The taxpayer who participates
in the OVCI faces penalties and interest of less than $5,000, while the taxpayer
who does not participate faces penalties of well over $200,000 plus criminal
prosecution – all of this to avoid tax on a little over $10,000 of income.
For participants in offshore
tax schemes, the choice is clear: voluntarily comply under the OVCI before April
15th and start with a clean slate. Those who procrastinate or take
their chances on the “audit lottery” face criminal prosecution and hundreds of
thousands of dollars in penalties for even the slightest offense. The audit
lottery is becoming a dangerous game for participants in offshore tax schemes.
Besides the increased chance for audit for such persons, how else might the IRS
discover unreported income? Disgruntled ex-employees, vengeful ex-spouses, the
media, and ruthless judgment creditors are just a few examples of the sources of
such information.
Riser Adkisson LLP will
vigorously represent taxpayers willing to voluntarily comply with tax laws under
the Offshore Voluntary Compliance Initiative. For a fixed fee of $5,000, we
offer an analysis of your specific situation, including potential penalties and
interest, and the initial submission to the IRS of the request for participation
in the OVCI. Followup submissions will include overdue and amended returns and
additional factual information. Fees for overdue and amended returns will be
handled on a case-by-case basis. We will not represent individuals who have
income from illegal activities as they are not eligible for the OVCI.
In order to be eligible for
the OVCI, your initial request for participate must be received by the IRS by
April 15, 2003 and:
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Before the IRS has
initiated a civil examination or criminal investigation of you, or has
notified you that it intends to commence such an examination or investigation
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Before the IRS has received
information from a third party (e.g., informant, other governmental agency, or
the media) alerting the IRS to your noncompliance
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Before the IRS has
initiated a civil examination or criminal investigation that is directly
related to your specific liability and
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Before the IRS has acquired
information directly related to your specific liability from a criminal
enforcement action (e.g., search warrant, grand jury subpoena).
As long as you meet the
eligibility requirements, the fact that a promoter who pitched an offshore
scheme to you is under investigation will not affect your eligibility for the
OVCI. However, if a promoter has already provided information to the IRS about
your involvement in an offshore financial arrangement, then you would not be
eligible for the OVCI.
The bottom line: comply now
voluntarily before you are caught by the IRS.
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