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:

• 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

• 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:

• A fraud penalty of about $8,500

• 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

• A penalty of $35,000 for failure to file Form 3520 in 1999

• A penalty of $16,500 for failure to file Form 3520-A in 1999, 2000 and 2001

• A penalty of $100,000 for failure to file Form TD F 90-22.1

• 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 15^th 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:

• 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

• 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

• Before the IRS has initiated a civil examination or criminal investigation that is directly related to your specific liability and

• 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.