As 2010 came to a close, IRS Commissioner Doug Shulman reiterated that the IRS will continue to focus on offshore tax abuse.
In that spirit, Commissioner Shulman announced that the IRS will soon launch a new offshore voluntary disclosure program for U.S. persons with foreign assets that have not been correctly reported on U.S. tax returns or Reports of Foreign Bank and Financial Accounts (FBARs). This past Monday, an IRS spokesman confirmed that the program will be announced shortly.
U.S. persons (citizens, green card holders and other residents) must report income from all worldwide sources on their U.S. income tax returns, and must also file an FBAR with respect to certain assets located outside of the U.S., including bank accounts, brokerage accounts, mutual funds, and a variety of other assets.
The IRS ran a previous offshore voluntary disclosure program in 2009 that resulted in approximately 15,000 voluntary disclosures of unreported foreign assets, and after that program ended an additional 3,000 people came forward. Although these are staggering figures, many people believe that this is just the tip of the iceberg.
Although it may be tempting for many taxpayers to avoid addressing the issue, for most people, the problem won’t go away on its own. It will either escalate as the result of some action by the taxpayer, a third party, such as a bank or the IRS; or worse, it will be inherited by their loved ones. Anyone thinking that they are better off waiting should consider the following:
• This is not a UBS Swiss bank issue. Although the scandal at UBS in Switzerland was the impetus for the prior offshore voluntary disclosure program, many other accounts located in many other countries have been disclosed — this problem is not limited to Swiss accounts at UBS.
• The IRS is already gathering data on other taxpayers. The IRS is using the offshore voluntary disclosure program to gather data on financial institutions and account holders that are not directly involved or implicated in the program — this data will form the basis for additional IRS inquiries at home and abroad.
• Bank secrecy is not what it used to be. The UBS case and a similar case at LGT Bank in Liechtenstein were precipitated by bankers looking to sell secret bank account information to government authorities. The UBS case resulted in cooperation between UBS, the Swiss government and the U.S. government so that the U.S. government could obtain details on otherwise secret Swiss bank accounts. As this article was coming to press, it was announced that Rudolf Elmer, a former bank executive with Julius Baer, had disclosed offshore account details of around 2,000 persons to WikiLeaks. This latter example appears to have resulted from Elmer’s desire to report what he considers unlawful behavior as opposed to any specific monetary goals. No matter what the goals may be — whistleblower awards, international cooperation, or being true to one’s moral compass — it is clear that bank information is only as secure and secret as the human beings who are hired to run the banks.
• New laws increase the likelihood of detection and the stakes of getting caught. In 2010, Congress passed the HIRE Act with the Foreign Account Tax Compliance Act provisions. Commissioner Shulman stated that this is “the most important development in international information reporting in a generation, and it is a big step forward in our efforts to combat tax evasion.” Among other things, these provisions:
— Increase the reporting obligations and tax penalties for U.S. persons with foreign assets and generally impose an unlimited statute of limitations for persons who do not comply with the new rules; and
— Require that foreign financial institutions provide U.S. tax reporting with respect to accounts that are directly or indirectly owned by U.S. persons or face a new withholding tax regime. Many foreign financial institutions are already working on implementing new internal systems to provide the required U.S. tax reporting.
Taxpayers with foreign assets that have not been properly reported for U.S. tax purposes should speak with experienced U.S. tax counsel as soon as possible to develop a plan for coming into compliance. It is important that these conversations, especially the initial conversations, be conducted with an attorney to help preserve the attorney/client privilege.
Furthermore, taxpayers planning future investments abroad should involve their U.S. tax counsel as early as possible to ensure that the investment structure is tax-efficient and that all compliance obligations are identified and met.
Daniel L. Gottfried is a partner at Rogin Nassau LLC in Hartford. His practice encompasses domestic and international tax planning and dispute resolution. He also serves as an adjunct tax professor at the University of Connecticut School of Law, has been a commentator on international tax matters and frequently speaks before legal, business and accounting groups.
