IRS’ Offshore Amnesty Program
By: Howard S. Fisher, Samuel L. Lohman, & Donald ("Mac") MacPherson

Introduction

In the fall of 2000 the IRS issued subpoenas to credit companies such as American Express and Master Card International to produce credit and ‘debit’ cars that were issued to ‘offshore" trusts and corporations - especially debit cards. See, Fisher, "IRS Tracks Dow Offshore Credit Cards," Offshore Investment, April 2001, pg. 42.

As a result of its investigation the IRS has uncovered over a hundred thousand potential cases of tax fraud. Typically the Justice Department prosecutes about 3,000 tax cases a year. The credit card investigation would grid-lock the Justice Department if it were to prosecute all of the guilty. Faced with the Herculean task of investigating and prosecuting thousands of credit/debit card cases, as well as the following up on leads from these cases, on January 14, 2003 the IRS announced an amnesty program for Americans with any type of ‘offshore financial arraignment.’ The program is called The Offshore Voluntary Compliance Initiative." This is a very generous program, and should be considered by anyone with a questionable offshore arrangement.

IRS' Arsenal

There is no prohibition on U.S. persons having an ‘offshore bank account’ or credit/debit cards, or in owning a foreign corporation, or being the beneficiary of a foreign trust. However, the income from wherever in the world earned is subject to tax, and the ‘control’ or ‘signature’ authority over an offshore account must be reported on Treasury from 90.22-1 and on the individual’s U.S. income tax return, and ownership in foreign entities must be reported.

Failure to file the appropriate returns, and subsequent use of the credit/debit card or offshore funds to conceal the offshore account can lead to charges of: tax fraud, money laundering and wire fraud.

Considering the potential penalties for illegally maintaining an offshore structure, the IRS’ offer of interest and 25%* penalties is a very generous offer - designed to entice taxpayers to return to the tax system.

Ducks In A Barrel

It is often difficult to detect small-moderate funds secreted offshore as long as the taxpayer does not access the funds. However, by having a credit card and making daily access of the funds, for the IRS it was like shooting ducks in a barrel. The typical problems in prosecuting ‘offshore’ arrangements are the lack of evidence, secrecy laws that inhibit investigations, and uncooperative jurisdictions. This was not the case for the credit card investigation.

Typically the credit cards were issued by an ‘offshore bank’ in the names of an entity that deposited cash into a blocked account that secured payment of the credit card charges. Because the card was in the name of the entity, the taxpayer thought ‘they’ could never be caught. The credit card master organization, such as Master Charge are domestic companies - so all information is available in the U.S. Even as to cards issued by an ‘offshore’ bank, the U.S. master organization can force the cardholder to provide information regarding the cardholders.

The IRS’ initial investigation focused on charges for air travel, and other instances where identification is required for the purchase. It was easy for the IRS to obtain information that XYZ Co. was issued a ‘debit card’ in its corporate name and that the card was used to purchase an airline ticket, which was used by a particular taxpayer. Because airlines are required to confirm the identification of passengers, they have evidence that a particular taxpayer flew on the ticket purchased by the offshore company. The IRS then approaches the taxpayer and enquires about the trip - either it was for business (what business?), or it was pleasure (and why didn’t the taxpayer report the ‘free trip’). Hence, the IRS is able to domestically connect the dots of offshore tax evasions when it came through offshore credit/debit card arrangements. This is why those with undisclosed offshore arrangements should seriously consider accepting the IRS’ offer.

IRS’ Voluntary Disclosure Program

From 1946 through 1952 the Treasury Department had a formal policy of not prosecuting any taxpayer who voluntarily disclosed their tax fraud to the IRS prior to the commencement of any civil or criminal investigation. Since termination of the formal policy the IRS continued the policy "informally." In 2002 the IRS established guidelines for its Voluntary Disclosure Practice, described in IR-2002-135 (12-11-02).

A voluntary disclosure has historically been when the communication(s) is truthful, complete and is received before the IRS has initiated any inquiry that is likely to lead to the taxpayer, and the taxpayer is not aware of any event that is likely to cause an audit.

The IRS’s January Amnesty Initiative

On January 14 the IRS published Revenue Procedure 2003-11 outlining its ‘offer’ to those with offshore arrangements to make a voluntary disclosure, in exchange the IRS agrees not to prosecute criminally, nor impose the civil fraud penalty. The highlights of the program are:

It applies to tax years from 1999, and to earlier years if they are also part of the plan. The general statutes of limitation are 3 years, 6 years if under-reporting is greater than 25%, and no statue as to fraud. Hence, the IRS in limiting the Initiative to 3 years has made a substantial concession to the errant taxpayers.

The IRS does not intend to secure information concerning approved participant’s tax prior to 1999 - but they are required to provide details of earlier transactions. If there was ‘substantial tax avoidance" prior to 1999 the IRS reserved the right to examine the prior years if the statute of limitations has not expired. If the IRS looks at earlier years it will apply the principles of the Initiative to resolving the tax issues for the earlier years.

The program applies to all types of ‘offshore financial arrangements’, not just credit/debit cards, and includes both unreported income and false deductions. For example, it could be used to disclose ‘constitutional trust,’ "Section 861" plans, and any type of unreported offshore activities.

No civil fraud or fraudulent failure to file penalties will be assert. If these civil penalties were to be asserted, in all likelihood, most if not all of the principal offshore would have gone to penalties. So by waiving these penalties, the taxpayer will have something left.

Civil penalties for delinquent payment and accuracy related penalties will apply.

To qualify for the program, the taxpayer must make a ‘voluntarily disclosure’ by April 15. The disclosure must include:

Information on the promoter of the tax scheme, including all promotional materials, correspondence and documentation.

Within 150 days after being informed that the taxpayer has been accepted for the Initiative program the taxpayer must provide copies of amended returns, and full details and documents relating to their offshore activities. And if the IRS asks, the taxpayer must also provide information on transactions that occurred outside of the Initiative period.

The disclosure may be submitted via email, or sent to:

National Offshore Voluntary Compliance Initiative Coordinator
DP S6005 1160 Roosevelt Boulevard Philadelphia, CA19154

The IRS will notify the taxpayer of preliminary eligibility for the program. If the taxpayer is eligible, eventually they will have to sign a closing agreement, that will waive all defenses, and provide for the payment of the tax.

There is no guarantee the IRS will accept you into the program - and if rejected, the IRS may use the disclosure against the taxpayer

No criminal prosecution is the ‘carrot’ being offered by this program, however, there is no assurance that someone who disclosed will not be prosecuted. Some commentators say this is a fatal shortcoming of the program. However, a blanket amnesty for ‘offshore crimes’ is politically undoable, and is not good for the overall fisc

Like with all voluntary compliance programs, the taxpayer must make the disclosure prior to:

Being notified of a civil audit or criminal investigation

Prior to the commencement of an audit or criminal investigation (which the taxpayer does not know of). This is much narrower than the traditional requirement for voluntary disclosure. Perhaps it is justified because of the wide-spread publicity of the IRS’s program to gather information regarding offshore accounts

Receiving information from a third party (e.g. informant, press, or other governmental agency)

If the IRS has already obtained information relating to the Taxpayer’s potential criminal liability. This is the great unknown. Withhold applying; there is no way of knowing if the IRS has such information without chancing disclosure. If the IRS does know about you, and you make the disclosure - the disclosure may be used against you in a subsequent prosecution. The program is not available to anyone who:

Was a promoter or who solicited the participate of others in any kind of abusive tax arrangement - offshore or domestic

The income was derived from some illegal activity, e.g., drug trafficking

Finally, a condition for qualification for the program is the payments of back taxes, interest and certain civil penalties such as delinquency and accuracy-related penalties. Payments can be made under an installment arrangement if the taxpayer has insufficient liquid assets.

Why Use The Incentive Program

Since the core of the program is build upon a voluntary disclosure program that have been in effect since 1946, it is uncertain what the effect will be of the expiration of this current program that is focused on offshore arrangements. However, the two principal benefits of the Incentive program are:

The traditional program did not guarantee that the 50%* civil fraud penalty would not be applied - this is one of the benefits of disclosure under the incentive program

Technically voluntary disclosure never applied to the obligation to file the From 90-22.1 with Treasury relating to offshore financial accounts. The current program includes an amnesty from prosecution for failing to have tiled the 90-22.1. However, as a practical matter, in the past, if one discloses they were typically not prosecuted - so the expiration of the program may not mean the end of the opportunity to make proper disclosures.

Conclusion

Because the immunity from prosecution is not automatic anyone considering the program should seek competent legal advice to determine:

what the likelihood of their disclosure being accepted will be

the likely cost (e.g., tax, penalties & interest)

what, if any alternatives are there, e.g. disclosure outside of the program, or start accurately filing all future returns making all required disclosures.

Howard S. Fisher, Esq.
Beverly Hills, California
Tel: + 1 (310) 553-2000 E-mail: Fisher@GlobalTaxPlan.com

Samuel L. Lohman, Esq.
Geneva, Switzerland
Tel: +41 22.317.8020 E-mail: lohman@lohman-law.com

Donald ("Mac") MacPherson, Esq.
Phoenix, Arizona
Tel: +1 (602) 866-9566 Webpage: www.beatirs.com