Tax News

CCH (cch.taxgroup.com) reports:

  The IRS has announced new steps to coax U.S. taxpayers with undisclosed foreign bank accounts to come forward. In return for paying back taxes for the past six years, plus interest and a set of stiff penalties, the IRS will promise not to bring criminal charges or the 75-percent fraud penalty. IRS Commissioner Douglas H. Shulman announced this policy shift and clarification at a press briefing from his Washington, D.C. offices on March 26, at which he also released internal IRS documents that put the plan into motion.

  "We believe the guidance represents a firm, but fair, resolution of these cases and will provide consistent treatment for taxpayers," Shulman explained. "The goal is to have a predictable set of outcomes to encourage people to come forward and take advantage of our voluntary disclosure practice while they still can." He set a deadline of six months for disclosures under the terms of the guidance, at which time the program will be re-evaluated.

  The IRS has issued a series of three memoranda, and has revised the Internal Revenue Manual (IRM), to reflect updated policies concerning voluntary disclosure, primarily in connection with offshore transactions. Voluntary disclosure occurs when a taxpayer timely discloses information necessary to determine or correct the taxpayer's liability. The IRM continues to provide that its voluntary disclosure practices do not create any substantive or procedural rights for taxpayers, but are a matter of internal IRS practice.

Voluntary Disclosure Terms

  Shulman emphasized that the terms being offered for the disclosure of offshore accounts are an outgrowth of current policy and carry penalties at a level consistent with voluntary disclosure programs in the past. Within this framework, Shulman enumerated the amounts that would need to be paid by taxpayers with heretofore undisclosed offshore accounts who "come clean" under the program:

  --Back taxes due on newly disclosed assets for the last six years;

  --Interest due on these back taxes for the last six years;

  --A 20-percent accuracy-related under Code Sec. 6662 or a 25-percent delinquency penalty under Code Sec. 6651 for each tax year at issue; and

  Looking to the past six years, a 20-percent penalty on the total balance of all the taxpayer's foreign bank accounts or assets during the year among the past six in which the accounts had their highest aggregate value.

  CCH Comment. This latter penalty is reduced to 5 percent for passive investors in certain transactions.

  While Shulman observed that the penalties demanded under the program are not insubstantial, he pointed to several advantages to participating taxpayers regarding what the IRS will not do:

  --The IRS will not pursue charges of criminal tax evasion against taxpayers who voluntarily disclose their offshore assets under this new policy; and

  --The IRS will not pursue other penalties against participating taxpayers, such as the Code Sec. 6663 fraud penalties (75-percent 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 Report, (FBAR) (the greater of $100,000 or 50-percent of the foreign account balance) that both annually apply to undisclosed accounts and assets during the relevant tax years.

  Shulman also touted the advantage to offshore account holders of "getting the matter behind them" and giving them certainty as to their tax liability.

  In a follow-up comment, an IRS spokesman emphasized that "it is too late for any taxpayer who is under criminal investigation to make a voluntary disclosure. The IRS cannot discuss specific situations, but the voluntary disclosure process does not apply when the IRS has information related to a specific taxpayer from a criminal enforcement action."

  CCH Comment. The issue apparently remains unclear as to whether taxpayers recently disclosed by the Swiss Bank, UBS, as holding undisclosed bank accounts in Switzerland may successfully participate in this initiative. The IRS provided reporters during the March 26 briefing a copy of Section 9.5.11.9 of the Internal Revenue Manual that holds taxpayers to have timely participated in the voluntary disclosure program if they disclose before the IRS has initiated a civil or criminal examination or notified the taxpayer of such an investigation. Their failure to disclose their accounts/assets before the IRS received notice under the UBS deferred prosecution agreement may, therefore, be irrelevant.

Other Documents Provided

  In addition to the announcement of its penalty framework for voluntary disclosures of offshore accounts, the IRS also provided reporters with the following documents:

  Offshore Case Development. An SBSE memorandum provides that field personnel should give priority treatment to offshore transactions and entities during examinations, with a special emphasis on detecting unreported income. Examiners are instructed to use all tools, including interviewing taxpayers, making third party contacts, and timely issuing summonses in order to gather information and make determinations about applicable penalties. Managers are asked to ensure that income and penalty considerations are fully developed and documented. The memorandum also advises that as of March 23, 2009, taxpayers will no longer be permitted to minimize penalties through the Last Chance Compliance Initiative (LCCI). Relevant portions of the IRM addressing the LCCI are in the process of being obsoleted. Taxpayers in open examinations where LCCI terms have been offered will be able to resolve their cases under LCCI if they respond to the examiner within 15 days of their prior notification.

  Voluntary Disclosure. Another SBSE memorandum addresses a change in the processing of voluntary disclosure requests containing offshore issues. Such requests will continue to be initially screened by Criminal Investigation (CI) to determine eligibility for voluntary disclosure and, if involving only domestic issues, will be forwarded to Area Planning and Special Programs for civil processing. Voluntary disclosure eligibility for offshore issues, including those in current inventory, will be initially screened by CI, and forwarded to the Philadelphia Offshore Identification Unit (POIU) for processing.

  For submitted, but as yet unresolved, disclosure requests forwarded to the POIU, an internal LMSB memorandum sets forth a liability and penalty framework to be used for processing such cases during the next six months. POIU is authorized to assess all taxes and interest going back six years, or the period of existence of an account/entity if shorter, require the taxpayer to file or amend all returns, and impose an applicable penalty as set forth in the memorandum.

  Finally, the Internal Revenue Manual (IRM) has been updated to reflect the initial evaluation of voluntary disclosure requests by CI. Minor revisions to the examples of what constitutes voluntary and not voluntary disclosures have also been made.

  By Torie Cole and Sherri Morris, CCH News Staff

IRS SB/SE Division, LMSB Division Memorandum on Routing of Voluntary Disclosure Cases

Memorandum for IRS SB/SE Division Commissioner, LMSB Division Commissioner on Authorization to Apply Penalty Framework to Voluntary Disclosure Requests Regarding Unreported Offshore Accounts and Entities

IRS SB/SE Division, LMSB Division Memorandum on Emphasis on and Proper Development of Offshore Examination Cases, Managerial Review, and Revocation of Last Chance Compliance Initiative

IRS Voluntary Disclosure Practice

Statement from IRS Commissioner Shulman on Offshore Income