The IRS's focus on unreported foreign entities and financial accounts is at its highest point at any time in history and continues to escalate. As a result, taxpayers have overwhelmed the IRS with voluntary disclosures. The IRS’s voluntary disclosure practice provides a way for taxpayers to minimize the risks of civil penalties and criminal prosecution due to unreported foreign entities and financial accounts. Last year, the US government took legal action against UBS AG, Switzerland's largest bank and 14,700 taxpayers participated in a special voluntary disclosure program.
It is highly likely that the US government will soon take similar actions against other foreign banks around the world. If the US government does so, the wave of voluntary disclosures will increase. The government treats taxpayers more leniently if they come forward to fix past problems before they are caught. US citizens and residents with undeclared foreign accounts and entities should contact an international tax advisor experienced with the voluntary disclosure program.
In February 2009, UBS AG entered into a deferred prosecution agreement on charges of conspiring to defraud the United States. UBS AG agreed to close US client accounts, disclose client names to the IRS, and pay $780 million in fines. Last year’s voluntary disclosure program was only open to taxpayers from March 23, 2009 to October 15th, 2009 . Although the program was a response to the UBS AG scandal, disclosures were made by taxpayers with foreign accounts and entities in all parts of the world. The special program changed the IRS’s long-standing voluntary disclosure practice. It changed the way cases were handled procedurally and provided a published framework for reduced civil penalties. Most taxpayers participating in the program will pay six years of back taxes, interest, and a penalty equal to 20% of the unreported assets.
This civil penalty framework ended with the special voluntary disclosure program on October 15, 2009. Most of the procedural changes instituted by the special program remain in place. The published guidelines for avoiding criminal prosecution continue to remain the same as they have been since 2002. Taxpayers are still continuing to make disclosures. So far the IRS has not published new guidelines for civil penalties. It may never do so, in which case penalties may be negotiated with the IRS on a case by case basis. However, it is unlikely that the IRS will be more lenient on taxpayers who missed the deadline for the program. We speculate that, going forward, the onetime 20% penalty may be replaced by a onetime 30% or 40% penalty.
In many cases, voluntary disclosures are made to correct innocent oversights rather than clear cut cases of tax evasion. The filing requirements for foreign accounts and entities are complex and often misunderstood. Taxpayers are often unaware of the filing requirements unless they are working with a firm with specialized international tax expertise. US citizens and residents must file forms annually to report interest in foreign:
- bank and financial accounts
- partnerships, and
- other entities