Archive for category: Undisclosed Foreign Bank Accounts & Unreported Foreign Income

If you have undisclosed foreign accounts you have an important decision to make. That decision being – when do you start disclosing your foreign bank accounts and foreign income and how should you disclose?

Many people thought that forever they can keep their foreign accounts a secret – not just from their creditors and spouses but also from the IRS.

Well thanks to a man called Bradley Charles Birkenfeld, no longer can these foreign accounts be a secret.

Birkenfeld, an American citizen who grew up in Boston and was educated at the American Graduate School of Business in Switzerland, was an up-and-coming banker rising through the ranks of Switzerland’s greatest bank, UBS. Working at UBS in Geneva, Switzerland, as a private banker offering wealth management services, his principal job responsibility over his 5-year tenure at UBS was to solicit wealthy Americans to move their assets to the bank, enabling them to hide their funds due to Switzerland’s strict banking secrecy laws and thus avoid paying U.S. taxes.

Birkenfeld was living the high life with UBS going to UBS sponsored events like art shows and yacht races in the United States to attract wealthy people as potential clients. The events gave its Switzerland-based bankers, who essentially behaved as salesmen offering the product of a Swiss tax haven, a chance to network with the rich in order to cement deals, which was illegal under U.S. banking laws.

One of Birkenfeld’s wealthiest clients was billionaire California real estate developer, Igor Olenicoff. Birkenfeld arranged for him to transfer $200 million to UBS and for Olenicoff to have these funds accessible via credit cards supplied to him by UBS. Birkenfeld then introduced Olenicoff to other bankers at UBS who helped him create off-shore companies to hid his assets and evade taxes.

Olenicoff subsequently pleaded guilty to tax evasion and paid a $52 million fine, but avoided a jail sentence. Apparently the U.S. Department Of Justice (DOJ) had their sites on a bigger target – that being Birkenfeld.

In 2005 Birkenfeld resigned from UBS. That is when he approached DOJ and informed the DOJ of UBS’ business practices.

At the same time, Birkenfeld wanted to take advantage of a new federal whistleblower law, the Tax Relief and Health Care Act of 2006, that could pay him up to 30% of any tax revenue recouped by the IRS as a result of Birkenfeld’s information.

Birkenfeld also wanted immunity from prosecution for his part in UBS’s transactions.

Essentially Birkenfeld wanted to have his cake and eat it too!

When Birkenfeld saw that the DOJ was not meeting his demands, he contacted the Securities and Exchange Commission (SEC), the IRS, and the U.S. Senate.

You would think with all of this information Birkenfeld would receive praise and gratitude by the Federal government. Instead, in May 2008, Birkenfeld was arrested in Boston when he deplaned from Switzerland. He was arraigned at the U.S. District Court, Southern District of Florida. The DOJ prosecutor in the case justified the prosecution of Birkenfeld by claiming he failed to be forthcoming about his clients, specifically, Igor Olenicoff. Eventually Birkenfeld agreed to plead guilty to a single count of conspiracy to defraud the United States. Birkenfeld was sentenced by a U.S. District Judge to 40 months in prison and paying a $30,000 fine.

Since Birkenfeld blew the whistle on the UBS tax evasion scandal, in 2007 UBS avoided prosecution by agreeing to pay a fine of $780 million to the U.S. government.

Additionally, UBS paid $200 million for settlement with the SEC to avoid a trial on UBS’ alleged conduct that the company facilitated the ability of certain U.S. clients to maintain undisclosed accounts in Switzerland and other foreign countries, which enabled those clients to avoid paying taxes related to the assets in those accounts.

Finally to avoid additional fines, UBS agreed to provide the names of all Americans who had offshore accounts with UBS.

In the wake of the UBS scandal, the erosion of Switzerland’s fabled bank secrecy culminated when Switzerland officially signed on October 15, 2013 a treaty called the Convention on Mutual Administrative Assistance in Tax Matters. By Switzerland signing the treaty, they no longer could be a tax haven for offshore assets. The U.S. had won its war against Switzerland!

This then set the stage for the IRS’ worldwide campaign to break into foreign financial institutions and uncover U.S. accountholders.

So what ended up becoming of Birkenfeld? Birkenfeld was able to get his sentence commuted and ended up serving about 32 months. In September 2012, the IRS Whistleblower Office awarded Birkenfeld $104 million as a whistleblower. After serving a 32 month jail sentence – that equates to daily compensation of about $105,000.00.

If you have never reported your foreign investments on your U.S. Tax Returns, you should seriously consider participating in the IRS’s 2012 Offshore Voluntary Disclosure Initiative (OVDI). Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law. Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.

Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco and elsewhere in California qualify you for OVDI.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

IRS has established programs for taxpayers to voluntarily come forward and disclose unreported foreign income and foreign accounts under what the IRS calls the Offshore Voluntary Disclosure Initiative (OVDI).

On January 9, 2012 the IRS announced the terms of the 2012 OVDI which requires that taxpayers: (1) File 8 years of back tax returns reflecting unreported foreign source income; (2) Calculate interest each year on unpaid tax; (3) Apply a 20% accuracy-related penalty under Code Sec. 6662 or a 25% delinquency penalty under Code Sec. 6651; and (4) Apply up to a 27.5% penalty based upon the highest balance of the account in the past eight years.

In return for entering the offshore voluntary disclosure program, the IRS has agreed not to pursue charges of criminal tax evasion which would have resulted in jail time or a felony on your record; and other fraud and filing penalties including IRC Sec. 6663 fraud penalties (75% of the unpaid tax) and 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% of the foreign account balance).

With taxpayers still facing a rather large penalty, taxpayers are torn on whether or not they should participate in OVDI or “Opt-Out”. The “opt-out” process was first introduced in the 2011 version of OVDI and still continues to this day.  As our office has received many inquiries on opting-out. Here are top OVDI opt-out questions that we are routinely asked.

1.         Will the IRS prosecute me criminally if I opt-out of the OVDI? The IRS should keep your case in Civil because you are still within the structure of voluntary disclosure (a program which the IRS encourages taxpayers to come forward in exchange for avoiding criminal prosecution) but you are no longer subject to the standard penalty rates of OVDI.  Under the standard 2012 OVDI penalty cap, you pay one penalty either (a) 12.5% of account value, Offshore “FBAR equivalent” penalty for accounts under $75,000, or (b) 27.5% for accounts over $75,000.So that standard 12.5% / 27.5% penalty cap is all that you are “opting-out” of.

2.         Will the IRS charge me more than the standard 12.5% or 27.5% offshore penalty if I opt out? That’s possible and therefore one of the risks to consider in opting-out.

3.         What is the status and outcome of those cases that have opted out?The opt-out program is fairly new as it was first introduced in 2011.  So far only a few have closed out and the IRS has not announced any guidelines as to how these cases are being dispensed.  The reason: The IRS is trying to centralize all opt-out decisions for consistency especially given the hazards of litigation that the IRS would face if one of these cases went to Court and the Court ruled in favor of the taxpayer.  Another reason for the delay is that the IRS overestimated how many intentional tax evaders would use the program, while simultaneously underestimating how many innocent or at worst negligent filers like ex pats, dual citizens, Visa holders and resident aliens, would be entering OVDI.

4.         What if I disagree. Can I appeal or dispute the agent’s determination?Yes. There are means to dispute an agent’s determination that will be different whether within OVDI or having opted out.  When disputing a determination that is within OVDI, we still remain on more certain ground as to the downside if we cannot effect any change.  However, outside OVDI the law lets the IRS “raise the bar” by assuming willfulness and thus charge multiple 50% penalties that can wipe out your entire net worth.

5.         For small cases, OVDI seems like overkill. Why don’t I just do a “soft” or “quiet” disclosure?The decision to enter into the program is entirely yours. And honestly, the biggest threat of not entering into the program is the risk of an FBAR audit – not criminal charges (although it is possible). But if caught in an FBAR audit, the results could be disastrous.A “soft” or “quiet” disclosure to us makes no sense. The IRS is using its vast data collecting tools and is receiving information directly from foreign financial institutions under the Foreign Account Tax Compliance Act (“FATCA”).  Already IRS has discovered about 10,000 individuals and businesses that have made soft disclosures. The IRS claims they will track down all of those who have made soft or quiet disclosure.We have heard many people tell us they find the law unfair. Yet despite this unfairness, it is the law and our advice is to hire experienced tax counsel to take your case into OVDI and secure the best possible outcome within the OVDI guidelines.  We have found some “wiggle-room” in the guidelines that for some of our clients we used certain techniques that the IRS accepted resulting in lower penalties than what our clients thought they would be facing.

6.         If I made a soft disclosure can I still use the OVDI?Yes and you should. Again, the IRS has detected 10,000 people it suspects of making a soft disclosure. And these are only the accounts over $1 million. There are a lot more under $1 million.

7.         I started, or my CPA started my OVDI. But I am getting uncomfortable. I want to get a lawyer who specializes in this. Can you take over my case?We think that getting an OVDI / FBAR tax attorney is critical for your opt-out and from our experience each person’s case must be looked at separately to determine if opting-out is the best option.  If you have no evidence of willfulness, the sheer numbers may make opting out attractive especially where the proposed OVDI penalty is in the hundreds of thousands of dollars.  But for those taxpayers whose proposed OVDI penalty is let’s say $80,000 or less, opting out probably can’t save you too much, especially if by opting out you end up with non-willful penalties which over a six-year period can equate to about the same amount as this $80,000 guideline amount referred herein.

From a broad perspective OVDI is predictable but opting out is much less so. As the above considerations reflect, think about your facts. Ask whether the potential risks and additional legal fees of opting out offset the potential rewards. Individual advice about the particular facts is important.

The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. are highly skilled in handling OVDI cases and can effectively represent you no matter what is the make-up or circumstances of your unreported foreign assets and unreported foreign income.  We will keep you informed step-by-step of the progress in your case and present your case in the best possible way to avoid any pitfalls and gain the maximum benefits conferred by this program.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your foreign account filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.