SUMMARY: There are a number of reporting obligations that must be complied with to avoid criminal and civil penalties in connection with foreign bank accounts. This year, the IRS, Department of Justice, President Obama and Congress have prioritized enforcement action against those with undisclosed foreign bank accounts to generate revenue and to bring those with such accounts into compliance with federal tax laws.
Author Fran Obeid writes: This year, the Internal Revenue Service ("IRS"), Department of Justice ("DOJ"), President Barack Obama and Congress have prioritized enforcement action against those with undisclosed foreign bank accounts to generate revenue for the United States and to bring those with such accounts into compliance with federal tax laws. This initiative quickly accelerated last year after the Senate Permanent Subcommittee on Investigations ("Subcommittee") held hearings and reported that the United States loses an estimated $100 billion in tax revenue per year due to offshore tax abuses taking place in countries such as Switzerland and Liechtenstein.
While there is nothing wrong about having an interest in an offshore account, there are a number of reporting obligations that must be complied with to avoid criminal and civil penalties. In the event that a taxpayer has not timely reported an offshore account, criminal prosecution may be avoided and civil penalties reduced by participating in a voluntary disclosure. Any taxpayer who wishes to participate in a voluntary disclosure, should engage a tax representative as soon as possible to assist the taxpayer with the disclosure because the IRS has warned that after October 15, 2009, "taxpayers who do not voluntarily disclose their hidden accounts. . . face much harsher civil penalties, where applicable, and possible criminal prosecution."
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Since 1996, a tax treaty between the United States and Switzerland has provided for the exchange of information between the two countries, for the prevention of tax fraud but not tax evasion, which is considered an administrative matter in Switzerland and may be resolved by no more than a fine. In mid-March, the Swiss agreed to alter its treaty with the United States as a result of international pressure to adopt the Organization for Economic Cooperation and Development's ("OECD") standard concerning the exchange of information with other countries, thereby agreeing to eliminate the restriction of assistance only in matters involving tax fraud.
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On September 23, 2009, the United States and Switzerland signed a protocol revising the existing income tax treaty between the two countries. The protocol provides for the "exchange of information in tax matters to the widest possible extent without allowing the Contracting States to engage in fishing expeditions' or to request information that is unlikely to be relevant to the tax affairs of a given taxpayer." The State seeking the information must submit a request containing (i) information identifying the person under investigation; (ii) the time period for which the information is requested; (iii) a description of the information sought and the tax purpose for seeking the information; and (iv) information identifying the person thought to be in possession of the requested information. If the United States and Switzerland are unable to agree about a particular case governed by the treaty, the protocol provides for a mandatory arbitration proceeding to resolve the dispute. The revised treaty is likely to ease the IRS' ability to obtain information concerning U.S. persons with Swiss bank accounts. The IRS, however, has not been waiting in the wings for a revised treaty but has obtained, and continues to obtain, information from Switzerland concerning U.S. persons with Swiss accounts.
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To participate in a voluntary disclosure, the taxpayer's undisclosed income must originate from a legal source and the taxpayer's disclosure to the IRS must be timely, truthful and complete. A disclosure will be considered timely by the IRS if it is received before (i) the IRS has initiated a civil examination or a criminal investigation of the taxpayer or related to the specific liability of the taxpayer; or (ii) the IRS has received information from a third party alerting the IRS to the specific taxpayer's noncompliance. The disclosure will be considered truthful and complete when the taxpayer demonstrates a willingness to cooperate and does cooperate with the IRS in determining the taxpayer's correct tax liability and by making good faith arrangements to pay in full, the tax, interest and penalties determined to be due.