IRS Offshore Voluntary Disclosure Program (OVDP)

Subscribe to IRS Offshore Voluntary Disclosure Program (OVDP)

January 28, 2019 – Alerts

By Matthew D. Lee and Marissa Koblitz Kingman

Following the termination last fall of its immensely successful Offshore Voluntary Disclosure Program (OVDP), the Internal Revenue Service (IRS) has announced a new regime to govern all voluntary disclosures regarding tax noncompliance. These new procedures apply to both domestic and offshore voluntary disclosures, and in many ways they replicate the procedures under the now-shuttered OVDP.

In other ways, the new procedures are significantly different, particularly the new civil penalty framework. Taxpayers who now take advantage of the updated voluntary disclosure program will potentially face a 50 percent penalty on their undisclosed offshore financial assets, and a 75 percent civil fraud penalty on the unpaid taxes, and both of these penalties can, in certain circumstances, be applied for multiple years. In addition, the new procedures place greater emphasis on taxpayer cooperation during the voluntary disclosure process, and make clear that non-cooperative taxpayers may face greater penalty exposure. This significantly more stringent penalty framework may well cause some taxpayers to question whether the new program is worth the price of admission, especially when other voluntary disclosure options continue to exist.

Voluntary Disclosure Background

The IRS has for years maintained a self-disclosure regime whereby taxpayers can voluntarily disclose instances of noncompliance with the tax laws and in most cases avoid criminal prosecution. The critical underlying principal of voluntary disclosure is that the taxpayer must self-disclose before the IRS learns of the noncompliance; if the IRS already knows of the taxpayer’s noncompliance from whatever source (for example, from third-party reporting or a whistleblower), the taxpayer is ineligible to make a voluntary disclosure.

In March 2009, following the landmark agreement regarding offshore tax evasion struck by the United States with Switzerland’s largest bank, UBS AG, the IRS unveiled its now-famous “Offshore Voluntary Disclosure Program.” This was a specially-designed voluntary disclosure program – premised upon the IRS’s longstanding voluntary disclosure practice – for taxpayers with secret foreign bank accounts and other types of offshore financial assets. Participating taxpayers were required to file eight years of amended tax returns and to pay all back taxes, interest, and a “miscellaneous” offshore penalty calculated at 20 percent of the aggregate highest balance of undisclosed offshore financial assets. The IRS subsequently announced various modifications to the OVDP in 2011, 2012, and 2014, with the primary change each time consisting of an elevation of the penalty rate, which ultimately reached 27.5 percent in the 2014 iteration. In addition, under certain circumstances, the miscellaneous penalty could be elevated to 50 percent if the taxpayer maintained an account at a financial institution, or did business with an offshore service provider, identified on a list maintained by the IRS.

The OVDP was designed for taxpayers with exposure to potential criminal liability or substantial civil penalties due to a willful failure to report foreign financial assets and pay all tax due associated with those assets. The OVDP provided taxpayers with such exposure potential protection from criminal liability and terms for resolving their civil tax and penalty obligations. Taxpayers with unfiled returns or unreported income who had no exposure to criminal liability or substantial civil penalties due to willful noncompliance could come into compliance using other options, including the Streamlined Filing Compliance Procedures, the delinquent FBAR submission procedures, or the delinquent international information return submission procedures.

By the time the OVDP ended in September 2018, more than 56,000 taxpayers successfully completed the program, paying more than $11.1 billion in back taxes, penalties and interest. The total number of taxpayer disclosures under the OVDP peaked in 2011, when about 18,000 individuals came forward. In addition, more than 65,000 taxpayers took advantage of the Streamlined Filing Compliance Procedures, a related voluntary disclosure initiative unveiled in 2014 as an alternative to OVDP for taxpayers whose conduct was non-willful. Collectively, the OVDP and the Streamlined Filing Compliance Procedures represented the most successful voluntary disclosure program ever offered by the IRS, far eclipsing all prior initiatives. Participation in OVDP declined in recent years, however, with only 600 disclosures occurring during 2017, prompting the IRS to announce that the program would close as of September 28, 2018.

Highlights of the New Voluntary Disclosure Regime

On November 20, 2018, the IRS announced the new voluntary disclosure procedures by releasing publicly a five-page internal guidance memorandum. These new procedures are effective for all voluntary disclosures – both offshore and domestic – received after September 28, 2018. The objective of the new voluntary disclosure practice is to provide taxpayers concerned that their conduct is willful or fraudulent, and that may rise to the level of tax and tax-related criminal acts, with a means to come into compliance with the law and potentially avoid criminal prosecution. The guidance emphasizes that taxpayers who did not commit any tax or tax related crimes and do not need the voluntary disclosure practice to seek protection from potential criminal prosecution can continue to correct past mistakes using the Streamlined Filing Compliance Procedures or by filing an amended or past due tax return.

Preclearance by IRS-Criminal Investigation

As with the OVPD, IRS-Criminal Investigation will screen all voluntary disclosure requests (whether domestic or offshore) to determine if a taxpayer is eligible to make a voluntary disclosure. To do so, the IRS will require all taxpayers wishing to make a voluntary disclosure to submit a preclearance request on a forthcoming revision of Form 14457. Internal Revenue Manual section 9.5.11.9 will continue to serve as the basis for determining taxpayer eligibility. If IRS-CI determines that the taxpayer satisfies the voluntary disclosure requirements, it will issue a “preclearance letter” to the taxpayer.

For all cases where IRS-CI grants preclearance, taxpayers must then promptly submit all required voluntary disclosure documents using a forthcoming revision of Form 14457. This form will require information related to taxpayer noncompliance, including a narrative providing the facts and circumstances, assets, entities, related parties, and any professional advisors involved in the noncompliance. Once IRS-CI has received and preliminarily accepted the taxpayer’s voluntary disclosure, it will notify the taxpayer of preliminary acceptance by letter and simultaneously forward the voluntary disclosure letter and attachments to the IRS Large Business & International unit in Austin, Texas, for case preparation before examination. As with the OVDP, IRS-CI will not process tax returns or payments.

Civil Processing and Case Development

Once the LB&I Austin unit receives information from IRS-CI, it will route the case for audit. If a taxpayer or representative wishes to make a payment prior to case assignment with an examiner, payments may be remitted to the LB&I Austin unit. The LB&I Austin unit will select the most recent tax year covered by the voluntary disclosure for examination and then forward cases for case building and field assignment to the appropriate Business Operating Division and Exam function for civil audit. All voluntary disclosures will follow standard audit procedures. Examiners will be required to develop cases, use appropriate information-gathering tools (such as Information Document Requests and summonses, as appropriate), and determine proper tax liabilities and applicable penalties.

Six-Year Disclosure Period in Most Cases

In general, voluntary disclosures will include a six-year disclosure period, which means that participating taxpayers will be required to file corrected tax returns for the most recent six-year period, even if their tax noncompliance covered a greater period of time. However, IRS agents have the discretion to expand the disclosure period to cover additional years – including what the IRS calls “the full duration of the noncompliance” – if the taxpayer refuses to resolve the audit by agreement. In addition, cooperative taxpayers may be allowed to expand the disclosure period to include additional tax years in the disclosure period for various reasons (such as correcting tax issues with other tax authorities that require additional tax periods, correcting tax issues before a sale or acquisition of an entity, or correcting tax issues relating to unreported taxable gifts in prior tax periods).

Importance of Taxpayer Cooperation

The new voluntary disclosure procedures are notable for the emphasis they place on taxpayer cooperation, and perhaps more importantly, the consequences to taxpayers of non-cooperation. The IRS’s historical voluntary disclosure process has always required taxpayer cooperation, specifying that “[a] voluntary disclosure occurs when the communication is truthful, timely, complete, and when . . . the taxpayer shows a willingness to cooperate (and does in fact cooperate) with the IRS in determining his or her correct tax liability.” Similarly, the OVDP required taxpayer cooperation as a condition of participating in the program, which included making full disclosure of all offshore assets; agreeing to extend the applicable statutes of limitations; and fully paying all back taxes, interest, and penalties, or making satisfactory payment arrangements.

Under the new procedures, taxpayer cooperation takes on greater significance, and by “cooperation” the IRS means more than just making full disclosure of offshore assets, extending the time to assess, and arranging for payment. Rather, the extent of a taxpayer’s cooperation (or lack thereof) will have a direct bearing on the type and magnitude of penalties to be asserted. The new guidance states that the IRS expects that voluntary disclosures will be resolved by agreement with full payment of all taxes, interest, and penalties for the disclosure period. In other words, taxpayers are expected to assent to all adjustments that result from the audit, and not to exercise their legal rights to contest audit adjustments and seek review by IRS Appeals. In particular, taxpayers are warned that in cases that are not resolved by agreement (and the taxpayer exercises his or her right to take the case to Appeals), the agent “may assert maximum penalties under the law with the approval of management” and may expand the disclosure period beyond six years. Also, if a taxpayer fails to cooperate with the civil examination, the examiner may request that IRS-CI revoke preliminary acceptance, potentially triggering the opening of a criminal investigation.

Penalty Framework

The new voluntary disclosure procedures make clear that the nature and extent of penalties to be assessed will in large part be a function of the taxpayer’s cooperation during the process. As noted above, taxpayers whose cases that are not resolved by agreement can face “maximum penalties under the law.” On the other hand, taxpayers who provide “prompt and full cooperation during the civil examination of a voluntary disclosure” are entitled to civil penalty mitigation.

The following penalty terms will be applied to taxpayers who make timely voluntary disclosures and who fully cooperate with the IRS during the voluntary disclosure process:

Civil Fraud Penalty
The civil penalty under I.R.C. § 6663 for fraud or the civil penalty under I.R.C. § 6651(f) for the fraudulent failure to file income tax returns will apply to the one tax year with the highest tax liability. In limited circumstances, the IRS may apply the civil fraud penalty to more than one year in the six-year scope (up to all six years) based on the facts and circumstances of the case, for example, if there is no agreement as to the tax liability. The IRS may assert the civil fraud penalty beyond six years if the taxpayer fails to cooperate and resolve the examination by agreement. The new procedures provide that taxpayer may request imposition of accuracy-related penalties under I.R.C. § 6662 instead of civil fraud penalties, although granting such requests is expected to be exceptional. Where the facts and the law support the assertion of the civil fraud FBAR penalty, a taxpayer must present convincing evidence to justify why such penalty should not be imposed.

FBAR Penalty
Willful FBAR penalties will be asserted in accordance with existing IRS penalty guidelines contained in the Internal Revenue Manual, which include mitigation guidelines that permit the IRS to reduce FBAR penalties if certain criteria are met. Taxpayers may request that the IRS impose non-willful FBAR penalties, but granting such requests is expected to be exceptional, and taxpayers must present convincing evidence to justify lower penalties.

Information Return Penalties
The new voluntary disclosure procedures provide that penalties for failure to file information returns will not be automatically imposed. This is a positive development for taxpayers, as the penalties for not filing information returns such as Forms 5471 (requiring disclosure of ownership of foreign corporations), Forms 8938 (requiring disclosure of foreign financial assets), and Forms 3520 (requiring disclosure of information regarding foreign trusts), can be significant, especially if the taxpayer’s noncompliance spans multiple years. The procedures provide that agents will exercise discretion as to these types of penalties and will take into account the application of other penalties (such as the civil fraud penalty and the willful FBAR penalty) and the extent of the taxpayer’s cooperation.

Other Penalties
Other types of penalties, such as those relating to excise taxes, employment taxes, and estate and gift taxes, will be handled based upon the facts and circumstances with IRS agents coordinating with appropriate subject matter experts.

Ability to Request an Appeal

In a break from prior practice under the OVDP, the new voluntary disclosure procedures provide that taxpayers retain the right to request an appeal with the IRS Office of Appeals. Taxpayers accepted into the OVDP were not permitted to request an appeal under any circumstances; the only recourse for taxpayers who did not wish to accept the OVDP civil resolution terms was to “opt-out” of the program and face a full-scope audit. The ability to take an appeal is another positive development for taxpayers under the new voluntary disclosure procedures, but this is a double-edged sword. It appears that taxpayers who exercise their appeal rights – one of the fundamental rights enumerated in the “Taxpayer Bill of Rights” – will be deemed non-cooperative and can face imposition of greater penalties than taxpayers who agree to resolve their voluntary disclosure cases and do not appeal.

Application of the New Civil Penalty Framework

As noted, the new voluntary disclosure procedures are described in a five-page internal guidance memorandum released in November. The IRS has not yet published any additional guidance on how the new program will work in practice, such as Frequently Asked Questions which were a large part of the OVDP and largely helpful to taxpayers and practitioners.

At the American Bar Association’s National Institute on Criminal Tax Fraud and National Institute on Tax Controversy in December 2018 – held only a few weeks after the IRS issued the new voluntary disclosure guidance – an attorney from the IRS Office of Chief Counsel presented the following three scenarios to illustrate how the new voluntary disclosure penalty framework will be applied to various fact patterns.

Hypothetical 1

Taxpayer 1 is a US citizen who lives in California, but he was born in Italy and lived in Italy for parts of his adult life. Taxpayer 1 has several bank accounts in Italy and a Swiss bank account established by his grandfather’s estate for Taxpayer l’s inheritance. Taxpayer 1 accessed the Swiss account and never informed the Swiss bankers of his US citizenship. Taxpayer 1 had no interests in or control over any foreign entities. He intentionally did not tell his return preparer about his foreign bank accounts and checked “no” to the question about having foreign bank accounts on Schedules B filed with his tax returns.

Taxpayer 1 fully cooperates with the civil examination. The examiner asserts the civil fraud penalty for one year and a willful FBAR penalty totaling 50% of the highest aggregate balance in all foreign bank accounts.

This scenario represents what appears to be a relatively straightforward case of willful conduct by the taxpayer, as evidenced by the taxpayer’s deliberate concealment of his offshore accounts from his return preparer and his “no” answer to the question about foreign bank accounts on Schedule B. The taxpayer is cooperative during the examination, and presumably resolves the audit by agreement (and does not request an appeal). Because the taxpayer’s conduct was willful, the IRS revenue agent asserted a one-year civil fraud penalty and a one-year willful FBAR penalty.

Hypothetical 2

Taxpayer 2 owns a restaurant in Dallas as a sole proprietorship. Taxpayer 2 reports all credit card receipts, but only 20% of cash receipts. Taxpayer 2 kept a second set of books tracking his actual income. Taxpayer 2 had no other tax or information reporting noncompliance. Taxpayer 2 used the unreported cash to pay various personal expenditures and to buy gold bullion. Taxpayer 2 accumulated $2 million in gold bullion in his personal safety deposit box over the last 10 years with his cash skimming scheme. In Taxpayer 2’s voluntary disclosure letter to CI he expresses willingness to sell his bullion to pay all outstanding tax liabilities if he doesn’t have sufficient liquid assets to pay his taxes. Taxpayer 2 fully cooperates including providing his second set of books tracking his actual income to the examiner. The examiner asserts the civil fraud penalty for one tax year.

This scenario, which involves solely domestic conduct, demonstrates the value that the IRS will place on taxpayer cooperation during the voluntary disclosure process. The scenario presents numerous examples of fraudulent conduct by the taxpayer, including a typical “cash skim,” maintaining a second set of books, payment of personal expenses, and accumulation of a “cash hoard” (albeit in the form of gold bullion). Outside of the voluntary disclosure process, an IRS agent would undoubtedly assert the civil fraud penalty for multiple years. Because this is a voluntary disclosure case, the civil fraud penalty is limited to a single year, a significant concession to the taxpayer.

Hypothetical 3

Taxpayer 3 is a US citizen who lives in New York. Taxpayer 3, through nominees, owned 100% of a Panamanian corporation that held several foreign financial accounts in Singapore and interests in two businesses in China. Taxpayer 3 willfully and fraudulently failed to disclose his ownership of the CFC and his control over the foreign financial accounts. Taxpayer 3 actively traded securities and held mutual funds in one of the foreign financial accounts. During the course of the examination, Taxpayer 3 and the IRS cannot agree on the proper PFIC tax calculations for the last three years of the six-year disclosure period and transition tax under Section 965. Taxpayer 3’s positions on the issues are made in good faith and are non-frivolous. The examiner and her manager coordinated the issues internally and disagree with Taxpayer 3. Although agreement is not reached on those years, Taxpayer 3 fully cooperates throughout the examination including providing all documents requested and answering questions in an interview. Taxpayer 3 requests review by the Office of Appeals. The examiner asserts the civil fraud penalty for the last three years of the disclosure period and a willful FBAR penalty totaling 65% of the highest aggregate balance in all foreign bank accounts.

This scenario presents the most objectionable application by the IRS of the new voluntary disclosure penalty framework. The taxpayer’s conduct in this hypothetical is unquestionably willful, as evidenced by the taxpayer’s use of nominees to hold offshore accounts in tax haven countries and deliberate concealment of ownership of a controlled foreign corporation and control over foreign accounts. During the audit, the taxpayer fully cooperates but cannot reach an agreement with the agent as to a technical issue relating to application of the highly complex passive foreign investment company (PFIC) rules. The audit is resolved on an unagreed basis, and the taxpayer exercises his legal right to review by IRS Appeals. Despite the taxpayer’s assertion of a good faith, non-frivolous position regarding the PFIC issue, the IRS agent asserts a whopping array of penalties consisting of three years of civil fraud (a 225-percent penalty in total) and multiple willful FBAR penalties that total 65 percent in the aggregate. Taxpayers should not be punished for asserting good-faith legal positions and seeking review by IRS Appeals, but this scenario makes clear that taxpayers who do so may face what can only be described as retaliatory penalty assertions by IRS agents.

Other Voluntary Disclosure Options Still Exist

It is important to note that the new voluntary disclosure regime unveiled in November is not the only pathway for noncompliant taxpayers. Other viable, and less expensive, voluntary disclosure options still remain available depending, of course, on individual facts and circumstances. As noted, the highly-popular Streamlined Filing Compliance Procedures may still be used by taxpayers whose conduct was non-willful. For taxpayers whose only noncompliance was omission of certain information returns, the Delinquent FBAR Submission Procedures and the Delinquent International Information Return Submission Procedures are good options. Finally, although the IRS discourages the practice, taxpayers may still make so-called “quiet” disclosures by filing amended tax returns and following the procedures described in section 9.5.11.9 of the Internal Revenue Manual.

Conclusion

The new IRS voluntary disclosure regime is a mixed bag for taxpayers and practitioners. On the one hand, they should be welcomed by taxpayers and practitioners because they make clear that voluntary disclosure practice for both domestic and offshore issues is alive and well despite closure of the OVDP. On the other hand, the new procedures dramatically increase the range of available penalties as compared to OVDP and authorize IRS revenue agents ostensibly to punish non-cooperating taxpayers by significantly ratcheting up the potential penalty exposure, even when taxpayers assert good faith positions and/or seek to exercise their appeal rights. The increased price of admission may well discourage taxpayers from making formal voluntary disclosures and instead drive taxpayers into using other options, such as the Streamlined Filing Compliance Procedures or quiet disclosures.

For more up-to-date coverage from Tax Controversy and Financial Crimes Report, please subscribe by clicking here.

Today the Internal Revenue Service released its long-awaited updated procedures for voluntary disclosures now that the much-heralded Offshore Voluntary Disclosure Program (OVDP) closed on September 28, 2018. The updated procedures apply to all voluntary disclosures (both domestic and offshore) received by the IRS after the closing of the OVDP. IRS-Criminal Investigation will continue to screen all voluntary disclosures through the preclearance process, with the IRS LB&I office in Austin, Texas, continuing to process, and examine, tax returns. Most importantly, the updated procedures contain a new “Civil Resolution Framework” which addresses the scope of future voluntary disclosures and a new penalty structure. In subsequent posts we will provide detailed analysis of these newly-updated voluntary disclosure guidelines.

For more up-to-date coverage from Tax Controversy and Financial Crimes Report, please subscribe by clicking here.

August 29, 2017 – Law360

An unusual feature of this latest bank resolution is what the Justice Department characterizes as Prime Partners’ “voluntary and extraordinary cooperation” with the U.S. government. In early 2009, Prime Partners voluntarily implemented a series of remedial measures to stop assisting U.S. taxpayers in evading federal income taxes, before the initiation of any investigation by the U.S. government. The timing of these corrective actions is particularly notable, as the Justice Department announced its landmark deferred prosecution agreement with UBS AG, the largest bank in Switzerland, in February 2009, and the Internal Revenue Service unveiled its Offshore Voluntary Disclosure Program approximately 30 days later. In the midst of the announcement of the UBS resolution, many other Swiss banks were advising their U.S. clients to transfer their account holdings to other, smaller Swiss banks in order to avoid detection by U.S. authorities, thereby creating a class of U.S. taxpayers now labeled by authorities as “leavers.” In stark contrast, it appears that Prime Partners embarked on a different course of conduct, implementing corrective action to avoid further violations of U.S. law.

The Justice Department appears to have taken great care to describe publicly the extent of Prime Partners’ extensive cooperation, which included the following:

  • Prime Partners’ voluntary production of approximately 175 client files for noncompliant U.S. taxpayers, which included the identities of those U.S. taxpayers;
  • Prime Partners’ willingness to continue to cooperate to the extent permitted by applicable law; and
  • Prime Partners’ representation — based on an investigation by outside counsel, the results of which have been reviewed by the Justice Department — that the misconduct under investigation did not, and does not, extend beyond that described in a statement of facts accompanying the non-prosecution agreement.

Another notable aspect of this case is that while Prime Partners is a Swiss institution, it did not take advantage of the popular yet now-closed “Swiss Bank Program,” which essentially offered amnesty to any Swiss financial institution willing to come forward and make full disclosure of its cross-border activities involving U.S. citizens. Nearly 80 Swiss institutions enrolled in the Swiss Bank Program and successfully resolved their potential exposure under U.S. tax laws by paying steep financial penalties and agreeing to fully cooperate with the U.S. government’s ongoing investigations of offshore tax evasion. Instead of enrolling in the Swiss Bank Program, Prime Partners appears to have conducted an internal investigation, voluntarily disclosed its misconduct to the Justice Department, cooperated with the subsequent government investigation, and attempted to negotiate the best possible deal it could. Prime Partners may have been prompted to undertake such action based upon what the Justice Department has publicly stated is its “willingness to reach fair and appropriate resolutions with entities that come forward in a timely manner, disclose all relevant information regarding their illegal activities and cooperate fully and completely, including naming the individuals engaged in criminal conduct.”

The Justice Department’s announcement that it agreed to a nonprosecution agreement with Prime Partners is no doubt a signal to other financial institutions (both Swiss and non-Swiss) that the voluntary disclosure “window” remains open (notwithstanding the termination of the Swiss Bank Program), and that institutions voluntarily disclosing their wrongdoing and demonstrating substantial cooperation — like that of Prime Partners — will be treated leniently.

Indeed, in a press release announcing the resolution Acting Manhattan U.S. Attorney Joon H. Kim stated that “[t]he resolution of this matter through a non-prosecution agreement, along with forfeiture and restitution, reflects the extraordinary cooperation provided by Prime Partners to our investigation. It should serve as proof that cooperation has tangible benefits.” In the same vein, Acting Deputy Assistant Attorney General Stuart M. Goldberg said that “[i]n our ongoing investigations, we will continue to draw on information from a variety of sources and to provide substantial credit to those around the globe who provide full and timely cooperation regarding the identity of U.S. tax cheats and the phony trusts and shell companies they seek to hide behind.” At the same time, the Justice Department will undoubtedly seek to punish — to the fullest extent possible under U.S. laws — financial institutions that have aided and abetted tax evasion by their U.S. customers and that fail to come forward voluntarily and cooperatively.

Finally, the Justice Department’s resolution with Prime Partners stands as yet another stern warning to taxpayers with undisclosed foreign accounts that they must take corrective action immediately or face harsh consequences. In the press release, Acting Deputy Assistant Attorney General Stuart M. Goldberg said “[t]he message is clear to those using foreign bank accounts to engage in schemes to evade U.S. taxes – you can no longer assume your ‘secret’ accounts will remain concealed, no matter where they are located. In our ongoing investigations, we will continue to draw on information from a variety of sources and to provide substantial credit to those around the globe who provide full and timely cooperation regarding the identity of U.S. tax cheats and the phony trusts and shell companies they seek to hide behind.” The Internal Revenue Service’s Offshore Voluntary Disclosure Program remains available to taxpayers with undisclosed foreign assets, although the penalty for account holders at Prime Partners will now increase from 27.5 percent to 50 percent.

Reprinted with permission from Law360. (c) 2017 Portfolio Media. Further duplication without permission is prohibited. All rights reserved.

For more up-to-date coverage from Tax Controversy Sentinel, please subscribe by clicking here.

The Justice Department revealed its latest offshore bank resolution by announcing that it had entered into a non-prosecution agreement with a Swiss asset management firm called Prime Partners. This means that Prime Partners will not be criminally prosecuted for participating in what the DOJ characterized as a conspiracy to defraud the Internal Revenue Service and evade federal income taxes in connection with services that it provided to U.S. accountholders between 2001 and 2010. According to a press release announcing the resolution, the non-prosecution agreement was based upon Prime Partners’ “extraordinary cooperation,” including its voluntary production of approximately 175 client files for non-compliant U.S. taxpayer-clients. The non-prosecution agreement further requires Prime Partners to forfeit $4.32 million to the United States, representing certain fees that it earned by assisting its U.S. taxpayer-clients in opening and maintaining these undeclared accounts, and to pay $680,000 in restitution to the IRS, representing the approximate unpaid taxes arising from the tax evasion by Prime Partners’ U.S. taxpayer-clients.

As part of the non-prosecution agreement, Prime Partners admitted that it knew certain U.S. taxpayers were maintaining undeclared foreign bank accounts with the assistance of Prime Partners in order to evade their U.S. tax obligations, in violation of U.S. law. Prime Partners acknowledged that it helped certain U.S. taxpayer-clients conceal from the IRS their beneficial ownership of undeclared assets maintained in foreign bank accounts by using well-known mechanisms employed by offshore banks to hide funds, such as:

  • creating sham entities, which had no business purpose, that served as the nominal account holders for the accounts;
  • advising U.S. taxpayer-clients not to retain their account statements, to call Prime Partners collect from pay phones, and to destroy any faxes they received from Prime Partners;
  • providing U.S. taxpayer-clients with prepaid debit cards, which were funded with money from the clients’ undeclared accounts; and
  • facilitating cash transfers in the United States between U.S. taxpayer-clients with undeclared accounts.

An unusual feature of this latest bank resolution is what the Justice Department characterizes as Prime Partners’ “voluntary and extraordinary cooperation” with the U.S. government. In early 2009, Prime Partners voluntarily implemented a series of remedial measures to stop assisting U.S. taxpayers in evading federal income taxes, before the initiation of any investigation by the U.S. government. The timing of these corrective actions is particularly notable, as the Justice Department announced its landmark deferred prosecution agreement with the largest bank in Switzerland, UBS AG, in February 2009, and the Internal Revenue Service unveiled its Offshore Voluntary Disclosure Program approximately 30 days later. In the midst of the announcement of the UBS resolution, many other Swiss banks were advising their U.S. clients to transfer their account holdings to other, smaller Swiss banks in order to avoid detection by U.S. authorities, thereby creating a class of U.S. taxpayers now characterized by authorities as “leavers.” In stark contrast, it appears that Prime Partners embarked on a different course of conduct, implementing corrective action to avoid further violations of U.S. law.

The Justice Department appears to have taken great care to describe publically the extent of Prime Partners’ extensive cooperation, which included the following:

  • Prime Partners’ voluntary production of approximately 175 client files for non-compliant U.S. taxpayers, which included the identities of those U.S. taxpayers;
  • Prime Partners’ willingness to continue to cooperate to the extent permitted by applicable law; and
  • Prime Partners’ representation – based on an investigation by outside counsel, the results of which have been reviewed by the Justice Department – that the misconduct under investigation did not, and does not, extend beyond that described in a statement of facts accompanying the non-prosecution agreement.

Another notable aspect of this case is that while Prime Partners is a Swiss institution, it did not take advantage of the popular yet now-closed “Swiss Bank Program,” which essentially offered amnesty to any Swiss financial institution willing to come forward and make full disclosure of its cross-border activities involving U.S. citizens. Nearly 80 Swiss institutions enrolled in the Swiss Bank Program and successfully resolved their potential exposure under U.S. tax laws by paying steep financial penalties and agreeing to fully cooperate with the U.S. government’s ongoing investigations of offshore tax evasion. Instead of enrolling in the Swiss Bank Program, Prime Partners appears to have conducted an internal investigation, voluntarily disclosed its misconduct to the Justice Department, cooperated with the subsequent government investigation, and attempted to negotiate the best possible deal it could. Prime Partners may have been prompted to undertake such action based upon what the Justice Department has publicly stated is its “willingness to reach fair and appropriate resolutions with entities that come forward in a timely manner, disclose all relevant information regarding their illegal activities and cooperate fully and completely, including naming the individuals engaged in criminal conduct.”

The Justice Department’s announcement that it agreed to a non-prosecution agreement with Prime Partners is no doubt a signal to other financial institutions that the voluntary disclosure “window” remains open (notwithstanding the termination of the Swiss Bank Program), and that institutions demonstrating substantial cooperation – like that of Prime Partners – will be treated leniently. Indeed, in a press release announcing the resolution Acting Manhattan U.S. Attorney Joon H. Kim stated that “[t]he resolution of this matter through a non-prosecution agreement, along with forfeiture and restitution, reflects the extraordinary cooperation provided by Prime Partners to our investigation. It should serve as proof that cooperation has tangible benefits.” In the same vein, Acting Deputy Assistant Attorney General Stuart M. Goldberg said that “[i]n our ongoing investigations, we will continue to draw on information from a variety of sources and to provide substantial credit to those around the globe who provide full and timely cooperation regarding the identity of U.S. tax cheats and the phony trusts and shell companies they seek to hide behind.” At the same time, the Justice Department will undoubtedly seek to punish – to the fullest extent possible under U.S. laws – financial institutions that have aided and abetted tax evasion by their U.S. customers and that fail to come forward voluntarily and cooperatively.

Finally, the Justice Department’s resolution with Prime Partners stands as yet another stern warning to taxpayers with undisclosed foreign accounts that they must take corrective action immediately or face harsh consequences.  In the press release, Acting Deputy Assistant Attorney General Stuart M. Goldberg said “[t]he message is clear to those using foreign bank accounts to engage in schemes to evade U.S. taxes – you can no longer assume your ‘secret’ accounts will remain concealed, no matter where they are located. In our ongoing investigations, we will continue to draw on information from a variety of sources and to provide substantial credit to those around the globe who provide full and timely cooperation regarding the identity of U.S. tax cheats and the phony trusts and shell companies they seek to hide behind.” The Internal Revenue Service’s Offshore Voluntary Disclosure Program remains available to taxpayers with undisclosed foreign assets, although the penalty for accountholders at Prime Partners will now increase from 27.5 percent to 50 percent.

For more up-to-date coverage from Tax Controversy Sentinel, please subscribe by clicking here.

Today the Justice Department’s Tax Division announced that it has reached final resolutions with the remaining “Category 3 and 4” Swiss banks who had enrolled in the Swiss Bank Program. Originally unveiled in August 2013, the Swiss Bank Program provided a path for Swiss banks to resolve potential criminal liabilities in the United States, and to cooperate in the Justice Department’s ongoing investigations of the use of foreign bank accounts to commit tax evasion. The Swiss Bank Program also provided a mechanism for those Swiss banks that were not engaged in wrongful acts but nonetheless wanted a resolution of their status. Banks already under criminal investigation related to their Swiss-banking activities and all individuals were expressly excluded from the Swiss Bank Program.

The Swiss Bank Program established four categories of Swiss financial institutions, as follows:

Category 1 included Swiss banks already under investigation when the program was announced, and therefore, were not eligible to participate.  Banks in this category include UBS AG, Credit Suisse AG, Wegelin & Co., Zurcher Kantonalbank, among others.

Category 2 was reserved for those banks that advised the department by Dec. 31, 2013, that they had reason to believe that they had committed tax-related criminal offenses in connection with undeclared U.S. related accounts. In exchange for a non-prosecution agreement, the Category 2 banks made a complete disclosure of their cross-border activities, provided detailed information on accounts in which U.S. taxpayers have a direct or indirect interest, are cooperating in treaty requests for account information, are providing detailed information as to other banks that transferred funds into hidden accounts or that accepted funds when those secret accounts were closed, and must cooperate in any related criminal and civil proceedings for the life of those proceedings. The banks were also required to pay appropriate penalties.

Category 3 was designed for banks that established, with the assistance of an independent internal investigation of their cross-border business, that they did not commit tax or monetary transaction-related offenses and have an effective compliance program in place. Category 3 banks were required to provide the Department with an independent written report that identified witnesses interviewed and a summary of each witness’s statements, files reviewed, factual findings, and conclusions. In addition, the Category 3 banks were required to appear before the Department and respond to any questions related to the report or their cross-border business, and to close accounts of accountholders who fail to come into compliance with U.S. reporting obligations. Upon satisfying these requirements, Category 3 banks received a non-target letter pursuant to the terms of the Program.

Category 4 of the Program was reserved for Swiss banks that were able to demonstrate that they met certain criteria for deemed-compliance under the Foreign Account Tax Compliance Act (FATCA). Category 4 banks also were eligible for a non-target letter.

Between March 2015 and January 2016, the Justice Department executed non-prosecution agreements with 80 Category 2 banks and collected more than $1.36 billion in penalties. The Justice Department also signed a non-prosecution agreement with Finacor, a Swiss asset management firm, reflecting what the government described as its “willingness to reach fair and appropriate resolutions with entities that come forward in a timely manner, disclose all relevant information regarding their illegal activities and cooperate fully and completely, including naming the individuals engaged in criminal conduct.”

Today’s announcement revealed that between July and December 2016, four banks and one bank cooperative satisfied the requirements of Category 3, making them eligible for Non-Target Letters. No banks qualified under Category 4 of the program. The Justice Department did not announce the names of any of the qualifying Category 3 banks, nor did it release the names of the banks which failed to qualify as Category 4 institutions. Earlier this year, Swiss bank Thurgauer Kantonalbank announced that it had received a non-target letter from the Justice Department, thus qualifying as a Category 3 institution.  And just last week, Vontobel announced that it had reached a resolution with the Justice Department as a Category 3 bank.

The Swiss Bank Program has been an unqualified success for the U.S. government’s aggressive campaign to crack down on offshore tax evasion. Never before had the Justice Department offered what is essentially a tax evasion “amnesty” program to an entire country’s financial industry, leading some critics to initially question whether any Swiss banks would come forward. Those critics have been resoundingly proven wrong, given the overwhelming demonstration of interest in the program by Swiss banks and the significant amount of information that the program has generated for the Justice Department and Internal Revenue Service.

Today’s announcement does not, however, mark the conclusion of the Swiss Bank Program. Instead, the program is now in what the Justice Department calls its “legacy phase,” pursuant to which all participating Swiss banks are cooperating with ongoing civil and criminal investigations in the United States. The Swiss Bank Program is undoubtedly affording U.S. prosecutors and IRS agents a wealth of leads that they will use to “follow the money” around the globe and continue to seek to hold financial institutions, advisors, and account holders liable if they engage in evasion of U.S. tax laws. In this regard, Principal Deputy Assistant Attorney General Caroline D. Ciraolo issued the following statement today:

“The completion of the resolutions with the banks that participated in the Swiss Bank Program is a landmark achievement in the Department’s ongoing efforts to combat offshore tax evasion. We are now in the legacy phase of the Program, in which the participating banks are cooperating, and will continue to cooperate, in all related civil and criminal proceedings and investigations. The Tax Division, working closely with its colleagues throughout the Department and its partners within the Internal Revenue Service (IRS), will continue to hold financial institutions, professionals, and individual U.S. taxpayers accountable for their respective roles in concealing foreign accounts and assets, and evading U.S. tax obligations.”

IRS Large Business & International Division Commissioner Douglas O’Donnell further explained how the IRS is mining all of the data it is receiving from the Swiss Bank Program and other sources to further ongoing and new investigations:

“Offshore compliance remains an important area of tax administration. We are evaluating incoming information to detect accountholders who have evaded reporting overseas assets and income, and we are using this information to further untangle the web of financial institutions and intermediaries helping with this evasion. We have expanded our investigations to other regions of the world, and we will continue to apply these techniques to help protect honest taxpayers.”

Today’s announcement is replete with statements from other high-ranking government officials touting the success of the Swiss Bank Program, including Attorney General Loretta E. Lynch:

“The Swiss Bank Program has been and continues to be a vital part of the Justice Department’s efforts to aggressively pursue tax evasion. This groundbreaking initiative has uncovered those who help facilitate evasion schemes and those who hide funds in secret offshore accounts; improved our ability to return tax dollars to the United States; and allowed us to pursue investigations into banks and individuals. I want to thank the Swiss government for their cooperation in this effort, and I look forward to continuing our work together to eradicate fraud and corruption.”

Principal Deputy Associate Attorney General Bill Baer echoed those sentiments:

“Working with the Swiss government, we have made financial institutions reform the way they do business. We are moving toward an era of global financial transparency, and those seeking to violate our nation’s tax laws, or the laws of our treaty partners, will find that the days of hiding funds abroad are over.”

Taxpayers who have still not “come clean” and declared their offshore assets may still take advantage of various IRS voluntary disclosure programs, such as the Offshore Voluntary Disclosure Program or the Streamlined Filing Compliance Procedures, but time is of the essence. Noncompliant taxpayers should consider taking immediate action because these programs may not be available if the U.S. government receives information about their offshore assets before they start the voluntary disclosure process. Please feel free to contact a member of Fox Rothschild’s tax controversy and litigation practice to discuss voluntary disclosure options.

Effective today, 47 new names have been added to the Internal Revenue Service’s ever-expanding list of “Foreign Financial Institutions or Facilitators” which trigger a significantly higher penalty for participants in the Offshore Voluntary Disclosure Program (OVDP).  Under the current OVDP terms, individuals making a voluntary disclosure about offshore bank accounts and assets can avoid criminal prosecution by filing amended returns and FBARs and paying back taxes, interest, and penalties.  The standard penalty applicable to OVDP participants is 27.5 percent of the highest aggregate value of undisclosed offshore assets during the eight-year lookback period.  Taxpayers who maintained accounts, or were clients of, financial institutions or facilitators identified on the IRS list are subject to a substantially increased penalty calculated at 50 percent of the highest balance.

Since the OVDP terms were modified in 2014, the IRS has maintained a list of financial institutions and facilitators on its website that trigger the higher penalty.  Initially, that list was compromised of a handful of foreign banks (mostly Swiss) which were the subject of U.S. government scrutiny, such as UBS, Credit Suisse, HSBC India, and Bank Leumi, among others.  Over time that list grew steadily, as Swiss banks who participated in the DOJ’s Swiss Bank Program resolved their potential exposure for U.S. tax offenses and had their names added to the list.  Eventually, the names of 78 Swiss banks were added to the list, and taxpayers who had accounts at any of those institutions became subject to the 50 percent penalty.  Other banks were added to the list as a result of the issuance of “John Doe” summonses, including institutions in Belize and the Cayman Islands.

The 47 new names added to the list effective today consist of 40 individuals and 7 entities.  The new additions include some familiar and well-known names, including UBS whistleblower Bradley Birkenfeld and Swiss financial advisor Beda Singenberger.  A large number of Swiss bankers are among the newly-added individuals, including employees of UBS, Credit Suisse, Julius Baer, Wegelin, and smaller banks such as Zuercher Kantonalbank, Bank Frey, and Rahn & Bodner Banquiers.  The list also includes a number of professional advisors, such as attorneys and asset managers from Switzerland and Liechtenstein, and includes individuals who assisted U.S. taxpayers in moving funds out of larger Swiss banks like UBS and Credit Suisse into smaller financial institutions (the so-called “leavers” that are the subject of great interest by the IRS and Justice Department).  Today’s additions to the facilitator list are not limited to Switzerland, however; other countries implicated by the additions include the Cayman Islands, Turks & Caicos, and Belize.  The seven companies added to the list are from Belize and were utilized as part of securities and tax fraud schemes orchestrated by a Belize-based individual named Robert Bandfield who has pleaded guilty to money laundering conspiracy in federal court in Brooklyn.

With the addition of these 47 new names, the total number of financial institutions and facilitators for which the 50 percent penalty applies is 144.  The complete list can be found here.

Today’s action by the IRS confirms once again that U.S. taxpayers with undisclosed offshore accounts or assets should take immediate action.  For taxpayers who still have not voluntarily corrected past misdeeds with respect to offshore assets, the window of opportunity for voluntary disclosures remains open but time is of the essence.  Both the OVDP and the related “Streamlined Compliance Procedures” remain available to non-compliant taxpayers at this time, but only if the taxpayer initiates the voluntary disclosure process before the IRS receives information about a taxpayer’s non-compliance (such as through third-party disclosures mandated by FATCA or the Swiss Bank Program).  Once the IRS learns of a taxpayer’s non-compliance, voluntary disclosure options are generally off the table.  And, the IRS has said that it may terminate the OVDP and streamlined procedures at any time, without advance notice.  Non-compliant taxpayers with offshore assets who fail to take immediate action now do so at their peril.  This is especially so for taxpayers who had dealings with any of the institutions or individuals identified on the growing IRS facilitator list.

The Internal Revenue Service has achieved another milestone in its long-running campaign to crack down on offshore tax evasion, announcing that more than 100,000 taxpayers have voluntarily returned to compliance and paid more than $10 billion in back taxes, interest, and penalties. At the same time, the IRS warned non-compliant taxpayers that its international compliance efforts – both criminal and civil – will continue unabated.

In a press release touting its latest successes, the IRS announced that 55,800 taxpayers have utilized the Offshore Voluntary Disclosure Program (OVDP) to resolve their tax obligations. The IRS unveiled the OVDP in March 2009, following its landmark resolution with Swiss bank UBS AG, affording taxpayers with secret offshore bank accounts the opportunity to avoid criminal prosecution if they voluntarily filed amended tax returns and paid a hefty financial penalty.  The current version of the OVDP requires participants to file eight years of amended tax returns and pay a penalty calculated at 27.5 percent (or 50 percent, in certain cases) of the highest aggregate value of their undisclosed offshore assets.  Since 2009, taxpayers participating in the OVDP have paid the U.S. Treasury more than $9.9 billion in taxes, interest, and penalties, rendering the OVDP by far the most successful voluntary disclosure initiative ever offered by the IRS.

In June 2014, in response to widespread criticism that the OVDP’s “one size fits all” settlement terms did not adequately take into account the varying facts and circumstances of each individual case, the IRS announced an alternative voluntary disclosure option: the Streamlined Filing Compliance Procedures.  Like the OVDP, this program was designed to provide a vehicle for taxpayers with undisclosed offshore assets to return to compliance.  Unlike the OVDP, however, the streamlined program takes account of a taxpayer’s state of mind, and taxpayers who can demonstrate that their non-compliance was attributable to “non-willful” conduct – as opposed to intentional or deliberate behavior – can qualify for the streamlined program’s favorable settlement terms.  Taxpayers eligible for the streamlined procedures need only file three years of amended tax returns, six years of foreign bank account reporting forms (commonly known as FBARs).  Taxpayers residing in the U.S. are required to pay a financial penalty of five percent of the highest aggregate value of their undisclosed foreign assets.  Taxpayers residing outside of the U.S. do not have to pay any financial penalty.

Since their unveiling in the summer of 2014, the streamlined procedures have been enormously popular, as the latest IRS statistics confirm. Approximately 48,000 taxpayers have utilized the streamlined procedures to correct prior non-willful omissions and meet their federal tax obligations, paying approximately $450 million in taxes, interest, and penalties.  In its short two and one-half year existence so far, the streamlined program has had nearly as many participants as the OVDP, which has been in existence for nearly three times as long.  These statistics illustrate what many practitioners have long suspected:  many more non-compliant taxpayers are taking advantage of the streamlined procedures than the OVDP, even if they may not satisfy the “non-willful” criteria.

At the same time it was celebrating its latest voluntary disclosure benchmark achievement, the IRS warned non-compliant taxpayers that they should take immediate corrective action to avoid potentially harsh enforcement activity. “As we continue to receive more information on foreign accounts, people’s ability to avoid detection becomes harder and harder,” said IRS Commissioner John Koskinen.  “The IRS continues to urge those people with international tax issues to come forward to meet their tax obligations.”  The Justice Department’s Tax Division issued a similarly stern warning for taxpayers who falsely claimed their conduct was “non-willful” in order to qualify for the streamlined procedures.  Caroline D. Ciraolo, Principal Deputy Assistant Attorney General, stated in a speech on October 28 that taxpayers who “lied their way through a streamlined narrative” will be criminally prosecuted.  Ciraolo added that “[I]t’s our job to make sure that those people who chose the streamlined program chose appropriately.”

The risks for taxpayers with undisclosed offshore assets is at an all-time high now, as the IRS and the Justice Department now have access to an unprecedented amount of information and data regarding the offshore activities of U.S. taxpayers. As a result of the Foreign Account Tax Compliance Act (FATCA), and its network of bilateral treaties (known as inter-governmental agreements) between the U.S. and more than 100 partner countries, automatic annual reporting of foreign account data to the IRS has entered its second year.  In addition, account information continues to pour into the U.S. government as a result of the Justice Department’s ground-breaking Swiss Bank Program, pursuant to which 80 banks in Switzerland entered into resolutions to avoid criminal prosecution in the U.S. and agreed to hand over details about their U.S. customers to the Justice Department.

For taxpayers who still have not voluntarily corrected past misdeeds with respect to offshore assets, the window of opportunity for voluntary disclosures remains open but time is of the essence. Both the OVDP and the streamlined procedures remain available to non-compliant taxpayers at this time, but only if the taxpayer initiates the voluntary disclosure process before the IRS receives information about a taxpayer’s non-compliance (such as through third-party disclosures mandated by FATCA or the Swiss Bank Program).  Once the IRS learns of a taxpayer’s non-compliance, voluntary disclosure options are generally off the table.  And, the IRS has said that it may terminate the OVDP and streamlined procedures at any time, without advance notice.  Non-compliant taxpayers with offshore assets who fail to take immediate action now do so at their peril.