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The headlines are a result of very strong efforts by the United States in
recent years to stop the use of “tax havens” where Americans were
depositing unreported income that had not been taxed and were doing
so with anonymity and impurity.
Those efforts have started to bear fruit for the U.S. tax collectors. Since
knowingly not reporting income on your Federal income tax return is a
crime, many U.S. individuals were put in a hard place with important
choices to make about taxes.
The Internal Revenue Service has very intelligently made that choice
easier.
On March 23, the Internal Revenue Service came up with a six month
“Amnesty Program” to allow U.S. taxpayers with unreported income to
disclose their foreign bank accounts without fear of any criminal tax
penalties. The price is to pay the income tax, the interest on the income
tax and two specific penalties on unreported income and foreign bank
accounts for the years 2003 through 2008. The Amnesty Program
terminates six months after its March 23, 2009 announcement, on
September 23, 2009.
This Article will discuss the I.R.S. Amnesty Program, its requirements, pitfalls
and its procedures.
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tax penalties that might result from the disclosures of previously untaxed
income remained uncertain.
The I.R.S. manual spells out the principal requirements of the Voluntary
Disclosure which must be truthful, timely and complete. This occurs under
the following circumstances
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Assuming eligibility for the Amnesty Program, first the taxpayer must file
amended income tax returns and Treasury Department Forms TD F 90-22.1,
Report of Foreign Bank and Financial Accounts (“FBARs”), for each of the
prior six years (or for each year since the foreign bank account(s) in
question were opened), whichever is less.
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Q.12. How does the penalty framework work? Can you give us an
example?
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Q27. If I don’t have the ability to pay can I still participate in the IRS’s
Voluntary Disclosure Practice?
A27. Yes. The March 23, 2009 guidance requires the taxpayer to fully pay
all taxes and interest for all years covered, and the Voluntary Disclosure
penalty, as well as all other unpaid, previously assessed liabilities, when the
signed closing agreement is returned to the Service. However, it is
possible for a taxpayer who is unable to make full payment at that time to
submit a request that includes other payment arrangements acceptance
to the IRS.
The answer to the question of what asset may be subject to the Amnesty
Program actually required two Questions and Answers, not one. The I.R.S.
issued one set of Questions and Answers in May and recently updated
those Questions and Answers on June 24th. It seems the May Questions
and Answers on this subject needed clarification in the form of a second
question in June which is Question and Answer NO. 37.
The two answers make it clear that the assets that may be subject to the
20% penalty include more than just bank deposits. They include tangible
assets such as real estate or art, intangible assets such as patents or stocks
or other interests in a business.
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Question 37 clarified that there was no 20% penalty for non income
producing assets that had no reporting obligation to disclose their
existence at this point. The tax on gain in any of these assets should be
paid to the U.S. when the gain is realized.
Q20. Does the twenty percent penalty apply to entities? Does the
twenty percent penalty apply only to cash and securities held in foreign
accounts or entities or to tangible and intangible assets as well?
A20. The twenty percent penalty applies to entities. The twenty percent
penalty applies to all assets (or at least the taxpayer’s share) held by
foreign entities (e.g., trusts and corporation) for which the taxpayer was
required to file the information returns, as well as all foreign assets (e.g.
financial accounts, tangible assets such as real estate or art and
intangible assets such as patents or stock or other interests in a U.S.
business) held or controlled by the taxpayer.
Q37. Re: Q & A 20. A taxpayer owns valuable land and artwork located
in a foreign jurisdiction. This property produces no income and there were
no reporting requirements regarding this property. Must the taxpayer
report the land and artwork and pay a 20 percent penalty?
Paragraph No. 3 also requires two separate Questions and Answers for
clarification. Previously in this Report, Question and Answer 12 was
referred to. In Answer No. 12, there is a specific point of saying the original
deposit “is not unreported income for 2003”. This answer begs the
question of whether amnesty is granted for pre 2003 unreported income.
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In Question 33 of the June 24th version of the Questions and Answers, the
following statement is made about unreported income in a pre disclosure
year (2003 – 2008). Question No. 33 appears to say that the Amnesty
Program is a program that will also cover the pre amnesty years. The
answer to this question continues to need clarification by the I.R.S.
Q33. If the look back period is 2003-2008, what does the taxpayer do if the
taxpayer held foreign real estate, sold in 2002, and did not report the gain
on his 2002 return? Does the taxpayer compute the 20 percent on the
highest aggregate balance in 2003-2008? What, if anything, does IRS
expect the taxpayer to do with respect to 2002?
A18. Our experience with offshore cases in recent years is that taxpayers
are successful in retrieving copies of statements and other records from
foreign banks when they genuinely attempt to do so. If assistance is
needed, the agent assigned to a case will work with the taxpayer in
preparing a request that should be acceptable to the foreign bank.
Q25. Besides federal income tax returns, what forms or other returns must
be filed?
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Q.14 What are some of the criminal charges I might face if I don’t
come in under voluntary disclosure and the IRS finds me?
Possible criminal charges related to tax returns include tax evasion (26
U.S.C. § 7206(1) and failure to file an income tax return. The failure to file
an FBAR and the filing of a false FBAR are both violations that are also
subject to criminal penalties,
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What are some of the civil penalties that might apply if I don’t come in
under voluntary disclosure and the IRS finds me?
Fraud penalties
There are answers to these and many other questions in the I.R.S.
publication and a taxpayer is urged to read it in full. The I.R.S. certainly
does its job to push the taxpayer towards compliance, since it gives
another example that shows how costly it could be from a civil tax
payment standpoint for the taxpayer who chooses not to use the
Amnesty Program but chooses to sit and wait and hope for the best.
The reader will note that the example in Question 12 of the I.R.S.
publication produced a total amount of tax, not including interest equal
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If the taxpayer did not come forward and the IRS discovered other
offshore activities, they face up to $2,306,000 in tax, accuracy-related
penalty, and FBAR penalty. The taxpayer would also be liable for interest
and possible additional penalties, and an examination could lead to
criminal prosecution.
Note that if the foreign activity started more than six years ago, the
Service may also have the right to examine additional years.
Practical Solutions
This author has found on multiple occasions that when dealing with cases
such as those involved in the Amnesty Program, the taxpayer is best
served by making his first few steps the right ones which include hiring the
right team of counsels that include both a tax lawyer and a criminal
lawyer.
These two disciplines of law working together will generally come up with
the best solution. Often the tax lawyer believes that certain taxpayer
disclosures and presentations will be helpful in deterring an I.R.S. criminal
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investigation while the criminal lawyer must always keep his eyes on the
taxpayer’s Fifth Amendment rights to make sure the disclosures necessary
to tell the taxpayer’s story do not violate the taxpayer’s constitutional
rights and do great harm. The resulting work product of the two disciplines
generally seems to have outcomes that include the best of both worlds.
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Richard S. Lehman, P.A. has been meeting these needs when it comes to
dealing with the federal tax law for more than three decades. Thanks to a
team of tax attorneys who are familiar with every aspect of the Internal
Revenue Code, the tax needs of international and domestic clients,
corporations and individuals have been met. The firm has been involved
in unique and complex tax situations on behalf of the affluent from its
beginning.
Richard S. Lehman, with four years of U.S. Tax Court and Internal Revenue
Service experience in Washington D.C., has built a boutique tax law firm
with a national reputation for being able to handle the toughest tax
cases, structure the most sophisticated income tax and estate tax plans,
and defend clients before the Internal Revenue Service. It regularly works
with law firms, accountants, businesses and individuals struggling to find
their way through the complexities of the tax law. In short, the firm is a
valuable resource to each of these audiences.
Central to the firm’s philosophy is the recognition that the tax laws do not
exist in a vacuum. Legal and other professional disciplines often need to
be woven together to assure a successful outcome. Consequently, the
firm is regularly approached by and often works with the finest
professionals in many areas of the law and the business world to untangle
complex tax situations that require its specialized expertise.
Regardless of the issue, the firm has consistently guided clients on topics
ranging from complex tax scenarios in real estate, business acquisitions
and sales, securities offerings, tax contests, probate litigation and
numerous other areas of commerce.
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