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Indian/Americans are Targeted by IRS for Offshore Accounts - Robert E. McKenzie, Tax Attorney

Indian/Americans are Targeted by IRS for Offshore Accounts

Indian/Americans are Targeted by IRS for Offshore Accounts
By: Robert E. McKenzie ©2011

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In April the Justice Department filed a lawsuit that sought to force HSBC India to reveal the names of U.S. customers with secret accounts, and a U. S. District subsequently granted the IRS authority to issue John Doe Summons for the names of U. S. residents of Indian descent who have had NRE accounts (Non-resident External Rupee Accounts) at the bank.

The move opens up a new front in the U.S. crackdown on tax evasion. Until recently, U.S. efforts against offshore tax evasion have primarily focused on Swiss bank accounts. UBS AG admitted in February 2009 to conspiring to defraud the U.S. government of billions in taxes by helping wealthy Americans hide assets. The bank paid $780 million in a deal to avoid prosecution and eventually released the names of more than 4,000 U.S. clients.

The Justice Department sent signals this year that London-based HSBC Holdings PLC’s India operations were in its sights. Prosecutors indicted a New Jersey businessman In January and a Milwaukee doctor in July on charges that they conspired to evade taxes by hiding offshore bank accounts in India maintained by HSBC. Multiple other criminal investigations are currently pending against NRE HSBC account holders as a result of an apparent informant in the bank’s India operations. Other international banks with operations in India offering NRE accounts have also been mentioned in press reports as being potential targets of IRS investigations including Citibank, ING Bank and State Bank of India.

Offshore Voluntary Disclosure Initiative The IRS, February 8, 2011, announced a new 2011 Voluntary Disclosure Initiative (OVDI) for taxpayers to disclose their unreported offshore accounts. To participate in the OVDI, taxpayers must file or amend their tax returns and Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts (FBAR)) and pay all delinquent taxes, interest and penalties by August 31, 2011. The initiative covers tax years 2003 through 2010.

In exchange for participating in the OVDI, taxpayers with undisclosed offshore accounts can avoid criminal prosecution for their unpaid taxes and may be subject to significantly reduced penalties. [Generally, the civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign account per violation. See 31 U.S.C. § 5321(a)(5).] The IRS decision to open a second special disclosure initiative follows continuing interest from taxpayers with foreign accounts. The first special voluntary disclosure program closed with 15,000 voluntary disclosures on Oct. 15, 2009. Since that time, more than 3,000 taxpayers have come forward to the IRS with bank accounts from around the world. Those taxpayers who came forward during the period from October 26, 2009 and the present will also be allowed to participate in the new program.
“As we continue to amass more information and pursue more people internationally, the risk to individuals hiding assets offshore is increasing,” said IRS Commissioner Doug Shulman. “This new effort gives those hiding money in foreign accounts a tough, fair way to resolve their tax problems once and for all. And it gives people a chance to come in before we find them.”
The overall penalty structure for 2011 is higher, meaning that people who did not come in through the 2009 voluntary disclosure program will not be rewarded for waiting. However, the 2011 initiative does add new features. Under the OVDI, taxpayers will be subject to a 25 percent penalty on the highest aggregate account balance on their undisclosed account(s) between the 2003 and 2010. If the value of the undisclosed account(s) was less than $75,000 at all times during the tax years in question, the penalty is reduced to 12.5 percent. Moreover, in limited situations, a penalty of 5% may be imposed.
The first voluntary disclosure period ended on October 15, 2009,. Participants were subject to a 20 percent penalty rate covering a six-year window while the 2011 program requires the submission of 8 years of returns.

IRS Commissioner Shulman has described the 2011 OVDI as “the last, best chance for people to get back into the system.”
“The IRS also created a new penalty category of 12.5 percent for treating smaller offshore accounts. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the 2011 initiative will qualify for this lower rate.”
The 2011 initiative offers clear benefits to encourage taxpayers to come in now rather than risk IRS detection. Taxpayers hiding assets offshore who do not come forward will face far higher penalty scenarios as well as the possibility of criminal prosecution.
“This is a fair offer for people with offshore accounts who want to get right with the nation’s taxpayers,” Shulman said. “This initiative offers them the chance to get certainty about how their case will be handled. Just as importantly, those who truly come in voluntarily can avoid criminal prosecution as well.”
The IRS is handling processing of the voluntary disclosures in centralized units to more efficiently process the applications.
Eligibility. The OVDI is open to taxpayers, including individuals, corporations, partnerships and trusts. Taxpayers under examination or under criminal investigation, however, are ineligible to participate in the program.

Taxpayers that have made “quiet disclosures” by filing amended returns and paying related tax and interest for previously unreported offshore income without otherwise notifying the IRS are encouraged to participate in the OVDI. Taxpayers that make quiet disclosures without seeking the protection of the OVDI run the risk of being examined and potentially criminally prosecuted for all applicable years.

Deadline. The OVDI will be available to taxpayers that come forward and complete all requirements on or before August 31, 2011. Therefore, taxpayers looking to take advantage of the amnesty period should act quickly as it likely will take some time to obtain the requisite documentation from offshore financial institutions and to prepare an accurate disclosure to the IRS.

As a condition to being accepted into the 2011 Offshore Voluntary Disclosure Initiative (2011 OVDI), applicants must provide the IRS the following for those tax years covered by the voluntary disclosure (generally 2003 through 2010, inclusive) on or before August 31, 2011.

Copies of previously filed original (and, if applicable, previously filed amended) federal income tax returns for tax years covered by the voluntary disclosure.

Complete and accurate amended federal income tax returns (for individuals, Form 1040X, or original Form 1040 if delinquent) for all tax years covered by the voluntary disclosure, with applicable schedules detailing the amount and type of previously unreported income from the account or entity (e.g., Schedule B for interest and dividends, Schedule D for capital gains and losses, Schedule E for income from partnerships, S corporations, estates or trusts).

Copy of taxpayer’s completed and signed Offshore Voluntary Disclosures Letter.

A check made out to the U.S. Treasury. The check must include the amount of tax, interest, and accuracy-related penalty under IRC § 6662(a), and, if applicable, the failure to file and failure to pay penalties under IRC § 6651(a) (the suspension of interest provisions of IRC § 6404(g) do not apply to interest due in this initiative). If you cannot pay the total amount of tax, interest, and penalties as described above, submit your proposed payment arrangement and a completed Collection Information Statement ( Form 433-A, Collection Information Statement for Wage Earners and Self-employed Individuals, or Form 433-B, Collection Information Statement for Businesses, as appropriate).

Completed Foreign Account or Asset Statement Completed penalty computation worksheet showing the applicant’s determination of the aggregate highest account balance of his/her undisclosed offshore accounts, fair market value of foreign assets, and penalty computation signed by the applicant and the applicant’s representative if the applicant is represented.

Properly completed and signed agreements to extend the period of time to assess tax (including tax penalties) and to assess FBAR penalties.

For those applicants disclosing offshore financial accounts with an aggregate highest account balance in any year of $1 million or more, completed Foreign Financial Institution Statements as appropriate.

Complete and accurate Form TD F 90.22-1, Report of Foreign Bank and Financial Accounts, for foreign accounts maintained during calendar years covered by the voluntary disclosure and/or copies of previously filed FBARs.

For those applicants disclosing offshore financial accounts with an aggregate highest account balance in any year of $500,000 or more: Copies of offshore financial account statements reflecting all account activity for each of the tax years covered by your voluntary disclosure. Explain any differences between the amounts reported on the account statements and the tax returns.

For those applicants disclosing offshore financial accounts with an aggregate highest account balance of less than $500,000: copies of offshore financial account statements reflecting all account activity for each of the tax years covered by your voluntary disclosure must be available upon request.

A statement identifying all offshore entities for the tax years covered by the voluntary disclosure, whether held directly or indirectly, and your ownership or control share of such entities.

When accounts or assets were held in the name of a foreign entity, complete and accurate amended (or original, if delinquent) information returns required to be filed, for all tax years covered by the voluntary disclosure. If the applicant is requesting that the Service waive the information reporting requirement, the applicant must submit a completed and signed Statement on Dissolved Entities.

If the applicant is a decedent’s estate, or is an individual who participated in the failure to report the foreign account, foreign asset, or foreign entity in a required gift or estate tax return, either as executor or advisor, provide complete and accurate amended estate or gift tax returns (original estate or gift tax returns, if not previously filed) for tax years covered by the voluntary disclosure necessary to correct the underreporting of assets held in or transferred through undisclosed foreign accounts or foreign entities.

Returns involving Passive Foreign Investment Company (PFIC) issues. A statement whether the amended returns involve PFIC issues during the tax years covered by the 2011 OVDI period, and if so, whether the applicant chooses to elect the alternative to the statutory PFIC computation that resolves PFIC issues on a basis that is consistent with the mark to market (MTM) methodology authorized in IRC § 1296 but does not require complete reconstruction of historical data.

Anyone with an offshore account would be well advised to seek the advice of an experienced tax attorney for advice on their options. Because there is only a short time left to participate in the OVDI it is imperative to seek that advice as promptly as possible.


Robert E. McKenzie is a Partner of the law firm of Arnstein & Lehr LLP of Chicago, Illinois, concentrating his practice in representation before the Internal Revenue Service and state tax agencies. He has made numerous media appearances including Bloomberg News and The ABC Nightly News. Mr. McKenzie was previously employed by the Internal Revenue Service, Collection Division. Robert currently serves as a member of the IRS Advisory Council (IRSAC) which is a group appointed by the IRS Commissioner. Mr. McKenzie is the author of REPRESENTATION BEFORE THE COLLECTION DIVISION OF THE IRS and co-author of REPRESENTING THE AUDITED TAXPAYER BEFORE THE IRS and REPRESENTATION BEFORE THE UNITED STATES TAX COURT. Mr. McKenzie is a Regent of the American College of Tax Counsel and has been selected for inclusion in Super Lawyers, Leading Lawyers and the Bar Registry of Preeminent Lawyers.