Penalties on the Income Tax
Remember that the accuracy related penalty is entirely separate from any other penalty, such as the failure to file penalty. The Accuracy Related Penalty is 20% of any underpayment due to negligence or disregard of rules or regulations, or substantial understatement of income tax.
To bring this together, IRS Commissioner Shulman remarked before the 23rd Annual Institute on Current Issues in International Taxation in Washington, DC that:
“If you add all of our offshore compliance efforts together, perhaps the most important outcome is the deterrent effect. Today, banks are much less willing to facilitate offshore evasion than they were in the past. advisors are asking more questions of their clients regarding offshore accounts, and taxpayers understand that their chances of getting away with hiding assets overseas have diminished. While very difficult to measure, this deterrent effect has important, lasting, multi-billion dollar consequences for our tax system.”
The case just concluded in September of 2010 at the United States District Court for the Eastern District of Virginia with the United States of America in the favor of Mr. Williams as the plaintiff and J. Bryan Williams as the defendant. Now armed with the above information from the IRS, U.S. Treasury and Commissioner Shulman, let us apply this to an actual tax case.
It is probably best to give some background to which neither the taxpayer, Mr. Williams, or the IRS disagree: Our test case plaintiff, Williams, opened two bank accounts at Credit Agricole Indosuez, SA, in the name of ALQI Holdings, Ltd., a British Corporation. In the tax years 1993 and 2000, Williams deposited more than $7,000,000 in assets in the two above bank accounts, which produced bank interest income exceeding $800,000. Schedule B, Part III of William’s 2000 income tax return instructed Williams to indicate whether he had an interest in financial accounts in a foreign country by checking “Yes” or “No” in the appropriate box and directed him to Form TDF 90-22.1, the now globally know “Foreign Bank Account Report.”
If you look at your federal form 1040 that we as individuals file each on or before April 15th of the following year, you will see an innocent bottom part of Schedule B, part III with a few lines of questions with simple check-the-box questions without any place for amounts or dates that is generally deemed important on a tax return.
The year 2000 was not a good year for Williams. On William’s 2000 tax return, Schedule B, Part III, the box was checked “No.” as to foreign bank accounts. Williams also missed the of the TDF 90-22.1 filing. This is, in my view, easy to miss since the tax return is due April 15 of the following year and the TDF 90-22.1 is due June 30 of the next year win no extensions allowed. Also in the year 2000, Williams was interviewed, pursuant to a Swiss government official request on these offshore bank accounts base on requests made by the U.S. government. However, this innocent bottom area with boxes to be checked as “yes” or “no” is now essentially lethal Pandora’s boxes.
Williams did, fortunately, retained legal U.S. and Swiss tax counsel prior to the interview date of November 13, 2000. The very next day after this interview, the U.S. Treasury requested that the Swiss government freeze William’s two Swiss bank accounts. That same day, the Swiss government did indeed freeze any and all funds in those two offshore bank accounts. Therefore, Williams was, I suspect, then severely handicapped in subsequent years attempting to pay his attorney fees and costs as well as massive penalties to the IRS.
On October 15, 2002, Williams again disclosed the accounts by filing his income tax return for the tax year 2001. Then a third time, Williams made full disclosure of the ALQI accounts on February 14, 2003, as part of his application to participate in the Offshore Voluntary Compliance Initiative.
In February 2003, Williams filed Amended Returns for 1999 and 2000, which, for the fourth time, disclosed details about his offshore accounts. William’s tax attorneys and accountants, subsequent to the freezing, advised him to make a series of complete disclosures to Swiss and U.S. authorities. In January 2002, Williams disclosed the offshore accounts to John Manton of the IRS in Washington, D.C even though the IRS already knew of these accounts well before requesting the Swiss freeze in November 2000.Thereafter, in May 2003, Williams agreed to plead guilty to tax fraud and for a fifth time, fully disclosed all information about the ALQI Swiss bank accounts. On June 12, 2003, Williams pleaded guilty to one count of conspiracy to defraud the United States and to one count of criminal tax evasion in connection with funds held in the Swiss bank accounts during the years 1993 through 2000.
Even with at least six disclosures of his two originally unreported offshore bank accounts, the U.S. government charged Williams with, amongst other violations, Title 31, Section 5314 of the U.S. Code, which requires qualifying individuals to disclose their interests in foreign bank accounts. And now, if you are keeping count, a sixth time, on January 18, 2007, Williams filed the TDF 90-22.1 forms for all years going back to 1993, including tax year 2000.The Internal Revenue Code Section 5314(b) permits the U.S. Secretary of Treasury to delegate additional findings of fact by enforcing the filing of TDF 90-22.1 if the following conditions exist:
1. The individual was a resident or a person doing business in the United States;
2. The U.S. person had a financial interest in the account or signatory or other authority over the foreign financial account.
3. The individual had a financial account or accounts that exceeded $10,000 during the calendar year; and
4. The financial account was in a foreign country;
Williams told the court that he did fall under the first three of the above conditions, but the civil penalties for willful violations of IRC Section 5314, carrying maximum assessment of $100,000 did not apply to him because he did not act in a “willful” manner.
Be careful here, because the court’s findings were based on acts prior to 2004! Since 2003, the U.S. government has legislated new statutory language addressing willful violations in an expanded sense for acts falling below the willfulness standard. The court found that the U.S. government had failed to prove its case on the matter of a “willful” violation. The court also found that the Government’s case did not adequately account for the difference between failing and willfully failing to disclose an interest in a foreign bank account pursuant to IRC Section 5321(b)(l).
CONCLUSION:
We are entering a new era of foreign bank account voluntary compliance program. By watching this current program take regulatory form and taking into account lessons learned from the past programs, we hope to use this as an advantage in counseling clients who are seeking a resolution to the current, and even past, dilemma of having a bank account or securities overseas and of making the delicate decision to come forward and be compliant with the U.S. government. It is important to note that, as with past amnesty programs, if the IRS discovers the non-reporting of foreign bank account before you apply for amnesty, the amnesty application will not apply to you. There is now a solid history of IRS voluntary programs referencing foreign bank accounts.
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