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Increased information exchange

Taxpayers are seeing many countries, especially the US with its Foreign Account Tax Compliance Act (FATCA) and the OECD Countries Common Reporting Standard (“CRS”), making greater use of tax treaties and tax information exchange agreements, and engaging in more spontaneous disclosures of data from one taxing authority to another. With the post 9/11 focus on terrorism and money laundering and the increasing consensus that tax and fiscal crimes are just as serious as other offences, countries are exchanging tax information more freely.

The US, Canada, the UK, Japan and Australia have established the Joint International Tax Shelter Information Centre (JITSIC), aimed at sharing information on tax shelters and on the professionals and financial institutions that plan and promote them. The purpose is to enable tax authorities in these five nations to exchange details on complex tax avoidance structures, and to enable more rapid and coordinated enforcement responses.

With the implementation of tax exchange mechanisms such as FATCA & CRS, other US enforcement initiatives like the Swiss Bank Program, along with websites like International Consortium of International Journalists (ICIJ) publishing Hacker’s leaked information like the "Panama Papers” which disclosed Mossack Fonseca’s clients offshore structures, IRS has access now to far more information about the offshore activities of U.S. taxpayers than ever before!

History of Undisclosed Foreign Accounts

The history of undisclosed accounts and unreported income from foreign financial assets.

  • 2008 Senate report – U.S. loses $100 billion in annual tax revenues due to offshore tax abuses.
  • Up to $70 billion in annual tax losses from individual tax evasion using offshore structures (testimony of Professor Avi-Yonah before House W&M, March 31, 2009).
  • 2000 State Department report – $4.8 trillion in offshore accounts

In 2008, DOJ investigations into American-owned accounts in LGT and UBS led to a series of voluntary disclosure initiatives and programs focused on disclosure of offshore financial assets and related income. In 2012, Streamlined Procedures introduced for nonresidents, updated in June 2014 and as of January 2015, aggregate of more than 50,000 OVDP participants netting more than $7 billion in taxes, penalties and interest in the various OVDP iterations.;


With the implementation of FATCA and the ongoing efforts of the IRS and the Department of Justice to ensure compliance by those with U.S. tax obligations have raised awareness of U.S. tax and information reporting obligations with respect to non-U.S. investments.

Whether a U.S. taxpayer with noncompliant offshore holdings should pursue the formal OVDP or should file remedial returns under the IRS voluntary disclosure practice is an issue that requires considerable professional judgment by the tax practitioner, particularly on the issue of ‘‘Willfulness.’’  This judgment must take into account all facts and circumstances, including all items of evidence, whether in the form of banking or tax-related documentation, third-party statements, or the taxpayer’s own statements.

Because the circumstances of taxpayers with non-U.S. investments vary widely, the IRS offers the following 4 options for addressing previous failures to comply with U.S. tax and information return obligations with respect to those investments:

  1. Voluntary Disclosure
  2. Streamlined Disclosure - Non-Resident Taxpayer and Resident U.S. Taxpayer
  3. Delinquent FBAR Submissions Procedures
  4. Delinquent International Information Return Submissions Procedures

There are also 5 other options that some taxpayers may consider, which are not as advantageous as the fort discussed above:

  1. Filing a Noisy Disclosure
  2. Filing a Quiet Disclosure
  3. Prospective Compliance
  4. Do Nothing
  5. Expatriation

Legal and tactical issues

Every taxpayer's case is different, and a number of issues often arise in each case. One such issue is how many years the taxpayer must correct. In many cases, practitioners recommend going back six years, as that is the statute of limitations for criminal tax prosecutions in the US. In other cases, for a variety of reasons, a taxpayer may correct filings for fewer years.

A second issue is the manner of the disclosure itself. Depending on the facts of the case, taxpayers might make an effective voluntary disclosure by filing amended (or delinquent) returns accompanied by payment, or they could surface overtly with IRS officials to provide relevant facts to obtain their view that the Voluntary Disclosure Policy would apply.

While many tax practitioners recommend a strategy of simply filing the appropriate returns, in more complicated cases or those involving substantial amounts (over $250,000 of tax liability), a practitioner might suggest making affirmative contact with the IRS. Such a contact might first be on a hypothetical basis to sound out IRS representatives on the repercussions of a significant disclosure. But the IRS will not grant voluntary disclosure status unless the names of the relevant taxpayers are eventually provided.

Third, complex tax reporting and accounting issues often arise from the nature and structure of the assets and income at issue. The presence of foreign corporations, foreign trusts, IBCs, foundations, personal estates, or nonprofit entities can complicate the analysis of how a taxpayer might correct returns and filings in earlier years. If the conduct involves wages or Withholding issues, additional complexities arise. The exact nature of the assets and even technicalities such as currency exchange calculations will require accounting analysis.

Fourth, there are often questions regarding the separate US Treasury form (Form 90-22.1, the FBAR), an annual information return required of US persons that control or have interests in foreign financial accounts. There are separate rules on the filing of this form for individuals and for businesses. A complete voluntary disclosure will require analysis of these matters as well.

Lastly, the IRS policy does not protect against civil penalties. These penalties can be significant in cases where information returns on foreign corporations, estates, trusts or foundations may be involved. Having said this, the IRS is often more lenient in voluntary disclosures because the taxpayer has shown good faith in coming forward and making a complete and truthful disclosure.

Complications aside, given the increasing US enforcement focus on offshore accounts and business structures, the IRS's Voluntary Disclosure Policy provides an opportunity for companies to make their peace at what is often (relatively speaking) a reasonable price, especially when the benefits include avoiding a criminal inquiry. Policies in other countries afford the same chance to clean up matters before trouble arises.

It would behoove taxpayers worldwide, to review their tax-related structures, accounts and holdings, to ascertain whether it would make sense to consider a voluntary disclosure. This is especially the case for valued company management who may have undeclared assets in tax haven countries and for families and individuals about secret accounts or offshore business structures, which may be perceived as abusive.

Prudent Action NOW Could Pre-Empt Potentially
Serious Legal Trouble Down the Road!


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