We recently wrote that the IRS has hinted about a new voluntary disclosure program (VDP) for non-compliant foreign accounts. Our post from November 18, 2010 can be found here and discusses the earlier VDP that expired in 2009, as well as commentary about the possible penalties that might be part of a second, new VDP.
Last week, IRS Commissioner Shulman again stated that the IRS is considering a second VDP. Commissioner Shulman’s most recent remarks, following the earlier hints from November, suggest a strong possibility that a second VDP will be announced soon.
Clearly, following the IRS success against UBS, plus current IRS investigations of other banks such as HSBC, Credit Suisse, Julius Baer, Liechtensteinische Landesbank, Bank Leumi and others, the IRS has the upper hand in discovering and prosecuting tax fraud related to undeclared offshore accounts. Foreign bank secrecy has been further eroded by the passage of the HIRE Act earlier this year, which increases reporting obligations by US taxpayers with foreign holdings as well as new reporting obligations incumbent upon foreign banking institutions. Fines and penalties for undeclared offshore accounts and unreported foreign income are significantly increased by the HIRE Act.
Commissioner Shulman’s recent remarks make it clear that the IRS is not stopping at UBS alone. Other banks are next. Commissioner Shulman stated:
As I have said from the beginning, this was never about one country or one bank. The John Doe Summons [against UBS] was just one piece of a much larger effort underway here at the IRS on international tax compliance issues that is producing real results for U.S. taxpayers.
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The VDP and UBS matters are significant, but there is obviously more to come. We have been scouring the vast quantity of data we received from the VDP applicants and from other sources. Although more data mining is still to be done, this information has already proved invaluable in supplementing and corroborating prior leads, as well as developing new leads, involving numerous banks, advisors and promoters from around the world, including Asia and the Middle East.
Clearly, a new voluntary disclosure program would be welcome for taxpayers who need to bring their foreign holdings into tax compliance. Presumably, a new VDP would also include clarification of what the penalties will be. The prior VDP, which ended in October 2009, imposed a special penalty of 20% of the highest aggregate balance of the offshore accounts. But taxpayers who voluntarily disclosed their foreign accounts after the expiration of the prior VDP face uncertainty of what the penalties would be. By law, the IRS is allowed to take 50% of the non-compliant account for each year that the account is non-compliant. Commissioner Shulman hinted about the new penalty regime:
Given its success, we are seriously considering another special offshore Voluntary Disclosure program. However, there will be some fundamental differences. Taxpayers will not get the same deal as those who came in under the original program. To be fair to those who came in before the deadline, the penalty – and thus the financial cost to participate – will increase. Let me say too that we expect to make the terms of any new program available to those who have already come in after October 2009 when that program expired. Stay tuned for more details as they become available.