Generally, taxpayers who submit a
request for participation in the OVDP pay a miscellaneous offshore
penalty equal to 27.5 % of the highest aggregate value of OVDP
assets during the period covered by the voluntary disclosure. The
offshore penalty is in lieu of all other penalties that may otherwise
apply to the undisclosed foreign accounts, assets and entities,
including FBAR and offshore-related information return penalties and tax
liabilities for years prior to the voluntary disclosure period. These
penalties could otherwise far exceed the value in an undisclosed
offshore account. Howwever, the offshore penalty rate is increased to 50%
under certain circumstances. Under the newly released list, the 50% penalty would apply if, at the time of making the initial
submission to request participation in the OVDP to the IRS, the taxpayer
had an account at any of the following:
1. UBS AG
2. Credit Suisse AG, Credit Suisse Fides and Clariden Leu Ltd.
3. Wegelin & Co.
4. Liechtensteinische Landesbank AG
5. Zurcher Kantonalbank
6.
swisspartners Investment Network AG, swisspartners Wealth Management
AG, swisspartners Insurance Company SPC Ltd. and swisspartners
Versicherung AG
7. CIBC FirstCaribbean International Bank Limited, its predecessors, subsidiaries and affiliates
8. Stanford International Bank, Ltd., Stanford Group Company and Stanford Trust Company, Ltd.
9. The Hong Kong and Shanghai Banking Corporation Limited in India (HSBC India)
10.
The Bank of N.T. Butterfield & Son Limited (also known as
Butterfield Bank and Bank of Butterfield), its predecessors,
subsidiaries and affiliates
11. Sovereign Management & Legal, Ltd., its predecessors, subsidiaries and affiliates (effective 12/19/14)
12.
Bank Leumi le-Israel B.M., The Bank Leumi le-Israel Trust Company Ltd,
Bank Leumi (Luxembourg) S.A., Leumi Private Bank S.A. and Bank Leumi
USA (effective 12/22/14)
Widespread Repercussions
Taxpayers
with accounts at the banks listed above as numbers 1 through 10 became
subject to the increased penalty regime on Aug. 4, 2014. Now, the
increased penalty regime has been expanded to include Bank Leumi and
taxpayers who used Sovereign Management & Legal, Ltd.
Bank
Leumi is one of Israel’s largest banking groups with over 300 branches
in Israel and throughout the world. The Department of Justice issued a news release
on Dec. 22, 2014 to the effect that Bank Leumi agreed to pay the United
States a total of $270 million in the wake of its admission that it
assisted U.S. taxpayers in hiding assets in offshore bank accounts. As
part of that deal, Bank Leumi will provide testimony and disclose
details to the IRS on more than 1,500 account holders.
It is
interesting to note that Sovereign is not in and of itself a bank. Among
other things, Sovereign is known for the formation and administration
of anonymous corporations and foundations in Panama, as discussed in the
Department of Justice news release
of Dec. 19, 2014. Accordingly, it may be particularly challenging for
taxpayers to identify if they have a disqualified structure. Taxpayers
may not even know that they are involved with Sovereign if they have a
foreign account held through a structure created by Sovereign over a
decade ago or if they inherited a Sovereign structure set up by a parent
or grandparent. Panamanian structures are common offshore structures
recommended in many jurisdictions, including the United Kingdom, Hong
Kong, Greece and Italy. Accordingly, the repercussions may be
widespread. Unfortunately for Sovereign clients, that investigation has
progressed to the point where the DOJ has used John Doe summonses
against Federal Express, UPS, DHL and Western Union to help identify
additional tax evaders.
For Taxpayers Considering Coming Forward, Timing Matters!
The
IRS maintains that the date the taxpayer submits their initial
submission via the so-called pre-clearance letter to the IRS determines
their penalty rate. That is, if the taxpayer has an account at a bank on
the above list and submits their letter today, it is clear that their
penalty rate is 50%. A taxpayer with only banks and advisors who
are not disqualified under IRS FAQ 7.2 would face a penalty rate of only
27.5 percent.
Experts believe that the IRS will continue to add
additional financial institutions and financial advisors to this list as
investigations proceed. For taxpayers with undisclosed assets, winning
the race to disclose makes a big difference. For a person with a $1
million dollar account, the penalty savings would be $225,000!
Of
note, the IRS published this new list on Dec. 30, 2014. The effective
date of the increase in penalties for newly added banks (shown above)
precedes the publication of the new list. While some may say that it
should come as no surprise that Leumi and Sovereign would be added to
the list eventually, the retroactive applicability of the increased
penalty creates unfairness for taxpayers and a period in which OVDP
applicants were effectively potential victims of an IRS “bait and
switch.” They thought that they were applying to one program when
another may be applied to them.
It remains to be seen whether the
agents will recognize this issue and apply the 27.5 percent penalty to
any applicants during December 19 through December 29.
Consider Reducing the Penalty Through the Streamlined Program
Fortunately,
this list does not apply to streamlined filing procedure participants.
For many taxpayers, the streamlined program introduces a great chance to
address inadvertent non-compliance through a quick and fairly painless
process with a drastically reduced penalty.
The streamlined filing
procedures were designed for taxpayers who can certify that their
failure to report foreign financial assets and pay all tax due with
respect to those assets did not result from willful conduct.
U.S.
resident taxpayers must also pay a penalty equal to 5 percent of the
highest aggregate balance/value of their foreign financial assets. For
foreign residents, that penalty is reduced to 0 percent.
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