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On January 14, 2003, the IRS issued a revenue
procedure (Rev. Proc. 2003-11) on an offshore Voluntary Compliance
Initiative (VCI) to give individuals using offshore credit cards or
similar tax-avoidance schemes the chance to "make things right" in
exchange for information on the promoters.
The VCI grew out of the two- year-old "John Doe" summons investigation.
Since October 2000, the IRS has issued a series of summonses to a
variety of financial and commercial businesses to obtain information on
U.S. residents who held credit, debit or other payment cards issued by
offshore banks. Investigators have been using records from these
summonses to trace the identities of those whose use of these payment
cards may be related to hiding taxable income. The investigation itself
has entailed combing through data on millions of transactions.
The deadline for applications to participate in the
initiative is April 15, 2003, covering the income tax years 1999 and
thereafter. Individuals not coming forward will be subject to
taxes, interest, penalties, and exposure to potential criminal
prosecution. Individuals who promoted the avoidance schemes or
solicited others to avoid tax are NOT eligible to participate in the
compliance initiative.
The IRS will use this information to pursue promoters and to obtain
information about taxpayers that have avoided tax through the use of
offshore payment cards or other offshore financial arrangements and who
do not come forward under the VCI.
In addition to the names of those who promoted these offshore financial
arrangements, taxpayers deemed eligible to participate in the VCI must
provide the details on all aspects of the plan used to avoid paying the
proper tax liability.
Under the VCI, eligible taxpayers will have to file or amend their
returns and pay interest and certain civil penalties, as well as the
tax. The interest and penalties depend on the amount of the unpaid tax
liability, the years involved, whether a return was inaccurate or if a
return should have been filed and was not.
For example, a taxpayer that understated his income to avoid $100,000
in taxes in 1999 would wind up paying $149,319 to the government. This
includes the tax liability plus $29,319 in interest and an additional
accuracy-related penalty of $20,000.
If a taxpayer did not step forward, his tax liability generally would
include the civil fraud penalty of $75,000, and therefore higher
interest of $42,758. The total amount due would be $217,758, without
considering probable additional civil penalties for failure to file
certain information returns.
The accuracy-related penalty, cited in the above examples, is equal to
20 percent of the tax underpayment. The civil fraud penalty is up to 75
percent of the unpaid tax liability attributable to fraud.
Additionally, the service can refer some cases to the Justice Department
for criminal prosecution.
To apply for the VCI, taxpayers must notify the IRS in writing and
provide their name, taxpayer identification number, current address,
daytime phone number and certain promoter information as specified in
the Revenue Procedure.
The Service will acknowledge receipt of the taxpayer's written request
to participate in the Offshore VCI within 30 calendar days of receipt of
the request. In its acknowledgment, the Service will advise whether the
taxpayer has been preliminarily determined to be eligible to
participate in the Offshore VCI or has been determined to be ineligible
to participate in the Offshore VCI. A preliminary determination of
eligibility will not prevent the Service from later determining that the
taxpayer is not eligible to participate in the Offshore VCI.
Within 150 calendar days of the date of the letter informing the
taxpayer that the Service has preliminarily determined that the taxpayer
is eligible to participate in the Offshore VCI, the taxpayer must
provide the following materials:
(1) copies of original and amended federal income tax returns for tax
periods ending after December 31, 1998, that the taxpayer previously
filed;
(2) copies of any powers of attorney (Forms 2848) granted by the
taxpayer with respect to tax years in which the taxpayer requests to
participate in the Offshore VCI;
(3) descriptions of offshore payment cards and foreign and domestic
accounts of any kind (including the name and address of the bank or
financial institution, the account number, and the date the account was
opened), and descriptions of foreign assets in which the taxpayer has or
had any ownership or beneficial interest or that are or were controlled
by the taxpayer;
(4) descriptions of entities of any kind (including but not limited to
corporations, partnerships, trusts, and estates) and any nominees
through which the taxpayer exercised control over foreign funds, assets,
or investments at any time after December 31, 1998;
(5) descriptions of the source of any foreign funds, assets, or
investments owned or controlled by the taxpayer at any time after
December 31, 1998;
(6) all promotional materials, transactional materials, and other
related correspondence and documentation regarding offshore payment
cards or offshore financial arrangements received subsequent to the date
the taxpayer submits the request to participate in the Offshore VCI;
(7) complete and accurate amended or delinquent original federal income
tax returns of the taxpayer for all tax years ending after December 31,
1998, which are supported by an explanation of previously unreported
income or incorrectly claimed deductions or credits
(8) complete and accurate amended or delinquent original information
returns
As part of the VCI, the IRS will also be closely monitoring the filing
of amended returns. If, in order to circumvent this initiative,
taxpayers simply file an amended return without complying with the other
required provisions, they run the risk of having the civil fraud
penalty and other information return penalties applied.
ADVICE TO ADVISERS: Note in the above discussion of theVCI program and
by a detailed reading of RP 2003-11 that the IRS does not grant amnesty
until a preliminary determination that the taxpayer is eligible followed
by providing detailed information, filing of the amended returns,
payment of taxes, penalties and interest, and then followed by a final
determination of eligibility to participate in the Offshore VCI by the
execution of a closing agreement (see sample included in the Revenue
Procedure).
As of now there is no response from any states that also could grant
amnesty. With the short-fall in revenues in most (high tax) states
it would behoove them to consider a similar amnesty as a method
increasing revenue and of further "inspiring" taxpayers to, in the words
of the IRS "make things right." Of course, they may just rely on
the exchange of information between the IRS and the states.
You might have clients that ask your opinion about joining the
amnesty. Might you have been aware in the past of such mentioned
offshore arrangements being utilized by a client? Under
either of these circumstances it is suggested that the client or you, or
both need to engage an experienced criminal tax lawyer before
proceeding to obtain the benefits of amnesty. In this case "time
is of the essence."
POSTSCRIPT: This initiative in no way relates to the effectiveness of
overseas tax-neutral Asset Protection Trusts where professional due
diligence and compliance is part of the process.
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