IRS Amnesty Leaves Some Offshore Deadbeats Taking Their Chances

Internal Revenue Service Commissioner Douglas Shulman
In February, IRS Commissioner Douglas Shulman said that the first 2,000 cases settled from the 2009 initiative yielded about $400 million. Photo: Chip Somodevilla/Getty Images

An Internal Revenue Service deadline for U.S. taxpayers holding undisclosed offshore bank accounts to qualify for reduced penalties has kept tax lawyers surprisingly busy in recent weeks.

The IRS offshore voluntary disclosure initiative is the second and likely last chance for thousands of U.S. taxpayers with hidden offshore holdings to qualify for a partial amnesty on penalties and back taxes. The deadline is Sept. 9.

“People are still coming in this morning,” Mark Matthews, a Washington-based partner in Morgan Lewis & Bockius LLP, told Bloomberg Government in a telephone interview yesterday. “I wasn’t expecting it.”

Unlike in the earlier disclosure program, which ended Oct. 15, 2009, crowded law firm waiting rooms don’t necessarily mean clients are taking advantage of this partial amnesty. The current program is less generous and that’s causing some tax filers, particularly those with smaller offshore accounts, to take their chances with the IRS, some lawyers said.

“I have substantially fewer clients signing up and a much higher percentage of people who come to talk to me about this and decide not to participate,” Matthews, a former IRS deputy commissioner, said in a telephone interview.

It’s been a similar story at Caplin & Drysdale where several lawyers and support staff labored through the weekend of Aug. 27-28 as the remnants of Hurricane Irene lashed the Washington area, according to Scott Michel, the firm’s president.

Fewer Disclosures

Between 350 and 400 clients made disclosures in the first program and only one third as many have come forward so far in this initiative, Michel said in a telephone interview.

Matthews estimated a similar proportional drop-off at his firm.

The scramble to decide whether to disclose offshore assets comes as U.S. and Swiss authorities continue negotiations on a deal for more information from Swiss banks.

The first iteration of a special disclosure program began in March 2009 as part of an effort to crack down on offshore tax evasion promoted by UBS AG, the largest bank in Switzerland. By the time it ended, about 15,000 filers had come forward with accounts from 60 countries.

The IRS hasn’t said how much revenue the first program generated. The current initiative “may represent the best possible deal for many taxpayers seeking to get right with the U.S. tax system,” IRS spokesman Dean Patterson said. “They can avoid potential criminal charges and pay less in penalties than they otherwise would.”

‘Most Significant’ Program

IRS Commissioner Douglas Shulman in February said the first 2,000 cases settled from the 2009 initiative yielded about $400 million. At least 3,000 offshore account holders came forward after the end of the first program and became part of the new initiative when it was announced on Feb. 8.

Regardless of how many people sign up by the Sept. 9 deadline, the two amnesty initiatives will be “the most significant voluntary disclosure program in the history of the United States,” Caplin & Drysdale’s Michel said. It’s unlikely the IRS will offer another program because that would undermine the agency’s credibility, he said.

“When they say, ‘Now we really mean it,’ it’ll be like the boy who cried ‘wolf,’” Michel said.

It is legal for U.S. citizens to have offshore holdings, and many do as a consequence of owning a home or being employed overseas. Taxpayers must disclose offshore accounts that exceed $10,000, and they are subject to U.S. tax.

Potential Clients

Unlike other tax practitioners, William Sharp, a partner with Sharp Kemm P.A. in Tampa, Florida, hasn’t seen potential clients waffling at the prospect of making a disclosure. Sharp thinks that is because his nine-lawyer firm has a Zurich office and attracts a clientele that is motivated enough to travel to Switzerland to consult with bankers before coming to his office.

Sharp said a significant number of his clients are opting out of the disclosure process because it doesn’t allow for reduced penalties if the taxpayer contends he didn’t willfully avoid disclosure.

“’I inherited money from my Aunt Mathilde in Austria and I didn’t find out about it until two years ago.’ That’s the kind of fact pattern we’re looking for in the opt-out,” Sharp said in a phone interview.

Such taxpayers enter the program to obtain a letter granting them conditional clearance from criminal prosecution. While not ironclad, “it is somewhat comforting to have that in the file,” Sharp said.

Full IRS Examination

Clients then can pursue a full IRS examination and an appeals process that can lead to U.S. Tax Court.

IRS spokesman Patterson said that opting out of the initiative after coming forward is an alternative, “but it does not provide any of the certitude that comes with the OVDI process.”

Some lawyers said they noticed a different demographic mix considering the second amnesty initiative.

“The first program was very Eurocentric,” Larry Horn, a lawyer with Sills, Cummis & Gross P.C. in Newark, New Jersey, said in a telephone interview. “The taxpayers were mostly of European origin, with maybe about 10 percent Asians mixed in.”

In the current amnesty, Horn said his clientele is “90 to 95 percent Indian Americans,” spurred by a U.S. government filing in April against London-based HSBC Holdings Plc seeking information about U.S. citizens or residents who may have held accounts in India to hide assets from the IRS.

This time, Horn said undisclosed sums are smaller than in the 2009 initiative.

“In the old program, there were numerous clients with holdings in excess of $10 million in Swiss banks,” he said. “We’re not seeing that in this program.”

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