DOJ’s offshore compliance initiative

Issue April 2014 By Christopher G. Beck

If your clients haven't come forward yet, now's the time


According to a 2008 U.S. Senate report, the use of secret offshore accounts to evade U.S. taxes costs the U.S. Department of the Treasury an estimated $100 billion annually. The U.S. Department of Justice's Tax Division's current offshore program began in 2008, when it opened an investigation into UBS AG. As a result of the investigation, UBS agreed to enter into a deferred prosecution agreement by February 2009, admitting guilt on charges of conspiring to defraud the United States, agreeing to turn over the names of approximately 4,500 account holders and paying $780 million in fines.

On the heels of this investigation, the Internal Revenue Service announced its Offshore Voluntary Disclosure Initiative (OVDI), which set forth a means for disclosing previously unreported accounts with a fixed program for civil penalties. This program ran from March to Oct. 15, 2009. A second offshore program was announced in February 2011, ending in September 2011, and a third and continuing program was announced in January 2012. With each successive program, the penalties were increased. The OVDI programs have so far been responsible for the collection of more than $5 billion in tax, interest, and penalties, and have brought forward more than 40,000 foreign account holders.

Despite their success, the voluntary disclosure programs have come under criticism for the draconian manner in which taxpayers are penalized. Taxpayer advocate Nina Olsen, in her 2013 Annual Report, faulted the programs as "a good deal for 'bad actors' but not for 'benign actors.'" According to Olsen, the penalties paid under the programs have averaged more than double the unpaid tax and interest associated with the unreported accounts. Yet for those with accounts valued in the lowest 10 percent ($87,145 or less), the penalties were a higher multiple of the unpaid tax, and for pro se taxpayers, the multiple was even higher. The severe penalty regimes have led many account holders to consider other means for coming into compliance.

While many taxpayers have come forward through the programs to report their previously unreported bank accounts, some have become current simply by correcting their returns, paying additional tax and interest (but not under the programs' penalty regime) in what are called quiet disclosures. Some have also simply begun reporting their foreign accounts prospectively. It is yet to be seen whether these individuals will face additional penalties in the future.

In continuation of its efforts, the DOJ announced a special voluntary disclosure program aimed at a large group of Swiss financial institutions in August of last year. The program was made possible by a U.S.-Swiss agreement of enhanced information exchange. While the Swiss government (along with many other governments) agreed to comply with the Foreign Account Tax Compliance Act (FATCA), which began on Jan. 1, 2014, under which both the United States and Switzerland will automatically exchange foreign account information, the special program announced in August would allow an eligible Swiss financial institution to avoid prosecution in the United States in exchange for detailed disclosures for years prior to 2014. Upon announcing the special program, the DOJ also announced that it would place a moratorium on investigations of Swiss financial institutions until Jan. 1, 2014. Beyond that date, the DOJ may determine any bank not in the program to be the target of an investigation, and therefore ineligible to enter the program. Some institutions may postpone applications into the program until as late as Oct. 31, 2014. On Jan. 25, the DOJ announced that 106 Swiss entities have applied to enter into the program.

As we have seen in our practice over the past five years, taxpayers with undisclosed offshore accounts have faced significant pressure to come forward through the voluntary disclosure programs. Now, with the special voluntary program aimed at their financial institutions, the pressure will be coming from their banks, as well. Many financial institutions have begun sending letters to account holders they believe are U.S. citizens stating that they will be releasing their information to the DOJ. If taxpayers have thus far been holdouts on coming forward with unreported accounts, now is the time to seriously consider doing so.