On June 30, a federal court in Fort Lauderdale authorized the IRS to serve a civil summons on the Swiss banking giant UBS, demanding the names of approximately 19,000 U.S. clients who apparently hold offshore bank accounts. UBS has yet to comply with the court order. However, the banking giant has notified many of its US and foreign customers that their secrete bank accounts will be terminated.
The forced elimination of these bank accounts has left many U.S. holders of Swiss bank accounts with apparently two harsh options. First, they could transfer their funds to other banks beyond the borders of Switzerland. Second, they could repatriate the funds to the U.S and come clean with the IRS. The first option creates a paper trail that could be discovered by the IRS. It also creates the possibilities that the IRS may seek additional criminal and civil sanctions against such an account holder.
The second option involves participating in the so-called voluntary disclosure program. Attorneys throughout the country have apparently advised countless holders of Swiss accounts to participate in the program. The voluntary disclosure program allows taxpayers to come forward to the IRS and report income that was omitted from a tax return. The voluntary disclosure program typically requires a taxpayer to amend his or her tax return for the period at issue and disclosure the income omitted from the tax return. The taxpayer must then pay all applicable tax, penalties, and interest in exchange to avoid criminal prosecution.
The problem with this strategy is there is no tax law or case law binding the IRS to a voluntary disclosure program. As a matter fact, there are several reported cases where taxpayers have entered into a voluntary disclosure program with the IRS and the agency refused to abide by the terms of the disclosure program. These individuals were later convicted of tax evasion. Indeed, the Federal Court of Appeals in this circuit has indicated that taxpayers and their attorneys cannot rely on the voluntary disclosure program to avoid prosecution for tax evasion. To compound matters, the voluntary disclosure program was designed only to assist taxpayers avoid prosecution for not reporting. It was not designed to protect U.S. taxpayers who hold hidden foreign back accounts.
What is the holder of a UBS bank account to do? Given the uncertainty of entering into the voluntary disclosure program, it seems foolish to blindly file amended tax returns with the IRS in hopes to avoid criminal prosecution. Instead, a holder of UBS account should have their attorneys contact the local IRS district office. Without disclosing the account holder’s name, the attorney should explain the facts and circumstances to the IRS to determine if a valid disclosure can be made. This disclosure should only be done with a high-level IRS official or counsel. If approved at this level, a disclosure may be made to the IRS. It should be noted that a disclosure at this level will not guarantee that the IRS will not seek criminal sanctions. However, it is far better simply filing amended tax returns with the IRS or waiting for the IRS to find out about an undisclosed foreign bank account.
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