IRS Announces New Voluntary Disclosure Terms for Offshore Account Holders, Sets Six-Month Deadlines

The IRS has announced new steps to coax U.S. taxpayers with undisclosed foreign bank accounts to come forward. In return for paying back taxes for the past six years, plus interest and a set of stiff penalties, the IRS will promise not to bring criminal charges or the 75-percent fraud penalty. IRS Commissioner Douglas H. Shulman announced this policy shift and clarification at a press briefing from his Washington, D.C. offices on March 26, at which he also released internal IRS documents that put the plan into motion.

"We believe the guidance represents a firm, but fair, resolution of these cases and will provide consistent treatment for taxpayers," Shulman explained. "The goal is to have a predictable set of outcomes to encourage people to come forward and take advantage of our voluntary disclosure practice while they still can." He set a deadline of six months for disclosures under the terms of the guidance, at which time the program will be re-evaluated.

The IRS has issued a series of three memoranda, and has revised the Internal Revenue Manual (IRM), to reflect updated policies concerning voluntary disclosure, primarily in connection with offshore transactions. Voluntary disclosure occurs when a taxpayer timely discloses information necessary to determine or correct the taxpayer's liability. The IRM continues to provide that its voluntary disclosure practices do not create any substantive or procedural rights for taxpayers, but are a matter of internal IRS practice.

Voluntary Disclosure Terms

Shulman emphasized that the terms being offered for the disclosure of offshore accounts are an outgrowth of current policy and carry penalties at a level consistent with voluntary disclosure programs in the past. Within this framework, Shulman enumerated the amounts that would need to be paid by taxpayers with heretofore undisclosed offshore accounts who "come clean" under the program:

--Back taxes due on newly disclosed assets for the last six years;

--Interest due on these back taxes for the last six years;

--A 20-percent accuracy-related under Code Sec. 6662 or a 25-percent delinquency penalty under Code Sec. 6651 for each tax year at issue; and

Looking to the past six years, a 20-percent penalty on the total balance of all the taxpayer's foreign bank accounts or assets during the year among the past six in which the accounts had their highest aggregate value.

CCH Comment. This latter penalty is reduced to 5 percent for passive investors in certain transactions.

While Shulman observed that the penalties demanded under the program are not insubstantial, he pointed to several advantages to participating taxpayers regarding what the IRS will not do:

--The IRS will not pursue charges of criminal tax evasion against taxpayers who voluntarily disclose their offshore assets under this new policy; and

--The IRS will not pursue other penalties against participating taxpayers, such as the Code Sec. 6663 fraud penalties (75-percent of the unpaid tax) or the statutory penalty for willful failure to file a TD F 90-22.1, Report of Foreign Bank and Financial Accounts Report, (FBAR) (the greater of $100,000 or 50-percent of the foreign account balance) that both annually apply to undisclosed accounts and assets during the relevant tax years.

Shulman also touted the advantage to offshore account holders of "getting the matter behind them" and giving them certainty as to their tax liability.

In a follow-up comment, an IRS spokesman emphasized that "it is too late for any taxpayer who is under criminal investigation to make a voluntary disclosure. The IRS cannot discuss specific situations, but the voluntary disclosure process does not apply when the IRS has information related to a specific taxpayer from a criminal enforcement action."

CCH Comment. The issue apparently remains unclear as to whether taxpayers recently disclosed by the Swiss Bank, UBS, as holding undisclosed bank accounts in Switzerland may successfully participate in this initiative. The IRS provided reporters during the March 26 briefing a copy of Section 9.5.11.9 of the Internal Revenue Manual that holds taxpayers to have timely participated in the voluntary disclosure program if they disclose before the IRS has initiated a civil or criminal examination or notified the taxpayer of such an investigation. Their failure to disclose their accounts/assets before the IRS received notice under the UBS deferred prosecution agreement may, therefore, be irrelevant.

Other Documents Provided

In addition to the announcement of its penalty framework for voluntary disclosures of offshore accounts, the IRS also provided reporters with the following documents:

Offshore Case Development. An SBSE memorandum provides that field personnel should give priority treatment to offshore transactions and entities during examinations, with a special emphasis on detecting unreported income. Examiners are instructed to use all tools, including interviewing taxpayers, making third party contacts, and timely issuing summonses in order to gather information and make determinations about applicable penalties. Managers are asked to ensure that income and penalty considerations are fully developed and documented. The memorandum also advises that as of March 23, 2009, taxpayers will no longer be permitted to minimize penalties through the Last Chance Compliance Initiative (LCCI). Relevant portions of the IRM addressing the LCCI are in the process of being obsoleted. Taxpayers in open examinations where LCCI terms have been offered will be able to resolve their cases under LCCI if they respond to the examiner within 15 days of their prior notification.

Voluntary Disclosure. Another SBSE memorandum addresses a change in the processing of voluntary disclosure requests containing offshore issues. Such requests will continue to be initially screened by Criminal Investigation (CI) to determine eligibility for voluntary disclosure and, if involving only domestic issues, will be forwarded to Area Planning and Special Programs for civil processing. Voluntary disclosure eligibility for offshore issues, including those in current inventory, will be initially screened by CI, and forwarded to the Philadelphia Offshore Identification Unit (POIU) for processing.

For submitted, but as yet unresolved, disclosure requests forwarded to the POIU, an internal LMSB memorandum sets forth a liability and penalty framework to be used for processing such cases during the next six months. POIU is authorized to assess all taxes and interest going back six years, or the period of existence of an account/entity if shorter, require the taxpayer to file or amend all returns, and impose an applicable penalty as set forth in the memorandum.

Finally, the Internal Revenue Manual (IRM) has been updated to reflect the initial evaluation of voluntary disclosure requests by CI. Minor revisions to the examples of what constitutes voluntary and not voluntary disclosures have also been made.

By Torie Cole and Sherri Morris, CCH News Staff

IRS SB/SE Division, LMSB Division Memorandum on Routing of Voluntary Disclosure Cases

Memorandum for IRS SB/SE Division Commissioner, LMSB Division Commissioner on Authorization to Apply Penalty Framework to Voluntary Disclosure Requests Regarding Unreported Offshore Accounts and Entities

IRS SB/SE Division, LMSB Division Memorandum on Emphasis on and Proper Development of Offshore Examination Cases, Managerial Review, and Revocation of Last Chance Compliance Initiative

IRS Voluntary Disclosure Practice

First Circuit Decides to Rehear Controversial Tax Accrual Workpapers Case En Banc

The First Circuit Court of Appeals has entered an order to rehear, en banc, Textron, Inc. (CA-1, 2009-1 USTC ¶50,167), a controversial case involving the reach of the work product privilege. The court ordered the prior panel opinion withdrawn and its judgment vacated. The rehearing has been put on the court's calendar for June 2. The decision to rehear Textron is considered a victory for the IRS or, at least, a reprieve from the early pro-taxpayer panel decision.

Background

In its January 21, 2009, decision, the First Circuit panel allowed a publicly traded corporation to claim work product privilege protection with regard to an IRS request for its tax accrual workpapers. The panel upheld a district court decision that Textron's tax accrual workpapers, the contents of which were communicated to an independent auditor, were not considered revealed to an adverse party and, therefore, the taxpayer did not forfeit protection under the work product privilege. The panel, however, had remanded the case back to the district court to decide to what extent the independent auditor's own workpapers can be disclosed without violating the taxpayer's work product privilege or, if in fact, that privilege was waived. A dissenting opinion had argued in part that the need for the taxpayer as a public company to compute the reserves for financial reporting purposes, rather than litigation, was the dominant motive in preparing the workpapers.

Practitioner Reaction

Kevin Kenworthy, member, Miller & Chevalier, Washington, D.C., told CCH that "it is not shocking that the full court would decide to hear the case," given the vigorous dissent on the panel, the argument that contrary precedent exists, and the high-profile nature of the issue in general. Kenworthy also speculated that the party who loses before the full court is likely to petition the Supreme Court, which might be disposed to take the case, given the pervasive nature of the issue that pits the need for transparency in financial reporting against the need of the IRS to enforce the tax laws effectively.

Lawrence Hill, partner, Dewey & LeBoeuf LLP, New York, told CCH, that "the vacation of Textron and granting of a motion for hearing en banc was predictable. One of the three judges on the court of appeals panel issued a harsh dissent and basically invited the government to file the motion for a rehearing en banc. Moreover, the Court of Appeals' reasoning in its opinion was confusing, in places strained and particularly problematic when it came to its remand instructions regarding the waiver of the work product doctrine."

By George Jones, CCH News Staff

Hawaii --Multiple Taxes: Governor Proposes Financial Plan to Close Latest Revenue Shortfall

Hawaii Gov. Linda Lingle has announced a balanced financial plan to close the latest projected $255 million revenue shortfall for the remainder of the current fiscal year (FY09) and the biennium fiscal years 2010 through 2011, without general tax increases to individuals or businesses. As with the two previous financial plans the governor submitted on December 22 (TAXDAY, 2008/12/24, S.6) and March 4 (TAXDAY, 2009/03/06, S.7), the administration's most current plan balances the budget without adding to Hawaii's unemployment with layoffs or furloughs of state employees, and without making further cuts to public services or programs. In addition, the governor's plan does not take any money from the counties, such as the Transient Accommodations Tax (TAT) or Honolulu County's general excise rail transit tax.

The full text of the release can be accessed at http://hawaii.gov/gov.

Illinois --Sales and Use Tax: Mobile TV Charges Subject to Chicago Amusement Tax

Charges for mobile TV service, which allows users to view paid television programming on wireless phones, are subject to the Chicago amusement tax. Users are responsible for paying the tax to their wireless phone service providers, and the providers are responsible for collecting and remitting the tax to the Chicago Department of Revenue. Typically, users are charged a monthly fee for mobile TV service on their wireless phone bill.

The tax is to be remitted monthly with taxes collected in one month payable by the last day of the subsequent month. An annual return for the period commencing July 1 and ending June 30 of the subsequent year is due by August 15. Returns and payments can be made by mail, in person, or online.

The Mobile Telecommunications Sourcing Conformity Act, 35 ILCS 638, may be used as the basis for determining which mobile TV customers are subject to the City's amusement tax. This is the same rule used to determine which wireless phone service customers are subject to the City's simplified telecommunications tax. Therefore, customers who are subject to the City's telecommunications tax on their wireless phone service charges are also subject to the City's amusement tax on any charges for mobile TV.

Subscribers can view the release.