Some people considering an IRS voluntary disclosure of their foreign income and assets don’t do so because they fear prosecution.
This seems counter-intuitive. The best way to avoid prosecution for undisclosed foreign income or accounts is unquestionably to enter the IRS program.
Yet some fear prosecution precisely because of the tepid protection the IRS seems to offer. The IRS says most people won’t be prosecuted. That isn’t the same as a guarantee and in itself is kind of unsettling.
Ever since 2009 when the IRS started its disclosure program, taxpayers have raised this concern. In 2009, I believe some people may not have come forward because the IRS did not guarantee that there would be absolutely no prosecution. For some, that was enough to cause them to remain quiet.
As it turned out, though, the 2009 program went smoothly. So did the 2011 program, and now the 2012 program.
In fact, many of the most sensitive cases in 2009 sailed through just fine. After that, clients and lawyers alike became more secure. The prosecution risk once in the program is nonexistent or at least nearly so.
There was one troubling development, though. A small number of taxpayers were evidently pre-cleared but then later rejected from the program.
Many tax lawyers have been highly critical of this IRS reversal, which undermines the program. Since then, the IRS appears to have backed off considerably.
It also impacted very few people, said the IRS. But worries remain. Indeed, some have noted the apparent mismatch between the IRS and the DOJ, both of which have a role in tax prosecutions.
As a technical matter, it is apparently possible for the U.S. Attorney to initiate prosecution without first obtaining Tax Division approval. See U.S. Attorney Manual 6-4.243. Even the IRS manual can stir up concern. It says that a voluntary disclosure is a fact to consider but that it does not automatically guarantee immunity from prosecution.
But the reality is that it is highly, highly unlikely that an OVDP participant would face prosecution. Has it ever happened? Not that I am aware. It seems more than wrongheaded to not enter the IRS program because of prosecution fears.
In the very near future–if it is not here already–there will be no place to hide from IRS scrutiny. Whether you think the IRS program is fair, it remains the best way by far to avoid the cost, heartache and danger of potential criminal liability.
We recommend disclosing and then opting out to reduce the fines.
ABOUT THE AUTHOR: Lance Wallach
Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, abusive tax shelters, financial, international tax, and estate planning. He writes about 412(i), 419, Section79, FBAR and captive insurance plans.
Copyright Lance Wallach, CLU, CHFC
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
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