Offshore Trusts

IRS Revived Scrutiny of Foreign Accounts: Amnesty Offered But Uncertainty and Perils Remain

About 25 years ago, the Internal Revenue Service sought to determine the identities of account holders at a particular “offshore” bank. An elaborate undercover “sting” was effected, with successful results. However, little in the way of compliance enforcement or deterrence ever came of the clever undercover action. The IRS recently revived its focus on offshore noncompliance, when, starting in 2000, it filed “John Doe” summons requests. See I.R.C. §7609(f). In those actions, the IRS sought to uncover the identities of U.S. taxpayers who owned or controlled funds offshore and were covertly accessing them by use of credit or debit cards. Thereafter, it summonsed credit card issuers and retail merchants and other businesses.

Once an account holder’s identity is obtained, inquiry into the person’s affairs is undertaken by IRS civil (audit) or criminal (investigation) enforcement activity. Records of offshore accounts and related activity will be sought directly from the account holder, by summons (subpoena in the case of a grand jury investigation) for records subject to his or her control, whether or not possessed, or by service upon the taxpayer of a court order compelling the taxpayer to execute a hypothetically phrased document directing then unknown third parties to produce records of any account(s) over which the taxpayer has signature or other authority. These compulsion techniques can be used expediently, as they do not require resort to complicated inter-sovereign activity, such as a tax or other international treaty.

In January 2003, the IRS announced an amnesty program for taxpayers who had engaged in offshore activity and had not fully complied with the tax laws and/or Bank Secrecy Act (BSA). Taxpayers who previously failed to report foreign account income, and/or to file foreign account forms or IRS information returns can participate. The program goes well beyond the existing IRS “voluntary disclosure” framework, which was updated shortly before the amnesty was announced. The marked distinction of the 2003 amnesty is that it targets a precise class of violator, negates exposure to certain civil tax penalties, and can provide immunity from criminal tax prosecution. In addition, it also provides safe harbor against the foreign account reporting penalty, something no IRS voluntary disclosure practice ever addressed. However, to obtain the amnesty, certain disclosures, and strict compliance with a very specific procedure is required, beyond just filing correct amended or delinquent income tax returns.

Use of Foreign Accounts by U.S. Taxpayers

Tax avoidance and related planning are legitimate endeavors, whether or not offshore accounts or financial arrangements are utilized. Public and privately held businesses have long sought tax “haven” by using subsidiary corporations or segmenting business activity in foreign jurisdictions. Various tax law provisions have from time to time provided incentive for and distinct benefits to such arrangements. Individuals have also resorted to using foreign jurisdictions to park assets or funds, or to make investments using offshore entities or trusts. Such arrangements have been touted as effecting protection from creditors or offering favorable probate or estate planning strategies. In many instances, however, tax benefits are not only fictional, the schemes are often nothing more than promotions of blatant misconstruction of law and therefore a component part of unmistakable tax law violation.

Common offshore violators include U.S. taxpayers (citizens or aliens who have become U.S. taxpayers by virtue of physical presence or the possession of permanent resident immigration status) who have or place funds offshore because the funds are income which has not been reported to the IRS or other jurisdiction(s) and taxed, or because the funds derive from an illegal undertaking. Offshore placement is thought to provide secrecy in keeping the source, ownership, and disposition of the funds anonymous under the law of the foreign jurisdiction.

Foreign Account Reporting

Despite the propensity for unscrupulous use, owning or having authority over a financial account in a foreign jurisdiction is not illegal per se. However, federal law mandates disclosure if one is “maintaining a relationship” with a “foreign financial agency.” See 31 U.S.C. §5314. The disclosure requirements are most often triggered by a bank or securities account which is held on deposit at an institution located in a foreign jurisdiction. Both ownership and nominal interests are reportable, not just typical bank accounts. The principal disclosure requirement is met by the filing of the stand alone annual report, Form TDF 90-22.1, “Report of Foreign Bank and Financial Accounts” referred to as an “FBAR.” The threshold reporting requirement is account or accounts that exceed $10,000, at any time during the prior year. The form must be filed each year by June 30. Regulatory jurisdiction over the FBAR is with the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) under 31 C.F.R. §103.24.

The FBAR instructions dictate the particulars of how compliance with the statute is achieved. The current version (revision of July 2000) requires detailed account information for each foreign account (up to 25) in which a U.S. citizen, resident, or domestic corporation, partnership, estate, or trust has either a “financial interest” or “signature or other authority over.” The term “financial interest” includes record ownership and any holder of legal title (e.g., as nominee, agent, or attorney).

A person is considered to have a reportable interest in the foreign account of a more than 50 percent owned partnership or corporation, a trust from which the person receives more than 50 percent of such person’s income, or when a person has more than a 50-percent present interest as beneficiary of a trust.

“Signature authority” includes the power to control disposition of an account alone, or in conjunction with the power of one or more other persons. “Other authority” includes power of disposition that can be exercised orally or by other communication. Each owner of a joint account has an independent reporting obligation. The term “account” includes savings and securities accounts, commingled funds, checking, time, or demand deposit, or other accounts maintained with a person engaged in the “business of a financial institution.”

An account is considered foreign if it is held in a country other than the U.S., Guam, Puerto Rico, or the Virgin Islands. An account held by a U.S. affiliate bank or institution is reportable, but an account maintained at a domestic branch, agency, or office of a foreign institution is not. In addition to the FBAR filing requirement, individuals having a reportable account are required to file Schedule B with their individual income tax return (Form 1040), and must answer (by check mark) two questions. The questions pertain to foreign financial accounts and trust activity as beneficiary or grantor. We can assist with IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

On March 23, 2009 the IRS issued a series of memorandums that outline a new voluntary disclosure program for unreported foreign income. The program designated as the IRS Offshore Income Reporting Initiative (the “Initiative”) was initially available until September 23, 2009 and then extended to October 15, 2009. Taxpayers who qualify for the Initiative will be required to follow certain filing procedures in exchange for not being subject to criminal and civil fraud penalties.

The Initiative requires that taxpayers:

  • File 6 years of back tax returns reflecting unreported foreign source income;
  • Calculate interest each year on unpaid tax;
  • Apply a 20% accuracy-related penalty under Code Sec. 6662 or a 25% delinquency penalty under Code Sec. 6651; and
  • Apply a 20% penalty based upon the highest balance of the account in the past six years (Under certain circumstances, taxpayers entering into this program may be able to qualify for a penalty at the rate of 5%).

In return, IRS has agreed to not pursue:

  • Charges of criminal tax evasion; and
  • Other fraud and filing penalties including IRC Sec. 6663 fraud penalties (75% of the unpaid tax) and 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% of the foreign account balance).

The tax attorneys at are specialists in tax disputes with the IRS and state governmental tax agencies.  A free initial telephone call to us should answer your most compelling questions about overseas audits.  This no obligation telephone call is strictly confidential and protected by the attorney – client privilege and will never be disclosed.  We look forward to hearing from you and discussing your tax situation.

Prevent Criminal Charges

Always remember there are many ways to prevent an IRS foreign tax audit from turning into a criminal tax matter.  With enough planning and forethought during the audit process a smart attorney and client can prevent the IRS from even starting a criminal tax inquiry.  A hard line tax strategy at the start of the audit will protect your license or career.  Ways to prevent a common IRS tax audit from turning into a criminal tax investigation include not volunteering incriminating documents, not making admissions to IRS-Criminal Investigation Division, and treating the case as a common civil tax audit with the IRS Revenue Agent with well prepared common sense explanations to every event.

Setting up a Foreign Trust is not prohibited.  Neither is setting up an International Business Corporation.  However, failing to divulge certain dealings, or using untaxed funds can be prosecuted as tax evasion.  If handled incorrectly, the IRS may decide to prosecute a tax crime.  The sentence for tax evasion includes incarceration in a federal penitentiary for up to 5 years, fines up to $500,000 and restitution of the tax loss, plus the 75% civil fraud penalty and interest.

Here are some ground rules we use at  First, it is an absolute given that you discuss this case with no one, especially the IRS.  If you walk into an interview without competent legal help, during the interview they will extract statements to be used against you.  Funny thing, but when you see their field records you will find that there is no information that will help your side, even if you told them things that clearly would help your side.  This is why we never volunteer information at audit interviews.  Second, our clients at don’t even accompany our attorneys to the interview.  We would prefer to assert your rights under the IRS laws and rules and stay completely away from the interview.

The benefit of hiring an experienced criminal tax attorney early on is to avoid detection of the act, prevent further harm and pursue your legal rights to keep your out of harm’s way.  Since you are protected by the attorney-client privilege, everything you tell us at remains firmly confidential.  We will do everything possible to protect any professional licenses you may hold.  We will protect you from your circle of friends and business associates finding out about the investigation.  While it is expensive to hire competent representation in criminal tax matters, the cost of hiring is tiny compared to a criminal conviction on your record and repayment of the tax, 75% civil fraud penalty, interest and court fines.

Our aggressive tax attorneys are highly experienced in tax disputes with the IRS and state tax agencies. Schedule a confidential consultation to discuss your options.