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The next step in the IRS pursuit of high-net-worth individuals

The DOJ steps up the hunt for offshore accounts. Here's what not to try: spiriting the cash out in a suitcase.

Friday, July 23, 2010 – 3:53 AM by By Alan Olsen, CPA, Guest Columnist
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Alan Olsen: The DOJ has plenty of leads developed from last year's amnesty program, and from the agency's pursuit of banks.

Elizabeth’s note: It’s no secret that the DOJ has been using every tool in its power to go after the use of off-shore bank accounts to dodge U.S. taxes. This column by tax expert Alan Olsen gives advisors a heads up on the next step in the agency’s pursuit, as well as some background on how the effort to find off-shore accounts fits in with the IRS’s overall strategy to close the tax gap – the different between the tax that ought to be paid and the tax that actually is – by targeting high-net-worth individuals. The audit rate for the wealthiest taxpayers, the 441,715 Americans who reported income of more than $1 million is up to 6.42% from 5.03% in 2004. Meanwhile, the audit rate for people with incomes of more than $200,000 rose to 2.89% from 2.57% between 2006 (the earliest statistics are available) and 2009. Those stats are compared with an audit rate of .96% for the whole population. Clearly, if you make more than $1 million a year, you are in the IRS’s crosshairs, and if you make more than $200,000 a year, you’re not far out of the bulls eye.

In the past five years, the IRS, under direction from Congress to close the tax gap, has increasingly been pursing high-net-worth individuals.

This should be a matter of great concern for advisors, who can help make clients aware of the need to keep good records and supporting documentation to support items on their tax returns. Advisors can also help clients stay under the audit radar screen by setting up tax plans that do not show wide swings in income or expenses.

Advisors should also be aware that the Department of Justice now is taking an even-closer look than in the past at the area of off-shore accounts. In the next few months, according to a senior tax attorney with the agency, DOJ will begin following up on leads developed during last year’s amnesty program.

About 15,000 Americans with offshore accounts came clean under that program, giving them reduced penalties and a chance to avoid criminal prosecution while giving authorities a trove of information to pursue other off-shore account holders.

In addition to disclosures from individuals, the agency has information it has developed as various banks have come forward to try to purify themselves.

“We now have the ability to go back through with voluntary disclosures and really target the banks with witnesses and evidence that’s right in the United States,” said Kevin Downing, a senior tax attorney of the U.S. Department of Justice. He was touring several cities in Asia with his Justice Department team to discuss cross-border tax prosecution.

“We expect over the next couple of years to have somewhere between 4,000 and 7,000 cases coming to us. These are from banks and governments cooperating with us.”

Oh, that suitcase isn’t mine

Since the start of the U.S. crackdown on tax evasion, money has moved from the Caribbean to Switzerland and Asia.

According to Reuters, some private banking clients are choosing to close Swiss accounts and carry cash by hand back to the United States, to avoid an electronic trail, only to be caught by U.S. law enforcement officers. Not realizing this money is traceable, they are then penalized for tax evasion and illegal smuggling of money into the country.

The DOJ objective is to bring taxpayers who have used undisclosed foreign accounts and undisclosed foreign entities to avoid or evade tax into compliance with United States tax laws. The information gathered from taxpayers making voluntary disclosures under this practice will be used to further the IRS’s understanding of how foreign accounts and foreign entities are promoted to United States taxpayers as ways to avoid or evade tax. Data gathered will be used in developing additional strategies to inhibit promoters and facilitators from soliciting new clients.

There are many other taxpayers considering making voluntary disclosures, but they are reportedly reluctant to come forward because of uncertainty about the amount of their liability for potentially onerous civil penalties.

In order to resolve these cases in an organized, coordinated manner and to make exposure to civil penalties more predictable, the IRS has decided to centralize the civil processing of offshore voluntary disclosures and to offer a uniform penalty structure for taxpayers who voluntarily come forward.

Advisors can find more information about the stiff penalty structure and the implications of voluntary disclosure here: https://www.irs.gov/newsroom/article/0,,id=210027,00.html.

The penalties for disclosure

It the individual voluntarily comes forward, and files amended returns to report unreported foreign income the taxpayer would pay (assume 35% incometax rate):

35% Income tax on the unreported income, 20% accuracy related penalty on tax due, and 20% FBAR penalty of 20% of the Foreign Bank Account Balance.

If the failure to report is willful the IRS could impose a 75% fraud penalty.


Alan Olsen is managing partner at Greenstein Rogoff Olsen & Co., LLP, a CPA firm in the San Francisco Bay Area. He last wrote for RIABiz in May: Here’s a 15-item checklist of low-hanging tax tips for financial advisors. With more than 25 years of experience in public accounting and tax issues, he works with successful venture capitalists, developing innovative financial strategies for individuals and businesses. For more information, contact Alan Olsen at www.GROCO.com.

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