M E M O R A N D U M
January 28, 2010
TO: Distribution
FROM: Burt, Staples & Maner LLP
RE: Likely Consequences to Financial Institutions from the IRS Voluntary Disclosure Program for U.S. Holders of Undisclosed Offshore Accounts
Over 14,000 U.S. taxpayers trying to escape criminal prosecution have voluntarily disclosed their offshore accounts to the IRS in the last few months. More such disclosures can be expected. Financial institutions housing these accounts have been asking us with increasing frequency about what these disclosures portend and what steps they can take to address potential legal exposure. We outline some thoughts and suggestions below.
The U.S. Strategy: The IRS and Department of Justice (“DOJ”) believe that the solution to their problem with offshore accounts is to eliminate the roots of the problem – the financial institutions and tax havens fostering U.S. tax evasion – rather than pursue isolated prosecutions of individual taxpayers. Their plan is to catch some of the small fish in order to get the big fish that they really want. If this sounds familiar, it should. It is the same approach that the U.S. took to combat institutions issuing offshore credit cards used to facilitate U.S. tax evasion and to stop promoters of abusive tax shelters.
Link between Disclosures and Strategy: The IRS and DOJ used the information they gained from voluntary taxpayer disclosures during their assault on offshore credit cards and abusive tax shelters to vastly accelerate the marshalling of facts that they needed for successful litigation against those behind these schemes. They are taking the same approach to offshore accounts by attempting to develop strong factual bases to pursue cases against the institutions that may have facilitated U.S. tax evasion by offering them to direct and indirect U.S. customers. A financial institution with U.S. customers who may have used these accounts to evade U.S. tax obligations must expect that some or all of these customers will tell the IRS about these accounts. Therefore, the institution must be sure of its role with respect to these accounts to determine if they are at risk and, if so, how to address that risk and the high likelihood the U.S. authorities will at the least inquire into the financial institution’s activities.
Do You Know Your U.S. Customers? First, you must know who your U.S. customers are and were. Do you have robust account opening and due diligence procedures to establish the U.S. tax status of an accountholder (including dual citizenship, “green card” or U.S. visa status)? Can you identify U.S. owners of tax haven entities that own accounts? Do such entities engage in behavior that could give the government a basis to argue that the entity should have been considered a sham and the account treated as a direct U.S. individual account? These are just some of the questions that are crucial to answer to assess your potential as a target of the IRS and DOJ.
Do You Know Your Personnel? The second step is to thoroughly investigate exactly how your personnel have worked with U.S. customers. We frequently hear that institutions claim that they are “not like UBS” but that unfortunately may be beside the point. The IRS and DOJ can make a compelling case out of facts that differ from UBS’s situation, and you should assess your facts objectively and completely.
Develop a Strategy: There are any number of potential approaches that you should consider once you have a firm grasp of your particular facts – ranging from voluntarily disclosing the situation to the IRS to developing a plan of defense in the event that the government comes knocking at your door. However, the key is not to ignore the current compliance environment but to confront it head on with a plan for as successful an outcome as possible.