Offshore Voluntary Disclosure Program

Anxious US Taxpayers Who Disclosed Foreign Bank Accounts and Await Their Call From the IRS Need to Decide Whether to Accept the “Offshore” Penalty or Withdraw From the Program, Says Marks Paneth & Shron Director and Former IRS Special Agent The Call From the IRS Will Come; Once It Does, US Taxpayers Must Make Tough Decisions About Whether to Accept the 20% Offshore Penalty or Dispute It by Showing “Non-Willful” Failure to File an FBAR via an Audit, Says David Gannaway.

US taxpayers who disclosed their foreign bank accounts under the government’s Offshore Voluntary Disclosure Program are growing anxious as they wait to hear from tax authorities.

But instead of worrying about whether the call from the IRS will come, they should be more concerned with the decisions they’ll have to make once they’re contacted, says David Gannaway, a former IRS special agent with the Criminal Investigation Division who is now a Director in the Litigation and Corporate Financial Advisory Services Group at New York accounting firm Marks Paneth & Shron LL.

According to Mr. Gannaway, anxiety is mounting among the more than 15,000 US taxpayers who submitted applications before the October 15, 2009 deadline and who complied with the Information Document Request due on January 15, 2010. “The IRS is working through its backlog of cases,” Mr. Gannaway says. “US taxpayers can rest assured that they will hear from the IRS in due course.”

“What they need to be concerned about is the decision they’ll have to make once the IRS does call — should they accept the standardized penalty, or contest it by asking for an audit. An audit can be difficult and time consuming, but it could drastically lower the 20 percent ‘offshore’ penalty amount that taxpayers will have to pay,” Mr. Gannaway says.

Mr. Gannaway is available for interviews and can also author a bylined article that discusses:

To pay or to be audited – the tough choice US taxpayers must make: The IRS is assessing US taxpayers who opened an account(s) in a foreign country or conducted one transaction a standard penalty — which equals 20 percent of the highest balances in the foreign accounts they disclosed. The IRS’s apparent position is that these US taxpayers acted with ‘willful blindness’ by failing to file FBARs and the 20 percent penalty should apply. However, the US taxpayer can withdraw from the program, contest the penalty assessment and go through a tax audit — a sometimes burdensome procedure, but one that could result in lower penalties.

How US taxpayers should decide: “While some US taxpayers may want to challenge the ‘willful blindness’ position — and it may not in fact be accurate — in most cases, the decision comes down to one of cost and benefit,” Mr. Gannaway explains. “If the highest account balance during the six year period was $500,000, your penalty will be $100,000. But if you go to audit and the IRS does not prove that your failure to disclose was willful, the penalty might be $50,000 in total. You have to decide if the audit process — which can be quite daunting — is worth the additional $50,000. If you had $5 million in the account, but still had a chance for a $50,000 ‘non-willful’ failure to file FBAR penalty, you might opt for the audit — in that case, your 20 percent standard penalty would be $1 million, so the $50,000 non-willful failure to file penalty would be substantially lower.”

Whether the IRS offshore penalty assessment is fair: According to Mr. Gannaway, the IRS imposed the 20 percent penalty to make sure that all US taxpayers were treated the same way. “It takes away the possibility that a field agent in Dallas will interpret things one way and a field agent in Chicago will interpret them another way,” he says. “The problem is that the penalty isn’t based on conduct. It’s based on the IRS’s apparent position that everyone had knowledge of what an FBAR is and that each person who entered into the program acted with ‘willful blindness.’ If the US taxpayer first became aware to the FBAR filing requirement in 2008 when the UBS case broke or in 2009 when the IRS initiated the ‘offshore’ program, they are being penalized the same as the person who failed to file the FBAR on purpose for many years.”

Why the IRS is targeting overseas transactions: “The UBS investigation opened the door for the US government to obtain the ‘secret’ bank account information from Switzerland that has been virtually impossible to obtain in the past.” Mr. Gannaway explains. “By coming into the US under false pretenses to recruit US taxpayers and participate in a tax evasion scheme, the UBS deferred prosecution created the opportunity to re-visit the US / Switzerland tax treaty.”

US taxpayers who are concerned about their foreign account disclosure status should consider contacting an attorney or accountant who is well versed in IRS enforcement, Mr. Gannaway said.

For more information, or to schedule an interview with Mr. Gannaway, contact Itay Engelman of Sommerfield Communications at (212) 255-8386 or:itay@sommerfield.com.

About Marks Paneth & Shron

New York City-based accounting firm Marks Paneth & Shron LLP (MP&S) has a team dedicated to offering services for US taxpayers disclosing foreign accounts at UBS AG and other foreign banks. The firm has extensive experience in working with high-net-worth individuals and international tax issues, as well as in forensic accounting, litigation support, and negotiating with government agencies. For more information please visit www.markspaneth.com/

About David Gannaway

David Gannaway, MBA, CFE, CAMS, EA is a Director in the Litigation and Corporate Financial Advisory Services Group at Marks Paneth & Shron LLP. In this role, he provides comprehensive litigation consulting services encompassing the areas of forensic accounting, civil income tax controversies and criminal income tax investigations, complex white collar fraud investigations : www.markspaneth.com/biodetails.php?ID=530&Hash=ddbc22c09ac54 .. , and anti-money laundering.