Practitioners who represent taxpayers with unreported offshore accounts should urge them to come forward and assist them under the new voluntary disclosure initiative for a number of reasons.
Of course, it’s the right thing to do. And taxpayers who do come forward can avoid criminal penalties and decrease the amount of their civil penalty significantly. Moreover, it takes time to collect the necessary information, and the deadline of Aug. 31, 2011, may already be too soon for some to comply.
From a practitioner’s perspective, though, the 2011 Voluntary Disclosure Initiative makes it clear that a practitioner who represents a noncompliant taxpayer is in violation of Circular 230.
Question number 47 in the Initiative’s Frequently Asked Questions states that if a taxpayer decides not to make the voluntary disclosure despite the taxpayer’s noncompliance with U.S. tax laws, the practitioner must explain the consequences of the noncompliance to the client.
Moreover, “A practitioner whose client declines to make full disclosure of the existence of, or any taxable income from, a foreign financial account, may not prepare a current or future income tax return for that taxpayer without being in violation of Circular 230,” the IRS states.
“There could conceivably be preparers who are not doing due diligence and therefore are not aware that the taxpayer is noncompliant,” cautioned Kevin Packman, a partner at Holland & Knight LLP and chair of its Offshore Tax Compliance Team. “And the IRS has made it clear that they don’t want taxpayers to make a ‘quiet’ disclosure. Essentially, that means filing delinquent items with a service center and hoping that it will be processed without penalties. An adviser who helps a taxpayer make a quiet disclosure may be violating Circular 230.”
The penalty structure under the new initiative is higher than the one which ended in 2009. The new penalty framework requires individuals to pay a penalty of 25 percent of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period. In addition, participants must pay back taxes and interest for up to eight years, as well as pay accuracy-related and/or delinquency penalties.
The initiative includes reduced penalties of 12.5 percent for smaller accounts, and a 5 percent penalty in certain situations such as inherited accounts, or for foreign residents who were unaware they were U.S. citizens.
To qualify for the reduced penalty on inherited accounts, the taxpayer must not have opened the account, must have exercised minimal contact with the account, must not have withdrawn more than $1,000 from the account in any year covered by the voluntary disclosure, and must be able to establish that all applicable U.S. taxes have been paid on funds deposited to the account.
The current initiative offers clear benefits to encourage taxpayers to come in now rather than risk detection, since taxpayers who don’t come in face higher penalties as well as the possibility of criminal prosecution. A practitioner with clients that might be affected should take care to read the frequently asked questions available on the IRS Web site, which detail how to make a voluntary disclosure.
“Basically the IRS has put together a very fair deal,” said Marty Davidoff of E. Martin Davidoff & Associates. “The FAQs are comprehensive and understandable. And the program itself is fair, reasonable and smart.”
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