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Amnesty for offshore tax evaders.

Effective Jan. 14, 2003, the IRS issued Rev. Proc. 2003-11, the Offshore Voluntary Compliance Initiative. This one-time amnesty program generally applies to taxpayers who underreported their 1999, 2000, 2001 and/or 2002 taxable income by using payment cards (e.g., debit, credit and charge cards) issued by foreign banks and offshore financial arrangements with foreign entities (e.g., foreign trusts, corporations, partnerships and financial institutions). The Initiative may be available for tax years ending before 1999 under certain circumstances.

According to the Initiative, eligible taxpayers who apply by April 15, 2003 can possibly avoid criminal prosecution and some civil penalties; however, they must still pay back taxes, interest and, perhaps in appropriate circumstances, the delinquency penalty under Sec. 6651 and the accuracy-related penalty under Sec. 6662. In IR 2003-5, the Service indicated "[e]ligible taxpayers who come forward will also avoid criminal prosecution based upon application of the revised voluntary disclosure practice." Further, filing for amnesty will not preclude the Service from auditing a taxpayer's related return and/or proposing changes for items not resolved under the Initiative.

The Initiative permits eligible taxpayers to file or amend their returns and pay back taxes. The amount and type of penalties will be based on several factors, including the number of years involved, the tax underpayment amount, whether a return was inaccurate and whether a return was filed at all.

Possible Penalties Avoided

For eligible taxpayers who voluntarily come forward, the IRS will refrain

from assessing:

* The Sec. 6651 (f) fraudulent failure-to-file penalty;

* The Sec. 6663 civil fraud penalty; and

* Information return civil penalties for failure to comply with Secs. 6035, 6038, 6038A, 6038B, 6038C, 6039F, 6046, 6046A and 6048.

The latter penalties result when a taxpayer fails to file Forms 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations; 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or Foreign Corporation Engaged in a U.S. Trade or Business; 926, Return by a U.S. Transferor of Property to a Foreign Corporation; 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts; 3520-A, Annual Information Return of Foreign Trust with a U.S. Owner; and/or 8865, Return of U.S. Persons with Respect to Certain Foreign Partnerships.

In addition, Treasury's Financial Crimes Enforcement Network will refrain from imposing civil penalties for failure to comply with 31 USC Section 5314 and 31 CFR Part 103.24. These rules require taxpayers to timely file Form TDF 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), to report on foreign bank or financial accounts, if such accounts total over $10,000 at any time during the tax year. This information return is required for foreign accounts, held under any name, over which the U.S. taxpayer had actual control.

The IRS's Objective

Under the initiative, the IRS'S goal is to gather information from amnesty applicants, to help it pursue the individuals who promote offshore credit card accounts as a device to conceal assets and evade U.S. income taxes.

Currently, the Service is investigating several thousand offshore accounts, and has referred a large number of these to its Criminal Investigation Division. This division, however, lacks the financial and human resources to pursue all of them.

The IRS has been studying offshore accounts since October 2000, when the first Federal judge granted it the authority to issue a series of "John Doe" summonses to several financial and commercial businesses, to obtain records of U.S. residents who held offshore credit, debit and charge cards. MasterCard International, American Express and Visa International are just a few of the companies that have since provided information to the Service on cards issued by financial institutions in countries such as Antigua, Barbuda, the Bahamas and the Cayman Islands. In addition, the IRS has been obtaining data via U.S. bilateral treaties and agreements with a myriad of foreign countries.

Because these investigations also tend to uncover nontax evasion schemes (e.g., concealing assets from divorcing spouses, creditors and bankruptcy proceedings), they are often conducted jointly with other law enforcement organizations.

According to the IRS, holding an offshore card is not illegal if there is a legitimate need, but U.S. citizens are still required to pay Federal tax on their worldwide income. The abuse stems from U.S. taxpayers holding these cards solely to evade taxes, as such cards can provide easy access to offshore funds and accounts in bank-secrecy or tax-haven countries that allow income to be concealed from U.S. authorities.

For example, corporate executives, professional athletes, entertainers, etc., may deposit unreported wages, gambling winnings or investment income in an offshore account titled in their own name or in a corporation's name. They can then spend these funds anywhere with internationally accepted debit or charge cards drawn on these accounts; the IRS cannot trace the origin.

Participant Eligibility

Taxpayers may participate in the amnesty program if they timely file their request in writing or by email by April 15, 2003.The IRS will not grant any extensions for the initial filing. Also, a practitioner may submit a request, on a client's behalf, using a properly executed Power of Attorney. Taxpayers who demonstrate that they cannot pay all of the tax liabilities can submit a request to the IRS to make other payment arrangements.

There are several criteria for program eligibility:

1. A taxpayer cannot already be under civil or criminal investigation (or notified of an impending investigation).

2. The IRS cannot already possess information that specifically identifies that taxpayer's lack of compliance.

3. A-taxpayer cannot be involved in other illegal activity.

4. A promoter or solicitor of the offshore arrangement in question cannot apply.

Participation requirements are detailed in the box on p. 228.

How to Use the Initiative

IR 2003-5 illustrated how the Initiative affects taxpayers who apply and those who do not. For example, in applying for amnesty, a taxpayer who understated his or her income to avoid $100,000 in taxes for 1999 would pay a $20,000 accuracy-related penalty and approximately $29,319 interest, for a total of $149,319. However, if he or she does not voluntarily apply, and the IRS ultimately detects tax evasion, the taxpayer would owe an additional $75,000 civil fraud penalty, additional interest of $42,758 and probable additional civil penalties for failure to file required returns, resulting in owing $217,758.

In the above example, the accuracy-related penalty is 20% of the underpayment; the civil fraud penalty is up to 75% of the unpaid tax liability attributable to the fraud.

Tax Practitioner's Responsibilities

Treasury Department Circular 230 explains tax practitioners' responsibilities. Section 10.21 requires a practitioner who has knowledge of a client's omission or error on any return, affidavit or document, to advise the client promptly of its existence and explain the related consequences provided under the Code and regulations.

Section 10.22 requires a practitioner to exercise due diligence in preparing and filing any return, affidavit or other document and to determine the accuracy of all oral and written representations made by the practitioner to clients and to the IRS on any IRS matter; for details, see Gardner, et al., "Circular 230 Final Regs. (Part I)," TTA, January 2003, p. 26 (Part II), February 2003, p. 96.

Contact Information

For more information on the Initiative, taxpayers and practitioners can call (215) 516-3537 or send an email to, which the IRS has established to address questions about the program.

Editor's note: Mr. Ely is the former chair of the AICPA Relations with the IRS Committee. Messrs. Brennan, Dolan, Dougherty and Rosenberg are members of the IRS Practice and Procedures Committee. Mr. Dougherty is chair of that committee.


According to Rev. Proc. 2003-11, to participate in the Offshore Voluntary Compliance Initiative, a taxpayer must send a written request by April 15, 2003, if by U.S. Postal Service, to P.O. Box 480, Bensalem, PA 19020; if via private delivery service, to 11601 Roosevelt Blvd., Philadelphia, PA 19154, Attn.: DP S6005; if by email, to The request must include:

1. A statement that the taxpayer requests and is eligible to participate in the Initiative.

2. The taxpayer's name, taxpayer identification number, current address and daytime telephone number.

3. The name and employer identification number of any entity (including, but not limited to, corporations, partnerships, trusts and estates) that the taxpayer caused to use offshore payment cards or offshore financial arrangements or that was the source of funds that the taxpayer caused to be transferred to a foreign jurisdiction.

4. The name and office location of any IRS official whom the taxpayer previously contacted about making a voluntary disclosure.

5. Any promotional materials and information about promoters, solicitors and advisers.

The IRS will acknowledge receipt of the request within 30 days and provide a preliminary determination as to the individual's eligibility to participate; however, it may later determine that the individual is ineligible. An individual's eligibility to participate is deemed final only after a Sec. 7121 closing agreement is executed (discussed below).

Within 150 days after preliminary notification of eligibility, the taxpayer must submit:

1. Copies of previously filed income tax returns for periods ending after 1998.

2. Amended or delinquent original income tax returns for all tax years ending after 1998, with an explanation of previously unreported income or incorrectly claimed deductions or credits (whether or not related to offshore payment cards or financial arrangements). Note: The taxpayer must pay (or make arrangements to pay) all applicable taxes, penalties and interest when the amended returns are filed for the years covered by the Initiative.

3. FBARs for tax years ending after 1998.

4. Various other documents specified in Rev. Proc. 2003-11, Section 6. Once the IRS makes a final determination that a taxpayer is eligible to participate in the Initiative, he or she must execute a specific matters closing agreement under Sec. 7121. Under the closing agreement, the taxpayer must waive all defenses to the assessment and collection of taxes, penalties and interest for the years for which he or she seeks amnesty. (Note: Until a closing agreement is executed, there is no guarantee of amnesty. Thus, a taxpayer should consider engaging an experienced criminal tax lawyer to handle the negotiations with the IRS.)

Editor's note: Dr. Godfrey thanks the AICPA Tax Division's International Taxation Technical Resource Panel's Reporting Requirements Task Force for reviewing this item and providing helpful comments. The Task Force's members are J. Ben Vernazza (Chair), Olaf Bartelmai, Vernon P. Jacobs, Neil Sullivan and Eileen Sherr (AICPA Technical Manager).To assist members with this complex area of the law, the Task Force is currently drafting a practice aid on IRS and Treasury Reporting Requirements for U.S. Persons with Interests in Foreign Bank, Brokeraqe and Insurance Accounts or Ownership in Foreign Entities.

Howard Godfrey, Ph.D., CPA, the University of North Carolina at Charlotte, member, AICPA Tax Division's International Taxation Technical Resource Panel's Reporting Requirements Task Force

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Author:Ely, Mark H.
Publication:The Tax Adviser
Date:Apr 1, 2003
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