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The IRS's Credit Card 'Amnesty' Program Explained, London

21 January 2003

Following the US Internal Revenue Service's announcement last week that US citizens who have used offshore credit cards and bank accounts to conceal assets for the purposes of tax evasion can avoid criminal charges if they come forward before April 15, Washington and London law firm Moore & Bruce, LLP has produced a useful critique of the IRS's proposal.

Denying that the program amounts to an amnesty, Charles Bruce of Moore & Bruce says that anyone wanting to take advantage of the IRS's offer will have to move quickly. Here is the firm's analysis of the IRS proposal:

'The IRS has initiated a Program, effective January 14, 2003 and ending three months later, on April 15, 2003, permitting U.S. taxpayers who have used offshore accounts and other financial arrangements to avoid reporting, or to underreport, taxable income, to come forward, report the income and avoid many of the otherwise applicable civil and criminal penalties and related costs.

'The Program is aimed at taxable years 1999-2002. Years prior to 1999, in certain circumstances, may not be subject to scrutiny, but taxpayers nonetheless will have to provide information about their involvement in offshore financial arrangements during these years.

'The interest and penalties imposed will depend on the amount of the unpaid tax liability, the years involved, whether a return was inaccurate or if a return should have been filed and was not.

'By way of example, a taxpayer who understated his income to avoid $100,000 in taxes in 1999 would wind up paying $149,319. This includes the tax liability plus $29,319 in interest and an additional accuracy-related penalty of $20,000.

'If a taxpayer did not step forward, his tax liability generally would include the civil fraud penalty of $75,000, and therefore higher interest of $42,758. The total amount due would be $217,758, without considering probable additional civil penalties for failure to file certain information returns. Also, without coming forward, the taxpayer must worry about possible criminal penalties.

'The Program is not an amnesty Program in that taxes are not wholly or partially forgiven. Instead, if the taxpayer meets the requirements of the Program, the IRS will not impose a number of civil and criminal penalties. The taxpayer will have to pay the tax and, in appropriate circumstances, certain delinquency and accuracy-related penalties. If the Foreign Bank and Financial Accounts Report (Treasury Form 90-22.1) also was not filed, the civil and criminal penalties associated with this failure will also be dropped.

'As part of the procedure, the taxpayer will be required to give complete information about how he was introduced to the account or arrangement, information about any promoter or other person involved, etc.

' While at first blush it seems this Program is aimed at taxpayers who used offshore accounts, credit cards paid against those accounts, foreign corporations, foreign trusts, and the like, to avoid U.S. taxes, in no small measure the Program is designed to enable the IRS to proceed "with a vengeance" against promoters and facilitators of these schemes. The wording of various announcements and explanations makes clear that the IRS intends to use every means available to it to attack these persons.

'The United States has recently significantly expanded its Tax Information Exchange Agreements with tax haven countries. As stated by Pamela Olson, Treasury Assistant Secretary for Tax Policy, "The voluntary compliance initiative announced today will be an important source of information. Treasury will continue its efforts to improve and expand the U.S.'s broad network of bilateral tax treaties and tax information exchange agreements. Better tax information exchange relationships will permit the IRS to obtain the information it needs from other countries so it can pursue taxpayers attempting to hide income offshore to avoid their tax obligations." It can be assumed, also, that the IRS will exchange information that it obtains with other countries, such as, the United Kingdom, France and Germany.

' There are really two groups of persons affected by this latest development: One, U.S. taxpayers that have used offshore arrangements and, therefore, have some exposure. Two, non-U.S. persons-advisors, banks, trust companies, investment management firms, and other persons that might be characterized by the IRS as "promoters."

'As for individuals, they will need to assess this "opportunity" rapidly. Are they eligible? What is the possibility of being drawn into the Program but learning later that there are hidden detriments? What happens if the individual is not able to make full payment of taxes and penalties due? (The taxpayer must fully pay the tax liabilities and interest or make "other financial arrangements" that are acceptable to the IRS. What these arrangements are and the negotiation of the details may become very important. If some type of work-out is called for, it will be necessary to prepare carefully the necessary financial statements.)

'After making the initial filing, called a written request to participate, within 150 calendar days, the taxpayer will have to submit a number of items including:

  • copies of previously filed original and amended federal income tax returns for tax periods ending after December 31, 1998;
  • copies of any powers of attorney granted by the taxpayer with respect to the subject tax years;
  • descriptions of offshore payment cards and foreign and domestic accounts of any kind (including the name and address of the bank or financial institution, the account number, and the date the account was opened), and descriptions of foreign assets in which the taxpayer has or had any ownership or beneficial interest or that are or were controlled by the taxpayer (i.e., the taxpayer has or had the practical ability to direct or influence the financial transactions or affairs of an account or entity, or the use or disposition of an asset, whether this ability was exercised directly or indirectly through a nominee, agent, power of attorney, letter of directions, letter of wishes, or any other device whatsoever) at any time after December 31, 1998;
  • descriptions of entities of any kind (including corporations, partnerships, trusts, and estates) and any nominees through which the taxpayer exercised control over foreign funds, assets, or investments at any time after December 31, 1998;
  • descriptions of the source of any foreign funds, assets, or investments owned or controlled by the taxpayer at any time after December 31, 1998;
  • all related promotional materials, transactional materials, and other related correspondence and documentation received subsequent to the date the taxpayer submits the request to participate in the Program (such materials received prior to submitting a request will have been supplied with the request);
  • complete and accurate amended or delinquent original federal income tax returns of the taxpayer for all tax years ending after December 31, 1998, which are supported by an explanation of previously unreported income or incorrectly claimed deductions or credits (whether or not related to offshore payment cards or offshore financial arrangements);
  • complete and accurate amended or delinquent original information returns required by sections 6035, 6038, 6038A, 6038B, 6038C, 6039F, 6046, 6046A, and 6048 for which the taxpayer requests relief from penalties; and
  • complete and accurate Foreign Bank Account Reports for tax years ending after December 31, 1998.

'Taxpayers and their advisors will be hard pressed to pull together these materials in this short period. It remains be seen whether requests for extensions of time will be granted. Also, as with all exercises involving the filing of late returns, there will be a large number of "judgment calls" including how to handle the section 911 earned income exclusion and foreign tax credit issues.

'There will be issues as to what to do with respect to non-U.S. tax authorities that may be owed returns and taxes as well. Obviously, information provided to the U.S. can be exchanged by the U.S. with other countries' tax authorities.

'At the end of the process, the taxpayer and the IRS will enter into a closing agreement, which like all such agreements entails a number of legal issues. The exact wording of that agreement should be constructed with great care. There will be issues that arise in connection with joint returns, especially where one spouse was not aware of the activities of the other spouse. There will be special issues where the taxpayer is a trust or an estate.

'Unusual issues can arise where the foreign trustee bears obligations to other beneficiaries. For example, to what degree should a trustee cooperate where one U.S. beneficiary wishes to participate but this has implications for other U.S. and non-U.S. beneficiaries? Also, the trust, acting through the trustee, may be required to join in the filings. What indemnifications should the trustee obtain?

'As for the advisors, banks, trust companies, investment management firms, and the like who may be thrown into the category-rightly or wrongly-of "promoters," they will want to anticipate the IRS's next steps. They probably should not wait until they receive, for example, a request for information or writ issued by their "home country" tax authority at the behest of the IRS pursuant to an applicable Tax Information Exchange Agreement.

Moore & Bruce is at; or contact Charles M. Bruce at +44 207 495 3842 or Michael C. Durney at +1 202 965 5300.

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