NORTH BAY – Tax attorneys and planners are being inundated by inquiries from clients with what they believed were perfectly innocent offshore accounts as the federal government seeks to crack down on intentional tax evasion.
Last year, the Internal Revenue Service cracked down on United States citizens with offshore bank accounts who were not reporting income or filing the proper reports.
It created a voluntary disclosure period when people could come forward. The voluntary compliance period ended last year, but people still are coming forward.
Meanwhile, the IRS and Department of Justice are conducting a wide-ranging investigation into whether Americans with offshore bank accounts have used the accounts to evade U.S. taxes.
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“Douglas Shulman, the IRS commissioner, thinks that everyone with an offshore account is a hardened criminal,” said Kent Lawson, a shareholder of Burr Pilger Mayer who advises clients on global tax planning and compliance.
Mr. Lawson said there are 17,000 cases in the country of people needing to amend their taxes, and not everyone with a foreign bank account is a criminal. Many of those people have not received good tax advice.
“It could be grandfather was in WWII and had an account in Holland that has grown substantially,” he said. “This legacy of criminality passes through the generations, but it could be innocent.”
Or, he said, someone could have moved from another country and not gotten good tax advice.
He said that in one week the firm received requests for 40 cases from attorneys to look into individuals’ returns with offshore accounts.
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Stu Myhill, a senior manager in Moss Adams’ tax practice who focuses on international tax issues, said penalties have been increased to now potentially be 50 percent of the account balance in the case of a willful violation. A non-willful violation is $10,000.
He, too, said there are plenty of legitimate reasons for offshore accounts.
“It could be personal property offshore where there is a foreign account to pay a maid or property manager, a business that has foreign operations overseas. Someone could have a foreign parent and grandparent who gifted or willed it to someone in the U.S.,” he said. That person may not even know necessarily that they have the account, he said.
“There is not necessarily intention of fraud.”
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Steve Goldberg, a tax planning attorney with Friedemann Goldberg in Santa Rosa, cited other reasons for legitimate offshore accounts.
“There are companies and businesses that have offshore holdings or individuals who have properties in other countries,” he said. “It is not always tax evasion for the purpose of tax evasion.”
He said they do have clients who go offshore for asset protection. But, he said, “It takes foresight. If people call me and say I have a judgment and want to put money offshore, I say no way.”
He said when doing tax planning, “Ask yourself if the same planning could be done onshore? If not, that will get you a date with the IRS.”
He said there are people who have offshore accounts who reported income but merely were not filing the proper forms.
“Is that negligence? Or tax fraud?”
The IRS has had a voluntary disclosure practice in its criminal manual for many years. Once the IRS Criminal Investigation division has determined preliminary acceptance into the voluntary disclosure program, the case is referred to the civil side of the IRS for examination and resolution of taxes and penalties.
In an occasional offshore account, it is an employee who has signatory power on accounts but may not have anything to do with the actual money in them.
Mr. Lawson said the issue of liability can have serious consequences.
“I have a client who was a CEO of a company that had subsidiaries in other countries,” he said. The CEO, he said, was the signer on more than $100 million on bank accounts offshore.
“We have had to disclose on all the accounts on his personal taxes. He didn’t know he had to put this in because it was for business. We are trying to convince the IRS that he should not pay tax on the $100 million and are working with top legal counsel, but it is unclear.”
And the cost of working with the attorneys and accounting firms to resolve disputes is not insignificant.
“The accounting part can cost $50,000,” he said. “Anyone who goes into the program has to amend six years of tax returns. If there are three family members, that is 18 tax returns. And it is not just filing a few 1099s.”
However difficult it may be, he said, “This is a good thing to help people become tax compliant. People are coming to me that have not gotten good advice in the past and just need some understanding of the law.”