Three times over the past four years, the IRS has given taxpayers with undisclosed offshore accounts the opportunity to come clean and avoid prosecution. While the most recent offer – the 2012 Offshore Voluntary Disclosure Program (OVDP) – remains open indefinitely, the IRS’s recent decision to disqualify approximately 50 taxpayers who disclosed Bank Leumi accounts could undermine the program’s continued success.
Some background. Since 2009, the IRS and the Tax Division of the Department of Justice have aggressively pursued the use of offshore accounts to evade U.S. taxes. Their enforcement efforts have resulted in the highly publicized deferred prosecution agreement with UBS and the criminal prosecution of one Swiss bank (Wegelin & Co.) and numerous taxpayers, bankers and other professionals.
The IRS has leveraged this highly-publicized criminal enforcement focus by encouraging non-compliant taxpayers to participate in its longstanding Voluntary Disclosure practice. As I’ve written elsewhere, the 2009, 2011 and 2012 programs provided taxpayers who came forward before the IRS learned of their accounts with both certainty regarding the financial penalties they would incur and assurances that they would not be referred for prosecution. According to a recent GAO study, these programs generated approximately 38,000 disclosures and well over $5 billion in taxes, interest and penalties.
In order to participate in the OVDP, a taxpayer generally requests “pre-clearance” by providing certain identifying information. The IRS’s criminal investigation group then assesses whether the taxpayer meets certain threshold eligibility requirements. After receiving “pre-clearance,” the taxpayer is required to disclose details regarding his offshore account(s) on IRS created forms. Assuming his admissions are satisfactory, the taxpayer is “preliminarily” accepted into the program conditioned on the information provided being (and remaining) truthful, timely and complete and the taxpayer’s cooperation with the IRS’s civil unit, principally through the submission of amended returns and the payment of back taxes, interest and penalties.
The program has worked, largely because lawyers and accountants have been able to present the costs and benefits of participation to their clients, including counter-intuitive assurances that self-reporting will significantly decrease the risk of a criminal prosecution. In early March, however, the IRS detracted from this ability to provide clear advice when it notified certain Bank Leumi accountholders that they were being bounced from the program.
The about-face was evidently caused by miscommunication between the IRS, which administers the OVDP, and the DOJ, which apparently obtained the names of these accountholders through a separate investigation. Rather than living with its mistake, the IRS disqualified these individuals from the program. While taxpayers who were disqualified after they had been “pre-cleared,” but before they completed the next stage of the process arguably were not prejudiced by the IRS’s reversal, taxpayers who had relied on the pre-clearance and submitted detailed information will be materially worse off in the event criminal charges are brought.
Perhaps recognizing the potential hazards caused by the snafu, Assistant Attorney General for the Tax Division Kathryn Keneally publicly assured the disqualified taxpayers that the DOJ would “consider the facts and circumstances under which any substantive disclosures were made, and the fairness of proceeding” criminally. Precisely what this means is unclear; at a minimum it likely means the DOJ will not use information obtained from the OVDP submission in the event it prosecutes any of these taxpayers.
Late last week, Judge Kenneth Ryskamp of the Southern District of Florida gave the IRS and DOJ a strong incentive to reconsider the disqualification of the Bank Leumi accountholders. Several of the early taxpayers prosecuted for having undisclosed accounts were identified when UBS disclosed the names of approximately 250 accountholders before the initial OVDP was announced. Several of these accountholders had attempted to participate in the first program only to be rejected because the IRS already had their names. Defense lawyers representing these taxpayers have argued – with some success – that their clients should be treated leniently since they were not given the same opportunity to avoid criminal prosecution as thousands of similarly situated taxpayers. In sentencing one of these defendants last week, Judge Ryskamp criticized the government for prosecuting the case, sentenced the defendant to one year of probation – which he promptly terminated – and urged the government to join a defense application for a Presidential pardon.
In the face of Judge Ryskamp’s comments, it is doubtful that the Bank Leumi accountholders who not only applied for the OVDP, but had been pre-cleared or preliminarily accepted only to find themselves bounced from the program, will face incarceration if prosecuted. Under the circumstances, perhaps the IRS should reconsider its treatment of the Bank Leumi accountholders, readmit them to the OVDP and thus restore confidence that it is administering the program fairly and consistently.
From The Insider Blog: White Collar Defense & Securities Enforcement.