IRS Boosts Pressure for Disclosure of Offshore Accounts

U.S. clients of 106 Swiss banks face dramatically steeper penalties if they don’t disclose their accounts to the Internal Revenue Serviceby August, under rules announced by the agency today.

The penalties are among changes to the IRS’s offshore voluntary disclosure program, which has drawn 45,000 account holders who paid $6.5 billion since 2009. Starting Aug. 4, taxpayers making such disclosures will have to pay a penalty of 50 percent of an account’s value, not the current 27.5 percent.

The 106 Swiss banks are seeking to avoid U.S. Justice Department prosecution by disclosing how they helped Americans evade taxes. The U.S. can use that information to seek taxpayers’ identities under a U.S.-Swiss tax treaty. Clients who disclose their accounts after Aug. 4 will face a 50 percent penalty whether or not the U.S. has already learned their names.

“If you’re engaged in willful tax evasion, time is getting quite short for you to come in,” Mike Danilack, an IRS deputy commissioner, said in a telephone call with reporters. “Enforcement efforts in this area are continuing to thrive. We are very intent on stamping out noncompliance in this area.”

The IRS also could learn taxpayers’ identities from data provided by Credit Suisse Group AG (CSGN), which pleaded guilty in May and paid a $2.6 billion penalty, or from any bank worldwide turning over information under the Foreign Account Tax Compliance Act, or FATCA, which takes effect July 1.

Noose ‘Tightening’

“The noose is tightening around people with undisclosed offshore accounts,” said Seth Entin, a tax attorney at Greenberg Traurig LLP. “What they’re saying is if you don’t start coming in now, the consequences are going to be worse and worse.”

Tax attorney Scott Michel said “it’s inevitable” that the 106 Swiss banks will sign non-prosecution agreements and hand over data, leading to U.S. treaty requests.

“If you’re a non-compliant taxpayer who’s been sitting on the sidelines and you had money at the 106 banks after August 2008, the risk calculus has now changed,” said Michel of Caplin & Drysdale. “Before today, your risk in that circumstance was pretty diffuse.”

At the same time, the IRS made changes to encourage voluntary disclosures by taxpayers with unreported foreign accounts whose actions weren’t considered willful.

The agency will no longer require them to answer a risk questionnaire, and won’t limit the procedure to those with $1,500 or less of unpaid tax. Taxpayers must certify that “previous failures to comply were due to non-willful conduct,” the agency said.

Penalties Waived

For non-willful taxpayers outside the U.S., all penalties will be waived. Those inside the U.S. face penalties of up to 5 percent.

The IRS has run three offshore voluntary disclosure programs since UBS AG (UBSN), the largest Swiss bank, avoided prosecution in 2009 by paying a $780 million penalty and admitting it fostered tax evasion. The penalties have increased with each version of the program.

The first one, announced in 2009, set penalties at 20 percent and drew 18,000 taxpayer disclosures with $3.4 billion in back taxes, interest and penalties.

The 2011 program had a 25 percent penalty, drawing 15,000 disclosures and $1.6 billion. A 2012 program, with a 27.5 percent penalty, drew 12,000 disclosures. The IRS didn’t give a dollar amount.

“Our aim is to get people to disclose their accounts, pay the tax they owe and get right with the government,” IRS commissioner John Koskinen said in a statement. “At the same time, for important categories of these non-willful people with offshore issues, a compliance regime that is too harsh won’t net the desired result.”

Unlike most countries, the U.S. taxes its citizens on income they earn around the world regardless of where they live, creating a burden for many expatriates and people who have birthright citizenship but little other connection to the country.