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Date: 27 May, 2009

It is unlikely that Congress will pass anti-tax havens legislation containing a provision that uses the concept of offshore secrecy jurisdictions, Bruce Zagaris, partner at Berliner, Corcoran & Rowe LLP, said May 26.

Zagaris addressed recent proposals that concern disclosure and offshore bank accounts, including the House and Senate’s Stop Tax Havens Abuse Act, a separate proposal by Senate Finance Committee Chairman Max Baucus (D-Mont.) to deter offshore tax havens, and President Obama’s international tax proposals. Zagaris spoke at a forum hosted by Buchanan Ingersoll & Rooney PC and sponsored by BNA Tax Management.

The Stop Tax Havens Abuse Act (S. 506, H.R. 1265), introduced in the Senate by Sen. Carl Levin (D-Mich.) and in the House by Rep. Lloyd Doggett (D-Texas), uses the approach of dividing the world into offshore secrecy jurisdictions and other countries, Zagaris said. The Treasury Department has said the concept of offshore secrecy jurisdictions is “problematic,” he said.

Obama’s proposal would instead distinguish between transactions involving qualified intermediaries and non-QI transactions, Zagaris said. That proposal, which is similar to the Levin-Doggett and Baucus proposals, requires QIs to do more to qualify to be QIs, he said. Zagaris said he thinks Congress will pass this provision.

The United States has a macroeconomic problem with the QI issue because countries like China and Brazil have not signed onto the notion of QIs, Zagaris said. The United States will try to convince them to sign on to QIs rather than cut itself off from transactions with those countries, he said.

All of the proposals provide for expanded reporting and penalties, and Obama’s proposal would require taxpayers to attach a schedule to their Forms 1040 on which the taxpayer would list his foreign bank accounts in addition to his foreign bank account report (FBAR), Zagaris said. “That will mean that there’s going to be increasingly a comparison within the service between the FBAR and the schedule if that passes,” he said, calling the schedule “overkill.”

The Obama budget has a line item of $210 billion in savings associated with international tax compliance, Zagaris said. “This is all driven by the budget,” he said.

New Voluntary Disclosure Structure

Many of the cases related to the new penalty structure to encourage taxpayers with offshore accounts to use the Internal Revenue Service’s voluntary disclosure program are “legacy cases” spanning generations, Zagaris said.

“Many of the people that want to make disclosures now are in a bind because if they don’t convince their five siblings or three children to participate, they’re basically going to put those people in a bad light,” he said.

Zagaris said that, at the moment, “the service is frankly still trying to figure out if the new program is going to work.” IRS published 30 frequently asked questions about the program a few weeks after the memorandums were released March 26 (57 DTR GG-1, 3/27/09) that do a better job of setting forth how the program works than the memos, he said.

However, there are some issues that examples in the FAQs did not cover, such as the “tougher” legacy cases Zagaris said he has seen frequently in which parents started an offshore account and the surviving children must file estate tax returns.

For taxpayers to benefit from the temporary program, which ends Sept. 23, they must “take it or leave it,” Zagaris said. The disclosure is timely only if IRS does not have the taxpayer’s name from a source and has not started to investigate the taxpayer, he said.

The March memos make a number of administrative changes to the voluntary disclosure program, Zagaris said. Individuals used to be able to go to IRS and give information on a hypothetical basis, but now tipsters must disclose the name of the taxpayer, his or her taxpayer identification number (TIN), and address before the service will consider the case, he said. The taxpayer must now disclose the information in the judicial district where the individual lives to prevent them from “forum shopping” for deals, Zagaris said.

In lieu of all other penalties, taxpayers must pay a 20 percent penalty on the highest aggregate amount in foreign bank accounts and entities, Zagaris said. There is also a reduced 5 percent penalty, which Zagaris called a “mythical penalty” because he does not know of a case to which it could apply. The 5 percent penalty applies if the following conditions are met:

  • if the taxpayer did not open or cause any accounts to be opened or entities formed,
  • no deposits or withdrawals occurred during the period when the taxpayer controlled the account or entity, and
  • all U.S. taxes have been paid on the funds in the account or entity.

The new structure applies to all individuals who applied to the program prior to March 23 but whose cases were not adjudicated, Zagaris said. Many applications were in the pipeline when this was announced, and people had expected better treatment if they had applied before the new structure announcement because they were able to “forum shop,” he said.

IRS now reserves the right to assess penalties, including criminal penalties, against taxpayers who make “quiet disclosures” by filing amended returns, Zagaris said.

Practitioners used to recommend that taxpayers with more difficult issues do this in the past, and practitioners debate whether or not quiet disclosures can still be done given IRS’s caseload and lack of resources, he said. However, IRS has made it clear through the March memos and subsequent FAQs that anyone who already has quietly disclosed should go to IRS and make it known to them, Zagaris said.