A CORNUCOPIA OF OVDP TAX FRAUD by EDWARD M. ROBBINS, Jr.
Has this happened to you? You are in your office toiling away in the tax trenches when a colleague down the street who works the offshore cases sends you an e-mail:
“I’m sending over an OVDP client. He has a problem and I can’t represent him anymore.”
Eventually the client sits in your office and spins the following tale. He is a lawyer. He had an undisclosed account at UBS with about $1.5 million in it. He entered the 2009 OVDP represented by another tax practitioner and successfully obtained a closing agreement in 2012 after paying all of the necessary taxes, penalties and interest for 2003, 2004, 2005, 2006 2007 and 2008 as required by the 2009 IRS Offshore Voluntary Disclosure Program (OVDP).
THE INITIAL – FALSE – OVDP SUBMISSION. Recently the client received a letter from a second Swiss bank telling him, in effect, that the second Swiss bank would turn his bank data over to the United States unless he did a whole bunch of things, including waiving his rights to bank secrecy under Swiss law, proving he has complied with his filing and reporting obligations under the U.S. Internal Revenue Code and the U.S. Bank Secrecy Act, or in the alternative, proving he is participating in the OVDP. The client reveals that this second Swiss Bank account has held around $4 million since 2003, funded with unreported taxable income.
In 2012, after he “successfully” (in his mind) completed the 2009 OVDP, he transferred all of the money from the second Swiss bank to a more secure foreign bank in Vanuatu where it sits today. The client did not bother to mention this second Swiss bank to the lawyer down the street until a few days ago. Needless to say, he did not comply with any of his obligations under the U.S. Internal Revenue Code or the U.S. Bank Secrecy Act regarding this second Swiss account, let alone his Vanuatu account. The client is about ready to file his 2013 federal and state income tax returns which, like every return he filed for the last decade, will be fraudulent.
So what advice can you give this taxpayer client? You obviously can not advise him to flee to Vanuatu and live with his money, not only because it is unethical to say so but it may well also be a crime to provide such advice. Let’s look at some other options:
1. Do Nothing. A default move considered by many when confronted by life’s problems, but it is not indicated here. Any of FATCA or The Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks (the “Program”) will reveal this second Swiss bank account to the United States with plenty of time on the statute of limitations to develop their criminal case. This case is a tax prosecutor’s dream. It has significant unreported income, lots of “badges of fraud,” a lawyer defendant, and an open statute of limitations.
Thanks to the client’s affirmative acts of evasion during the 2009 OVDP, his 2003 through 2008 criminal tax statute of limitations on tax evasion (26 U.S.C. Section 7201) is open until six years after he signed the closing agreement in 2012. Fortunately the statute of limitations for prosecuting FBAR crimes is fixed at six years. Count up the fraudulent original and amended federal and state income tax returns since 2003 and you get thirty-two. Thirty-four if you let the client follow through on his plan for 2013.
2. Do a “Quiet Disclosure.” Assuming the client can meet the basic requirements of the IRS Voluntary Disclosure Practice set forth in Internal Revenue Manual (IRM) in IRM 126.96.36.199 (12-02-2009) the client may simply choose to file correct amended tax returns, with payment, with the appropriate IRS campus (a “quiet” voluntary disclosure). Since the criminal statute of limitations allows prosecution of the 2003 through 2012 income tax returns, the client would need to amend each of these returns. Although the IRS and Department of Justice have a dim view of quiet voluntary disclosures in the context of undeclared foreign bank accounts, we are aware of no situation where a taxpayer has been prosecuted for tax crimes after a proper quiet voluntary disclosure that FULLY complies with each of the terms and provisions set forth in the IRS Voluntary Disclosure Practice, IRM 188.8.131.52 (12-02-2009).
Rather, the quiet voluntary disclosures that are later identified by the IRS are sometimes subjected to multiple 50% civil FBAR penalties as a punishment. That being said, if the client attempts a quiet voluntary disclosure here, it will not cure his willful failure to file his FBARs which alone, provides plenty of ammunition to the government for a tax related criminal prosecution. We have not seen FBAR prosecutions on a stand-alone basis, but in the appropriate case the government might well prosecute the FBAR counts alone. On balance, a “quiet” voluntary disclosure is not likely something the taxpayer should consider as a completely safe landing.
3. Try to Get Back into the 2009 OVDP. This could work, if at all, where the undisclosed second foreign bank account overlapped precisely the first foreign bank account. There you could work with the implicit, but always unspoken, excuse that the client basically “forgot” the second account. You would need to get someone in the IRS to reopen the client’s 2009 OVDP so that you could correct the first closing agreement and file amended income tax returns and amended FBARs and pay all of the necessary additional taxes, penalties and interest. Without help from the IRS, the IRS could reject your subsequent tax payments as beyond the collection statute of limitations and would likely ignore any increased FBAR penalty that you attempted to pay. If the IRS refuses to accept these payments, the client obtains no protection under the 2009 OVDP.
In our case, the client’s noncompliance on the second Swiss account stretches though the six 2009 OVDP years and also takes in 2009, 2010, 2011 and 2012. So what do you do with 2009, 2010, 2011 and 2012? It is unlikely the IRS would fold these later years into the 2009 OVDP.
4. Go into the 2012 OVDP. On the face of things, the client seems to qualify for the 2012 OVDP. This would allow you to correct 2005 through 2012. What about those pesky 2003 and 2004 tax years where your client lied to the government during the 2009 OVDP, filed false income tax returns and false FBARS and the statute of limitations for tax prosecutions is still open for those years? Maybe you could convince your OVDP Revenue Agent into expanding the closing agreement to pick up 2003 and 2004. If accepted, that should solve the problem.
5. Combinations of the Above. The six year statute of limitations for criminal prosecutions relating to FBARS has expired for 2007. This means that the client might consider simply amending returns for 2003 through 2007 eliminating criminal tax exposure without worrying about any FBAR criminal prosecution. The client then could consider OVDP participation for 2009, 2010, 2011 and 2012.
WHAT TO DO? There are no clear “rules of thumb” for a situation where a taxpayer previously provided the IRS with a false or misleading submission seeking participation in an IRS OVDP. However, the taxpayer must somehow get into compliance with their filing and reporting obligations, fully into compliance.
Consult with experienced tax counsel at the earliest opportunity. For whatever reason, we seem to be seeing more of these scenarios are able to appropriately respond, if contacted in a timely manner. All relevant facts must be fully identified and developed by counsel with the assistance of others working for such counsel. The sensitive nature of things surrounding the initial false OVDP submission must be carefully handled.
The taxpayer and the prior representative are likely candidates for an interview by IRS representatives in the best case scenario.The IRS will likely inquire about what was disclosed to the representative who handled the initial, false OVDP submission. Did the representative make sufficient inquiries or simply look away?
Overall, the government seems able to acknowledge, to some degree, the benefit of this taxpayer coming into compliance the second time before the government had to go drag the person off the street. Regardless, all involved should be sure this taxpayer gets educated and, going forward, fully understands and respects their obligation to comply with all applicable domestic and foreign filing and reporting requirements.
EDWARD M. ROBBINS, Jr. – For more information please contact Edward M. Robbins, Jr. –EdR@taxlitigator.com Mr. Robbins is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., the former Chief of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. Additional information is available at www.taxlitigator.com