What happens when The IRS attacks your offshore asset protection plan? The simple answer is you may face a variety of civil and criminal investigations and penalties. What constitutes an offshore asset protection plan?
The most commonly known form of offshore asset protection plan is a “numbered”foreign financial account. This type of plan relies on a financial institution to offer an annonymous method of holding title to the account. The account holder often use a “mail hold” and, therefore, does not have statements mailed to him or her. These accounts were and in some cases still are marketed by “financial advisors” who may add a layer of annonymity by using a shell company owned by an offshore trust. Or, in some cases a sohpisticed insurance prodcut is used as another form of identity blocker (alos known as an “insurance wrapper”).
The risk for the taxpayer of civil or criminal action by the IRS arises if the ultimate beneficial owner of the account does not properly report their interest in the account. Rporting is done through the filing of a Report of Foreign Financial Account (FBAR),as required under the Bank Secrecy Act BSA) and various other reporting requirements under the Internal Revenue Code (IRC) on tax returns and information returns.
The more “sophisticated” the structure the more elements of “willfulness” are likely to be found by the IRS. If the IRS or Department of Justice (DoJ) identify a non-compliant taxpayer before the taxpayer comes forward, then depending upon how aggravating the facts and circumstance are, prosecution may result. Comlicating the situation are those cases where the DoJ has entered into non-porosecution agreements with offshore financial institutions and received information from the offshore financial institution that identifies the “ultimate beneficial owner” of the account as a U.S. person. For the taxpayer who thought that their asset protection plan would protect them from creditors, they may have made a serious error when it comes to the IRS. Statutes of limitations in foreign jurisdictions that blaock enforeecment of judgments have no impact on enforecment of U.S. tax and BSA laws against U.S. persons.
Under the Required Records Doctrine as stated by the U.S. Supreme Court, the DoJ can have a federal Grand Jury issue a Subpoena for records that are to be maintained by each taxpayer who has control over a foreign account. In the case of aset protection plans the control iis often indirect, such as through a financial advisor or trust protector, but it is there none the less. There is no Fifth Amendment privilege to prevent production of or establish the absence of reuired records.
The production of required records where no FBAR or other disclosures were made may be sufficent on its own to establish “willfulness”. So may be the failure to produce such records in respnse tothe subpoena.The result is that if the case is prosecuted an FBAR penalty of 50% per year for up to 6 years and incarceration could result. The only line of attack is to fight the “wilfulness” issue.
The best way of establishing non-will behavior is to come forward under one of the IRS sanctioned disclosure programs. These are 1) the Delinquent Filing Program, 2) the Streamline Procdure, either Domestic or Non-resident ) or 3) the Offshore Voluntary Disclosure Program (OVDP). The first two are based upon non-willfull behavior, which the DoJ will not define, but is genrally interpreted to mean “inadvertance or neglect or reliance on written professional advice of a prractitioner skilled in the area. The third, the OVDP is a “No-fault” system where willfulness is not a factor so long as the source of funds was lawful and the taxpayer submits a request to enter the program prior to discovery, makes full disclosure, pays the tax, interest an accuracy related penalty and an FBAR penalty when entering the program.
It is the “reliance on professional advice” that most asset protection participants will likely use to establish “non-willfu” conduct. These are individually unique situations and need to be evaluated careuflly. The choice of how to come forward or how to respond to a Grand Jury Subpoena for records requires advice of experienced tax lawyers. We at MillarLaw can help guide you to the most appropriate course of action.
