The other day I blogged about the new Internal Revenue Service (IRS) tax amnesty for holders of Swiss and other offshore bank accounts who make a voluntary disclosure. I called it a “break.” Upon further reflection I think that the tax amnesty is a blunt instrument rather than the scalpel that was needed. Consider these two examples:
Mr. E.Z. Going sold his business six years ago, paid tax on the sale, and put the proceeds of $1,000,000 in a Swiss bank account because he was concerned about potential lawsuits against him, and he had been told that putting your assets in an offshore bank account will help protect assets from frivolous lawsuits. Each year he has trading losses, and over the next six years he loses about $300,000. In addition, over that period he withdrew another $100,000 to pay for his daughter’s college education, leaving $600,000. He didn’t give too much thought to mentioning the existence of the account to his Certified Public Accountant (CPA) since he was losing money, not making money. If he makes a voluntary disclosure, E.Z. Going will be subject to a penalty of $200,000-20% of the high balance in the account.
In contrast take a look at Mr. Tax Fraud. Mr. Tax Fraud owns a restaurant, and every year for the past six years he has skimmed a little over $150,000 per year in cash, and not reported it on his tax return. Instead he travels several times each year with the cash in a suitcase to Switzerland. Mr. Tax Fraud has been advised by his friendly UBS banker to set up a trust in Lichtenstein to further disguise the ownership of the offshore bank account. Each year the Swiss bank account earns some interest, and as a result by 2008 he has $1,000,000 in the account. If he makes a voluntary disclosure Mr. Tax Fraud will pay the same $200,000 penalty.
In addition, Mr. Fraud will have to pay the back taxes (which Mr. E.Z. Going has already paid in a timely manner), plus interest, and a 20% penalty on the additional tax due. However, Mr. Fraud has skated on the 75% tax fraud penalty, as well as other penalties related to the non-filing of Forms 3520. Furthermore, he dodged potential penalties for the transporting currency, and failure to file the appropriate reports. Mr. E.Z. Going was never at risk for any of these tax penalties. Clearly, Mr. Tax Fraud is getting a much better deal.
It is very unfortunate that the IRS has failed to take into account these very different circumstances in structuring its tax amnesty.
Determining how to proceed in light of the new tax amnesty definitely requires a tax lawyer to avoid making a bad situation worse.