Often taxpayers who have not filed Reports of Foreign Bank or Financial Accounts (FBAR’s) will claim that they do not have records of their offshore accounts, because the accounts are maintained by third parties. In many cases the absence of records precludes taxpayer’s from applying for the Offshore Voluntary Disclosure Program (OVDP). Typical of absent records are circumstances where a taxpayer has (1) a custodial account, or (2) offshore trust, or (3) an offshore trust that controls an offshore corporation. Regardless of the situation, however, the taxpayer must be able to produce what are known as “required records”.
The Bank Secrecy Act has what is known as the “required records doctrine”, which mandates a taxpayer maintain records sufficient to establish offshore account balances, and interest and dividends earned for during the immediately preceding five years. The “Required Records Doctrine” has been used by the IRS Criminal Investigation Division in conjunction with Grand Jury actions to compel taxpayers to either produce records or give testimony about why the cannot produce the records of their offshore accounts. The U.S. Supreme Court has held that the Fifth Amendment Privilege against self-incrimination does not apply to testimony sought under the “Required Records Doctrine”, reasoning that the doctrine is essentially administrative/regulatory and not criminal in nature.
For those taxpayer’s who have accounts in financial institutions offshore and want to enter the OVDP in order to avoid “willful” penalties for not coming forward, the choice is to come forward with a skeleton OVDP letter and state that records are being sought or wait for the records to be produced. Time is not on the side of those who are waiting. The difference between waiting and coming forward could be the difference between timely enrollment in the OVDP. Not entering the OVDP can mean the loss of protection from penalties for unfilled information returns, such as foreign trust returns or Reports of Foreign Gifts or Bequests or Controlled Foreign Corporation or Controlled Foreign Partnership Returns all of which can be very significant. The penalty for failing to file a Report of Foreign Gift or Bequest in excess of $100,00 in a calendar year is 25% – 35% of the amount involved. But if the taxpayer can enter the OVDP then all unfilled information return penalties and FBAR penalties are rolled into a single civil miscellaneous penalty and in addition prosecution is avoided. But if the IRS finds the taxpayer before the taxpayer enters the OVDP then no protection from penalty assessment is available and the risk of prosecution exists.