What Does a Fiduciary Do When Advised of an Offshore Account?

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On June 18, 2014 the IRS announced changes to the Offshore Voluntary Disclosure Program (OVDP). The changes include the following:

“The changes announced today also make important modifications to the OVDP. The changes include:

• Requiring additional information from taxpayers applying to the program;

• Eliminating the existing reduced penalty percentage for certain non-willful taxpayers in light of the expansion of the streamlined procedures;

• Requiring taxpayers to submit all account statements and pay the offshore penalty at the time of the OVDP application;

• Enabling taxpayers to submit voluminous records electronically rather than on paper;

• Increasing the offshore penalty percentage (from 27.5% to 50%) if, before the taxpayer’s OVDP pre-clearance request is submitted, it becomes public that a financial institution where the taxpayer holds an account or another party facilitating the taxpayer’s offshore arrangement is under investigation by the IRS or Department of Justice”

Of these changes the potentially most troubling to fiduciaries, such as trustees, executors, and conservators, is the change in the OVDP penalty from 27.5% to 50%. The first notice that a fiduciary may have received about the potential existence of the existence of the account may have come from quite recently from the financial institution itself, or through its counsel while searching for the beneficial owner of the account(s).

The Justice Department (DOJ) and the IRS gave taxpayers until August 4, 2014 to come forward and enter the OVDP and retain eligibility for the 27.5% offshore penalty or otherwise face the 50% offshore penalty if they came forward later, but before being discovered. The premise being that adequate time and publicity has been provided to all taxpayers with offshore accounts so that they failure to come forward will be deemed “willful”. The “willful” as opposed to the “non-will” treatment offered with the 27.5% OVDP program.

It is interesting to note, that while there are an estimated 121 Swiss banks under DOJ investigation or which have entered into Non-prosecution Agreements, the 50% offshore penalty would apply not only to those 121, but to potentially any other financial institution which enters a similar agreement or is the subject of scrutiny.

This take us to the issue of what does a fiduciary do if post August 4, 2014, it discovers an otherwise unknown and undeclared account. The choices are difficult. If the fiduciary does not come forward, immediately and the account information is turned over to the DOJ, the fiduciary may face personal liability and risk prosecution. On the other hand, paying 50% or the account balance may not be an appealing incentive to enter the OVDP. The Streamline Procedure may or may not work depending on the facts, the relationship between the fiduciary and the beneficial account owner, (trustee, executor or conservator) and the source of funds and whether the beneficial owner is incapacitated or deceased, if the beneficial owner is alive, the Streamline Procedure is far less likely to be accepted by the IRS. The decision on which path to take is one that needs advice of skilled counsel and timely action.

Topics:  Compliance, DOJ, Fiduciary Duty, International Tax Issues, IRS, Offshore Funds, OVDP

Published In: Criminal Law Updates, Finance & Banking Updates, International Trade Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Sanford Millar, Law Offices of Sanford I. Millar | Attorney Advertising

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Sanford Millar
Law Offices of Sanford I. Millar

Experience and Qualifications: Over 30 years of experience in domestic and international tax... View Profile »


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