New IRSMedic Webinar: What to do when your offshore bank is “blacklisted”

Recorded September 25, 2015




What to do When Your Offshore Bank is Blacklisted by IRS Hello, this is Anthony Parent of Parent & Parent LLP, the IRSMedic and in this video we're going to talk about what to do when your offshore bank is blacklisted.

We're going to cover what we mean by 'blacklisted' bank, about what your options are, if you can go streamlined, when an opt out in the OVDP makes sense, and about the traps of doing a 'soft' or 'quiet' disclosure. Lastly, we talk about the importance of keeping your innocence.


The first thing is "what do we mean by a 'blacklisted' bank? Well right now there's a list of about 50 as of September 25, 2015 and this is a list of foreign institutions. These are banks that the IRS or Department of Justice has a non-prosecution agreement with or banks that the IRS or DOJ is investigating, investigating with something called a John Doe Summons and what it means is if you're going to disclose and pretty much you don't have much of a choice if you are not currently under a grand jury investigation, you're going to fall under OVDP FAQ 7.2. Offshore Voluntary Disclosure Program FAQ 7.2 and the reason why is because the IRS looks at you as not all that voluntary because there is a non-prosecution agreement with that bank where the bank is going to disclose its US account holders or the IRS and DOJ has to go through all the trouble of getting a John Doe Summons to find out who has it. So because the IRS looks at you as not all that voluntary, that is you don't have much of an option, they want to hit you with a 50% offshore penalty, not the standard 27.5% penalty.


Now just to put this into perspective is that if you don't go through an OVDP, you would have a 50% penalty and you might go to prison and there might be some other things there too. Something to keep in mind is under this it gets a little bit unfair. We'll talk about some ways to address that. So that 50% penalty will attach to the value of things without FBAR requirements like rental real estate. Who really wants to take that 50%? Not a lot of us do, right? So here's the thing. If you weren't so innocent, if you weren't such an innocent little lamb, you might want to take that 50% hit. We certainly have clients who are doing that.


They really didn't have much justification and there's really no great grounds for an opt out and the reason why is again because if we look at what could happen without getting into an OVDP, the IRS and DOJ is free to prosecute criminally and this is the hot topic. This is what they're looking to get. They love the press releases on offshore compliance. This is the focus of the IRS right now and if you don't get in the program, you're probably going to be looking at at least one FBAR penalty of 50% and incarceration.


Now here's the thing and this is the thing that surprises people. Even if your bank is on this blacklisted list, you can still file a streamlined submission, but you have to be innocent or negligent. It's still an option so that means if your offshore penalty would be 5% and guess what? Your rental real estate isn't included in that penalty base so it gets a little bit better and it's even better for people who live overseas. They have a 0% penalty. The key is whether you were willful or not willful. It doesn't matter if your bank was blacklisted. It matters what you were thinking or not thinking.


What if you want to do something more than streamlined, but you really don't want to pay that 50%.? In that case you can opt out and those are for cases that sometimes there might be some facts that appear to be worse than they are and we want some additional protection and get out in front. Sometimes people do want protection from criminal liability and it makes a little bit of sense and then we're going to submit and get the criminal prosecution, but then we're going to argue and bring up facts that show why a willful penalty should not apply but not willful. Also when cases where we have bank accounts that are low relative to other OVDP offshore property, that is the rental property.


For instance, if your offshore banks were valued at $100,000 and your rental real estate was $2 million, then there you would opt out because even if you were hit with willful penalties, right, you're still in a better position because you've won if you were hit with a willful penalty at 50%, that's $50,000 and we're just going to assume mitigation things don't apply in this. You'll be hit with a penalty of $50,000 and your rental real estate is hit with no penalty, so there you would just want to opt out and if you lose, it's still a win. Another place where you might want to enter into full OVDP and opt out is where you are willful or maybe somewhat guilty, but you have an appetite for a fight or now I want to talk about what the options are.


A lot of people don't want to do that 50% and they're willful so they look to the quiet or soft disclosure about doing something else, just getting it out there and they think that's going to protect them. So let's think about how this works. You submit an amended 1040 with foreign income. You file old FBARs. Now this goes to the IRS and to FinCEN and what part of this seems quiet to you? What part of this seems soft? I mean you're sending this information to the IRS so you're saying when you send information to the IRS they don't know you sent them information? Their data bases don't know. Oh, there's an update to this tax return. Whereas the previous 1040 had no foreign income, well now we see foreign income and we might even see a form 1116, a foreign income tax credit.


So how does this work exactly? How is filing an amended return that includes foreign income not telling the IRS you have foreign income that you previously didn't report? How is filing an FBAR that you've never reported before and then filing it something the IRS doesn't know? What you're trying to do is tell them 'look I have this stuff' so it's not quiet. It's not soft. The IRS knows who is doing it. They just haven't gotten around to everybody who has done it. I can tell you the IRS has gotten to some people and when they come, it's not pretty. They want to hit them with the 50% penalties. You know just calling something quiet or soft doesn't make it true. I can call myself the King of Siam. Quiet is not quiet. Soft is not soft. It is loud and clumsy yet the IRS has time to catch you.


Now here's something to think about. What about those tax professionals doing this for people? Here's something I heard. A qualified soft disclosure, whatever that is and again calling yourself the King of Siam doesn't mean you are and calling it qualified doesn't mean it is. It's nothing. It's a nothing. If you go to one of these tax professionals advising you to do this, you are going to become infected with a viral liability. This is what I mean by that. Guess what? You are not the only person they advised to do this. So the IRS is going to come along and they're going to find someone who has done a soft disclosure and be like "okay, who is this person and who did this for them". Okay so they're auditing one tax payer who is doing a soft disclosure. It tracks back to the tax professional and now the IRS comes knocking on the door of the tax professional. "Hey, what's going on buddy? Who else did you do this for? Okay, we're going to subpoena your records to see who else your clients are".


So you will lose leverage and criminal charges can spring. We haven't seen that yet, but I've been told it's coming. Now when that happens, you should expect your tax professional to testify against you, even if they were the ones who told you to do the quiet or soft disclosure. That's the way it works. They're out to save their skin and do not think there's an attorney client privilege that's going to protect you from that. There's recent cases where they've blown through that, where testimony was invented by tax attorney and a jury was still able to consider that.


So here's the point. Don't lose your innocence. Also, what are you going to do next year? Are you going to report this or not report it? You know, there's risks to either one. If you report it, now you're telling the IRS what about the previous years and if you don't report it, you're going down the same road. It's getting a little tougher. If you have non-willfulness, exercise it. Don't let it change into willfulness.


This is Anthony Parent of Parent & Parent LLP, The IRSMedic.  Thanks for joining us today. 


If you need assistance getting into a program, contact us for a complimentary consultation. We can help.