Clients told to rethink taking IRS amnesty

Justice Watch

Clients told to rethink taking IRS amnesty offer
Written By: John Pacenti

With the Internal Revenue Service baring its teeth at anyone with an unreported offshore bank account, the rule of the thumb was to submit to the agency’s compliance program to avoid prosecution or excessive fines. But after the expiration of an amnesty program, tax litigators are not as ready to suggest their clients throw themselves under the IRS bus. Some are even opting out of the program that was so successful in the aftermath of the UBS investigation. The Swiss banking giant paid a $780 million penalty last year and agreed to reveal the identities of about 4,450 Americans who may be dodging taxes. Now, customers of other international banks, including HSBC, are getting letters from the IRS asking why they haven’t disclosed accounts.

The IRS set up a voluntary disclosure program allowing people with unreported accounts to come forward and avoid prosecution by paying 20 percent of the highest balance. About 15,000 people came forward by the deadline last October and informed the government of money hidden in the Cayman Islands, Costa Rica, the British Virgin Islands or elsewhere, squirreled away in shell corporations. Sometimes these accounts lay dormant for years, were inherited or belonged to Americans living overseas for decades.

But tax attorney Kevin Packman, a partner at Holland & Knight in Miami, said a case in the Eastern District of Virginia redefined the legal standard for willful tax violations Sept. 1.

“If you didn’t know you needed to report the account, needed to report the income on the account, you couldn’t have willfulness to evade,” he said.

U.S. District Judge Liam O’Grady refused to enforce penalties against J. Bryan Williams, who failed to report his interest in foreign bank accounts on a 2000 tax return. O’Grady found the government didn’t prove the failure was willful since the accounts were frozen at the time, they were disclosed on his 2001 return, and they were discussed with the IRS.

“While there are distinctions in the civil and criminal contexts, willfulness generally requires intent or reckless disregard and ignorance of a known obligation,” Packman said.

Fighting the mighty IRS isn’t as rare as it used to be — even in serious criminal prosecutions. The agency cherrypicks the best cases and rarely loses when it goes to trial.

But it does lose.

Brazilian race car celebrity Helio Castroneves beat back a government offensive claiming he failed to pay $2.3 million in taxes from 1999 and 2004. The defense maintained Castroneves was following his accountant’s advice on ontracts with a marketing firm and the Penske Racing team.

Castroneves employed two attorneys, Roy Black of Black Srebnick Kornspan & Stumpf in Miami and Miami solo practitioner David Garvin. They maintained their client did not willfully evade taxes — he was just a young man out of Brazil who was told to sign a 39-page single-spaced contract with words he didn’t know.

Black said juries can resent tax defendants for not paying their fair share. But Castroneves’ charming backstory and personality were too much for the prosecution to overcome. Black said the tax code is so complicated it’s easy to show a client did not willfully evade taxes. He said he thinks the government should look for civil remedies rather than criminal prosecutions when it comes to tax compliance.

“A lot of people did not understand what was taxable and what was not. This is all the creation of the tax code,” Black said. “The tax code is very complex, and there are untold hundreds of thousands of subsections.”

Currently, many eyes in the tax litigation world are focused on the prosecution of father-and-son hotel developers Mauricio Cohen Assor and Leon Levy Cohen in Fort Lauderdale federal court. They are charged with hiding at least $47 million in a relative’s name and failing to pay taxes on the $33 million sale of a Manhattan hotel.

The prosecution is an offshoot of the IRS crackdown on international banks. HSBC turned over audio tapes of Cohen Assor allegedly talking to a banker about hiding assets.

But when it comes to opting out of a self-disclosure program, tax litigators say Cohen Assor and Levy Cohen are not in the mix. They reported up to $46,000 in annual taxable income but lived like kings all over the world. They were clearly an IRS criminal target.

But many others have run afoul by failing to file a report of Foreign Bank and Financial Accounts, known in the tax world as an FBAR, if they have an overseas account worth at least $10,000 in any calendar year.

“A lot of taxpayers still don’t know what the hell an FBAR is,” Packman said.

Fort Lauderdale attorney Martin Press, a Gunster tax litigator, said there are all sorts of circumstances where a citizen may violate the tax code without willful intent. For instance, he said U.S. citizens who have lived abroad since they were children may not have filed income tax returns.

He said one client has decided to drop out of the voluntary disclosure program.

“We have at least one case in which the facts are so good and there is so much reasonable cause for not reporting that we have withdrawn the case,” Press said.

Attorneys say it’s unlikely the government would prosecute them if they are not high-profile targets.

The voluntary disclosure program levied a 20 percent penalty on the highest balance in offshore accounts and requires taxpayers to offer any mitigation information, or reasonable cause, for lowering the penalty. The program’s
main perk is avoiding criminal liability.

For those not in danger of prosecution, tax attorneys say it might be wise to opt out of the program.

“They were given the opportunity to come forward and get reduced penalties. That means that the penalties had to be greater outside of the program,” Packman said. “Willfulness is needed before there can be a penalty based upon a percentage of the account value. Otherwise, worst case is $10,000, and only in years when the $10,000 is available.”

Miami litigator Robert Panoff disagrees with Packman on the effect of the Virginia decision. He said it is too factspecific to set a precedent for other districts.

Williams’ tax deficiencies were detected before he owned up to his foreign accounts during an amnesty program that ended in 2003. The judge found the IRS already knew about the account, and Williams knew the IRS knew, so he could not possibly have had an intent to conceal the account from that point on. He pleaded guilty to tax fraud conspiracy in 2003.

More importantly, the judge mentioned Williams’ tax professional did not advise him about FBAR requirements.

“The case does not have a broad application,” Panoff said. “It merely shows what has to be argued to try to show a lack of willfulness in a failure to file FBAR case.”
John Pacenti can be reached at or at  305-347-6638.