Next Step after UBS: IRS Moves onto using Civil Information Document Requests for Undisclosed Offshore Accounts

In the wake of the Internal Revenue Service (IRS) Offshore Settlement Initiative Voluntary Disclosure Program and UBS AG investigation, there will likely be a surge in IRS Information Document Requests focusing on offshore bank accounts.  Offshore tax evasion remains a top enforcement priority for the IRS, which will continue to step up pressure on U.S. taxpayers with undisclosed offshore accounts.  The Information Document Request will be the next step in the IRS’s enforcement strategy. 

UBS Investigation

In June 2007, the U.S. Department of Justice (“DOJ”) and the IRS launched a highly-publicized civil and criminal investigation into Swiss banking giant UBS AG (“UBS”) and its U.S. accountholders who failed to disclose their interests in offshore accounts.  U.S. taxpayers are required to disclose their offshore assets on their individual tax returns as well as file a Foreign Bank Account Report or FBAR.  Failure to do so can result in severe civil penalties—often in excess of the account value—and criminal penalties.  

In February 2009, UBS and the DOJ entered into a deferred prosecution agreement (“the Agreement”) whereby UBS agreed to cooperate with the DOJ in its ongoing investigation and DOJ, in return, agreed not to prosecute UBS if certain conditions are met.  In August 2009, as part of a so-called “John Does” Summons action, the IRS, DOJ, UBS and Swiss government reached a settlement agreement whereby UBS agreed to disclose detailed account information on U.S. taxpayers who used UBS offshore accounts to conceal assets and failed to report income related to those assets for the purpose of evading U.S. tax law—thousands of accountholder names. 

In March 2009, the IRS announced the creation of the IRS Offshore Settlement Initiative Voluntary Disclosure Program (“the Initiative”) to encourage taxpayers to come forward and disclose previously undisclosed offshore accounts in exchange for reduced penalties and the promise not to refer the case for criminal prosecution.  As a result of pressure on UBS and other offshore banks, over 14,700 U.S. taxpayers with previously undisclosed offshore accounts took advantage of the Initiative and applied before the October 15, 2009 deadline.  The deadline to participate in the Offshore Settlement Initiative Voluntary Disclosure Program came and went.  However, it is clear that offshore tax evasion remains a top IRS enforcement priority. 

According to IRS Commissioner Doug Shulman, the U.S. government has information on banks in over seventy countries—not just Switzerland.  The recent release of the UBS Settlement Initiative signals that the IRS and DOJ will likely proceed against other foreign bank accountholders in the United Arab Emirates, Israel, the Bahamas, and elsewhere.  Furthermore, the U.S. Department of Justice has investigated and prosecuted taxpayers regardless of the amount of their assets—even taxpayers with assets of $20,000 or less in offshore accounts.  It is clear that offshore tax evasion remains and will continue to remain a top enforcement priority for the IRS and DOJ for years to come—beyond UBS. 

Information Document Requests

In the next three to six months, taxpayers with undisclosed offshore accounts that are under IRS investigation will receive from the IRS a Form 6564, Information Document Request.  The IRS will focus Information Document Requests on U.S. taxpayers with offshore assets and accounts that failed to disclose these interests to the U.S. government on their Form 1040, U.S. Individual Tax Returns, and file a corresponding Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). 

An Information Document Request is a formal request from the IRS for a taxpayer’s books, papers, and other data relevant to the validity of their individual tax return.  The Information Document Request is a formal and structured process for the IRS to request and secure information from taxpayers, including information regarding offshore bank accounts.  Although less formal than a subpoena, the Information Document Request carries with it consequences for failure to cooperate and can lead to further investigation into offshore tax evasion and additional sanctions. 

[An information document request is significant because it precludes a taxpayer from participating in the IRS’s traditional voluntary disclosure program.  Like the Initiative, a traditional voluntary disclosure provides taxpayers with previously undisclosed foreign accounts with a way out—potentially avoiding the most severe civil penalties and criminal prosecution.  Under the voluntary disclosure program, taxpayers disclose their foreign assets, pay back taxes and interest as well as civil penalties in return for reduced penalties and a promise not to prosecute criminally.  A taxpayer wishing to participate in the voluntary disclosure program must act before they receive an Information Document Request, which is an automatic bar to participation.]  

If IRS agents discover that a taxpayer has not reported an interest in an offshore account or income accruing on such accounts during the course of an audit, the IRS may impose steep penalties—including the greater of $100,000 or 50% of the offshore account balance for willful failure to file an FBAR for each account.  These penalties, compounded with interest and fraud penalties, can essentially wipe out the taxpayer’s foreign assets.  Additionally, taxpayers could be subject to criminal prosecution and prison time for tax evasion.

What Next for U.S. Taxpayers?

These issues are extremely sensitive.  Taxpayers who have been issued an Information Document Request by the IRS are best served by contacting a tax attorney who is skilled at resolving disputes with the IRS as soon as possible.  An attorney can direct the taxpayer how best to respond to an Information Document Request.