Offshore Tax Initiative

The Qualified Quiet Disclosure: Operating Outside of the IRS Offshore Voluntary Disclosure Initiative

Individuals with previously undisclosed foreign assets and/or income have a variety of options to become compliant with the IRS, with two avenues for resolution being the most common:  Qualified Quiet Disclosure and the Offshore Voluntary Disclosure Program ("OVDP").

Absent facts indicating willful or reckless intent, an individual may be better off ‘explaining’ the undisclosed foreign bank accounts through amended tax returns, rather than opting into the Offshore Voluntary Disclosure Program.  Though the IRS prefers everyone opting into the OVDP because the IRS has collected so much money from it, there is another avenue known as a "Qualified Quiet Disclosure."  The IRS has also blessed the "qualified quiet disclosure" which, if a person qualifies, gives the same forgiveness as the OVDP but without paying the heavy penalties, without giving up rights, and without forced admissions of intent to evade U.S. income tax, that can come back to haunt.    Note, a Qualified Quiet Disclosure is very different from a "quiet disclosure," of which the IRS has promised a detection and punishment campaign.      Moreover, the Qualified Quiet Disclosure approach allows a taxpayer to operate outside the OVDP and to thereby, freely and fully, administratively and/or judicially contest the offshore penalties.   Through, an Administrative Agency Procedure Act before the District Court, for instance, an individual may contest the offshore penalty demand as it is applied by the IRS.

Conversely, if a taxpayer enters into the OVDP, he or she must agree to the penalties outlined in the program. The penalties and taxes imposed within the OVDP, are extremely expensive and punitive. For instance, a participant must pay a penalty of 27.5 percent based on the value of the undisclosed assets - as they are defined by the IRS.  In addition to the OVDP penalties, a participant must also pay the original tax, an additional 20 percent accuracy related penalty, failure to timely pay penalties of up to 25 percent of the income tax, and interest.  The taxpayer must also consent to re-open tax years which are already beyond the statute of limitations, thereby allowing the IRS to assess tax and penalties that the IRS otherwise would not be unable to do.    Thus, in many cases, participants are forfeiting assets, including entire lifetime savings and more to the government so that any income, inheritances, or gifts these people may receive in the future will belong to the IRS. 

To make matters worse, participants entering into the OVDP must waive Constitutional Protections against: self-incrimination (5th amendment), unreasonable search and seizure (4th amendment), and excessive fines (8th amendment).  This "Trifecta" of constitutional protections disappear once an individual enters into the OVDP disclosing: their names, social security numbers, undisclosed income, undisclosed assets, and the names of the advisors/3rd parties who facilitated the alleged "offshore tax evasion." Further, the government is not bound by transactional or use immunity for the participant participating in the Program.   For instance, numerous participants of the OVDP have been removed from the program and have been prosecuted with the government using (and the taxpayer being limited by) the very information provided by the taxpayer as part of the OVDP process.     Therefore, a taxpayer should be fully advised of OVDP advantages and disadvantages before deciding to make a disclosure because an OVDP begins first, with a waiver of constitutional rights, and then requires directly disclosing to the IRS criminal investigation division offshore transactions that could be (mis)construed as money laundering, wire fraud, mail fraud, tax evasion, or failing to disclose foreign financial accounts on an FBAR.  An example of such treatment is the Ty Warner matter.

In the case of Ty Warner (Beanie Bag founder, a former member of the Forbes 400 richest Americans, with a previous net worth of $2.6 billion) entered into the IRS OVDP only to be removed from the program for unknown reasons. The risk of entering into the OVDP for Ty Warner can be best understood in the settlement his attorneys reached with the IRS for the civil part of his case; his criminal case is still pending. Ty Warner failed to pay approximately $885,000 of taxes generated from undisclosed Swiss accounts. Even though Ty Warner failed to pay $885,000 taxes, the settlement agreement requires him to pay the government $53 million in taxes, penalties, and interest. This amounts to 60 times the original tax due. In addition, Ty Warner faces up to five years in a federal prison for tax evasion.  There have been a number of other individuals removed from the OVDP program and prosecuted, including most recently a 79 year old widow residing in Palm Beach because she did not report her inheritance of late husband’s foreign accounts.

On the other hand, even though the government has issued ominous threats to individuals who have not entered the OVDP (or previous, similar programs), since 2009, the government has not carried out this threat in any significant way.   For example: a taxpayer made a partial disclosure (i.e., not a Qualified Quiet Disclosure) to the IRS in which he omitted a secret Bermuda account on his amended tax returns.  Evidence suggests that individuals making Qualified Quiet Disclosures outside of OVDP have mostly fared better than individuals making disclosures through OVDP.  Those outside of OVDP, are assessed far less in taxes and penalties than individuals who have elected to make a disclosure through OVDP. In addition, these individuals have not waived their constitutional rights.

To sum it up, despite the fact that the IRS continues to threaten those who chose not to enter OVDP with prison sentences, monetary penalties, and more, those qualified to make a Qualified Quiet Disclosure have a far greater ability to contest IRS allegations of criminal and civil wrongdoing than the participants of the IRS OVDP. As of this date, individuals making disclosures outside the OVDP as a whole are far better off than their counterparts.

For a related article, "A Closer Look at the Non-Willful FBAR Penalty", California Tax Lawyer, Published by the State Bar of California, (Winter 2012).  

Stephen M. Moskowitz is the founding partner of Moskowitz LLP.   He is a member of the California State Bar, and holds an LLM in tax along with admission to practice in the United States Supreme Court, all Federal Courts, and all courts within the State of California.   Before Steve began practicing as a tax attorney, he practiced as a CPA.     He has been a professor of law, tax, and accounting at Golden Gate University, University of San Francisco, and San Francisco State University.   He routinely addresses the public, professionals, students and governments on tax matters impacting individuals and businesses.    

Anthony V. Diosdi is a tax attorney with Moskowitz LLP.   He is a member of the Florida State Bar and holds an LLM in tax.    Anthony concentrates his practice on federal tax controversies, planning, and international taxation. 

Moskowitz LLP is a tax law firm.   We save financial lives by relentlessly pursuing all avenues to successfully resolve client tax matters.  From audits, appeals, trials and tax planning to tax opinions and civil and criminal defense, we help individuals and businesses understand their entire tax picture and act accordingly.  We defend personal liberty and dignity through our skill, experience and an aggressive approach.  Whether it’s spending time in court or negotiating with the government, we passionately treat your case as if it were our own.  We do whatever it takes, within the bounds of the law, to deliver top quality, non-judgmental legal representation to help you save your life’s work, resolve tax matters pending, and to enjoy your life and thrive.  

Moskowitz LLP
A Tax Law Firm
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Moskowitz LLP, A Tax Law Firm, Disclaimer: Because of the generality of this blog post, 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. Prior results do not guarantee a similar outcome. Furthermore, in accordance with Treasury Regulation Circular 230, we inform you that any tax advice contained in this communication was not intended or written to be used, and cannot be used, for the purposes of (i) avoiding tax related penalties under the Internal Revenue Code, or (ii.) promoting, marketing, or recommending to another party any tax related matter addressed herein.

United States and South Korea Coordinate to Combat Monetary & Tax Crimes

To combat money and tax crimes, such as tax evasion and money laundering, the United States and Korean Governments have committed to a simultaneous criminal investigation program, SCIP.  The arrangement allows the respective tax departments; the United States’ Internal Revenue Service (IRS) and South Korea’s National Tax Service (NTS), to share records for the purpose of comparing and verifying data submitted to both agencies by South Korean Americans.

The NTS is concentrating on South Korean businesses and individuals participating in the illegal practices of transferring funds out of country, avoiding taxes and engaging in money laundering, while the IRS is concerned with U.S. taxpayers participating in illegal and legal investing in or holding money/assets in South Korea.  The SCIP requires Foreign Bank Account Holders (FBA) to properly report their assets.  The United States requires the same under its Reporting Requirements.   See 2012 Offshore Voluntary Disclosure Program; One Size Does Not Fit All, Criminal Tax Defense.

Previously, the NTS asked over 2000 individuals to voluntarily report their overseas assets.  As of last June, assets worth over 39 billion won of assets previously not reported.  S. Korea Investigates Cases of Offshore Tax Evasion, January 9, 2011, Lee Ji-yoon, The Korea Herald.   We suspect that many of these individuals may have U.S. connections as well or may have been involved with pooling money with Korean-Americans who will be identified to the IRS because of the reporting.    In December 2011, in light of the SCIP arrangement, the National Congress of South Korea and the NTS, invited Steve Moskowitz of Moskowitz LLP, A Tax Law Firm based out of San Francisco, California to explain how the program will affect South Koreans living and working in the United States and Korean - Americans who have family and assets in South Korea.

Moskowitz with the translation assistance of Shawn Kim, Fortis Law Group, P.C., spent 4 days addressing the Congress and Tax Officials and meeting with local bankers and individuals on specific considerations and avenues for compliance without criminal prosecution and minimizing or eliminating monetary penalties, on matters including, Offshore Disclosure Initiatives (ODI) of the U.S. Department of Justice,  Report of Foreign Bank and Financial Accounts (FBAR), repatriation, exit tax matters, and other currency related regulations which, if previously undetected, are now detectable by both the United States and South Korean Justice Departments.

According to Steve Moskowitz:

The United States government is targeting South Koreans living in the United States, who are suspected of crimes.  [It] has every right to request financial information from the South Korean government regarding Korean-Americans living in the United States.”  He adds, “[Information requested] could include real estate records, bank account information, tax returns and other pertinent information.  Many South Koreans living in the United States are nervous because they may have an inheritance from parents, they operate businesses in the U.S. and Korea, maintain assets in Korea and are unsure about reporting these assets, etc.

We have already seen an increase in monetary and tax crimes charged against individuals and corporations of Korean descent, which have included prison sentences and very large monetary fines.

For example:

Obstruction of Justice charges:

In May 2012, the U.S. Department of Justice filed felony charges in federal district court in Washington D.C., against a citizen and resident of Korea, Kyoungwon Pyo, for providing false documents to the U.S. Government in response to an inquiry.    He was charged with obstruction of justice which carries a maximum penalty of 20 years in federal prison and a criminal fine of $250,000 for individuals.   With the advice and counsel of qualified attorneys, Mr. Pyo pleaded guilty and will serve five months in federal prison.

Tax Evasion:

In January 2012, the U.S. Department of Justice filed felony tax evasion charges in federal district court in Maryland, against Chung K. Choi for felony tax evasion which carries a maximum penalty of 5 years in prison (per offense) and a $100,000 fine (per offense) in addition to remaining liable for the civil penalties, which remain available to the Internal Revenue Service and are substantial in nature.     Mr. Choi, with the advice of an attorney, pled guilty and was sentenced to 18 months in prison, 3 years of supervised release, and ordered to pay $739,253 in restitution.

This case is particularly interesting to note because part of the plea agreement included a sealed information.   Sometimes this means that the defendant agrees to provide additional information about others involved in similar or related conduct.    We will continue to monitor the Court for subsequent indictments of Korean business owners who Choi may have implicated as part of a plea (if in fact, information was required under the terms of the plea).

False Tax Returns

In May 2012, a criminal judgment was issued against Insoo Kim, age 57, of Cupertino, California.   He was charged with false tax returns, failing to collect employment taxes.  Mr. Kim pled guilty to filing false tax returns and was sentenced to two months in prison and 4 months of electronic monitoring.   What is interesting about this case is even though the total tax loss to the government was only $28,451, he still received prison time.   We believe that Mr. Kim’s case was aggravated by the fact that he had hidden bank accounts that the government eventually discovered on their own.

Failure to Withhold Federal Taxes and Failure to Timely Pay:
  -  The Government takes action to prevent her from operating her business
On March 20, 2012, the U.S. Attorney’s office filed a civil complaint against Jea-il, Inc, doing business as, NiteCap, owned by Lynn Kim.   The complaint alleges that Ms. Kim filed to withhold and pay employment taxes in the amount of $165,332.   The Internal Revenue Service has added over $65,000 to this amount in monetary penalties and now, through the U.S. Attorney’s office, seeks to stop Ms. Kim from operating her business.     We are not the attorneys in this case but will continue to monitor it and provide you with any relevant updates.

Other articles related to this post:

Immigration & aggravated felony convictions,
Foreign Account Tax Compliance Act (FATCA)

Moskowitz LLP, A Tax Law Firm, Disclaimer:   Because of the generality of this blog post, 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.   Prior results do not guarantee a similar outcome.   Furthermore, in accordance with Treasury Regulation Circular 230, we inform you that any tax advice contained in this communication was not intended or written to be used, and cannot be used, for the purposes of (i) avoiding tax related penalties under the Internal Revenue Code, or (ii.) promoting, marketing, or recommending to another party any tax related matter addressed herein.