Tax Law Center Blog

Our firm recently informally met with a US Department of Justice official (name withheld because official was not authorized to officially speak) in Washington DC regarding the pending summons served on HSBC India to reveal account information (including names, addresses, etc.) of U.S. residents with HSBC accounts in India.

The government official stated that HSBC India accountholders’ discovered via the answered subpoena will not be able to enter the 2011 Offshore Voluntary Disclosure Initiative (OVDI), which will be available until Aug. 31, 2011.  However, the official also stated that taxpayers preliminarily cleared (the first stage of the OVDI process) to enter OVDI will not be removed from the OVDI program (even prior to the final filing of the taxpayer’s OVDI application) even if the same taxpayer is subsequently discovered by the IRS via the answered HSBC subpoena.

The government official’s statements make it imperative that HSBC India accountholders seriously consider entering the OVDI program.

BACKGROUND

On April 7, 2011, the U.S. District Court for the Northern District of California issued an order authorizing the Internal Revenue Service (“IRS”) to serve a “John Doe” summons requesting information from one of the world’s largest banks, HSBC, regarding U.S. residents who may be using accounts at HSBC in India to evade federal income taxes. If HSBC produces these records, which is likely, it may be too late for U.S. taxpayers with undisclosed HSBC accounts to take advantage of the IRS Voluntary Disclosure Program for offshore accounts.

The IRS says there are 9,000 high net worth Indian US residents who maintain at least $100,000 in their bank accounts in HSBC India but only 1,921 of them have disclosed details of their accounts.  In a statement to a San Francisco court, senior IRS official Daniel Reeves said, “This indicates that thousands of US taxpayers of Indian origin who maintain more than $100,000 in accounts with HSBC, may have failed to disclose their HSBC India accounts to the United States Government.”  He went on to say, “It is also likely that those taxpayers may have failed to report income earned on those undisclosed accounts.”

Is Voluntary Disclosure Right for You?

The factors involved in determining whether a taxpayer should make a voluntary disclosure are numerous and complex. A taxpayer considering making a voluntary disclosure may want to discuss the matter with experienced legal counsel. Such a discussion with legal counsel would be protected from disclosure by attorney-client privilege, which is particularly vital in instances where the taxpayer ultimately decides not to make the disclosure. However, a consultation regarding the voluntary disclosure program with a non-attorney (including the taxpayer’s accountant) is not a privileged communication. If the decision were made not to enter the OVDI, and the IRS discovers the foreign financial account, the taxpayer’s accountant or other non-attorney could become a witness for the IRS against the taxpayer. This would not be the case if an attorney, rather than an accountant or other non-attorney, had been consulted.

A taxpayer contemplating a voluntary disclosure also may want to consider the differences in the financial consequences of participating in the OVDI, opting out of the OVDI or making a traditional voluntary disclosure. (It is not known at this time, but it appears the IRS may initially process all voluntary disclosures of offshore issues through the OVDI.) In many instances, the OVDI would involve more years, higher taxes and significantly larger penalties than a traditional voluntary disclosure.

Taxpayers participating (willingly or not) in the OVDI may face an IRS unwilling to negotiate, notwithstanding facts supporting the reduction or elimination of penalties. Taxpayers who believe their situation warrants reduced penalties  can opt out of the OVDI and take their chances in a full examination. Before that decision is made, however, a taxpayer must perform a careful analysis of the facts surrounding the case.

That analysis should be directed at determining:
• exactly what years are open under the statute of limitations (possibly less than the eight years under the OVDI);
• the magnitude of additional tax and interest due;
• what tax penalties are applicable (fraud, accuracy-related or none); and
• •what additional information-return penalties may apply in cases involving foreign accounts, trusts, gifts, corporations and other business entities.

Key to this analysis are issues regarding negligence, fraud, willfulness, mitigation, burden of proof (on the taxpayer or on the IRS) and quantum of proof.  Only after a thorough review of an HSBC accountholder’s particular situation should a decision be made regarding whether a voluntary disclosure should be made and, if so, whether it should be made pursuant to the inflexible OVDI or through potentially less-rigid traditional means.

Patel Law Offices is a law firm dedicated to helping clients resolve complicated tax, criminal tax, and international tax problems. Our firm assists (and defends) clients and their advisors to legally disclose (and legitimize) foreign accounts.