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IRS Offers Amnesty Program

A plan to waive prosecution of users of illegal offshore tax shelters in exchange for information is likely to affect many in L.A.

January 15, 2003|Kathy M. Kristof | Times Staff Writer

The Internal Revenue Service said Tuesday that the government would waive criminal prosecution and fraud penalties for taxpayers who used offshore accounts to shelter income illegally -- in exchange for information on the promoters of the tax-evasion schemes.

The IRS program, known as the Voluntary Offshore Disclosure Initiative, is expected to have special significance in the Los Angeles area, long considered a hub of tax cheating. The IRS says it has identified hundreds of professionals, entertainers and athletes who may have used the schemes. Tax attorneys familiar with the investigation believe that many of them live in Southern California.

"This is a criminal amnesty program," said Elliott Kajan, partner with Beverly Hills tax law firm Kajan Mather & Barish.

"Many people will be crawling out now because they see a way out of the tunnel that they, unfortunately, dug for themselves."

The real targets of the program are tax-shelter promoters, said Steve Toscher, partner at Beverly Hills tax law firm Hochman, Salkin, Rettig, Toscher & Perez.

The IRS is barring tax-shelter promoters from participating in the voluntary disclosure program. All taxpayers who want to participate also must agree to turn in records showing who sold them the offshore package and how it worked.

With that information, the IRS expects to go after the promoters -- and any of their customers who didn't voluntarily come forward, said Dale Hart, an IRS deputy commissioner.

"Once we know who the promoter is, we are going to go full bore in terms of criminal or civil prosecution or both," Hart said. "And when we get information on the promoter, we will get the information on the other people that they sold packages to."

To participate in the program, taxpayers must file amended returns by April 15, disclosing previously hidden income.

They also will be required to pay the back taxes, interest and accuracy and delinquency penalties.

Those penalties are substantial, the IRS acknowledged. A person who participated in an offshore scheme to avoid $100,000 in 1999 taxes would owe $149,319 under this program, the agency said. That's the original $100,000 tax, $29,319 in interest and a $20,000 accuracy penalty.

However, the penalties the IRS is waiving are far more significant. If the same taxpayer were subject to civil fraud penalties, the bill would rise to $217,758. Moreover, the IRS could choose to prosecute under criminal fraud statutes that could land the taxpayer in prison.

"The real issue is avoiding criminal prosecution," Toscher said.

"This is an affirmative statement saying that if you do come forward, and meet the guidelines, the IRS will not recommend criminal prosecution."

Calling the voluntary disclosure program a "good balance between fairness and incentive," Hart noted that this is just the latest in a long series of moves that the IRS hopes will nab thousands of high-profile scofflaws who used offshore accounts to evade billions of dollars in tax.

The offshore initiative stems from a 1997 tip from an attorney who was approached to participate in one of the schemes. The IRS followed up by assigning undercover agents to pose as taxpayers to learn more about how the programs worked. But the agency's progress in finding individual tax cheats had been hampered by bank secrecy laws in tax havens such as the Cayman Islands.

Still, investigators gleaned a pivotal grain of information: U.S. taxpayers were using credit and debit cards, issued by Visa International, MasterCard Inc. and American Express Co., to access their offshore accounts. In late 2000, the IRS issued so-called John Doe summonses demanding credit card receipts from the offshore banks using these U.S.-based credit networks.

The volume of data provided by the summonses already has led the agency to conclude that original estimates, which suggested that up to 2 million Americans were participating in illegal offshore schemes, were overblown.

Hart said the agency has traced multiple credit card accounts to single taxpayers and has opened hundreds of investigations as a result.

The agency won't currently estimate how many people are believed to be participating in illegal offshore tax evasion, but Sen. Max Baucus of Montana, a ranking Democrat on the Senate Finance Committee, which oversees the IRS, puts offshore tax scofflaws at the "hundreds of thousands" and called the cheating a "serious threat to the integrity of our tax system."

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