IRS Launches Voluntary Compliance Initiative for Holders of Offshore Credit Card Accounts


Corporate & Finance Alert

January 30, 2003

By: Peter J. UlrichMark R. Kossow

Under the Internal Revenue Code, United States citizens must pay tax on their worldwide income. Even though it is not by itself illegal to have an offshore credit or debit card account, those accounts provide easy access to offshore funds and are often maintained in tax haven countries that allow interest income to be hidden from the Internal Revenue Service. Taxpayers are supposed to report income from these accounts and disclose the existence of these accounts on Form 1040, Schedule B.

Since October 2000, the IRS has been conducting a “John Doe” summons investigation to identify holders of offshore card accounts who might be hiding taxable income. The John Doe summons program has included the issuance of summonses to financial and commercial businesses to obtain information on U.S. residents who hold credit, debit or other payment cards issued by offshore banks. IRS investigators are using the information from these summonses to trace the identity of U.S. taxpayers who might be hiding overseas taxable income. Since the inception of the John Doe summons program, the IRS has been able to identify thousands of U.S. taxpayers holding offshore payment cards. Many of these cases have already been referred to the Service’s Criminal Investigation Division for possible criminal prosecution.

On January 14, 2003, the Internal Revenue Service unveiled a voluntary compliance initiative to bring users of offshore credit cards back into compliance with the tax laws. The initiative applies to tax years ending after December 31, 1998, but may also apply to earlier years. Arguably, the initiative is broad enough to cover arrangements involving foreign trusts, corporations, or partnerships bank accounts.

Under the Offshore Voluntary Compliance Initiative, eligible taxpayers can come forward without having to face civil fraud and information return penalties or penalties for failing to report a foreign financial account. In addition, taxpayers will most likely avoid criminal prosecution – based on application of the recently revised voluntary disclosure rules. However, taxpayers will still have to pay back taxes, interest and certain accuracy or delinquency penalties.

Application Process – April 15, 2003 Deadline

To participate in the Offshore Voluntary Compliance Initiative, taxpayers must send a written request by April 15, 2003 to the National Offshore Voluntary Compliance Initiative Coordinator. A taxpayer is eligible to participate in the program as long as he or she has not promoted or solicited the participation of others in arrangements to avoid taxation by using offshore credit or debit cards or other accounts, and as long as the IRS receives the written request before the IRS (a) initiated a civil examination or criminal investigation of the taxpayer, (b) received information from a third party alerting the IRS to the taxpayer’s noncompliance, (c) initiated a civil examination or criminal investigation that is directly related to the specific liability of the taxpayer, or (d) acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action. The taxpayer request must include detailed information about the taxpayer and about any parties who promoted or solicited that taxpayer’s use of offshore credit or debit cards or other accounts.

Within 30 days of receipt of the request, the IRS will notify the taxpayer whether he or she has been preliminarily determined to be eligible to participate in the Offshore Voluntary Compliance Initiative. Within 150 days of this IRS notification, the taxpayer must provide (a) copies of original and amended federal income tax returns for 1999, 2000, and 2001, (b) an explanation of previously unreported income or incorrectly claimed deductions and credits (even if not related to offshore financial arrangements), (c) a description of all offshore payment cards, accounts, assets, entities, and nominees used by the taxpayer, (d) a description of the source of foreign funds or assets, and (e) all information returns for which the taxpayer requests penalty relief. The taxpayer must fully pay the income tax liabilities, including applicable accuracy or delinquency penalties and interest or make other arrangements for such liabilities.

IRS Final Determination – Closing Agreement

After the taxpayer satisfies all of the requirements under the application process, the taxpayer and the IRS will enter into a specific matter closing agreement. Execution of this closing agreement will constitute a final determination that the taxpayer is eligible to participate in the Offshore Voluntary Compliance Initiative.


The IRS is encouraging taxpayers who have not been reporting foreign source taxable income to file corrected amended returns and pay related tax liabilities without being subject to severe civil fraud penalties. Moreover, the possibility of criminal prosecution is greatly reduced under this program because of the recently revised voluntary disclosure rules. However, taxpayers who are contemplating utilizing the Offshore Voluntary Compliance Initiative should first consult with legal counsel in assisting them with issues such as privilege, strategy, and the relevant statutes of limitation.