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Carrots and sticks in offshore account disclosure

The imagery of carrots and sticks is of course not literal. It dates to a time when horses, not motor vehicles, powered human commerce and culture. But we also know what the imagery implies. Carrots are supposed to provide incentives while sticks entail consequences.

Offshore account compliance certainly involves both carrots and sticks. Carrots have come in the form of limited amnesty programs that offer incentives to disclose previously unreported accounts. But there is increasing concern that the sticks are – well – out of whack.

This is particularly the case when it comes to tax penalties that the IRS is seeking to impose against taxpayers who have not properly disclosed offshore accounts. This is a serious issue for taxpayers in Southern California, across the nation and abroad who are seeking to make strategic decisions about how to handle those accounts.

In a recent case in Florida, the carrot-and-stick dynamic involved in offshore account disclosure is playing out in an especially dramatic way. Wielding a big stick, federal authorities are trying to collect tax penalties for an undisclosed foreign account that are essentially double the size of the account balance.

The case is the subject of a lawsuit called US v. Carl R. Zwerner. The Swiss bank account that is question never had a balance of more than $1.7 million. But the IRS and the U.S. Justice Department are seeking to assess tax penalties of nearly $3.5 million.

The taxpayer in the case is an 86-year-old man who once worked in the import business. He is arguing that imposing such severe tax penalties is unconstitutional because the Eighth Amendment bars "excessive fines."

A ruling in the case is not expected until next year.

Source: Wall Street Journal, "When Are Tax Penalties Excessive?" Laura Saunders, July 12, 2013