Can Spys and Criminals Make Voluntary Disclosures?

A recent article about convicted spy Jonathan Pollard speculated about the effects on his parole if he had an unreported foreign financial account. The simple truth is that Mr. Pollard would be ineligible for the Offshore Voluntary Disclosure Program (OVDP) if he held direct or beneficial ownership in a foreign financial account(s) which had $10,000 or more in a calendar year if the source of the funds in the account were illegal source. Payments for espionage against the U.S. certainly meet the test for illegal source. The test is stated in the IRS Frequently asked questions, restated in part as follows:

“Taxpayers who have legal source funds invested in undisclosed OVDP assets (see FAQ 35) and meet the requirements of IRM 9.5.11.9 are eligible to apply for IRS Criminal Investigation’s Voluntary Disclosure Practice and the OVDP penalty regime.”

A taxpayer who intends to make the disclosures required in order to participate in the OVDP, needs to fully inform his or her lawyer of all the facts and circumstances surrounding the source of funds in the undeclared foreign account. Without a full disclosure by the taxpayer to his/her lawyer NO ONE can assess the risks of participation in the OVDP, including the Fifth Amendment Waiver (the waiver of the privilege against self-incrimination). A thorough review of the facts is needed in order to provide a written recommendation to a taxpayer wishing to come forward and report undeclared foreign financial accounts.

A full written evaluation will compare the facts provided by the taxpayer and otherwise learned through investigation by the taxpayer’s lawyer with the available programs, including the Delinquent Filing Program, Streamline Procedures and the OVDP and make a considered recommendation. A separate analysis should be done for state law compliance.

If the taxpayer reveals conduct that would make the income “illegal source” then approaches to coming forward can be discussed and decisions made before any negative consequences occur. Whether the source of illegal funds is espionage or other criminal acts (including social welfare benefit fraud) in order to obtain the best advice, taxpayers must be forthcoming.