Chile Forum

NEW YORK (Dow Jones)--A form the Internal Revenue Service devised to make it simpler to confess to having a secret offshore account could help dig a deeper legal hole for some.

Tax lawyers say one question on the form is particularly alarming. It asks people to explain why they created an account.

"This could equate to a signed confession in many cases," said Bryan Skarlatos, a partner at New York law firm Kostelanetz & Fink. He said he fears "it could be used against the taxpayer if anything goes wrong" in the so-called voluntary disclosure process, which is designed to shield people from the harshest penalties if they come forward on their own.

The IRS introduced the form last week as the number of people turning themselves in swelled amid a crackdown on offshore tax evaders. The government is pressing Swiss bank UBS AG (UBS) for information on some 52,000 accounts belonging to U.S. clients.

Doctors, lawyers, financial-services executives and many others have been caught up in the UBS matter as owners of Swiss accounts. Many are older people who inherited accounts from relatives, and many have ties to World War II. Mistrust of the government after the war drove some to stash money in countries, like Switzerland, with laws that protect bank secrecy. Others, however, set up accounts simply to evade taxes.

The form, which users can submit to the IRS criminal investigation unit, asks for information about the size and source of a bank account and the people affiliated with it.

One question asks for an explanation of the account's purpose. "For example," it prompts, "Holocaust Compensation or Restitution; inherited account; account established prior to World War II, etc.; if tax non-compliance -- please explain."

Choosing the last option could amount to an admission that one set up the account to evade taxes, signed under penalty of perjury.

Since voluntary disclosure implies some level of wrongdoing in the first place, lawyers say the question is out of bounds.

"There simply is no legal reason to require an express admission under oath," Skarlatos said.

How one handles the question depends on the circumstances. In general, however, anyone making a voluntary disclosure needs to be complete, honest and truthful. If the IRS thinks he is holding back, it could "use the signed confession to obtain an immediate guilty plea," Skarlatos added.

IRS spokesman Bruce I. Friedland said the form, which is in a letter format, isn't intended to "trap taxpayers into self-incrimination." He also said it is optional.

People who want to turn themselves in can do so without the letter by contacting their local Criminal Investigation division office. Eventually, however, they will be required to provide numerous details of their non-compliance as part of disclosure.

The optional letter, Friedland said, was intended to make it clear to taxpayers and their representatives "what the IRS would need to know to determine their eligibility and to reduce the need for additional information requests or additional interviews."

The form ideally could help taxpayers in a rush to make voluntary disclosures before a possible UBS settlement potentially exposes more account holders.

Despite the potential sand-trap question, Skarlatos and other tax attorneys say the new form is a step in the right direction because it helps to standardize a program that has been quite diffuse until now.

Scott D. Michel, an attorney at Caplin & Drysdale in Washington, D.C., said it will simplify the first phase of disclosure and generally eliminate the need for those coming forward to be interviewed by the IRS. This should encourage more people to make voluntary disclosures, he added.

The intense pace of voluntary disclosures is continuing - in fact, many people are rushing to get their names in this week before an expected settlement between UBS and the government that could change the landscape.

Earlier this year, the IRS offered a deal involving penalty limits that will expire Sept. 23.

With ever more aggressive enforcement in this area, "having an undeclared account becomes an albatross around one's neck," Michel said. While the deal the IRS has on the table isn't perfect, it may be the best opportunity in years to come clean, he added.