During 2013, the IRS and U.S. Department of Justice (DOJ) continued to successfully attack offshore banking “secrecy”. The IRS’ success against UBS and other banks eroded Swiss banking secrecy, effectively ending “going offshore” to hide money from the IRS. Going offshore for asset protection from civil creditors, however, is still viable and effective, but must be tax-compliant.
Further Erosion of Offshore Bank Secrecy and Encouraging Tax Compliance
• The IRS and DOJ continue to prosecute U.S. taxpayers with undeclared offshore assets. In 2013, many such prosecutions occurred, including a criminal case against Ty Warner, creator and owner of “Beanie Babies”, who made millions but failed to declare his Swiss bank accounts. Mr. Warner pled guilty to tax evasion, owes $5.6 million in back taxes and $53.6 million in penalties for failure to file the FBAR form (Report of Foreign Bank and Financial Accounts, TD F 90-22.1). He will be criminally sentenced in January 2014.
Note that the dollar amounts of this case should not suggest that foreign accounts of lower values would be immune from prosecution or “off the radar”. DOJ offshore investigations and prosecutions have targeted accounts of various levels, and DOJ information requests to foreign banks have set minimum thresholds of accounts worth $50,000.
• In 2013, Switzerland agreed to a settlement with DOJ whereby almost all Swiss banks will begin to report bank account data to the U.S. without a need for court orders or government-to-government treaty requests. The only Swiss banks not eligible for this settlement are those fourteen Swiss banks which are already under DOJ criminal investigation (this group includes Credit Suisse, Julius Baer, and the various Kantonal Banks). Swiss banking secrecy, seriously weakened since DOJ forced UBS to disclose its U.S. clients in 2009, is now effectively over.
• In 2013, Liechtenstein agreed to sign a global treaty allowing for increased bank transparency and automatic exchange of tax information. In addition, Liechtenstein is expected to sign on to FATCA (the Foreign Account Tax Compliance Act) perhaps before the end of 2013, by which Liechtenstein banks will automatically begin to report to the IRS.
• All reputable countries are agreeing to the exchange of tax information and banking transparency. In 2013, Luxembourg agreed to automatic exchange of bank depositor information beginning in January 2015. Likewise, Austria, the last remaining EU member holdout, agreed in May 2013 to share banking data. Also in 2013, Singapore agreed to sign the Convention on Mutual Administrative Assistance in Tax Matters, and also agreed to comply with FATCA.
• In 2013, DOJ and IRS continued their successful offensive against foreign banks that facilitated U.S. clients to hide taxable funds from the IRS. Liechtensteinische Landesbank in 2013 agreed to hand over once-“secret” banking data to the IRS, and Credit Suisse and Bank Leumi have indicated their intention to also share banking data with the U.S.
In 2013, Swiss bank Frey ceased doing business as a result of DOJ’s investigation. In 2012, Wegelin Bank, Switzerland’s oldest private bank, was criminally indicted by DOJ for facilitating tax fraud, and its U.S. assets were frozen and forfeited to the Government. Wegelin, like Frey, is no longer in business. The reach of the U.S. Government to foreign banks is undeniable. The IRS is also investigating HSBC, Bank Julius Baer, the Swiss Kantonal banks, Bank HaPoalim, Bank Leumi, Mizrahi Tefahot and others. In late 2012, Bank Frey and Pictet & Cie, both Swiss banks, were added to the list. In 2013, the U.S. issued treaty requests to Julius Baer and the Liechtenstein Foundation Supervisory Authority for information related to accounts and entities (e.g., trusts and foundations) utilized by Americans to hide income from the IRS. In addition, in 2013, DOJ issued summonses to banks such as Bank of Butterfield (Bermuda and Cayman), CIBC First Carribean and Zurcher Kantonal Bank (ZKB) (Switzerland) for information on hidden accounts. DOJ also issued summonses to U.S. banks such as Citibank and Bank of New York Mellon for information on U.S. correspondent accounts used by owners of foreign accounts to access funds. Banks in Switzerland, Liechtenstein, Israel, India and the Carribean are now under investigation. We expect more banks, in other countries, to be targeted in 2014.
• The fact that a foreign bank lacks a U.S. presence is no longer a bar to U.S. enforcement efforts. In 2012, Swiss bank Wegelin (Switzerland’s oldest private bank) was criminally indicted by DOJ for facilitating tax fraud, its U.S. correspondent account was frozen and forfeited to the U.S. Government, and Wegelin was put out of business – – even though Wegelin lacked a U.S. presence. In 2013, Swiss bank Frey, which also lacked a U.S. presence, ceased doing business as a result of DOJ’s investigation. The reach of the U.S. Government to foreign banks is undeniable, even to banks with no branches or presence in the U.S.
• The Swiss Parliament changed long-standing Swiss banking secrecy laws to allow for cooperation and exchange of information with the IRS for both criminal and civil tax investigations. The Swiss government allowed Swiss banks to provide once-confidential bank account information directly and automatically to the IRS. The Swiss highest court also approved the release of banking information.
• Liechtenstein’s Parliament amended its law and its treaty with the U.S. Broad informational requests, known as “fishing expeditions” are now allowed. Now, broad requests for banking data will give rise to government-to-government assistance and exchange of information, rather than the IRS or DOJ having to obtain prior court approval. If Liechtenstein, probably the world’s most secretive jurisdiction, can succumb to U.S. pressure, other countries will do so also.
• In 2013, Israeli banks froze many accounts of U.S. persons, until the account owners signed an IRS Form W-9 disclosing their social security numbers or provided evidence of U.S. tax compliance. U.S. persons with Israeli accounts now face two challenges: access to their money, and IRS compliance. Many are now entering the Offshore Voluntary Disclosure Program.
• Recently, three Federal appeal courts (the 5th, 7th and 9th Circuits) separately ruled that the 5th Amendment right against self-incrimination does not apply to foreign bank account records. This means that the DOJ and IRS can compel a taxpayer to reveal his or her offshore account records even if those records are self-incriminating. Prosecutors may then use those records to prove commission of tax crimes, including failure to file bank disclosures, filing false tax returns, tax evasion and tax fraud. Further, at least one U.S. district court has gone a step further and held that even if a taxpayer does not have the banking records, the taxpayer must affirmatively contact the foreign bank and request the records for the U.S. government.
• In 2013, lawsuits against UBS by U.S. taxpayers, which essentially alleged that UBS caused taxpayers to incur IRS penalties for their undeclared Swiss accounts, were dismissed by U.S. courts. Judge Posner of the 7th Circuit Court of Appeals called one case a “travesty” and was surprised that UBS didn’t seek sanctions against the account owner plaintiffs who brought the lawsuits against UBS.
• The Foreign Account Tax Compliance Act (FATCA) is coming into effect in 2014. Almost all offshore banks will begin reporting information to the IRS, or to their home governments which will provide the bank data to the IRS. While having an offshore account is still legal, the account is subject to increased reporting requirements. Many foreign countries from Europe to Asia have already signed on to or are negotiating a FATCA agreement with the U.S., including: Spain, Italy, France, Ireland, Norway, Germany, Mexico, the U.K., Switzerland, South Africa, Singapore and Japan.
It should also be noted that FATCA works both ways. During 2013, Norway requested from the U.S. information on Norwegian taxpayers with accounts in the U.S. The IRS submitted John Doe Summons requests in nine federal district courts pursuant to Norway’s request.
• In light of the above events, many clients have retained us to make their foreign accounts tax-compliant. We have represented many clients in Offshore Voluntary Disclosure Programs introduced by the IRS in 2009, 2011 and 2012. We have represented clients with accounts and assets on every continent (except Antarctica), brought them into IRS compliance and avoided prosecution.
• Clients should bring their accounts into tax compliance on the state level as well. Some states, such as Connecticut, New Jersey and California, had formal programs for offshore accounts. Other states, such as New York, encourage compliance via a general voluntary disclosure. The IRS shares information with state governments, including that a federal tax return was amended to report foreign income. Please contact us regarding tax compliance on the state and federal levels.
• Against the background of the U.S. offensive against non-disclosed offshore accounts, FATCA and new compliance burdens, many foreign banks have “fired” their U.S. clients and closed even compliant accounts. In 2013, we assisted clients in keeping open their compliant foreign accounts, or locating new foreign banks to take their business. While many foreign banks no longer want U.S. account holders, we have relationships with foreign banks which still service tax-compliant American clients.
Tax-Compliant Offshore Asset Protection Planning Is Still Legal and Effective
We have long counseled that non-reporting of foreign assets to the IRS and relying on supposed offshore “secrecy” in order to avoid taxation is unlawful, unwise and would negate effective asset protection. Indeed, we have always emphasized that effective asset protection does not rely on secrecy; it is based on the careful use of domestic and foreign asset protection laws.
Although “secret tax havens” no longer exist for non-compliant accounts, there do exist politically, socially and economically stable and secure jurisdictions for tax-compliant asset protection planning and for tax-compliant strategies to minimize U.S. taxation on U.S. and world-wide income. Foreign annuities, international insurance, offshore trusts and other international vehicles still serve as the centerpieces of effective tax minimization plans that comply with U.S. and foreign tax laws.
We have various tax-compliant offshore strategies to accomplish both asset protection and tax minimization. These strategies do not rely upon secrecy. Rather, the strategies involve complete disclosure, compliance and safety in utilizing well-credentialed offshore institutions. In a 2008 ruling, U.S. v. Boulware, 128 S. Ct. 1168, the U.S. Supreme Court reaffirmed that it is the legal right of a taxpayer to decrease the amount of his or her taxes by means which the law permits. Clients can be assured that their offshore assets, and the tax-favorable profits that they earn, may be absolutely legally protected from creditors, litigants and taxes. We will be pleased to answer your questions regarding tax compliant offshore planning.
A 2010 decision by the highest court in Liechtenstein, in favor of one of our clients’ Liechtenstein trust, reaffirmed that offshore asset protection is still sound, legal and totally effective. The trust funds were administered and controlled by a licensed, bonded, qualified and reputable trustee in Liechtenstein. The trustee and the trust assets were outside the reach of U.S. court jurisdiction. The client’s creditor was forced to commence a new lawsuit in Liechtenstein, at great effort and expense. That creditor ultimately lost and was even forced to pay our client’s legal fees. Our client’s assets remain absolutely safe and secure in the Liechtenstein trust.
What If You Still Have a Non-Disclosed Foreign Account?
If you are the owner of a foreign account which has not been properly reported to the IRS, what are your options now?
Option One: come forward now. In 2012, the IRS re-launched its Offshore Voluntary Disclosure Program (OVDP), and the program still remains open. The penalties are higher under the OVDP than under the prior offshore disclosure opportunities. Still, criminal prosecution is usually avoided if you come forward before you are caught. In addition, the penalties are much higher outside the OVDP in the event you are caught by the IRS. Thus, if you have not entered the Offshore Voluntary Disclosure Program, you may still come forward; you will pay penalties, but the penalties will still be significantly lower than if you don’t come forward and the IRS catches you. In that case, jail time for criminal tax fraud is also a frightening possibility.
However, the IRS can “close the door” on the opportunity to voluntarily disclose a foreign financial asset. Under the most recent terms of the OVDP, the IRS merely has to announce that account holders at any specific bank under investigation are precluded from making a voluntary disclosure. The significance is that U.S. clients can no longer wait for an announcement of a John Doe Summons or a treaty request before they decide to come forward. The door to come forward can be closed by the IRS much earlier and without warning. That is a new variable in the opportunity to make a voluntary disclosure. It increases the risk of prosecution and it creates more immediate pressure to come into tax compliance. Timing, one again, is everything, and the IRS can close the door at anytime.
But some people will not voluntarily come forward. They do not want to disclose their offshore accounts, and they do not want to give any portion of their foreign assets to the IRS. What can they do?
Option Two: convert your account to a tax-compliant structure. We have long counseled the use of tax-compliant strategies to minimize U.S. taxation of foreign accounts. We also advise clients on the legitimization of non-compliant offshore assets. We counsel clients regarding the proper steps to transform a non-compliant offshore account into one that complies with current U.S. laws. Although we cannot erase a non-compliant past, we can counsel on full compliance going forward. Such steps may significantly reduce the risk of detection and prosecution.
Option Three: do nothing and hope that the IRS does not discover your account. You would be relying on past promises of banking secrecy as a means of future protection. However, as the events of recent years have proven (see above), foreign banking secrecy no longer exists. We need only look to UBS’ 2009 disclosure, Liechtensteinische Landesbank’s 2012 disclosure, the 2013 agreement with Switzerland, Credit Suisse’s current intention to disclose thousands of names of Americans with accounts they thought were protected under so-called banking secrecy, or the proliferation of tax information exchange (TIE) agreements between the U.S. and numerous foreign tax havens. Moreover, in 2014, FATCA will come into effect, whereby foreign banks will begin to report bank data to the IRS. In light of this new world order, sooner or later the IRS will likely find your foreign account and then it will be too late.
Even if you somehow remain “under the radar”, any attempts to access the foreign funds could raise “red flags” and thus your foreign assets are essentially inaccessible. This “do nothing” strategy is not recommended.
We do recognize that making a formal voluntary disclosure would include paying a penalty, and we recognize that this penalty, although much less than civil and criminal tax fraud penalties, may still be quite onerous. The question thus becomes: are alternatives available to come into IRS compliance, and, at the same time, to also avoid the OVDP penalty?
We do not believe that everybody with foreign assets should automatically rush to enter the OVDP and pay the high penalties. The OVDP, with its “one size fits all” penalty, is not always the best, or only, course of action in all offshore cases.
We examine whether a client might benefit from the Mitigation Guidelines of the Internal Revenue Manual. Assuming no offshore tax evasion, no prior FBAR or civil tax fraud penalties, and no criminal taint associated with the offshore funds, we may be able to argue for lower FBAR penalties under the Mitigation Guidelines.
While we normally advise against “quiet” disclosures: (i.e., submission of amended tax returns now reporting previously unreported foreign income, along with FBAR forms, outside the OVDP), it may be possible to achieve compliance by filing retroactive FBAR and other disclosure forms, without a formal OVDP submission, and without paying the full OVDP penalty.
It must be cautioned that this course of action is very fact specific. We must address the particular facts of the client’s foreign assets, the past non-compliance, the client’s reported income, the amount of unreported foreign income and the tax loss to the IRS. Not everyone with foreign assets should avoid the OVDP, but not everyone with foreign assets should enter the OVDP. We can examine the facts, assess the risks, and discuss alternative strategies.
Failing to remedy a non-compliant offshore account puts you at serious risk of harsh penalties in the event of discovery, including IRS criminal prosecution. As recent events have proven, discovery is very likely. Contact us before the IRS finds you.
Noteable 2013 Offshore Tax Counsel
During 2013, we had the opportunity to provide legal advice and tax counsel with respect to the following:
• To date, we have represented taxpayers in making compliant over $100 million in foreign assets, including bank accounts, real estate and businesses around the world.
• We advised foreign entrepreneurs and families in countries including Kazakhstan, Turkmenistan, Russia, Germany, Belize, England, France, Switzerland, Liechtenstein, Hong Kong, Israel, Mexico, Argentina, Latvia, India and China on U.S. tax matters.
• We provided tax counsel to a Cayman Islands takeover target, owned by an Irish company, that was being acquired by the Walt Disney Company.
• We advised U.S. citizens living in Canada, Panama, Israel, Singapore, Thailand, Spain, Switzerland, Denmark, Monaco and Italy on U.S. tax compliance and expatriation. We have also advised one of the wealthiest families in India regarding expatriation by U.S. family members.
• We counseled taxpayers on IRS compliance outside of the formal Offshore Voluntary Disclosure Program, including “opting out” of the OVDP.
• We advised foreign purchasers of U.S. real estate on how to avoid the “FIRPTA” tax (Foreign Investment in Real Property Tax Act) via special trusts.
• We advised a U.S. financial services firm on the structuring of foreign loans.
• We advised a U.S. manufacturer and importer in the sale of a significant minority interest in the company.
• We advised a German entrepreneur on pre-immigration U.S. tax planning.
Complacency Is The Enemy of Good Asset Protection Planning
The 2008 federal case U.S. v. Grant illustrated the effectiveness of a foreign asset protection trust, even in protecting assets from the IRS, and even under the challenges of repatriation and contempt of court orders. Since 2008, however, Ms. Grant became careless and sloppy. She ordered the foreign trustees to make cash transfers to her, totaling more than $500,000, as well as to a foreign account that she controlled, and to accounts in her children’s names that she controlled. The IRS discovered these transfers and in 2013, a federal judge held Ms. Grant in contempt of court and ordered her to turn over the funds to the IRS, along with future distributions from the trust.
Superficial commentators may claim that in the end the Grant trusts failed because the IRS got some of Ms. Grant’s money. A more accurate analysis is that the trusts did not fail; they remained intact but Arline Grant sabotaged them by becoming complacent and sloppy. The trustees could have, in their own absolute discretion, distributed funds to Ms. Grant’s children, who were secondary beneficiaries of the trusts (in 2008, the trustees refused to comply with the court’s order to repatriate trust funds to Ms. Grant because that would violate their obligations to the secondary beneficiaries). The children were not defendants in the IRS proceeding against Ms. Grant. They would have been free to use those funds for whatever purpose they wanted, including the support of their aged mother. This would not have violated the repatriation order issued against Ms. Grant and there would have been no contempt. The offshore trusts worked fine; Arline Grant failed by forgetting how the trusts were supposed to work and by shortcutting the process. This case demonstrates that effective asset protection planning requires ongoing attention and proper maintenance.
It should also be noted that millions of dollars remain protected in the offshore trusts, outside the reach of Ms. Grant’s adversary, the IRS, after years of litigation. The funds that were reached by the IRS (approximately $200,000 out of millions) were jeopardized due to Ms. Grant’s own actions. Finally, notwithstanding the arguments on Ms. Grant’s contempt, she never went to jail, nor was fined nor penalized.
New IRS Offshore Reporting Requirements
We wish to again remind clients of new IRS reporting requirements with respect to foreign assets.
In 2011, the U.S. Treasury Department issued new regulations regarding Form TD 90-22.1, the Report of Foreign Bank and Financial Accounts (“FBAR”). FBAR filing now applies to foreign annuity policies and foreign life insurance policies with cash surrender value that are owned by U.S. taxpayers, and to some U.S. beneficiaries of foreign trusts. The 2013 FBAR will be due June 30, 2014 and no extensions are permitted, even if you get an extension for your other tax returns.
The new FBAR regulations are in addition to the already applicable disclosure requirements, e.g., Forms 3520, 3520A, 5471, 8621, Form 1040 Schedule B “check the box”, etc.
In addition, the recently enacted Foreign Account Tax Compliance Act (FATCA) now applies additional IRS reporting requirements, including new IRS Form 8938, Statement of Specified Foreign Financial Assets, that will disclose foreign financial assets with an aggregate value in excess of $50,000. Form 8938 also applies to other foreign financial assets that are not “accounts”, like investment real estate. Form 8938 applies to offshore assets owned during 2013. Form 8938 will be due, along with Form 1040, by April 15, 2014.
As we have advised, it is crucial to preserve the integrity of your offshore planning and be tax-complaint. Contact us to assist you with offshore tax compliance issues.
Antigua Trusts and Trustee Changes
In 2007 and 2008, we advised the Government of Antigua on Antigua’s asset protection, trust, foundation and LLC legislation. In February 2009, the Antigua International Trust Act, International Foundations Act and International LLC act, all of which were drafted by Rubinstein & Rubinstein, became law. Since then, we have utilized the new Antigua laws on behalf of numerous clients, whose assets are protected in Antigua.
The new laws offer the world’s most secure and confidential environment for offshore asset protection, wealth preservation and tax minimization. The new laws make it nearly impossible for foreign creditors to reach assets protected by Antigua trusts or foundations. The statutes include a very short statute of limitations for creditor claims and limit a creditor’s ability to prove fraudulent conveyance claims. In addition, the legislation contains strong protections against asset repatriation, which prevent foreign courts and creditors from reaching assets protected in Antigua. As a result, Antigua is a premier jurisdiction for offshore asset protection.
While we believe that Antigua offers excellent asset protection laws, during 2013, for economic reasons, one of the trust companies that serviced our clients in Antigua announced that it would exit the trustee business.
If you have a trust in Antigua, and your trustee has advised it will no longer act as trustee, we can assist you. We are advising clients regarding alternative trustees, alternative asset protection jurisdictions, and re-domiciliation of their trusts to new jurisdictions. We have relationships with reputable trust companies in various foreign jurisdictions.
Also in 2013, Kenneth Rubinstein’s chapter on Antigua and Barbuda private foundations was published in Private Foundations World Survey, edited by Johanna Niegel and Richard Pease, Oxford University Press, 2013. Ken’s chapter contains detailed information on Antigua as an offshore jurisdiction, Antigua’s foundation law (which Ken wrote), foundation governance, asset protection issues, taxation issues, as well as discussion of forced heirship and divorce.
Please contact us to discuss any of the above Offshore developments.