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.Continue Reading
If You Have an Unreported Foreign Account,
You Really Should Be Thinking about Tax Compliance
If you have a foreign account that you have not declared to the IRS, you really should be giving thought to how to bring the foreign account into compliance now. It will only get more difficult to keep the account open, to access your offshore funds, and to keep the IRS from discovering the account. And, when the IRS does eventually discover the account, it will only get more expensive to correct the non-disclosure and defend against a tax fraud prosecution.
Foreign Banks Are Freezing and Closing Accounts and Limiting Access to Your Money
If you don’t bring the foreign account into IRS compliance, you will have problems trying to access the funds. Many foreign banks are simply freezing the accounts of Americans until the account holders provide signed IRS Forms W-9 or otherwise demonstrate evidence of U.S. tax compliance. If you provide a W-9 to the bank, the bank will likely share your identity and your banking information with the IRS.
We have had many clients tell us that their foreign bank has frozen their account, and they request that we intervene to get the bank to release their money. While we can often assist in that regard, the larger issue is: what are you going to do about the IRS finding the account?
In addition to freezing accounts, many foreign banks are simply closing the accounts of Americans, or of foreign nationals suspected of having a U.S. address or a U.S. tax nexus. These banks do not want to deal with the IRS and with U.S. compliance burdens. These banks are concluding, as a business matter, that it makes better sense for the banks to cease offering banking services to people with a U.S. nexus.
We have assisted clients in keeping open their compliant foreign accounts, and we have assisted other clients in locating new foreign banks to take their compliant foreign funds. If you have an undeclared foreign account, and your bank is telling you to leave, you will have to anticipate the successor bank asking the same sort of “know your client” and source of funds inquiries, and asking you to sign a IRS Form W-9. It is getting harder and harder to simply leave foreign Bank A and move the account to foreign Bank B. Very few foreign banks remain willing to take your non-compliant funds.
You Will Have Difficulty Getting Your Money Back to the U.S.
Wiring the funds back to the U.S. is not advisable. A sudden wire transfer of a large dollar amount into a U.S. account would likely lead to the receiving bank asking questions about the wire transfer, the source of funds, and whether the funds are tax-compliant. Banks will not ignore their due diligence and “know your client” obligations, no matter how friendly you might be with your banker. The compliance and legal risks to the bank are too significant.
Moreover, an inbound wire transfer could cause the bank to file an SAR (Suspicious Activity Report) with the U.S. Treasury Department, and there is no requirement that the bank even let you know that it is filing an SAR. Even if you try to deposit a foreign bank check and avoid a large wire transfer, the U.S. bank will likely ask the same questions.
Finally, even assuming that you can get your foreign funds safely back into the U.S., you still have to worry about the IRS discovering the past non-compliance when the funds were offshore. As discussed below, the IRS is interested in the past history of the non-compliant foreign account, even if that account is now closed.
Your Options Are Limited as to Where to Keep the Funds Outside the U.S.
As noted above, it will not be easy for you to simply find a new foreign bank, one that will overlook the fact that your funds are not U.S. tax compliant, one that will not ask you to sign a Form W-9, one that is not concerned about FATCA (the Foreign Account Tax Compliance Act) which will require the bank to report information to the IRS.
FATCA is a U.S. law, passed in 2010, which reaches overseas and requires all foreign banks and financial institutions to automatically report to the IRS (without IRS subpoena or request) information regarding their American client accounts. Essentially, every foreign bank becomes an agent of the IRS. If a foreign bank or financial institution does not agree to FATCA reporting, then the U.S. will penalize it by withholding significant amounts of U.S.-source income. Recently, many countries have signed on to FATCA, including Spain, Italy, Norway, Germany, Mexico, the UK, Ireland and Switzerland. Many other countries (some seventy five around the world) have announced that they are negotiating FATCA deals with the U.S., including South Africa, Singapore and Liechtenstein.
People suggest to us that foreign jurisdictions still exist which could act as shelters for non-compliant assets. We hear that certain countries are “the next Switzerland”. Since 2008, when UBS became the target of DOJ’s civil and criminal prosecution, the flow of funds exiting Switzerland for Singapore, for example, has been significant.
However, no reputable financial jurisdiction (including Singapore) would risk its financial reputation to harbor non-compliant accounts. Singapore makes a significant amount of money from legitimate international banking and would not jeopardize this by being “blacklisted” as an uncooperative tax haven, as it was a decade ago. To this end, Singapore has recently announced that it is in talks with the U.S. on a FATCA-type of agreement. In addition, a new Singapore regulation requires banks to identify all accounts that may harbor the proceeds of tax evasion, and close them. Failure to abide by this new law will result in criminal charges for the Singaporean bankers.
Virtually all reputable financial institutions around the world – – at least the credible, stable ones, i.e., places one would want to bank because of safety and stability – – will report to the IRS. Nations “off the grid” may welcome dollars, but one must ask whether depositing assets in an unsafe or unstable jurisdiction is a prudent move. Is it worth it to move money from the first world to the third world in order to avoid the IRS, if the risk of losing the money is significant?
Finally, even assuming that you find a new harbor for your foreign assets, there will almost certainly be a paper trail of where your assets went. The last bank statement from your prior account will show an outward transfer. That will be a road map for the IRS once it obtains the statement by subpoena, summons, treaty request or settlement agreement.
Closing the Account May Not be Enough
Merely closing a foreign account is not a viable solution, because DOJ and IRS never limit their investigations to only current accounts. In the case of UBS, DOJ’s John Doe Summons sought banking records back to 2000. In the case of Liechtensteinische Landesbank, DOJ requested records back to 2004. In the case of Julius Baer, the investigation goes back to 2002. DOJ’s request to Liechtenstein trust companies and other fiduciaries sought records back to 2001.
In other words, closing an account today does nothing to remedy the non-compliant past, and DOJ and the IRS focus on past non-compliance. In addition, a wire transfer or bank check from the foreign account to a U.S. account (or account elsewhere) creates an easy trail back to the foreign account, and also gives rise to due diligence, “know your client” and source of funds inquiries by the recipient bank. Using the non-compliant funds to buy real estate or other assets also creates a trail and does nothing to undo the non-compliant past, which will be the focus of the IRS investigation.
The Era of Bank Secrecy is Over
It seems that with every passing year, bank secrecy continues to decrease and the risk of discovery increases. In 2013, the following events occurred:
– Switzerland agreed to a settlement with the U.S. Department of Justice (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.
– Liechtenstein agreed to sign a global treaty allowing for increased bank transparency and automatic exchange of tax information. It is also expected that Liechtenstein will sign on to FATCA.
– All reputable countries are agreeing to the exchange of 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 2013 to share banking data.
– The U.S. Department of Justice has sent summonses and requests for banking information to the following: Bank Julius Baer, the Liechtenstein Foundation Supervisory Authority, CIBC First Caribbean International Bank, Bank of Butterfield, HSBC and others. DOJ is investigating many Swiss banks, Israeli banks, banks in Luxembourg, the Caribbean and elsewhere. IRS and DOJ are not stopping at Switzerland. U.S. investigators are paying particular attention to “leaver accounts”, i.e., the accounts of those people who leave Swiss banks in favor of banks elsewhere, in an attempt to continue to evade the IRS. It should be noted that under the 2013 Swiss-U.S. settlement agreement discussed above, Swiss banks are required to identify “leaver accounts” specifically, and report them to DOJ.
In 2014, foreign banks will begin to report information to the IRS under FATCA.
The Window of Opportunity to Come Into Compliance Could Close Anytime
It is possible to bring your foreign assets into tax compliance by disclosing the assets to the IRS before the IRS learns of those assets, and to participate in a partial amnesty program known as the Offshore Voluntary Disclosure Program (“OVDP”). If the IRS learns about your foreign assets (through any means, including from a foreign bank or foreign government, as a result of an audit or investigation, or even because of a whistle blower such as an ex-spouse or adversary), then the IRS will not accept your disclosure and the full weight of tax fraud penalties will apply, including criminal prosecution. If accepted into the OVDP, such consequences can be avoided, although back taxes, interest and penalties will be due.
However, at any time the IRS can “close the door” on the opportunity to voluntarily disclose a foreign financial asset and to participate in the OVDP. Under the most recent terms of the Voluntary Disclosure Program, 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 DOJ 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, once again, is everything, and the IRS can close the door at any time.
The common theme through all of the above is that if you have a foreign account or other asset that is not U.S. tax compliant, it will only get more difficult to keep the IRS from discovering the account, to maintain the account in a safe and secure institution, and to access your funds. Now is the time to consult with U.S. tax counsel on what to do about your offshore assets, how to minimize your exposure, how to bring the assets into compliance, and how to safely access your money.
We’ve written much about the ability of the IRS to discover unreported Swiss accounts, and we need not repeat warnings about criminal prosecution and onerous fines and penalties in the event that the IRS learns of undisclosed accounts.
What is new, however, is that the IRS will soon have direct, unimpeded, easy access to banking information from hundreds of Swiss banks. In a statement released by the U.S. Department of Justice (DOJ) and Swiss Federal Department of Finance on August 29, 2013, both sides reached an agreement whereby almost all Swiss banks will soon report to the IRS about Swiss accounts “in which U.S. taxpayers have a direct or indirect interest”, including accounts owned by U.S. persons, or where U.S. persons are beneficiaries, signatories, hold powers of attorney or have other incidents of ownership. In exchange for the provision of information to the IRS, the DOJ will not prosecute these banks as it did against UBS and Wegelin.Continue Reading
My last blog post discussed the disclosure of bank documents from Liechtensteinische Landesbank to the U.S. Department of Justice (DOJ). Today’s post offers additional comments as to why this is a significant event in terms of IRS enforcement and DOJ prosecutions related to offshore accounts.
The 2008 Liechtenstein-USA tax treaty was itself significant, because until that point, Liechtenstein offered very strong banking secrecy laws. However, in light of the events at that time – –
- DOJ success against UBS,
- erosion of Swiss banking secrecy laws,
- the OECD initiative against tax haven jurisdictions,
- the proliferation of tax information exchange agreements with many tax havens, and
- the theft of “secret” bank documents by an employee of Liechtenstein’s own LGT bank and sale to the German government
– – Liechtenstein saw the writing on the wall, so to speak, and realized that tax secrecy was a thing of the past and was no longer going to be tolerated by countries like the US, UK, Germany, etc.
However, while Liechtenstein agreed to tax information exchange and cooperation, Liechtenstein specifically did NOT agree to IRS “fishing expeditions” – – broad requests for information on a class of unknown taxpayers. Under the 2008 treaty, Liechtenstein was only to provide information if asked about a specific, known taxpayer identified by name. In other words “we are investigating John Smith, who we believe has an account at Bank XYZ” – that was an allowable request that would give rise to cooperation and exchange of bank information. “We want all records on all US taxpayers with accounts at Bank XYZ” – – that is “a fishing expedition” and would not give rise to cooperation and exchange of information under the treaty.
DOJ’s May 11, 2012 request to the Liechtenstein Tax Administration was not a specific request for information about known, named taxpayers. It was a broad request for unnamed, unknown taxpayers. And yet, the Liechtenstein Tax Administration is cooperating with this DOJ request.
Liechtenstein is cooperating with this DOJ request because, under U.S. pressure, and without any publicity, on March 21, 2012, the Liechtenstein Parliament passed an internal law and quietly amended the 2008 treaty, the result of which is that “fishing expeditions” are now allowed.
This is a game changer in terms of IRS/DOJ enforcement. It means that broad requests will now give rise to governmental assistance. It means that DOJ need not issue “John Doe” summonses, which require court approval, as DOJ did against UBS in 2008 and HSBC in 2011. Instead, DOJ can ask for, and presumably get, banking records quickly (in Landesbank’s case, one month), government-to-government. If Liechtenstein, formerly one of the world’s most secretive jurisdictions, can succumb to US pressure, it means that other countries will do so also.
Asher Rubinstein was interviewed in various European media outlets regarding the IRS and Department of Justice initiative against undisclosed Swiss bank accounts held by US taxpayers, and the recent Swiss court decision blocking the transfer of Credit Suisse information to US authorities.
- Der Standard, Austria (in German)
- Schweizer Fernsehen, Switzerland (in German)
- RTS (Swiss Radio & Television), Switzerland (in French)
- Tages Anzeiger, Switzerland (in French)
- Le Matin, Switzerland (in French)
- Romandie, Switzerland (in French)
- Sϋdostschweiz, Switzerland (in German)
- Blick, Switzerland (in German)
- Tio, Switzerland (in Italian)
We’ve written at length about the IRS moving past UBS and Swiss accounts and focusing on other banks world-wide. We’ve pointed out that non-compliant accounts in India are being targeted, see here.
On April 7, 2011, the Department of Justice (DOJ) asked a Federal Court in California to issue a “John Doe Summons” against HSBC which asks for the names of US taxpayers with accounts at HSBC in India.
Here are various reports:
What can we take away from this latest development:
1. The IRS crackdown is world-wide. Although traditionally, countries such as Switzerland, Cayman Islands, Jersey, Guernsey and various others were considered to be “tax haven” jurisdictions, the IRS investigation is broad and world-wide and now covers India. India, as we know, is an American ally with a stable democracy, a strong economy and is not known as a tax haven. Nevertheless, it is an IRS target.
2. As we’ve written, banking secrecy no longer exists. See our article, “The Death of Bank Secrecy”, here.
3. The “John Doe Summons” is an important, effective weapon for prosecutors to uncover once-“secret” banking information from foreign financial institutions. UBS settled civil and criminal tax fraud charges by DOJ, and Swiss banking secrecy ultimately ended, as a result of the John Doe summons served against UBS. It was once thought that without actual names of account holders and account numbers, prosecutors could not obtain information from foreign banks. The success of the John Doe summons against UBS proved otherwise. Now, a broad class of account holders, not identified specifically other than “Americans with accounts at HSBC”, are vulnerable to discovery and prosecution by the government.
4. Given HSBC’s sizeable presence in the US – – branches in the US, employees in the US, assets in the US and a lucrative banking license in the US – – it is clearly within the jurisdiction of the US courts. HSBC, like UBS before it, will likely cooperate and, sooner or later, provide the requested banking data to US authorities.
5. All of the above again goes to show that American taxpayers with non-compliant foreign accounts, whether in India or elsewhere, should take steps to bring those accounts into tax compliance. In February, the IRS announced a new Offshore Voluntary Disclosure Initiative (OVDI) that ends on August 31, 2011. Americans with non-compliant foreign accounts should take heed of the IRS and DOJ prosecutions and consult with a tax lawyer. If the IRS obtains the account information first (for example, as a result of a John Doe Summons, audit, investigation, whistle blower or otherwise), then a taxpayer’s disclosure will be considered untimely and will be rejected, in which case the full range of penalties will apply, including criminal prosecution. As we’ve advised in the past, see us before the IRS comes to you.