If You Have an Unreported Foreign Account, You Really Should Be Thinking about Tax Compliance

 

If You Have an Unreported Foreign Account,
You Really Should Be Thinking about Tax Compliance

by Asher Rubinstein, Esq.

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.

Conclusion

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.

Update: Changes in the Offshore Banking World

Update: Changes in the Offshore Banking World
by Asher Rubinstein, Esq.

We take this opportunity to update readers about recent developments in the Offshore world. Readers are reminded that the IRS Foreign Account Voluntary Disclosure Program expires very soon, on September 23, 2009.

Austria
Austrian bank confidentiality laws are written into Austria’s constitution, which had resulted in a higher level of secrecy.  Amending those constitutional secrecy provisions requires a two-thirds vote of the Austrian Parliament.  A proposal to loosen those secrecy laws failed in July.  Thus, it appeared that Austria might be the last European holdout.

However, on September 1, the Austrian parliament voted, by the required two-thirds majority, to relax Austria’s constitutional bank secrecy regulations.  We have not yet read an official summary, but we have read reports that under the new laws, information will be released to foreign authorities for civil, criminal or administrative tax inquiries (i.e., including civil audits).  Specific taxpayer names must be named.  Presumably, John Doe summonses (a/k/a “fishing expeditions”), such as the summons at issue in the recent UBS case, will not be honored.   However, this is not definite, pending release of the actual amendments.  Austria’s recent legislation was enacted in order to get Austria off of the OECD’s “grey list”.

Liechtenstein
In September, 2009, Liechtenstein signed a tax information exchange agreement with Germany.  The agreement follows the OECD model exchange of information agreement, which eliminates the distinction between tax fraud and tax avoidance.  The agreement will take effect in 2010.

Likewise, in August, 2009, Liechtenstein signed a tax accord with the United Kingdom.  Under the agreement, British taxpayers with non-compliant accounts in Liechtenstein must come forward and report those accounts to the UK tax authority, or else Liechtenstein will close those accounts.

Liechtenstein signed a tax information exchange agreement with the United States in December, 2008.

While these changes mean that Liechtenstein will no longer be a safe haven for undeclared funds or accounts which are otherwise not tax compliant, Liechtenstein still remains one of the top jurisdictions for tax compliant asset protection from civil creditors.

Switzerland
Following weeks of three-party negotiations between the US Department of Justice, UBS and the Swiss Government, the parties reached a settlement which ended the civil litigation in federal court.  Pursuant to the settlement, UBS will release approximately 4,500 names of American account holders to the US Government.  The account holders will be able to utilize the Swiss legal process to appeal the disclosure of the information, but must disclose their appeal to the U.S. Justice Department.  IRS investigations, and civil and criminal charges are certain to follow.  Despite reassurances from Swiss government and banking officials that Swiss privacy laws remain strong, it is clear that the once-sacrosanct Swiss banking secrecy is seriously weakened, if not entirely undone.

France
Following the U.S., which signed a Tax Information Exchange (TIE) agreement with Switzerland in June, France signed a tax treaty with Switzerland in August, 2009. The new tax treaty between France and Switzerland adopts the latest OECD standards on financial transparency.

Days after the French-Swiss tax agreement was signed, it was reported that Switzerland divulged the identities of some three thousand French citizens with Swiss accounts that may not be tax-compliant. Two points are particularly intriguing about this latest development. First, the information divulged by the Swiss is reported to be precise and particular, containing names, account numbers and dollar amounts. Second, the provision of this information appears to be quick and relatively effortless. Compare, for example, two rounds of litigation (civil and criminal), months of motions and court proceedings, and months further of settlement negotiations between the U.S., UBS and the Swiss Government, which led to the disclosure to the IRS of names of Americans with Swiss accounts. France obtained the information from Switzerland with comparative ease.

Monaco
Monaco had been perhaps the most secretive offshore tax haven. For this reason, we’ve speculated that Bernard Madoff may have hidden the proceeds of his fraud in Monaco. However, on September 8, 2009, Monaco and the U.S. signed a TIE. Pursuant to that agreement, the US will be entitled to request banking and financial information in criminal tax investigations and civil tax audits.

Canada
Canada is following the US lead on pressuring UBS to release the names of account holders.  It is believed that some Canadians are on the list of the 4,500 names which UBS will provide to the US in order settle the legal action against UBS.  Like the US, the Canadian government is offering an amnesty for taxpayers to come forward with non-compliant foreign accounts.

Connecticut
The Connecticut Attorney General has asked the federal government for information on whether any taxpayers from Connecticut are on the UBS list.  With many hedge funds headquartered in Connecticut, this might prove to be a lucrative target for Connecticut tax investigators.  We fully expect other states to follow suit.

Conclusion
What does this all mean?

It means that you should have no expectation of secrecy vis-a-vis the U.S. government regarding a foreign bank account.  If you have a foreign bank account that is not tax-compliant, now is the time to come forward and take advantage of lowered penalties and the promise of no criminal prosecution for tax fraud.  The IRS Voluntary Disclosure Program expires very soon – on September 23.  Please read “Do You Have a Foreign Bank Account?

Of course, it is legal for US taxpayers to have foreign accounts, and there are many good reasons for doing so, including Asset Protection.  But the foreign accounts must be tax-compliant, which means: (1) properly reporting the existence of the accounts to the government, and (2) paying taxes on income earned in those foreign accounts.  Provided that these obligations are met, the offshore accounts are tax-compliant and, if held in an offshore asset protection trust, will offer unparalleled asset protection from future creditors.

Please contact us  for additional information regarding the Voluntary Disclosure Program, asset protection or other tax questions.

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