2016: The Offshore Year in Review

Offshore account

The year 2016 was an epic year in the offshore world due to the leaks of confidential offshore financial information known as the “Panama Papers”.  In addition, in 2016, more countries began to report offshore financial information to the IRS under FACTA (the Foreign Account Tax Compliance Act).

Also in 2016, the IRS and U.S. Department of Justice (DOJ) continued to successfully attack offshore banking “secrecy”, moving beyond Switzerland to other foreign jurisdictions.  “Going offshore” for the purposes of hiding money from the IRS is now impossible.  Going offshore for asset protection from civil creditors and for tax minimization is still viable and effective, but must be tax-compliant.


Further Erosion of Offshore Bank Secrecy and Encouraging Tax Compliance

  • In 2016, the International Consortium of Investigative Journalists (ICIJ) released a massive amount of once-confidential offshore information known as the “Panama Papers”.  The files included sensitive foreign banking information, including identities of owners of offshore accounts, secretive corporations and other entities established by Panamanian law firm Mossack Fonseca.  Also in 2016, ICIJ released data from the Bahamas including names of directors, shareholders and “nominees” of shell companies, trusts and foundations in the Bahamas.  These most recent breaches of offshore secrecy followed the 2013 release of information, also by ICIJ, regarding offshore accounts in the British Virgin Islands (BVI) and Singapore, the 2008 theft of banking data at HSBC in France, and the 2006 leak at LGT Bank in Liechtenstein.  The lesson, once again, is that hacking, leaks and whistle blowers are as significant a threat to banking secrecy as laws such as FATCA (the Foreign Account Tax Compliance Act) and inter-governmental cooperation and exchange of information.  Another lesson is that offshore asset protection should not — indeed, cannot — be dependent upon “confidentiality” and “secrecy”, simply because offshore “secrecy” no longer exists.
  • During 2016, the IRS and DOJ continued to investigate and prosecute many U.S. taxpayers with undeclared offshore assets. U.S. taxpayers with undeclared foreign accounts in Switzerland, Cayman, Belize, India, Israel, Singapore, Panama and other jurisdictions have been targeted.  In 2016, the IRS collected a $100 million penalty from a U.S. taxpayer who hid his Swiss account.
  • In 2016, most Swiss banks settled with DOJ and reported accounts with a U.S. nexus.  In return for deferred prosecution, these Swiss banks are paying fines to the U.S. and revealing the identities of their American account owners.  Clients of these banks who have not already come into IRS compliance can make a voluntary disclosure of these accounts, but will pay increased penalties in return for no criminal exposure (but not if the IRS already has their names!).  Swiss banking secrecy, seriously weakened since DOJ forced UBS to disclose its U.S. clients in 2009, is now extinct.  Moreover, now the Swiss banks report to the U.S. without advance warning to their U.S. clients.  New legislation in Switzerland imposes penalties on a Swiss bank or bank employee who is aware of a U.S. request for information and then notifies the U.S. account owner prior to transfer of the requested information.
  • All reputable countries are agreeing to the exchange of tax information and banking transparency.  In 2016, Singapore implemented FATCA.  In 2015, Luxembourg began exchange of bank depositor information.   Likewise, Austria, the last remaining EU member holdout, agreed to share banking data.   During 2016, over 100 countries (and hundreds of thousands of foreign banks and other financial institutions)  have agreed to sign on to FATCA and automatically report foreign account and income data to the IRS, including: India, Cyprus, Singapore, Liechtenstein, Switzerland, Barbados, Bahamas, Hong Kong, Brazil, Jersey, Guernsey, Cayman, etc.  If you have financial ties to foreign countries, you must address IRS compliance for foreign accounts and assets.  The fact that a foreign bank has no branches in the U.S. is now irrelevant.
  • The reach of the U.S. Government to foreign banks is undeniable.  In 2016, Bank Julius Baer settled with DOJ, paying a fine of $547 million.  Also in 2016, two Cayman Islands financial institutions pleaded guilty to conspiring to hide millions from the IRS in Cayman accounts.  The IRS is investigating HSBC, the Swiss Kantonal banks, Pictet, Bank HaPoalim, Mizrahi Tefahot and banks in the Caribbean.  During 2016, the IRS focused on Panama, Singapore and the Cayman Islands.  DOJ also issued summonses to U.S. banks for information on U.S. correspondent accounts used by owners of foreign accounts to access funds.  Banks in Switzerland, Israel, India, Singapore and the Caribbean are currently under investigation.  We expect more banks, in other countries, to be targeted in 2017.  Again, the fact that a foreign bank has no branches in the U.S. is now irrelevant.
  • In positive news, the IRS issued recent guidance on FBAR penalties that seems to indicate a trend toward lower penalties for both willful and non-willful failure to file the FBAR.  The new penalty structure allows for a single penalty, rather than multi-year penalties.  In addition, the penalties should not exceed the value of the foreign account.  The new guidance is applicable to cases currently in audit.
  • Recent appellate court cases all uniformly have held that foreign bank statements must be handed over to the IRS regardless of any Fifth Amendment claim against self-incrimination.  This means that the IRS can compel, via Information Document Request (IDR) or subpoena, a taxpayer or his bank to provide his offshore account records even if those records are 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.
  • In light of the above events, many clients have retained us to make their foreign accounts and other assets tax-compliant.  We have represented many clients in Offshore Voluntary Disclosure Programs (OVDP) introduced by the IRS in 2009, 2011, 2012 and 2014.  The 2014 OVDP is still in effect (although the IRS warns that it may close the program at any time).  We have represented clients with accounts and assets on every continent (except Antarctica), brought them into IRS compliance and avoided prosecution.  In 2014, the IRS changed the terms of its OVDP, and also began new “Streamlined” voluntary disclosure procedures for non-willful conduct.  The Streamlined procedures have greatly reduced penalties (5% for U.S. residents; 0% for non-residents).  We can advise you on which program is best for you.  The penalties within the OVDP are usually less than if the IRS discovers the foreign account via audit, investigation or information the IRS receives from a bank or foreign government.
  • Within the OVDP, the penalty is 27.5% of the highest value of the foreign asset(s).  However, this penalty increases to 50% if the foreign financial institution housing the foreign account is under investigation or is cooperating with DOJ/IRS.  There are approximately one hundred foreign banks on the so-called “naughty bank” list, most but not all in Switzerland.  On November 15, 2016, the “naughty list” increased to approximately one hundred and fifty.  The new additions are foreign “facilitators” of U.S. tax fraud, i.e., the foreign bankers, lawyers, trustees, investment advisors and other service providers who worked with U.S. clients to hide assets and income from the IRS.
  • Clients should bring their accounts into tax compliance on the state level as well.  Some states, such as New York, New Jersey and California, have formal programs for offshore accounts.  Other states, including Connecticut, had a formal program in the past, and we have been successful in applying the favorable terms of the past programs to current clients.  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 undisclosed offshore accounts, FATCA and new compliance burdens, many foreign banks have “fired” their U.S. clients and closed even compliant accounts.  In 2016, we assisted clients in keeping open their compliant foreign accounts, or locating new foreign institutions to take their business.  While many foreign banks no longer welcome U.S. account holders, we have relationships with foreign institutions which still service our clients’ tax-compliant accounts.

This year has been an unprecedented year both domestically and offshore.  We can assist you in navigating through the changing offshore world and advise you regarding offshore (and onshore) assets.

 

Foreign Accounts in Israel Heading Toward IRS Scrutiny: Are You Compliant?

We have previously written about Israel’s willingness to enforce the Foreign Accounts Tax Compliance Act (FATCA) on behalf of the IRS.  See, for example, my article “Israel Is Becoming the IRS’s Strictest Enforcer of FATCA” (Tax Notes International, Volume 75, No. 6, August 11, 2014).  Recent events in Israel further support that conclusion. The lesson is that if you have foreign financial accounts in Israel that are not in U.S. tax compliance, the window to come into compliance is closing rapidly.

Earlier this month, the Israeli Supreme Court rejected a challenge to the implementation of FATCA in Israel.  The plaintiffs in Israel argued that FATCA violated Israeli sovereignty and violated their individual privacy.  The Israeli Supreme Court rejected these arguments and thereby cleared the way for banks in Israel to report account information to the Israeli Tax Authority, which will then transmit the information to the IRS.  This most recent challenge to FATCA failed in Israel, following similar failed challenges in the Cayman Islands and Canada.

September 30, 2016 is the FATCA implementation date in Israel.  Any financial accounts in Israel belonging to a U.S. citizen or green card holder or with any connection at all to a U.S. person (including a U.S. telephone number or email address), will soon after be transmitted to the IRS.

Note that taxpayers still have thirty days to object to the inclusion of their banking information in the transmission from Israel to the United States under FATCA.  However, under U.S. law, such a challenge must be reported to the U.S. Attorney General.

It is not too late to bring Israeli assets and Israeli income (whether bank interest, investment gains, rental income, business income, etc.) into U.S. tax compliance.  However, every additional day of non-compliance only heightens the risk of discovery by the IRS because the transmission of information from Israel to the U.S. is imminent.  As long as the IRS does not already know about the foreign assets and as long as the taxpayer is not already under IRS audit or investigation, a taxpayer can come forward voluntarily, declare the foreign assets and pay a much lower penalty than if the IRS discovers the foreign assets or learns about the Israeli assets from the FATCA transmission.  Moreover, taxpayers whose non-compliance is deemed to “non-willful” (i.e., more benign, less “guilty” of intentionally hiding assets or income), the penalties are even lower (0% if the taxpayer resides abroad).

Please contact us for a consultation regarding U.S. tax compliance for offshore assets, whether in Israel or elsewhere. FATCA has now been adopted by 113 foreign countries, all of which will report account information and income data to the IRS.

 

Will Bank Hapoalim be the next foreign bank to fall to DOJ/IRS?

We are seeing signs that the US Department of Justice and the IRS are gearing up their investigation and possible prosecution of Israeli bank HaHapoalim for tax fraud.  The basis of such a tax fraud charge is that Hapoalim offered banking services to US taxpayers designed to hide accounts and income from the IRS.  In December 2014, another Israeli bank, Leumi, paid a fine of $400 million to DOJ and New York State to avoid criminal charges based on the very same conduct.  As part of this settlement, Leumi also gave the names of 1,500 account owners to the US government.  We’ve known for years that Israeli banks such as Hapoalim, Leumi and Mizrachi Tefahot were under examination by US authorities, much the same as Swiss banks, for offering “secret” banking services.  Now it appears that the US government investigation of Hapoalim is entering a more critical phase.

In recent weeks, we have seen the IRS investigators from the Criminal Investigations (CI) Division of the IRS request interviews of clients who had accounts at Hapoalim.  Such interviews are usually used to build a case against a foreign bank.  At the same time, Hapoalim is freezing accounts owned by American clients and is requesting clients sign and return IRS Forms W-9 and waivers of banking secrecy.  When banks do this, they usually do so before handing over files, documents and information about their clients to DOJ and IRS.  If the clients do not comply, their funds are frozen.

US taxpayers with accounts at Hapoalim must take action on two levels.  First, they must address whether their Hapoalim accounts are US-tax compliant.  If not, for instance, if the accounts were not disclosed on the FBAR form and/or IRS Form 8938, and/or if income (interest, dividends, capital gains, etc.) was not properly reported to the IRS, the clients should seek advice from US tax counsel on the various options to come into US tax compliance.  Second, the clients have to deal with the foreign bank and navigate through the forms requested, taking careful note of the risks and liabilities of the bank reporting the accounts and account owners to DOJ and the IRS.  Of course, un-freezing the funds at the bank is a crucial concern as well, but this goal must be addressed in tandem with the bank’s request for signed documents and waivers and the risk of the bank reporting the client to the US government.

We have experience in representing clients with accounts at Hapoalim, other Israeli banks, and banks around the world.  We have been successful in advocating on behalf of these clients, to rectify account freezes, obtain documents and information from banks, and advise clients on their options to come into US tax compliance.

If you have an account at Hapoalim or anywhere else in the world, contact us for a confidential discussion.

Please also see the following articles on this topic:

Did You Receive a Letter from a Foreign Bank, Urging You to Report Your Account?

With Israeli Bank Accounts Under IRS Scrutiny, Israel is Becoming the IRS’ Most Severe Enforcer of FATCA

The Next Wave of IRS Offshore Account Enforcement: Israeli Banks Under Scrutiny

 

 

The Offshore World in 2015: Further Erosion of Offshore Bank Secrecy and Encouraging Tax Compliance

During 2015, 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 and for tax minimization is still viable and effective, but must be tax-compliant.

• During 2015, the IRS and DOJ continued to investigate and prosecute U.S. taxpayers with undeclared offshore assets.

Switzerland agreed to a settlement with DOJ whereby Swiss banks began to report bank account data to the U.S. without a need for court orders or government-to-government treaty requests.  In 2015, dozens of Swiss banks settled with DOJ and reported accounts with a U.S. nexus.  In return for deferred prosecution, these Swiss banks are paying fines to the U.S. and revealing the identities of their American account owners.  Clients of these banks who have not already come into IRS compliance can make a voluntary disclosure of these accounts, but will pay increased penalties in return for no criminal exposure (but not if the IRS already has their names!).  Swiss banking secrecy, seriously weakened since DOJ forced UBS to disclose its U.S. clients in 2009, is now over.  Moreover, now the Swiss banks report to the U.S. without advance warning to their U.S. clients.  New legislation in Switzerland imposes penalties on a Swiss bank or bank employee that is aware of a U.S. request for information and then notifies the U.S. account owner prior to transfer of the requested information.

• All reputable countries are agreeing to the exchange of tax information and banking transparency.  In 2015, Luxembourg began exchange of bank depositor information.  Likewise, Austria, the last remaining EU member holdout, agreed to share banking data.  During 2015, over 100 countries, and over 170,000 foreign banks and other financial institutions have agreed to sign on to Foreign Account Tax Compliance Act (FATCA) and automatically report foreign account and income data to the IRS.  Most recently, India and Cyprus agreed to implement FATCA, joining Singapore, Liechtenstein, Switzerland, Barbados, Bahamas, Hong Kong, Brazil, Jersey, Guernsey, Cayman, etc.  If you have financial ties to foreign countries, you must address IRS compliance for foreign accounts and assets. The fact that a foreign bank has no branches in the U.S. is now irrelevant.

• The reach of the U.S. Government to foreign banks is undeniable.  The IRS is investigating HSBC, Bank Julius Baer, the Swiss Kantonal banks, Pictet, Bank HaPoalim, Mizrahi Tefahot and banks in the Carribean.  DOJ also issued summonses to U.S. banks such as Bank of America, 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 Caribbean are now under investigation.  We expect more banks, in other countries, to be targeted in 2016.  The fact that a foreign bank has no branches in the U.S. is now irrelevant.

• In 2015, Israeli banks froze many accounts of U.S. persons, until the account owners signed IRS Forms 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.  Israel has become the most vigilant of foreign countries in enforcing FATCA, to the extent that an Israeli banker may face criminal liability under Israeli domestic criminal law, for failing to abide by FATCA, a U.S. law.

• In positive news, in 2015, the IRS issued guidance on FBAR penalties that seems to indicate a trend toward lower penalties for both willful and non-willful failure to file the FBAR.  The new penalty structure allows for a single penalty, rather than multi-year penalties.  In addition, the penalties should not exceed the value of the foreign account.  The new guidance is applicable to cases currently in audit.

Recent appellate court cases all uniformly have held that foreign bank statements must be handed over to the IRS regardless of any Fifth Amendment claim against self-incrimination.  This means that the IRS can compel, via Information Document Request (IDR) or subpoena, a taxpayer to provide 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.

• In light of the above events, many clients have retained us to make their foreign accounts and other assets tax-compliant.  We have represented many clients in Offshore Voluntary Disclosure Programs (OVDP) introduced by the IRS in 2009, 2011, 2012 and 2014.  We have represented clients with accounts and assets on every continent (except Antarctica), brought them into IRS compliance and avoided prosecution.  In 2014, the IRS changed the terms of its OVDP, and also began new “Streamlined” voluntary disclosure procedures for less egregious conduct. The Streamlined procedures have greatly reduced penalties (5% for U.S. residents; 0% for non-residents).  We can advise you on which program is best for you.  The penalties within the OVDP are usually less than if the IRS discovers the foreign account via audit, investigation or information the IRS receives from a bank or foreign government.

• If you participated in one of the OVDP/OVDI programs and paid a penalty (20-50%), you should consider whether your conduct was “non-willful” so that you might qualify for a lower 5% penalty.  If so, you may be entitled to a refund of the higher penalty.  Contact us to explore this option.

• Taxpayers should bring their accounts into tax compliance on the state level as well.  Some states, such as New York, Connecticut, New Jersey and California, have formal programs for offshore accounts.  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 2015, 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.

Following its success against foreign banks and foreign banking secrecy, we expect the IRS in 2016 to continue to pursue offshore tax fraud investigations of many foreign banks in many foreign countries.  We also expect DOJ to continue its prosecution of U.S. taxpayers with non-compliant foreign assets.  If you have a non-compliant or undeclared foreign asset, we can help you bring it into IRS compliance.  If you are being investigated by the IRS, we can represent you, defend you and negotiate for lower fines and penalties and for civil, rather than criminal, prosecution.

Contact us for a confidential consultation regarding your offshore assets and tax compliance.

Israel Is Becoming the IRS’ Strictest Enforcer of FATCA, by Asher Rubinstein, published in Tax Notes International

Asher Rubinstein’s article, Israel Is Becoming the IRS’ Strictest Enforcer of FATCA, has been published in Tax Notes International, Volume 75, Number 6 (August 11, 2014).

Please click here for a PDF of the article.

For our other articles on Israeli bank accounts and the IRS, please see the following:

The Next Wave of IRS Offshore Account Enforcement: Israeli Banks Under Scrutiny

Israeli Accounts on the IRS Radar: More Offshore Prosecutions

IRS Targeting Undeclared Accounts in Israel for Tax Fraud

Did You Receive a Letter from a Foreign Bank, Urging You to Report Your Account?

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