Credit Suisse, More Secret Bank Accounts and the Israeli Connection

In 2014, Credit Suisse pleaded guilty in U.S. federal court to facilitating tax fraud by Americans via secret bank accounts in Switzerland.  This was among the largest guilty pleas ever by a foreign bank, and Credit Suisse agreed to pay $2.6 billion in fines to the U.S. and New York State.  (Our previous report from 2014 is here, along with a Bloomberg Businessweek article that quoted Asher Rubinstein in 2014.)  Now, Credit Suisse is again facing similar allegations, this time for the bank’s “Israel desk” facilitating tax fraud by Israeli-Americans.

The current accusations stem from the Department of Justice prosecution of Dan Horsky, who held joint U.S. and Israeli citizenship and kept millions of dollars in cash and stock accounts at unreported Credit Suisse accounts in Switzerland.  Mr. Horsky pled guilty, cooperated with DOJ and provided information about Credit Suisse that could result in a new prosecution or punishment of Credit Suisse.  Following the 2014 guilty plea, a new prosecution will likely have severely negative results for Credit Suisse and other U.S.-Israeli taxpayers with unreported secret bank accounts at Credit Suisse and other banks.

We have written extensively about non-compliant foreign accounts in Switzerland, Israel and other jurisdictions around the world.  There is a limited opportunity to bring such accounts into U.S. tax compliance, but only if the IRS does not already know about the accounts.  If Credit Suisse, as part of an investigation, settlement, fine or penalty, reveals the names of its account holders to DOJ, it would be too late for the account holders to make a pre-emptive disclosure in order to avoid prosecution, severe penalties and even jail.  Banks have routinely disclosed the identities of their account holders in order to settle charges of facilitating tax fraud, including UBS, Credit Suisse and Bank Leumi.

If you have unreported foreign accounts, commonly known as secret bank accounts, contact us to discuss your options.

Please also see the following related articles:

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

Should Everyone with Undeclared Foreign Assets Make a Voluntary Disclosure to the IRS? Are there Less Costly Alternatives to a Voluntary Disclosure?

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

IRS Targeting Undeclared Accounts in Israel for Tax Fraud

Offshore Tax Reporting Requirements and the 2016 FBAR due April 18, 2017

Annual tax season is upon us, and we remind readers of important tax reporting requirements that must be met with respect to foreign assets.

  1. “Check the Box” on IRS Form 1040, Schedule B

If you had signature authority or a financial interest (e.g., ownership) in a foreign financial account (including a bank account, securities account, brokerage account, etc.) at any time during 2016, you must “check the box” on your IRS Form 1040, Schedule B, Part III, Line 7.  If your foreign account(s) were valued at more than $10,000 in the aggregate, you must also “check the box” on line 7 regarding the FBAR form, FinCEN 114 (see item 5, below).  This requirement is applicable to taxpayers who had beneficial ownership of, or signature authority or other authority over, such financial accounts in a foreign country.  Even if you closed the accounts during 2016, you must still “check the box” if you maintained the accounts during any part of 2016.  If you received a distribution from, or were the grantor of, or a transferor to, a foreign trust or foreign foundation, you must “check the box” on Line 8 and also file IRS Form 3520.

  1. Report Foreign Income

In addition to “checking the box” on IRS Form 1040, Schedule B, U.S. taxpayers must report all income (including interest, capital gains, dividends and pension distributions) realized during 2016, on IRS Form 1040.  If you held investments in foreign mutual funds or hedge funds, you may be required to file additional tax forms applicable to “PFICs” (Passive Foreign Investment Companies) for tax year 2016 (e.g., IRS Form 8621).  If you received rental income from foreign real estate or realized gains from the sale of foreign real estate, you must declare it.  You may be eligible to deduct real estate expenses and real estate taxes paid to a foreign tax authority.  In many cases, if foreign income was taxed in a foreign country, you may be able to get a credit for foreign taxes paid.  Even so, all foreign income should still be declared.

  1. IRS Form 8938

IRS Form 8938, Statement of Specified Foreign Financial Assets, first introduced in 2012, is yet another IRS form to report foreign bank, brokerage accounts and other foreign financial assets (including interests in offshore trusts and corporations, bonds, foreign mutual funds, foreign annuity and insurance policies).  IRS Form 8938 is due with your annual tax return (April 18, 2017, unless you obtain an extension).

  1. Additional Forms for Entities (Foreign Trusts, Foreign Corporations, etc.)

If you had an interest in a foreign entity such as a foreign trust or foreign foundation, and/or during 2016 you received assets from the a foreign entity, then you may also be required to file IRS Forms 3520 and 3520A.  Please contact us for a copy of our memorandum about this issue.  If you had an interest in a foreign corporation, and the foreign corporation is deemed to be a “Controlled Foreign Corporation” (CFC), then IRS Form 5471 is also due.  These forms are usually due with your income tax return (IRS Form 1040, due April 18, 2017).

  1. The FBAR – due April 18, 2017

This year, 2017, is the first year that the deadline for the FBAR, Report of Foreign Bank and Financial Accounts (FinCEN Form 114), is the same as the deadline for submission of income tax returns (1040s), for calendar year 2016.  The FBAR must be filed by taxpayers who had beneficial ownership of, or signature or other authority over, foreign financial accounts, including bank and securities accounts, if the aggregate value of such accounts exceeded $10,000 at any time during 2016.  The FBAR also applies to foreign insurance policies, annuity policies, retirement plans and other financial products.  Recent authority also extends the FBAR to on-line gambling/gaming accounts.  If you participated in the IRS Offshore Voluntary Disclosure Program (OVDP), Streamlined procedures or submitted retroactive FBARs, you should ensure ongoing compliance by timely submitting the 2016 FBAR.  If the accounts existed at any point during 2016, then the FBAR must be submitted by April 18, 2017.  Note that the FBAR is now known as FinCEN Form 114, and must be filed electronically.  This year, also for the first time, a taxpayer may obtain an automatic extension to file the FBAR.  The extended due date is the same as one’s extended income tax deadline (October 15, 2017).

  1. Strategic Concerns

If you have not yet filed an application for the OVDP or submitted a Streamlined application, or if your application is pending at the IRS, or you are undecided as to whether or not to make a disclosure, you may want to consider requesting an extension for your 2016 tax returns and FBAR.

You may request an extension for filing your income tax return by filing IRS Form 4868.  Note that this is an extension to file the tax return, not pay tax due.  You still need to pay your tax liability by April 18, 2017, while you have until October 15, 2017 to file your tax return and FBAR.  This means that your voluntary disclosure strategy needs to be formulated prior to reporting to the Government the existence of foreign accounts via the FBAR, Form 8938, etc.

Conclusion

Please ensure that your offshore assets are tax compliant by adhering to the ongoing reporting and tax requirements.  If you have any questions or would like our assistance in formulating a disclosure strategy or in preparing the 2016 FBAR, please feel free to contact us.

 

 

 

 

Currency is Virtual, but Real Time is Ticking for Voluntary Disclosure of Virtual Currency

virtual money  In the latest step by the IRS to address taxation issues in the digital on-line economy, the IRS has filed its first enforcement against convertible virtual currency, targeting tax abuse of “Bitcoin” transactions.  On November 20, 2016, a Federal Court in California authorized the IRS to issue a “John Doe” summons to Coinbase, Inc., a web-based global digital currency wallet and platform.  The IRS has in the past successfully used the John Doe summons to obtain information from financial institutions (e.g., UBS, HSBC and Cayman Islands banks) for a broad class of U.S. clients who are not individually named but who the IRS has reason to believe have utilized the financial institution to improperly evade tax.  The John Doe summons seeks records from 2013 through 2015 for any Coinbase user with a US address, telephone number, e-mail domain, etc., and all records related to disbursement of funds to any user.  In 2014, the IRS issued Notice 2014-21 describing how various income recognition and other US tax principles apply to virtual currency transactions.  In that Notice, the IRS clarified that virtual currencies are “property” subject to income tax, capital gains tax, etc.

Omission of income from virtual currency transactions or failure to file, especially in relation to offshore transactions or use of foreign accounts, could result in criminal charges related to tax evasion, filing a false tax return and failure to file the FBAR (FinCen Form 114).  Additional charges can include conspiracy to defraud the government.  Even innocent or negligent non-compliance can subject a taxpayer to the assessment of tax, interest and severe civil penalties.  Taxpayers have a limited time period remaining to voluntarily disclose virtual currency accounts and transactions, to correct prior non-compliance, avoid criminal prosecution and usually receive more lenient treatment than in a criminal or civil enforcement proceeding or audit.

Once the IRS obtains information on Coinbase’s users, the IRS will follow with civil tax audits, FBAR audits and criminal investigations.  Other virtual currency platforms, such as Localbitcoins, Kraken and ItBit may receive similar summonses for transactions with Bitcoins and its more recent competitor Ethereum.  The IRS offers opportunities to come into compliance before the IRS obtains information about unreported assets (virtual or actual) and income, including the Offshore Voluntary Disclosure Program (OVDP) and Streamlined Filing Compliance Procedures for taxpayers to disclose digital currency transactions, income and accounts.  A voluntary disclosure also provides the opportunity to calculate, with a reasonable degree of certainty, the total cost of resolving open tax issues.  Time is of the essence to voluntarily report such information before the IRS obtains information pursuant to John Doe summonses, FATCA (the Foreign Account Tax Compliance Act), TIE (Tax Information Exchange) Agreements, etc.  Anyone who has income as a result of transactions through Coinbase, Inc. or any other virtual or digital platforms, or unreported virtual or digital currency assets, should contact Rubinstein & Rubinstein, LLP immediately for a consultation.

Do You Still Have an Undisclosed Foreign Account?

If you are the owner of a foreign account or other foreign financial asset that has not been properly reported to the IRS, what are your options now?

Option One: come forward now.  The IRS Offshore Voluntary Disclosure Program (OVDP), still remains open.  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.  You may be caught because of FATCA, an investigation, an audit, an information request to a foreign bank, a subpoena upon a foreign bank, or another person’s disclosure of account info.  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.  In some cases, depending on the background facts, the penalties for an undisclosed foreign account may be as little as 5 percent or even zero, provided that the IRS doesn’t already know about your offshore assets.

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.  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 foreign 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, foreign banking secrecy no longer exists.  Moreover, FATCA is now in effect, whereby virtually all foreign banks 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.  Clearly, we do not recommend this “ostrich” strategy.

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.  In addition, if your background facts meet certain requirements, the “Streamlined” voluntary disclosure procedures may be appropriate, and would offer significantly lower penalties.

Every client has different facts.  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 that may reduce or even entirely eliminate IRS penalties.

Contact us to discuss your options regarding foreign accounts.

 

 

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.

 

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