IRS Announces Dozens of Additional Offshore Tax “Facilitators”; Offshore Penalties to Increase after November 15, 2016

Throughout 2016, the IRS and Department of Justice (DOJ) have continued to aggressively pursue offshore tax fraud investigations of many foreign banks in countries across the world.  Moreover, according to the DOJ Tax Division, DOJ is “now fully staffed [with] 370 attorneys and 500 employees to pursue the department’s priorities, including offshore enforcement.”  Now, more than ever, U.S. taxpayers are subject to the risk of criminal prosecution and various financial penalties if they fail to report foreign assets.

Taxpayers may, however, eliminate these risks by voluntarily becoming tax-compliant through the IRS’s Offshore Voluntary Disclosure Program (OVDP), but they must do so before the IRS learns about the unreported foreign assets.  There are many ways for the IRS to learn about unreported foreign assets.  The Foreign Account Tax Compliance Act (“FATCA”), a U.S. law passed in 2010, requires foreign banks and financial institutions to automatically report to the IRS (without IRS subpoena or request) information regarding accounts held by Americans.  Over one hundred countries around the world and many thousands of foreign banks have agreed to report financial information to the IRS rather than face the penalty of 30% withholding on U.S. source income.  The IRS has also learned about unreported foreign assets via TIE (Tax Information Exchange) Agreements, “John Doe” summonses, “Nova Scotia” summonses, MLATs (Mutual Legal Assistance Treaties) and from other friendly governments which share information.  The IRS has multiple sources of information around the world.

If, however, the IRS does not already have information about a taxpayer’s foreign account, that taxpayer can make a preemptive disclosure to the IRS in exchange for lower penalties.

In exchange for immunity from criminal prosecution and myriad penalties, taxpayers accepted into the OVDP will only pay back taxes owed (including interest and an “accuracy” penalty) and a “miscellaneous” penalty on the highest aggregate value of their foreign financial accounts.  Generally, under the OVDP, this miscellaneous penalty is 27.5% of the highest asset value during the last eight years and is generally much lower than the penalties that the IRS would impose if the IRS learned about the unreported foreign assets.  However, the OVDP penalty increases to 50% if, at the time the taxpayer makes a voluntary disclosure, the financial institution where the account is held is already under investigation or is negotiating a settlement with the IRS or DOJ.  The IRS has published a list of the banks giving rise to the 50% penalty.  The list is known colloquially by tax lawyers as the “naughty bank” list.

The list of foreign “facilitators” of U.S. tax fraud subject to the increased 50% penalty continues to grow.  This month, the IRS added forty-seven individual facilitators to the list of banks and institutions triggering the higher 50% penalty.  The new names on the “naughty list” are individual bankers, lawyers, trustees or financial advisors who assisted their U.S. clients in hiding assets and income from the IRS.  Although these forty-seven new facilitators were added in October 2016, taxpayers can still avoid the higher penalty associated with these facilitators if taxpayers make a voluntary disclosure by November 15, 2016.  After that date, the penalty will jump to 50%.  Because the IRS and DOJ continue to add to the list of institutions subject to the increased penalty, the longer a taxpayer waits to come forward, the more likely they are to be subjected to the 50% penalty.

The IRS and DOJ’s continued persistence in attacking offshore banking “secrecy”, combined with the reach of the Foreign Accounts Tax Compliance Act (FATCA) and inter-governmental cooperation, makes it almost certain that the IRS will discover taxpayers’ undeclared foreign assets.  Therefore, now is the time to consult with U.S. tax counsel on the best ways to come into IRS compliance, while minimizing exposure and ensuring continued access to the foreign funds.


Liechtenstein’s Disclosure of Bank Information to U.S. Department of Justice

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 – –

– – 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.

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