The year 2017 was another epic year in the offshore world due to the leaks of confidential offshore financial information known as the “Paradise Papers” and the fallout from the 2016 leak of offshore data known as the “Panama Papers”. In addition, in 2017, more countries began to report offshore financial information to the IRS under FACTA (the Foreign Account Tax Compliance Act). Also in 2017, 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.
A. Further Erosion of Offshore Bank Secrecy and Encouraging Tax Compliance
– In 2017, the “Paradise Papers” were leaked, exposing the financial affairs of people and corporations around the world. This followed a similar leak in 2016 known as the “Panama Papers”. Recent fallout from the Panama Papers has included resignations of the leaders of Pakistan and Iceland and the conviction of international soccer star Lionel Messi for tax fraud.
– 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 2017, the IRS and DOJ continued to investigate and prosecute many U.S. taxpayers with undeclared offshore assets. S. taxpayers with undeclared foreign accounts in Switzerland, Cayman, Belize, India, Israel, Singapore, Panama and even Canada have been targeted.
– During 2017, multiple federal court decisions examined whether taxpayers “willfully” (i.e., intentionally) failed to report their foreign assets. In general, courts have sided with the government against the taxpayers. The lesson is to properly report all foreign assets that are subject to reporting, including even foreign assets that did not generate income.
– In 2017, most Swiss banks continued to provide account information to the IRS. In return for deferred prosecution, these Swiss banks paid fines to the U.S. and revealed 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.
– All reputable countries are agreeing to the exchange of tax information and banking transparency. In 2017, Greece and Kuwait joined over one hundred other countries agreeing to report foreign assets to the IRS, including Singapore, Luxembourg, Austria, 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.
– In 2017, Israeli banks continued to freeze many accounts of U.S. persons, until the account owners signed IRS Forms W-9 disclosing their social security numbers and provided evidence of U.S. tax compliance. S. persons with Israeli accounts now face two challenges: access to their money, and IRS compliance. Israel has become amongst 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.
– Following Credit Suisse’s 2014 guilty plea for facilitating tax fraud via “secret” Swiss accounts (like UBS) and payment of a $2.6 billion fine, in 2017 Credit Suisse was hit with new allegations, this time for the bank’s “Israel desk” facilitating tax fraud by Israeli-Americans.
– In light of the above events, many clients have retained us to make their foreign accounts and other assets tax-compliant. The Offshore Voluntary Disclosure Program (OVDP) and “Streamlined” procedures are still in effect (although the IRS warns that it may close the programs at any time). We have represented clients with accounts and assets on every continent (except Antarctica), brought them into IRS compliance and avoided prosecution. 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.
– Clients should bring their accounts into tax compliance on the state level as well. Some states, such as New York and New Jersey, 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.
B. What If 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 avoided and penalties are lower than if the IRS gets your name from 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. In some cases, the penalties may be as little as 5% 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 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 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. 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.
Please contact us to discuss offshore tax compliance issues.