2018: The Offshore Year in Review

The year 2018 continued the trend of evaporation of offshore financial secrecy and IRS enforcement against unreported foreign assets. In 2018:

• The IRS continued to target U.S. taxpayers with non-compliant assets, sending out audit letters, criminally investigating and then prosecuting multiple taxpayers for failing to declare their foreign assets and income.

• The IRS also targeted “quiet disclosures” (i.e., not making a voluntary disclosure through proper channels but only submitting amended tax returns or FBARs), and those taxpayers who began but did not complete the IRS Offshore Voluntary Disclosure Program (OVDP).

• In 2018, the IRS discontinued the OVDP, which had been in effect since 2009. However, there are still opportunities to bring offshore accounts and assets into IRS compliance, while avoiding criminal charges and more onerous penalties. For example, the Streamlined Procedures and Delinquent Informational Return procedures are still open and available. Please contact us to discuss how to come into compliance after the OVDP has closed.

• All reputable countries have agreed to the exchange of tax information under FACTA (the Foreign Account Tax Compliance Act) and banking transparency, including Switzerland, Israel, Singapore, Luxembourg, Austria, India, Cyprus, Liechtenstein, 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 addition to FACTA, countries are cooperating with each other and sharing information among governments, as they crack down on tax avoidance by their own citizens. For instance, in 2018, German authorities raided offices of Deutsche Bank to obtain information on the bank’s facilitation of tax fraud. In one 2018 court case, the IRS assisted the French tax authorities in pursuing taxes due to France.

• Mossack Fonseca, the law firm in Panama which set up thousands of foreign entities and accounts for people around the world, ceased operations and its principals were indicted. These 2018 events followed the 2017 leak of the “Paradise Papers” and 2016 leak of the “Panama Papers”, both of which exposed the financial affairs of people around the world who relied (unsuccessfully) on claims of offshore secrecy. 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.

• In 2018, corporate registries in the Cook Islands, Malta and Samoa were leaked, exposing the offshore dealings of, among others, pop stars Bono and Shakira.

• The lesson, once again, is that hacking, leaks and whistle blowers are as significant a threat to banking secrecy as laws such as FATCA 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.

• 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 2018, 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. U.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.

• 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.

The lesson from the above is that “going offshore” for tax secrecy is foolish, risky and inadvisable. Going offshore for asset protection from civil creditors and for tax minimization is still viable and effective, but must be tax-compliant. Please contact us for more information.