How and Why to Bring a Foreign Account into Tax Compliance Now, by Asher Rubinstein, published on AccountingToday.com
Voluntarily Disclose Your Offshore Accounts, or Else
By PAUL SULLIVAN @ The New York Times
Published: August 26, 2011
IN the debate over federal taxes, there is one potential revenue source with few defenders: people hiding money offshore. While there are legitimate business and investment reasons for keeping an account outside the United States, there are no legal reasons not to report those accounts – and pay taxes on the income they earn.
Everyone should know this, but that makes the Internal Revenue Service’s current program of voluntary disclosure intriguing. The program came about after a similar one in 2009 drew in some 15,000 formerly undeclared accounts. But after it officially ended, thousands more came forward, flooding the I.R.S. enforcement system.
So it made sense from an I.R.S. perspective to offer a second round of disclosure, which began in February and ends on Sept. 9. (The deadline, originally Aug. 31, was extended Friday because of Hurricane Irene.)
Yet the structure of this program has given pause to people who haven’t declared offshore accounts. The penalties are steeper – up to 25 percent of the value of the assets – and they’re assessed on the highest value of those assets over the last eight years.
The Justice Department, which prosecutes tax evasion cases, is making sure people know that the penalties are real. Earlier this month, it announced that a California man named Robert E. Greeley had pleaded guilty to filing a false income tax return that concealed $13 million in two offshore accounts at UBS in Switzerland. Mr. Greeley paid a $6.8 million penalty for his failure to file a report of foreign bank accounts.
The penalty could have been worse. Mr. Greeley had set up two shell companies in the Cayman Islands to hide his ownership of the accounts. When someone willfully seeks to evade taxes, as he did, the penalty can be as high as 50 percent of the account value for every year it existed. (A separate fraud penalty can also be levied.)
“Some people will say, ‘I didn’t have my account at UBS so they’re not going to find out,’ ” said Warren Whitaker, a partner in the individual clients department at Day Pitney in New York. “The reality is the world is shrinking, and people who think they can squeak by and they won’t get caught are kidding themselves.”
So regardless of how the rest of us may feel about tax evaders, what should someone with an offshore account do? There are two options: join the program or go it alone and take your chances. Here’s a look at the two options.
VOLUNTARY DISCLOSURE The main benefit of the second round of the I.R.S.’s offshore voluntary disclosure initiative is that people who come forward will not face criminal charges. They will owe a lot of penalties, but these may be less than if they were caught. (While the program officially ends on Sept. 9, the I.R.S. has said taxpayers who make a good-faith effort to comply may be able to file for an extension.) There are three groups of people for whom this program makes a lot of sense.
The first is people who inherited money from a relative in another country and kept it there. The penalty for inherited money is 5 percent of the account value, and paying this would save the person from a lengthy negotiation over a penalty that might end up being more. But there is one caveat: if, say, the person moved the inherited account from Italy, where the relative lived, to a bank in Switzerland, the I.R.S. could use that move as reason to increase the penalty to the full 25 percent because it was no longer a passive account.
In the second group are people who put the money offshore in better times and need it now. Gone are the days when banks would quietly accept large sums of money wired in from offshore accounts. Today, banks are required to file a suspicious activity report if money appears to be coming in from an undeclared account.
“They can’t just call their banker in Geneva and say, ‘Can you wire-transfer me $150,000?’ ” said Asher Rubinstein, a lawyer in New York who specializes in offshore tax issues. “So they’re saying, ‘Let me clean it up, make it compliant, and bring it here.’ “
The third group is people who willfully hid money offshore to avoid paying taxes. If they are caught after the voluntary disclosure program ends, they could face penalties worse than Mr. Greeley’s.
NEGOTIATING The big difference from the last voluntary disclosure program is that this one is levying penalties on all assets kept abroad, not just financial assets.
“The first time around, they learned some advisers told people to switch to smaller banks not subject to I.R.S. scrutiny, while others said it was just on financial accounts so take the money out and buy a chateau in France,” said Paul Behling, a senior partner at the law firm Withers Bergman in New Haven.
This is where the I.R.S.’s pitch for people to come clean can be a tough sell and why some people are choosing to take their chances and negotiate independently of the program. In going it alone, the taxpayers may end up spending hundreds of thousands of dollars in legal fees, but that could be worth it to arrive at a settlement far less than a 25 percent cut.
The process is going to be long, complicated and expensive. And as Jim Medeiros, a partner in PricewaterhouseCooper’s private company services practice, pointed out, people going this route had better call their lawyer, not their accountant. Armed with attorney-client privilege, a lawyer can put out a feeler to the I.R.S. and gauge the potential merits and risks of complying with the voluntary program, negotiating or doing nothing, without identifying the client.
Douglas H. Shulman, the I.R.S. commissioner, said people should not think that they can simply amend a tax return. “If it’s someone who feels they have a very compelling case, they can come in, opt out of the program and get an audit,” which could produce a settlement less costly than the voluntary program would call for, he said. “The key here is not to just try to slide in under the radar.” Either way, the I.R.S. goal is to get individuals back into the system as continuing taxpayers.
Where the situation is particularly vexing is with so-called accidental Americans – people with green cards who did not know they had to report their worldwide income, or foreign nationals who worked in the United States but still maintained accounts in their home countries.
Mr. Whitaker gave the example of someone who earned $15,000 a year in interest on a $1 million checking account that was opened in Switzerland before he moved to the United States. Under the program, the person could be liable for a $250,000 penalty on the account’s value, instead of on the amount of tax that went unpaid on the interest.
“The program works for people who were willful, who structured their transactions, who hid the existence of the accounts or knew about the rules and didn’t file – they shouldn’t opt out because the willful penalties are quite severe,” said Jim Mastracchio, co-chairman of the tax controversy practice at Baker Hostetler, a law firm in Washington. “Not everyone is in that bucket.”
But for those who opt out of the program, determining what is owed comes down to a negotiation between the taxpayer and the I.R.S. And right now, the I.R.S. believes it has the upper hand. “We’re not letting up in pursuing offshore tax evasion,” Mr. Shulman said. “We’re getting better and better.”
Is Offshore Asset Protection Still Viable?
by Asher Rubinstein, Esq.
There has been much publicity over the last few years on the erosion of Swiss banking secrecy and the IRS offensive against “secret” foreign accounts, including jail sentences for Americans with non-compliant accounts at UBS and HSBC. Against this background, it is important to question whether protection of assets by moving them offshore is still viable. The answer is that offshore asset protection is not only still viable but remains extremely effective against civil creditors, provided that the offshore structure is tax compliant.
Fact 1: It Is Not Illegal for Americans to Have Foreign Assets
Americans can legally invest in foreign markets, own foreign real estate, own foreign businesses, and deposit their assets into foreign bank and brokerage accounts, provided that they disclose their foreign accounts to the U.S. government and pay U.S. tax on foreign income.
While there are some prohibitions against foreign investment by Americans (e.g., investing in or transacting with certain countries like Iran or North Korea), there is no prohibition against funding a foreign asset protection trust, opening a foreign bank account or buying a second home in a foreign country. While holding assets offshore remains legal, it is crucial to be tax compliant.
Fact 2: Foreign Asset Protection Does Not Rely on Secrecy
The IRS successes against UBS and Swiss banking secrecy, and prosecution of Americans with supposedly “secret” foreign accounts, demonstrate that foreign bank secrecy has been significantly eroded, if not destroyed . Yet, while we can no longer hide assets offshore from the IRS, we can still protect assets from private civil creditors and litigants.
Experienced and qualified lawyers who specialize in asset protection law understand that the effective protection of assets from civil adversaries does not involve “hiding” those assets. It is based upon the use of the laws of various jurisdictions, domestic and foreign, to legally protect assets while they are in plain view. Proper asset protection erects a crystal clear bullet-proof shield around your assets. In fact, the knowledge that your assets are legally protected often serves to discourage litigation or to force a settlement on favorable terms.
Fact 3: There Are Many Valid Reasons to Have an Offshore Presence
As our world becomes a smaller place, many people have a multinational presence. Business expansion into new markets or new sources of production is routine. Investment diversification into foreign currencies, foreign equities, funds and financial products is not only common, it may be financially wise. Many people are concerned about the viability or safety of the US financial system and the US dollar and have diversified their wealth outside the US. Maintaining foreign accounts and entities like foreign corporations, foundations or trusts may be useful for international business and prudent investment planning.
Our modern world is increasingly a web of domestic as well as foreign relationships, transactions and holdings. Sophisticated people understand the need for foreign options and foreign diversification. Among them is the use of foreign laws to protect hard-earned assets. Many people understand that their retirement plans in the US may provide for their later years, but that a protected nest-egg in a stable foreign country provides a greater level of assurance for wealth preservation.
Fact 4: Protecting Assets Offshore Is Legal and Effective, but You Can Have No Expectation of Avoiding Taxation
As noted above, placing assets in a foreign asset protection trust is legal and effective against future creditors. At the same time, it is crucial to recognize that while the assets are outside of the reach of creditors, they are not outside the reach of the IRS. Settling a foreign trust, for example, is legal and will safeguard your assets from creditor attack, but the IRS still considers trust assets to be your assets, and you will be obligated to declare and pay income tax on any gains in the foreign trust. Going offshore for asset protection is a legitimate strategy; going offshore to hide income from the IRS is foolish.
There exist effective, tax compliant offshore strategies to accomplish tax minimization. These strategies utilize tax-favorable treatment of foreign annuities and foreign life insurance . Preferential tax treaties between the US and foreign countries are also utilized for tax minimization. Asset protection is also a byproduct and addition benefit of these offshore tax strategies. Importantly, these strategies do not rely on secrecy.
Fact 5: Some Foreign Jurisdictions Are Better Than Others
There is no shortage of promoters of asset protection in a variety of foreign countries. You should chose a law firm that has years of offshore experience, that has analyzed the laws of various jurisdictions and has vetted the foreign trustees, attorneys, bankers and other service providers. Our experience has allowed us to chose the safest, most secure foreign countries and the most experienced and reliable foreign service providers. We have long-standing relationships with foreign bankers and trustees and we keep in the forefront of offshore developments and changes.
Notwithstanding the IRS successes against Swiss banks for aiding US tax fraud, offshore asset protection is still legal and still very effective, because proper offshore asset protection does not rely on secrecy or tax avoidance. In fact, having an offshore asset protection structure that is tax-compliant strengthens the asset protection, because it removes creditor leverage and removes tax non-compliance as a vulnerability to effective asset protection.
There have been many important recent developments regarding offshore banking. The cumulative result of these recent events is the continued eradication of offshore banking secrecy for accounts that are not tax compliant and the consequent increased risk of discovery and prosecution.
1. Additional Criminal Prosecutions For Undeclared Foreign Accounts
The US Department of Justice (DOJ) continues to criminally prosecute taxpayers with undisclosed foreign bank accounts. Please see our recent post here for details. This latest wave of criminal prosecutions appears to be timed to give additional incentive for taxpayers to take advantage of the IRS Offshore Voluntary Disclosure Initiative (OVDI), which runs until August 31, 2011.
Acceptance into the OVDI results in lower penalties and the avoidance of criminal prosecution. On the government’s side, it brings foreign funds back into the US tax system and avoids using governmental resources for investigating and then prosecuting the tax non-compliance. Thus, the OVDI can benefit both the government and the taxpayer.
2. Credit Suisse And Other Foreign Banks Under IRS And DOJ Investigation; HSBC and Bank Leumi Warn Clients To Become Tax Compliant
We have known for a long time that Credit Suisse, like UBS before it, has been the target of a US government investigation for assisting US clients in hiding foreign funds from taxation. This week, Credit Suisse revealed that it received a letter from the US Department of Justice officially alerting the bank that it is the target of a criminal tax investigation. Credit Suisse, along with Bank Julius Baer, Wegelin Bank and the regional Swiss Cantonal banks, are all under investigation for aiding and abetting US tax fraud.
In February 2011, four Credit Suisse bankers were indicted in the US for assisting Americans to hide income from the IRS. The Department of Justice stated that “the conspiracy dates back to 1953 and involved two generations of US tax evaders including US customers who inherited secret accounts.” The allegations also included a charge that a Credit Suisse banker suggested that non-compliant funds be transferred from Switzerland to a bank in Israel in order to avoid detection by the IRS. Tracing noncompliant funds from Swiss banks to Israeli banks is indicative of the expanding global scrutiny and effectiveness of the investigations. (For our article on Israeli banks under scrutiny, please click here.)
The investigations are not limited to Swiss banks. Banks of all sizes, in many other countries, are being targeted. HSBC is also facing similar allegations, and is the subject of a federal court summons to reveal the identities of account holders with undeclared accounts in India. (For our articles on Indian banks under scrutiny, please click here and here.) Also this week, HSBC sent a letter to its US clients urging them to bring their accounts into tax compliance. The letter provided details about the IRS Offshore Voluntary Disclosure Initiative. Last year, Bank Leumi, an Israeli bank, sent similar letters to its US clients with foreign accounts. Liechtensteinische Landesbank in Liechtenstein, Bank Leumi and Bank Hapoalim in Israel are also under investigation by the IRS and US Department of Justice.
Those are the foreign banks whose investigations are public. We have reason to believe that many additional banks in various foreign countries are also being investigated by the IRS for similar activities. To facilitate the investigations, the IRS has opened field offices in Australia, Panama, China and Hong Kong. From the many thousands of voluntary disclosures thus far, the IRS and DOJ have compiled an extensive database of foreign banks and individual bankers, attorneys, trustees and other service providers who are under investigation for facilitating tax fraud. DOJ prosecutes both the foreign service providers and the US account holders who did not disclose the foreign accounts.
In light of DOJ’s success in obtaining account information from UBS and the eradication of Swiss banking secrecy over the past few years, we anticipate that HSBC and Credit Suisse will have little ability to withstand a DOJ information subpoena and/or criminal indictment. This is underscored by the decision this week by the Swiss Federal Supreme Court (see 4. below) that the disclosure of secret UBS bank account data to the IRS in 2009 was lawful.
The resulting conclusion is that owners of non-compliant foreign accounts, whether at Credit Suisse or elsewhere, should apply for acceptance into the OVDI before they are discovered. The OVDI expires on August 31, 2011.
3. FATCA Reporting Requirements For Offshore Assets Are Delayed
The Foreign Account Tax Compliance Act (FATCA), which was signed into law in 2010 as part of the HIRE Act, imposes additional reporting requirements on US taxpayers with foreign holdings, and also obligates foreign banks to report account information to the IRS. FATCA’s reporting requirements were scheduled to commence in 2013. This week, the IRS announced a delay in the beginning dates of these new requirements. The new requirements will be phased in over 2014 and 2015.
It has been reported that these delays reflect the many negative comments received by the IRS on the new reporting requirements. Foreign banks and taxpayers alike have commented that these disclosure requirements are very burdensome. Many critics of FATCA predict that the new laws will result in many foreign financial institutions no longer doing business in the US, and a resulting decline in US investments from abroad.
4. Swiss High Court Affirms That UBS Revealing “Secret” Banking Information Was Lawful
Also this week, the Swiss Federal Supreme Court upheld the 2009 disclosure of UBS bank account information to US authorities, notwithstanding that the disclosure violated Swiss banking secrecy laws. The Swiss court ruled that the disclosure was lawful because it was necessary to avoid an economic catastrophe that would have ensued if UBS had not disclosed the account information.
Even if the Swiss high court had held the opposite way, i.e., that provision of account information to the IRS was improper, the incriminating information has already been in the possession of the IRS and US prosecutors for months, and has formed the basis for multiple prosecutions (see point 1, above). Had the Swiss court ruled the other way, it would have had no practical effect on these prosecutions or given the US defendants any relief. It might have, however, given the US account holders a cause of action to sue UBS in Swiss courts. But now, it appears that even that road is dead.
Further, this ruling should be scary to US taxpayers with accounts at Credit Suisse, Julius Baer, Wegelin, the Kantonal banks and other Swiss banks, because essentially, the Swiss high court has given its blessing to the end of Swiss banking secrecy.
5. No Settlement Between US And Switzerland On Offshore Banking
Last month, we wrote that the United States and Swiss governments were in negotiations toward ending US investigations of numerous Swiss banks for hiding assets from US taxation. Under such an agreement, the US would not prosecute the Swiss banks, and the banks would provide information to the US about Americans with non-compliant accounts and pay large penalties. This week, we learned that the negotiations have ceased after the US stated its lack of interest in pursuing a settlement.
Given the expanding offensive of the IRS and DOJ against Credit Suisse and other banks (see point 2, above), this latest twist is not surprising. Clearly, the US has significant leverage against Swiss banks. From over twenty thousand voluntary disclosures, the US has a mass of information implicating many Swiss banks and individual bankers for their roles in tax fraud. Credit Suisse has a significant presence in the US – – employees, branches and valuable assets within the US, plus a lucrative US banking license. The same US presence and vulnerability compelled UBS to settle with the US in 2009 and avoid criminal prosecution. With such momentum and continued leverage on its side, no wonder the US is flexing its muscles and walking away from a settlement.
6. Whistle Blowers Are Still A Threat To Offshore Accounts
We reported earlier this year that account information from Swiss bank Julius Baer had been copied by a Julius Baer employee and would be made public, via Wikileaks. This followed the purchase by the German government of supposedly secret account data from an employee of LGT Bank in Liechtenstein, and the provision of stolen HSBC data to the French government.
This week, it emerged that one disc containing the Julius Baer data was blank and the other disc did not contain incriminating bank data. Nevertheless, we’ve known for months that Julius Baer is already “on the radar” because many Americans accepted into the IRS Voluntary Disclosure Program have disclosed their Julius Baer accounts. For Americans who did not disclose their Julius Baer accounts, immediate disclosure via the OVDI is strongly advised. Once the IRS gets the name of an account holder from any source (audit, whistleblower, investigation or otherwise) a voluntary disclosure is too late and criminal prosecution is likely.
As a footnote, this week it was also revealed that Hans Kieber, the LGT banker who stole account data, sold it to the German government and has been in hiding ever since, recently testified to authorities in Australia about undeclared offshore bank accounts. As we’ve written, the revelation of bank account data by whistle blowers remains a serious threat to offshore bank secrecy.
The above developments further highlight the withering of offshore banking secrecy and the serious enforcement efforts by the IRS and DOJ against foreign banks and US taxpayers with noncompliant foreign accounts. The OVDI deadline is August 31, 2011. Bringing noncompliant foreign accounts into tax compliance is very strongly recommended.
This week, Anton Ginzburg, another taxpayer with a non-compliant account at UBS, plead guilty in a Federal Court in New York to criminally concealing his account and failing to disclose the account on the required FBAR form. This taxpayer faces a jail sentence of up to five years and a fine of approximately $1.5 million, constituting fifty percent (50%) of the value of the account during 2007. In fact, the law allows the government to impose a 50% penalty for every year that the account was non-compliant, although the pattern in recent criminal prosecutions is that if the defendant enters a guilty plea, the government imposes a 50% penalty for one year.
This potential jail sentence and monetary fine stands in contrast to taxpayers who voluntarily disclose their foreign accounts. A proper voluntary disclosure would avoid a criminal prosecution and jail time, and the fine would be capped at twenty five percent rather than fifty percent.
On June 28, Dr. Arvind Ahuja, another Indian-American taxpayer, was indicted in Federal Court in Wisconsin for failing to disclose his foreign accounts at HSBC India and the Channel island of Jersey. We have written at length about the particular focus that the government has on accounts in India owned by Indian-Americans. See our articles here, here and here.
Also in late June, taxpayer Kenneth Heller pled guilty in Federal Court in New York to failing to disclose his foreign account at UBS. His fine was close to $10 million and he faces a potential prison term of up to fifteen years. Mr. Heller’s case also involved his attempts to avoid detection by moving his foreign funds from UBS, which was under IRS scrutiny, to Wegelin, a smaller Swiss bank. However, as we know, many Swiss banks are under investigation for providing non-compliant accounts, including Wegelin, Julius Baer and the regional Cantonal Banks.
Also in late June, taxpayers Sean and Nadia Roberts pled guilty in Federal Court in California to failing to disclose their offshore accounts at UBS in Switzerland, as well as other accounts in Liechtenstein, Isle of Man, Hong Kong, South Africa and New Zealand.
Finally, also in June, taxpayer Robert Greeley was charged in Federal Court in California with failing to disclose a foreign account at UBS.
Comments and lessons from these latest prosecutions:
- This recent wave of criminal prosecutions for undeclared foreign accounts appears to be timed to incentivize taxpayers with such accounts to come forward under the Offshore Voluntary Disclosure Initiative, which runs until August 31, 2011.
- Accounts in various countries (not only Switzerland) are being targeted. Accounts in India (see above) and Israel are particular targets. Accounts of various sizes are being targeted. The IRS has opened field offices in Panama, Hong Kong, China and Australia to investigate offshore tax noncompliance. Efforts to move assets from large banks to smaller banks supposedly “under the radar” are ineffective and could result in additional criminal charges.
- Some of the taxpayers prosecuted for non-compliant foreign accounts utilized foreign corporations in attempt to obscure the true beneficial ownership of such accounts. As these prosecutions show, such a strategy is not effective. Using a foreign entity like a corporation, trust or foundation seems to draw even more anger by the IRS, as it exhibits an additional level of willful non-compliance and obfuscation of the foreign assets. However, even taxpayers whose foreign assets are in their own names and not in the names of foreign entities are being prosecuted. The lesson is that non-compliant foreign assets, whether in your name or the name of an entity, are vulnerable to investigation and criminal prosecution.
- Based on recent criminal prosecutions, plea deals and sentences, we can make the following rough conclusions:
Fight the IRS accusations at trial and lose: long jail sentences (e.g., ten years) and large fines.
Plead guilty to the IRS accusations and avoid a trial: shorter sentences, house arrest and probation, plus 50% penalty during one year (rather than 50% each year).
Voluntarily disclose the account: no jail, 25% penalty.
Reports are circulating that the governments of the United States and Switzerland are in negotiations toward ending US investigations of numerous Swiss banks for hiding assets from US taxation. Under this agreement, the US will not prosecute the Swiss banks, and the banks will provide information to the US about Americans with non-compliant accounts and pay large penalties. The US will then use the disclosed banking information to investigate and prosecute more Americans with undisclosed Swiss bank accounts.
This is reminiscent of the settlement agreed to by UBS in 2009. Under that agreement, the US dropped civil and criminal charges against UBS, which paid a fine of $780 million and provided once-“secret” banking data on 4,500 Americans with accounts at UBS. The information provided by UBS resulted in criminal charges against numerous US taxpayers who had UBS accounts that were not disclosed to the IRS.
It was the substantial presence of UBS in the United States that made UBS so vulnerable to US prosecution. With UBS branches in the US, employees in the US, substantial assets in the US, and a US banking license, the US Department of Justice (DOJ) had significant leverage over UBS and was able to coerce a settlement with UBS. Credit Suisse and Bank Julius Baer are likewise targets of DOJ investigations for providing similar “secret” bank accounts, and those banks´ similar presence in the US would likewise suggest that they would agree to a settlement under the terms currently being discussed by the Swiss and American governments.
An open issue is whether smaller Swiss banks, especially those without a presence in the US, would agree to these terms. It is possible that this will be a global settlement, since negotiations are at the governmental level and not with individual banks. The IRS might insist that the settlement cover all Swiss banks holding American accounts, including the smaller Kantonal and other banks without US assets or a US presence and would otherwise not be subject to IRS pressure to disclose accounts. This would dramatically increase the number of non-compliant accounts disclosed by the Swiss and would cover the flight of non-compliant accounts from UBS and large Swiss banks to smaller Swiss banks that occurred earlier in the IRS-UBS litigation.
US account holders at these smaller banks, which include the various Kantonal banks, should not consider themselves off the IRS radar. Even if these smaller banks do not avail themselves of the settlement, the American government still has significant tools to discover non-compliant accounts. These tools include a Tax Information Exchange (TIE) Agreement and a Mutual Legal Assistance Treaty (MLAT) between the US and Switzerland. Furthermore, US courts have issued “John Doe” summonses to foreign banks, most recently HSBC. These summonses demand banking information on a large class of unnamed Americans with accounts at the banks. In addition, banking data is also subject to theft by whistle blowers, who share the data with foreign governments. In recent years, theft of banking data occurred at LGT Bank of Liechtenstein, Julius Baer and HSBC. The recently enacted Foreign Account Tax Compliance Act (FATCA) also obligates many foreign banks to report information to the IRS. The cumulative end result is the death of offshore banking secrecy and an ever-wider IRS net exposing undeclared foreign accounts.
An agreement between the US and Switzerland would allow the Swiss banks to end the DOJ investigation and avoid prosecution. It would also free up US governmental resources; for example, the IRS would obtain information about US account holders without asking a court for a John Doe summons, and without proceeding on the diplomatic level with a TIE or MLAT. The banking data would be delivered to the IRS without a formal investigation, and the IRS could then devote increased resources to prosecuting Americans for tax fraud.
The agreement with the Swiss will likely serve as a template for other banks. For instance, HSBC is currently the target of a John Doe summons and IRS investigation for providing the same type of non-compliant banking services as UBS. The IRS is focusing on additional jurisdictions, most notably India, Israel, Panama, Hong Kong, Singapore and others. Such countries have even less banking secrecy than the Swiss, which suggests that banks in these countries would sign on to such an agreement and provide account information even faster than UBS. Similar agreements with other banks and other countries would, again, free IRS resources to focus on even more prosecutions against US persons with non-compliant foreign accounts.
Once these deals are finalized, the IRS will obtain foreign banking data with relative ease. There will thus be little incentive for the IRS to offer additional tax amnesties for US taxpayers with offshore accounts.
The resulting conclusion is that US taxpayers with undeclared foreign accounts, in Switzerland and elsewhere, should move quickly to take advantage of the current amnesty program, before the IRS learns of their accounts from other sources. The current opportunity expires on August 31, 2011. After that date, it is likely that the IRS will proceed against such account holders with relative ease, and with little mercy.
Asher Rubinstein’s article on IRS Crackdown on Offshore Accounts in India, published in Business & Economy Magazine (India): Banking, Finance and Markets.
Asher Rubinstein’s article, “The IRS Offensive Against Offshore Accounts: New Attacks and New Relief” published in Tax Notes International, Vol. 62, number 4
by Asher Rubinstein
Reprinted from Tax Notes Int’l, April 25, 2011, p. 293
In 2009 U.S. prosecutors achieved a staggering victory against UBS, forcing the largest Swiss bank to settle criminal and civil charges that it aided and abetted tax fraud by assisting Americans to hide funds from U.S. taxation. UBS also was compelled to disclose to the IRS the identities of thousands of Americans with formerly secret Swiss accounts. This was a stunning breach of hitherto ironclad Swiss bank secrecy. Yet since then, the IRS has criminally prosecuted only 30 Americans for hiding offshore accounts to escape taxation.
Contrary to the perception of calm since the UBS settlement, recent events make clear that the IRS is still very active in ferreting out undisclosed offshore assets. The IRS is investigating additional banks and other jurisdictions, and it is prosecuting more Americans with undeclared foreign funds. The IRS’s continuing efforts are buttressed by further erosions of bank secrecy by tax information exchange agreements between the U.S. and former tax haven jurisdictions, and by disclosures of offshore bank clients made by disgruntled bank employees. Also, the new Foreign Account Tax Compliance Act (FATCA) creates new reporting requirements for U.S. taxpayers and foreign financial institutions, which will provide more information to IRS investigators.
However, notwithstanding this continuing offensive against noncompliant offshore banking, the IRS has offered a new opportunity for Americans to bring their foreign accounts into tax compliance via the 2011 offshore voluntary disclosure initiative (OVDI).
Additional IRS Targets
In early April 2011, the DOJ asked a federal court in California to issue a John Doe summons against HSBC that asks for the names of U.S. taxpayers with accounts at HSBC in India. The John Doe summons is how the government began its attack against UBS, which led to UBS disclosing account holders’ identities to the IRS and ultimately the erosion of Swiss bank secrecy. In the summer of 2010, the DOJ sent letters to HSBC foreign account holders, advising them that they are the subjects of criminal investigations relating to unreported accounts in India and Singapore. The DOJ has prosecuted a Virginia surgeon and two Miami Beach real estate developers for undeclared foreign accounts with HSBC.
In early February 2011, the real estate developers, father Mauricio Cohen Assor and his son Leon Cohen-Levy, were each sentenced to 10 years’ imprisonment for utilizing undeclared foreign HSBC accounts and foreign entities such as corporations in Panama and the Bahamas to avoid U.S. taxation. While most of the earlier offshore tax fraud prosecutions resulted in plea bargains for more lenient punishment such as probation and home detention, the Cohens’ 10-year sentences resulted from the first court trial of the recent offshore account prosecutions. The use of intermediary entities (such as foreign corporations, trusts, or foundations) to obscure the true beneficial ownership of the underlying foreign bank account seems to draw the ire of the IRS even more than a foreign account held personally, although both types of noncompliant foreign accounts could give rise to criminal tax fraud charges.
There are also reports that HSBC is implicated in the recent criminal prosecution of Vaibhav Dahake, an Indian-American with undeclared accounts in India and the British Virgin Islands. While the criminal indictment against Dahake does not mention HSBC by name, it alleges that an ‘‘unidentified bank’’ operated a division called NRI Services that specifically marketed foreign banking services to Americans of Indian descent. According to the allegations in the indictment, the bank advised that accounts be opened in India because they paid higher interest rates; no U.S. tax forms or Social Security numbers would be required; and the accounts would not be taxed in India. Interestingly, the indictment details transactions with a total value of less than $200,000. This suggests that the government is sending a message that all noncompliant foreign accounts, large and small alike, are vulnerable to investigation and prosecution.
Other banks besides HSBC are also targets. In February 2011 the DOJ charged multiple bankers at Credit Suisse with enabling tax fraud via noncompliant offshore accounts. In December 2010 Deutsche Bank paid $553 million to settle tax fraud charges brought by the U.S. government. The charges related to tax shelters set up from 1996 through 2002 that were ultimately determined by the courts to be shams. Accounting firm KPMG was previously prosecuted for promoting these tax shelters. While sham tax shelters differ from unreported offshore bank accounts, the government’s efforts against Deutsche Bank indicate its growing initiative against banks that facilitate tax fraud.
There have also been reports that some clients of Swiss banks, when faced with the prospect of U.S. prosecution, disclosed to the IRS a portion of their funds at UBS, but moved other, undisclosed funds to smaller banks that were supposedly off the radar. The recent criminal prosecution of UBS banker Renzo Gadola, accused of advising and assisting Americans to evade taxes, now places those smaller cantonal (regional) Swiss banks firmly on the radar. The allegations are that Gadola utilized a small bank, Basler Kantonalbank, rather than UBS, in order to avoid detection. We can now add Basler Kantonalbank (and presumably other regional Swiss banks such as Zurich Kantonalbank) to the list of banks being investigated. Banks large and small and accounts of all sizes are vulnerable. Taxpayers should not believe that an account under a certain size is safe from discovery, nor is any bank, regardless of its size, off the radar.
Note that the cantonal banks do not have a U.S. presence. It was the substantial U.S. presence of UBS, and now HSBC, that made such banks vulnerable to U.S. prosecution. With U.S. banking licenses, multiple branches within the U.S., thousands of employees in the U.S., and billions of dollars in assets in the U.S., these banks are clearly within the jurisdiction of a U.S. court and susceptible to an adverse court judgment or order. UBS had to settle the tax fraud charges against it because the alternatives — seizure of its U.S. assets and revocation of its lucrative U.S. banking license — would have been catastrophic.
While the smaller cantonal banks do not have a U.S. presence, they are still subject to Swiss law, which now requires cooperation with the IRS. Following generations of Swiss bank secrecy, in 2010 Switzerland’s parliament changed long-standing Swiss bank secrecy laws to allow for cooperation and exchange of information with the IRS in both criminal and civil tax investigations. In 2009, Switzerland and the U.S. signed a new TIEA, which further eroded Swiss bank secrecy. The new agreement allows the U.S. greater access to Swiss banking records of American taxpayers, including records at the smaller cantonal banks.
Whistleblowers, Snitches, and Thieves
Bank employees handing over supposedly ‘‘secret’’ bank data is not new. In 1999 John Mathewson, the owner of Guardian Bank and Trust, a now-defunct Cayman Islands bank, was charged in the U.S. with money laundering. When Mathewson was arrested, he gave federal investigators bank records that contained information about American depositors at the bank who had evaded U.S. tax obligations. Mathewson gave up the bank data in return for leniency in his criminal sentencing.
In 2008 a renegade employee of LGT Bank in Liechtenstein stole data about client accounts and sold it to the German intelligence service in return for millions of euros. With that data, the German government prosecuted many prominent Germans for tax fraud. The German government also shared the data with other governments around the world. In 2009 an employee of HSBC provided bank account data to the French government. In 2010 Germany again purchased bank data, stolen by an employee of a Swiss bank. The DOJ was able to successfully prosecute UBS, and then UBS clients, because of information that had been disclosed by UBS banker Bradley Birkenfeld to the U.S. government.
Further Erosion of Banking Secrecy
The next bank to face DOJ action may be Julius Baer. It has been reported that this disclosure will be made via WikiLeaks. The banking data to be revealed comes, like the Guardian, LGT, UBS, and HSBC cases mentioned above, from internal bank sources — specifically, a disgruntled former employee of Julius Baer.
Irrespective of WikiLeaks, Julius Baer is already on the radar because many Americans accepted into the IRS voluntary disclosure program have disclosed their Julius Baer accounts. These account holders are now being interviewed by IRS investigators, presumably to build a case against Julius Baer, like UBS and HSBC. For Americans who did not disclose their Julius Baer accounts, immediate disclosure is strongly advised. Once the IRS gets the name of an account holder — from WikiLeaks or any other source (audit, whistleblower, investigation, or otherwise) — a voluntary disclosure is too late and criminal prosecution is likely.
Targets Beyond Switzerland
There are reports that IRS and DOJ investigators are also focusing on banks in Asia and the Middle East. Following the erosion of Swiss bank secrecy, large amounts of funds were reported to have been moved from Switzerland to Singapore. However, Singapore has taken steps to be removed from the OECD gray list of foreign tax havens and has discussed entering into an income tax treaty with the U.S. and other countries. In order to preserve its status as a major financial hub, Singapore has taken steps toward greater financial transparency. Also, as the HSBC investigation noted above illustrates, Singapore is very much under the watch of the IRS.
Following its success against UBS, the IRS has expanded beyond undeclared Swiss accounts to undeclared funds in other foreign jurisdictions. The IRS has opened or will soon open field offices in Panama, Australia, and China. TIEAs have been signed by all the former tax havens, including Liechtenstein and Monaco. While the IRS is intensifying its presence and its available tools around the world, it appears to be particularly concentrating on India and Israel.
New IRS Target: India
As noted above, HSBC is accused of having specifically targeted Indian-American clients and offered offshore banking services in India and Singapore. The John Doe summons against HSBC demonstrates that DOJ and IRS have moved beyond Switzerland, and India is now firmly a target for noncompliant offshore accounts. While UBS advised American clients that their accounts may be subject to exposure to the IRS, and therefore suggested preemptive disclosure, Americans with accounts at HSBC in India received letters from the DOJ in 2010, making it clear that the DOJ already had their names. In such a case, preemptive disclosure is impossible; the IRS will reject a voluntary disclosure if the taxpayer is already under investigation or if the IRS already has the taxpayer’s name (regardless of the source).
It appears that the stolen LGT bank data purchased by the German government (noted above) were also shared with the government of India. The Indian authorities have launched prosecutions of Indian citizens who had undeclared accounts outside of India. In 2010 India signed a protocol to the income tax treaty with Switzerland, and India is in the process of negotiating tax treaties with 65 countries. While there currently is no tax treaty between India and Liechtenstein, Liechtenstein has shown its new transparency by promulgating multiple tax treaties with other countries, including the U.S., and a future treaty with India is likely. But even in the absence of such a treaty, India already has names, thanks to the LGT affair. The LGT information is almost certainly in the possession of the IRS as well.
Another IRS Target: Israel
Some Americans feel comfortable not disclosing their Israeli bank accounts to the IRS because of Israel’s close ties with the U.S. They believe the IRS is reluctant to investigate Israeli banks. However, owners of accounts in Israel may soon feel the brunt of the next wave of the IRS crackdown on offshore banking.
Israel is in a unique situation in relation to the IRS because of ties between Israel and Jews around the world, including Jews who have inherited so-called Holocaust accounts. One example of a Holocaust account is an account established in Switzerland by European Jews before the Holocaust in an attempt to safeguard their assets from the rise of Nazi Germany. Another example is an account established after World War II by a Holocaust survivor in order to receive German reparation payments. In either case, tax avoidance was not the motivation behind the establishment of the accounts. (The same can be said of Greeks fleeing persecution in Turkey, who put their funds in Switzerland for reasons of safety and stability, or Egyptian Jews fleeing the military coup and dictatorship of Gamal Nasser, or various other refugees who put their money is Swiss banks to preserve and protect their assets in the face of persecution and upheaval.) Now, many decades later, their descendants who have inherited these accounts are in a position of unintended tax noncompliance because they were not aware of their obligation to annually report these accounts to the Treasury Department on Form TD 90-22.1, the ‘‘Report of Foreign Bank and Financial Accounts’’ (FBAR), even if no tax was due.
While Swiss bank secrecy laws presented a formidable challenge to the IRS before the UBS case, pursuing undisclosed accounts in Israel will not require nearly as much effort. The tax treaty between the U.S. and Israel enables the two countries to ‘‘exchange such information as is pertinent to . . . fraud or fiscal evasion in relation to the taxes which are the subject of this Convention.’’ Cooperation between the U.S. and Israel is routine in many matters, tax and otherwise. According to the Israeli Ministry of Justice, ‘‘The [Israeli government] has cooperated with requests from U.S. law enforcement in matters of financial crime.’’ Although this statement refers to Israel’s fight against money laundering, it is not a stretch to conclude that the ministry would cooperate with requests from the IRS in matters specifically pertaining to undisclosed bank accounts.
Also, the U.S. and Israel currently grant legal assistance to each other in criminal matters via a mutual legal assistance treaty (MLAT). The MLAT states that the U.S. and Israel ‘‘express their understanding that this treaty applies to . . . criminal tax offenses.’’ It is particularly noteworthy from an offshore banking perspective that for ‘‘serious [fiscal] offenses involving willful, fraudulent conduct,’’ the treaty even provides for the exchange of bank records.
It is not our conclusion that the IRS is specifically targeting Holocaust accounts. Indeed, while the OVDI penalty for offshore accounts is 25 percent, a specially reduced 5 percent penalty applies, in certain circumstances, to Holocaust accounts. We believe that the presence of undeclared assets in Israel (whatever their source, including the cash-heavy jewelry trade) presents a specific target to the IRS. Along these lines, in 2010 Israel’s Bank Leumi took the extraordinary step of sending letters to its U.S. customers, strongly advising them to disclose their accounts to the IRS. That Credit Suisse bankers allegedly advised clients to transfer funds to Bank Leumi also presents the IRS with a roadmap to Israeli accounts.
A Glimmer of Relief
In February 2011 the IRS announced its OVDI, mentioned earlier, which closely mirrors the 2009 offshore voluntary disclosure program (OVDP) with a few refinements. The new penalties are 25 percent, greater than the 20 percent penalty under the prior OVDP, yet less than the 50 percent penalty that the IRS has been imposing in recent criminal tax fraud prosecutions.
The new OVDI presents an opportunity for Americans
with foreign accounts who did not come forward under the 2009 OVDP but who still want to avoid criminal prosecution and bring their foreign accounts into compliance. As noted repeatedly, the IRS continues to target foreign accounts. Taxpayers are strongly advised to bring noncompliant foreign accounts into tax compliance in order to avoid discovery by the IRS, higher penalties, and criminal prosecution. In this new era of international transparency, decreased banking secrecy, cooperation and information between governments, and stronger enforcement efforts, offshore banking compliance is very highly recommended.
Asher Rubinstein was interviewed by CNBC Asia “Squawk Box”