As the year comes to a close, we take this opportunity to remind our clients, colleagues and interested parties of several important issues that might impact upon their tax, estate and asset protection planning, to reflect upon a few significant developments in 2013, and to offer suggestions for effective year-end tax planning.Continue Reading
Should Everyone with Undeclared Foreign Assets Make a Voluntary Disclosure to the IRS? Are there Less Costly Alternatives to a Voluntary Disclosure?
We have written extensively about the erosion of foreign banking secrecy, IRS discovery of undeclared foreign accounts, and the IRS Offshore Voluntary Disclosure Program (OVDP) to come into tax compliance before the IRS discovers the foreign assets. However, entering the OVDP means that you will pay a 27.5% penalty on the highest aggregate value of the foreign assets. We recognize that this penalty, although much less than civil and criminal tax fraud penalties, is still quite onerous. The question thus becomes: are alternatives available to come into IRS compliance, and, at the same time, to also avoid the 27.5% penalty of the OVDP?
If You Have an Unreported Foreign Account, You Really Should Be Thinking about Tax Compliance
If You Have an Unreported Foreign Account,
You Really Should Be Thinking about Tax Compliance
If you have a foreign account that you have not declared to the IRS, you really should be giving thought to how to bring the foreign account into compliance now. It will only get more difficult to keep the account open, to access your offshore funds, and to keep the IRS from discovering the account. And, when the IRS does eventually discover the account, it will only get more expensive to correct the non-disclosure and defend against a tax fraud prosecution.
Foreign Banks Are Freezing and Closing Accounts and Limiting Access to Your Money
If you don’t bring the foreign account into IRS compliance, you will have problems trying to access the funds. Many foreign banks are simply freezing the accounts of Americans until the account holders provide signed IRS Forms W-9 or otherwise demonstrate evidence of U.S. tax compliance. If you provide a W-9 to the bank, the bank will likely share your identity and your banking information with the IRS.
We have had many clients tell us that their foreign bank has frozen their account, and they request that we intervene to get the bank to release their money. While we can often assist in that regard, the larger issue is: what are you going to do about the IRS finding the account?
In addition to freezing accounts, many foreign banks are simply closing the accounts of Americans, or of foreign nationals suspected of having a U.S. address or a U.S. tax nexus. These banks do not want to deal with the IRS and with U.S. compliance burdens. These banks are concluding, as a business matter, that it makes better sense for the banks to cease offering banking services to people with a U.S. nexus.
We have assisted clients in keeping open their compliant foreign accounts, and we have assisted other clients in locating new foreign banks to take their compliant foreign funds. If you have an undeclared foreign account, and your bank is telling you to leave, you will have to anticipate the successor bank asking the same sort of “know your client” and source of funds inquiries, and asking you to sign a IRS Form W-9. It is getting harder and harder to simply leave foreign Bank A and move the account to foreign Bank B. Very few foreign banks remain willing to take your non-compliant funds.
You Will Have Difficulty Getting Your Money Back to the U.S.
Wiring the funds back to the U.S. is not advisable. A sudden wire transfer of a large dollar amount into a U.S. account would likely lead to the receiving bank asking questions about the wire transfer, the source of funds, and whether the funds are tax-compliant. Banks will not ignore their due diligence and “know your client” obligations, no matter how friendly you might be with your banker. The compliance and legal risks to the bank are too significant.
Moreover, an inbound wire transfer could cause the bank to file an SAR (Suspicious Activity Report) with the U.S. Treasury Department, and there is no requirement that the bank even let you know that it is filing an SAR. Even if you try to deposit a foreign bank check and avoid a large wire transfer, the U.S. bank will likely ask the same questions.
Finally, even assuming that you can get your foreign funds safely back into the U.S., you still have to worry about the IRS discovering the past non-compliance when the funds were offshore. As discussed below, the IRS is interested in the past history of the non-compliant foreign account, even if that account is now closed.
Your Options Are Limited as to Where to Keep the Funds Outside the U.S.
As noted above, it will not be easy for you to simply find a new foreign bank, one that will overlook the fact that your funds are not U.S. tax compliant, one that will not ask you to sign a Form W-9, one that is not concerned about FATCA (the Foreign Account Tax Compliance Act) which will require the bank to report information to the IRS.
FATCA is a U.S. law, passed in 2010, which reaches overseas and requires all foreign banks and financial institutions to automatically report to the IRS (without IRS subpoena or request) information regarding their American client accounts. Essentially, every foreign bank becomes an agent of the IRS. If a foreign bank or financial institution does not agree to FATCA reporting, then the U.S. will penalize it by withholding significant amounts of U.S.-source income. Recently, many countries have signed on to FATCA, including Spain, Italy, Norway, Germany, Mexico, the UK, Ireland and Switzerland. Many other countries (some seventy five around the world) have announced that they are negotiating FATCA deals with the U.S., including South Africa, Singapore and Liechtenstein.
People suggest to us that foreign jurisdictions still exist which could act as shelters for non-compliant assets. We hear that certain countries are “the next Switzerland”. Since 2008, when UBS became the target of DOJ’s civil and criminal prosecution, the flow of funds exiting Switzerland for Singapore, for example, has been significant.
However, no reputable financial jurisdiction (including Singapore) would risk its financial reputation to harbor non-compliant accounts. Singapore makes a significant amount of money from legitimate international banking and would not jeopardize this by being “blacklisted” as an uncooperative tax haven, as it was a decade ago. To this end, Singapore has recently announced that it is in talks with the U.S. on a FATCA-type of agreement. In addition, a new Singapore regulation requires banks to identify all accounts that may harbor the proceeds of tax evasion, and close them. Failure to abide by this new law will result in criminal charges for the Singaporean bankers.
Virtually all reputable financial institutions around the world – – at least the credible, stable ones, i.e., places one would want to bank because of safety and stability – – will report to the IRS. Nations “off the grid” may welcome dollars, but one must ask whether depositing assets in an unsafe or unstable jurisdiction is a prudent move. Is it worth it to move money from the first world to the third world in order to avoid the IRS, if the risk of losing the money is significant?
Finally, even assuming that you find a new harbor for your foreign assets, there will almost certainly be a paper trail of where your assets went. The last bank statement from your prior account will show an outward transfer. That will be a road map for the IRS once it obtains the statement by subpoena, summons, treaty request or settlement agreement.
Closing the Account May Not be Enough
Merely closing a foreign account is not a viable solution, because DOJ and IRS never limit their investigations to only current accounts. In the case of UBS, DOJ’s John Doe Summons sought banking records back to 2000. In the case of Liechtensteinische Landesbank, DOJ requested records back to 2004. In the case of Julius Baer, the investigation goes back to 2002. DOJ’s request to Liechtenstein trust companies and other fiduciaries sought records back to 2001.
In other words, closing an account today does nothing to remedy the non-compliant past, and DOJ and the IRS focus on past non-compliance. In addition, a wire transfer or bank check from the foreign account to a U.S. account (or account elsewhere) creates an easy trail back to the foreign account, and also gives rise to due diligence, “know your client” and source of funds inquiries by the recipient bank. Using the non-compliant funds to buy real estate or other assets also creates a trail and does nothing to undo the non-compliant past, which will be the focus of the IRS investigation.
The Era of Bank Secrecy is Over
It seems that with every passing year, bank secrecy continues to decrease and the risk of discovery increases. In 2013, the following events occurred:
– Switzerland agreed to a settlement with the U.S. Department of Justice (DOJ) whereby almost all Swiss banks will begin to report bank account data to the U.S. without a need for court orders or government-to-government treaty requests.
– Liechtenstein agreed to sign a global treaty allowing for increased bank transparency and automatic exchange of tax information. It is also expected that Liechtenstein will sign on to FATCA.
– All reputable countries are agreeing to the exchange of information and banking transparency. In 2013, Luxembourg agreed to automatic exchange of bank depositor information beginning in January 2015. Likewise, Austria, the last remaining EU member holdout, agreed in 2013 to share banking data.
– The U.S. Department of Justice has sent summonses and requests for banking information to the following: Bank Julius Baer, the Liechtenstein Foundation Supervisory Authority, CIBC First Caribbean International Bank, Bank of Butterfield, HSBC and others. DOJ is investigating many Swiss banks, Israeli banks, banks in Luxembourg, the Caribbean and elsewhere. IRS and DOJ are not stopping at Switzerland. U.S. investigators are paying particular attention to “leaver accounts”, i.e., the accounts of those people who leave Swiss banks in favor of banks elsewhere, in an attempt to continue to evade the IRS. It should be noted that under the 2013 Swiss-U.S. settlement agreement discussed above, Swiss banks are required to identify “leaver accounts” specifically, and report them to DOJ.
In 2014, foreign banks will begin to report information to the IRS under FATCA.
The Window of Opportunity to Come Into Compliance Could Close Anytime
It is possible to bring your foreign assets into tax compliance by disclosing the assets to the IRS before the IRS learns of those assets, and to participate in a partial amnesty program known as the Offshore Voluntary Disclosure Program (“OVDP”). If the IRS learns about your foreign assets (through any means, including from a foreign bank or foreign government, as a result of an audit or investigation, or even because of a whistle blower such as an ex-spouse or adversary), then the IRS will not accept your disclosure and the full weight of tax fraud penalties will apply, including criminal prosecution. If accepted into the OVDP, such consequences can be avoided, although back taxes, interest and penalties will be due.
However, at any time the IRS can “close the door” on the opportunity to voluntarily disclose a foreign financial asset and to participate in the OVDP. Under the most recent terms of the Voluntary Disclosure Program, the IRS merely has to announce that account holders at any specific bank under investigation are precluded from making a voluntary disclosure. The significance is that U.S. clients can no longer wait for an announcement of a DOJ summons or a treaty request before they decide to come forward. The door to come forward can be closed by the IRS much earlier and without warning. That is a new variable in the opportunity to make a voluntary disclosure. It increases the risk of prosecution and it creates more immediate pressure to come into tax compliance. Timing, once again, is everything, and the IRS can close the door at any time.
Conclusion
The common theme through all of the above is that if you have a foreign account or other asset that is not U.S. tax compliant, it will only get more difficult to keep the IRS from discovering the account, to maintain the account in a safe and secure institution, and to access your funds. Now is the time to consult with U.S. tax counsel on what to do about your offshore assets, how to minimize your exposure, how to bring the assets into compliance, and how to safely access your money.
New Opportunities for Ownership of Co-op Apartments by Family Limited Partnerships & Trusts
Many residential apartments are owned by cooperative corporations (“co-ops”). In New York City, it has been estimated the coop apartments outnumber condominium apartments by three to one. The boards of directors of co-ops have been known to be especially and unreasonably restrictive as to who they will admit as shareholders and residents, and many boards, especially in New York, have acquired reputations of being “snooty” and exclusive. The pop singer Madonna was famously rejected by the co-op board of a very expensive Park Avenue building.
The Wall Street Journal reports (“Co-ops Get Competitive”, August 29, 2013, page A-17) that the boards of cooperative apartments are now relaxing their policies and acceptance criteria in order to appeal to younger buyers, as well as to foreign buyers, who are not willing to put up with onerous admission requirements and unreasonable restrictions. These co-op boards are changing their policies in order to be competitive with condominiums and in order to attract new investment and new buyers.
What does this have to do with asset protection and tax minimization?
First, one’s home, whether a co-op, condo, house or otherwise, is normally a very significant asset and should be protected from future claims.
As the Wall Street Journal points out, “while buyers have always been able to buy condos and townhouses anonymously under corporations and trusts, now even some Fifth Avenue [co-op] boards have let brokers know that they would now consider purchases done in the names of trusts or limited liability companies . . . .” And, we would expect, in the names of family limited partnerships (FLPs), which are similar to limited liability companies (LLCs) but offer better asset protection. Thus, ownership of a co-op by an FLP is advisable if allowed by the co-op board.
Second, as noted above, co-op boards are positioning themselves to take advantage of the healthy demand by wealthy foreign buyers for U.S. real estate. As the Wall Street Journal reported, co-op boards have clarified their rules, and made “it clear that international buyers, who are active in the condo market, were welcome” at co-ops as well. We have written before about the appeal of U.S. real estate, especially expensive apartments, to wealthy foreign buyers. We have also discussed how, through the use of certain hybrid trusts, foreign buyers can minimize their exposure to the Foreign Investment in Real Property Tax Act (“FIRPTA”), which imposes an onerous 10% tax on the gross sale proceeds when a foreign owner sells U.S. real estate. Please see our article, How Foreign Purchasers of U.S. Real Estate Can Save Significant Taxes.
As co-ops attract new buyers, domestic and foreign, it is important to consider the best form of ownership of real estate. Ownership in entities such as FLPs and trusts may offer significant asset protection and tax benefits. Please contact us for additional information.
U.S. & Switzerland Reach Agreement: Almost All Swiss Banks to Provide Account Information to IRS
We’ve written much about the ability of the IRS to discover unreported Swiss accounts, and we need not repeat warnings about criminal prosecution and onerous fines and penalties in the event that the IRS learns of undisclosed accounts.
What is new, however, is that the IRS will soon have direct, unimpeded, easy access to banking information from hundreds of Swiss banks. In a statement released by the U.S. Department of Justice (DOJ) and Swiss Federal Department of Finance on August 29, 2013, both sides reached an agreement whereby almost all Swiss banks will soon report to the IRS about Swiss accounts “in which U.S. taxpayers have a direct or indirect interest”, including accounts owned by U.S. persons, or where U.S. persons are beneficiaries, signatories, hold powers of attorney or have other incidents of ownership. In exchange for the provision of information to the IRS, the DOJ will not prosecute these banks as it did against UBS and Wegelin.Continue Reading
Everything You Wanted to Know about Antigua Private Foundations
Our senior partner Kenneth Rubinstein was the author of the International Foundations Act of 2007, passed by the Parliament of Antigua and Barbuda and enacted into law. Kenneth also wrote Antigua’s International Trust Act and International LLC Act.
Kenneth has now authored the chapter on Antigua and Barbuda private foundations which is part of Private Foundations World Survey, edited by Johanna Niegel and Richard Pease, Oxford University Press, 2013. The chapter contains detailed information on Antigua as an Offshore jurisdiction, Antigua’s foundation law, foundation governance, asset protection issues, taxation issues, as well as discussion on issues of forced heirship and divorce.
For additional information, please see:
The Bullet-Proof Trust
The following actual case study proves that offshore asset protection, when done properly and lawfully and with complete disclosure to the IRS, is completely legal and 100% effective.
In 2004, our client Ruby, a retired physician living in Florida, established an irrevocable trust in Liechtenstein with funds totaling $1 million. Ruby’s goal was to protect her life savings from potential malpractice litigants. Ruby filed all required IRS forms relating to the funding of the trust and paid U.S. tax annually on all trust income.
In 2006, a former patient obtained a judgment against Ruby in a New York court. Shortly thereafter, the judgment creditor served a restraining notice against Ruby’s assets in New York. Later that year, the judgment creditor domesticated his judgment in Florida in order to attach Ruby’s assets there. However, Ruby had minimal attachable assets in both states.
Frustrated with the lack of attachable U.S. assets, in 2008 the creditor commenced a legal action in Liechtenstein, hoping to get to the assets in the trust. Since Liechtenstein’s short statute of limitations expired years earlier, the creditor could not re-litigate his malpractice claim, nor could he claim the trust was formed as a fraudulent conveyance. Instead, the creditor argued that because Ruby was a beneficiary of the trust, she had a right to trust assets and that right was attachable by the U.S. creditor.
First, a lower Liechtenstein court required the creditor to deposit $100,000 with the Liechtenstein court to cover Ruby’s legal costs in the (likely) event the creditor lost. Then the court issued an injunction preventing the trustee from transferring trust assets while that court considered the U.S. creditor’s claim. However, an appellate-level Liechtenstein court quickly determined that because the trust was a discretionary trust (i.e., distributions were only in the sole discretion of the trustee), Ruby had no “right” to trust assets that was attachable, and therefore the Liechtenstein courts lacked jurisdiction over Ruby. Thus, trust assets could not be taken to satisfy the creditor’s judgment and the lower court’s restraining order was cancelled.
The U.S. creditor appealed, but the highest Liechtenstein court upheld the lower court’s ruling in favor of Ruby against the creditor. Ruby’s assets remained safe in Liechtenstein and the creditor paid Ruby’s legal fees.
This case is instructive in a number of ways. First, the ultimate lesson here is that despite the legal challenge by a U.S. creditor, the Liechtenstein trust assets remained safe and protected from the creditor. The U.S. creditor was forced to commence a new action in a foreign jurisdiction, pay legal fees in advance (contingency fees are not allowed in good offshore jurisdictions), and overcome short statutes of limitations and prohibitive burdens of proof. With the odds so strongly stacked against him, the U.S. creditor lost and also paid our client’s legal fees.
Second, unlike many offshore trusts created by amateurs, this trust was impenetrable because distributions to the U.S. client were completely discretionary by the Liechtenstein trustee. This was the basis for the appellate court’s ruling that Ruby had no “right” to trust assets. Had Ruby been entitled to mandatory distributions, the court might have determined that she had a right to trust assets, and the court might have found in favor of the U.S. creditor. This demonstrates that for effective offshore asset protection, the U.S. client must part with legal control of the assets. However, the trust assets will still be protected and guarded by licensed, bonded, qualified and reputable trustees who understand that their obligation is to always act in the best interest of the beneficiary.
Third, clients who protect their assets offshore must still disclose those assets, and all gains thereon, to the IRS. Clients cannot expect their assets to be “hidden” – neither from their creditors nor from the IRS. The assets will be protected offshore, but U.S. taxes are still due and disclosure requirements must be met in order for the asset protection to be effective.
Finally, this case demonstrates that offshore asset protection is alive and 100% effective, provided that it is done properly and tax compliantly. “Hiding” assets does not work; protecting assets does.
The Care and Feeding of Family Limited Partnerships (FLP)
FLPs are complicated structures, and we want you to implement your FLPs properly. Carelessness and failure to abide by formalities may lead to a creditor undoing, or the IRS challenging, many of the benefits of an FLP. Thus, we present this reminder to clients who have established FLPs.
Keep accurate records of transactions, investments, sales of property, etc. Keep these records separately from your personal records. Keep records of distributions from the FLP to the partners. The simplest repository of a partnership’s financial records is the partnership’s bank account check register. It is often most convenient to keep all records in the FLP binder.Continue Reading
Offshore Update: The Door to Foreign Account Amnesty Can Close at Any Time
My new article, “The Door to Foreign Account Amnesty Can Close at Any Time” discusses current developments in the crackdown on undeclared offshore assets. This article will be published in a forthcoming edition of Tax Notes International.
Recent developments regarding foreign accounts include:
- Settlement between Swiss banks and the U.S. whereby DOJ and IRS will end their investigations of Swiss banks, in return for the banks paying fines and handing over formerly “secret” account data on U.S. taxpayers with undeclared accounts.
- U.S. requests for banking information from Swiss bank Julius Baer, from Liechtenstein foundations (stiftungs) and CIBC First Caribbean bank. It is expected that information will soon be disclosed to the IRS.
- Many foreign countries have agreed to provide banking information to the IRS under the Foreign Account Tax Compliance Act (FATCA), and many more countries are in discussions with the IRS regarding adopting FATCA or FATCA-like agreements.
In light of the above, there can be no expectation of banking secrecy, and U.S. taxpayers with non-compliant foreign assets must take steps to come into compliance. Importantly, the IRS can revoke the 2012 Offshore Voluntary Disclosure Program (OVDP) at any time. Further, the IRS can announce at any time that US taxpayers with accounts at a certain bank or banks are no longer eligible to participate in the OVDP. Outside the OVDP, penalties for undeclared foreign assets and foreign income can be severe, including criminal prosecution. US taxpayers with undisclosed foreign assets have little choice but to voluntarily come into tax compliance, before the IRS comes to them.