During 2015, the IRS and U.S. Department of Justice (DOJ) continued to successfully attack offshore banking “secrecy”. The IRS’ success against UBS and other banks eroded Swiss banking secrecy, effectively ending “going offshore” to hide money from the IRS. Going offshore for asset protection from civil creditors and for tax minimization is still viable and effective, but must be tax-compliant.
• During 2015, the IRS and DOJ continued to investigate and prosecute U.S. taxpayers with undeclared offshore assets.
• Switzerland agreed to a settlement with DOJ whereby Swiss banks began to report bank account data to the U.S. without a need for court orders or government-to-government treaty requests. In 2015, dozens of Swiss banks settled with DOJ and reported accounts with a U.S. nexus. In return for deferred prosecution, these Swiss banks are paying fines to the U.S. and revealing 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 over. Moreover, now the Swiss banks report to the U.S. without advance warning to their U.S. clients. New legislation in Switzerland imposes penalties on a Swiss bank or bank employee that is aware of a U.S. request for information and then notifies the U.S. account owner prior to transfer of the requested information.
• All reputable countries are agreeing to the exchange of tax information and banking transparency. In 2015, Luxembourg began exchange of bank depositor information. Likewise, Austria, the last remaining EU member holdout, agreed to share banking data. During 2015, over 100 countries, and over 170,000 foreign banks and other financial institutions have agreed to sign on to Foreign Account Tax Compliance Act (FATCA) and automatically report foreign account and income data to the IRS. Most recently, India and Cyprus agreed to implement FATCA, joining 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.
• The reach of the U.S. Government to foreign banks is undeniable. The IRS is investigating HSBC, Bank Julius Baer, the Swiss Kantonal banks, Pictet, Bank HaPoalim, Mizrahi Tefahot and banks in the Carribean. DOJ also issued summonses to U.S. banks such as Bank of America, Citibank and Bank of New York Mellon for information on U.S. correspondent accounts used by owners of foreign accounts to access funds. Banks in Switzerland, Liechtenstein, Israel, India and the Caribbean are now under investigation. We expect more banks, in other countries, to be targeted in 2016. The fact that a foreign bank has no branches in the U.S. is now irrelevant.
• In 2015, Israeli banks froze many accounts of U.S. persons, until the account owners signed IRS Forms W-9 disclosing their social security numbers or provided evidence of U.S. tax compliance. U.S. persons with Israeli accounts now face two challenges: access to their money, and IRS compliance. Many are now entering the Offshore Voluntary Disclosure Program. Israel has become 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.
• In positive news, in 2015, the IRS issued guidance on FBAR penalties that seems to indicate a trend toward lower penalties for both willful and non-willful failure to file the FBAR. The new penalty structure allows for a single penalty, rather than multi-year penalties. In addition, the penalties should not exceed the value of the foreign account. The new guidance is applicable to cases currently in audit.
• Recent appellate court cases all uniformly have held that foreign bank statements must be handed over to the IRS regardless of any Fifth Amendment claim against self-incrimination. This means that the IRS can compel, via Information Document Request (IDR) or subpoena, a taxpayer to provide his or her offshore account records even if those records are self-incriminating. Prosecutors may then use those records to prove commission of tax crimes, including failure to file bank disclosures, filing false tax returns, tax evasion and tax fraud.
• In light of the above events, many clients have retained us to make their foreign accounts and other assets tax-compliant. We have represented many clients in Offshore Voluntary Disclosure Programs (OVDP) introduced by the IRS in 2009, 2011, 2012 and 2014. We have represented clients with accounts and assets on every continent (except Antarctica), brought them into IRS compliance and avoided prosecution. In 2014, the IRS changed the terms of its OVDP, and also began new “Streamlined” voluntary disclosure procedures for less egregious conduct. 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.
• If you participated in one of the OVDP/OVDI programs and paid a penalty (20-50%), you should consider whether your conduct was “non-willful” so that you might qualify for a lower 5% penalty. If so, you may be entitled to a refund of the higher penalty. Contact us to explore this option.
• Taxpayers should bring their accounts into tax compliance on the state level as well. Some states, such as New York, Connecticut, New Jersey and California, 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. Please contact us regarding tax compliance on the state and federal levels.
• Against the background of the U.S. offensive against non-disclosed offshore accounts, FATCA and new compliance burdens, many foreign banks have “fired” their U.S. clients and closed even compliant accounts. In 2015, we assisted clients in keeping open their compliant foreign accounts, or locating new foreign banks to take their business. While many foreign banks no longer want U.S. account holders, we have relationships with foreign banks which still service tax-compliant American clients.
Following its success against foreign banks and foreign banking secrecy, we expect the IRS in 2016 to continue to pursue offshore tax fraud investigations of many foreign banks in many foreign countries. We also expect DOJ to continue its prosecution of U.S. taxpayers with non-compliant foreign assets. If you have a non-compliant or undeclared foreign asset, we can help you bring it into IRS compliance. If you are being investigated by the IRS, we can represent you, defend you and negotiate for lower fines and penalties and for civil, rather than criminal, prosecution.
Contact us for a confidential consultation regarding your offshore assets and tax compliance.