Yesterday the Internal Revenue Service opened its Offshore Voluntary Disclosure Program (OVDP) to encourage more taxpayers with assets in undeclared foreign bank accounts to come forward. While the OVDP was not expected by most tax lawyers and professionals, it may be welcomed by many of our clients who missed the recently closed 2011 OVDI program.
The IRS has introduced a series of voluntary disclosure programs in recent years. The OVDP follows on the success of the 2009 Offshore Voluntary Disclosure Program (the 2009 OVDP) and the 2011 Offshore Voluntary Disclosure Initiative (the 2011 OVDI), which were announced many years after the 2003 Offshore Voluntary Compliance Initiative (OVCI) and the 2003 Offshore Credit Card Program (OCCP) (there was low participation in the 2003 programs).
The many voluntary disclosure initiatives typically offer reduced penalties in exchange for taxpayers voluntarily coming into compliance before the IRS is aware of their prior tax indiscretions. In part, the success of such initiatives often depends on the perception that they will be followed by strong government tax enforcement efforts.
One reason for new OVDP program is the IRS’s ongoing well-publicized efforts with the Justice Department to pursue criminal prosecution of international tax evasion. Last year they charged a half dozen Americans with HSBC accounts with tax evasion. They also recently charged a trio of Swiss bankers with conspiring with U.S. taxpayers to hide more than $1.2 billion in assets from the IRS. There is ongoing summons activity (including the subpoena issued to HSBC India) seeking to force foreign financial institutions to deliver account-holder information to the U.S. government as well as possible indictments of foreign financial institutions. Recently, several foreign institutions have advised their account holders to consult U.S. tax advisors regarding the IRS voluntary disclosure program and their U.S. tax reporting relating to their foreign financial accounts. The institutions will likely take whatever action is necessary to avoid being indicted, beginning with the delivery of information regarding account holders to the U.S. government. In summary, the IRS is vigorously shaking the tax evasion tree, and fruits (i.e., tax evaders) are falling out.
The new 2012 OVCP program is similar to the 2011 program in many ways, but with a few key differences. Unlike last year, there is no set deadline for people to apply. However, the terms of the program could change at any time going forward, the IRS cautioned. For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers—or decide to end the program entirely at any point.
The overall penalty structure for the new program is the same for 2011, except for taxpayers in the highest penalty category. The 2012 OVDI is patterned after the 2011 OVDI but increases the maximum “FBAR-related” penalty from 25% to 27.5% of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25% in the 2011 program (the IRS has to give some incentive to previous taxpayers who earlier came forward; the 2009 program penalty was 20%). Some taxpayers will be eligible for 5 or 12.5% penalties; these remain the same in the new program as in 2011.
It is uncertain how the 2012 OVDP affects pending 2011 OVDI applications. It is possible that some 2012 OVCP filings could have resulted in a lesser (or greater) penalty, depending on account balances during the relevant disclosure period.
Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.
Participants face a 27.5 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty. Smaller offshore accounts will face a 12.5 percent penalty. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the new OVDP will qualify for this lower rate. As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.
Under the 2011 OVDI, the IRS agreed not to impose a penalty for the failure to file the delinquent FBARs if there were no underreported tax liabilities and the FBARs were filed by August 31, 2010 (FAQ 17). Presumedly, the IRS will follow the same course under the 2012 OVDI since those with no underreported tax liabilities are not truly within the range of taxpayers the IRS is trying to identify.
The ability of a U.S. taxpayer to maintain an undisclosed, “secret” foreign financial account is fast becoming impossible. Foreign account information is flowing into the IRS under tax treaties, through submissions by whistleblowers, from others who participated in the 2009 OVDP and the 2011 OVDI who have been required to identify their bankers and advisors. Additional information will become available as the Foreign Account Tax Compliance Act (FATCA) and Foreign Financial Asset Reporting (Form 8938 and new IRC § 6038D) become effective.
It is likely that the U.S. government will require foreign financial institutions doing any business in the United States (that may include any wire transfer activity, which is almost all institutions) to disclose account holders having relatively small accounts and earnings. There have been tax rumors of disclosure discussions regarding accounts having a high balance of the equivalent of $50,000 at any time between 2002 and 2010. U.S. persons having interests in foreign financial accounts should not be comfortable that their foreign financial institution will somehow refrain from disclosing very small accounts in the current enforcement environment. We do know how the unpredictable IRS will react to discovered undisclosed small account balances.
Taxpayers with undisclosed foreign accounts should consult a competent tax lawyer before deciding to participate in the 2012 OVDI. Although the 2012 OVDI penalty regime may seem overly harsh for many, the decision to participate should include an economic analysis of the taxpayer’s projected future earnings that could be generated from the foreign funds. If a taxpayer is discovered before any voluntary disclosure submission, there could be harsh criminal (in addition to civil) penalties. The risks may outweigh the benefits.
Patel Law Offices is a law firm dedicated to helping clients resolve complicated tax, criminal tax, and international tax problems. Our firm assists (and defends) clients and their advisors to legally disclose (and legitimize) foreign accounts.
The Internal Revenue Service today reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes.
The IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.
The overall penalty structure for the new program is the same for 2011 OVDI program, except for taxpayers in the highest penalty category. Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.
Under the new program, there’s a 27.5% penalty, up from 25% in the 2011 program, on the highest aggregate balance in a taxpayer’s overseas accounts in the eight years before disclosure. But those whose overseas account balances did not top $75,000 in any year face a lower penalty of 12.5%. Like the previous program, some taxpayers are eligible for an even lower penalty rate of 5%. Taxpayers also owe back taxes and interest. As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.
The IRS said the new program’s terms and penalties could change at any time, and the IRS may opt to end the program at any time.
“As we’ve said all along, people need to come in and get right with us before we find you,” said IRS Commissioner Doug Shulman, in the release. “We are following more leads and the risk for people who do not come in continues to increase.”
The IRS said its two previous disclosure programs — one ended in 2011 and one in 2009 — netted the agency about $4.4 billion so far in tax revenue, and the agency is still processing disclosures to the 2011 program.
The IRS received some 33,000 disclosures under the previous programs, and “hundreds of taxpayers” have come forward since the 2011 program closed in September, the IRS said in its release Monday. Those people will be treated under the terms of the new, third program, the IRS said.
“Our focus on offshore tax evasion continues to produce strong, substantial results for the nation’s taxpayers,” Shulman said. “We have billions of dollars in hand from our previous efforts, and we have more people wanting to come in and get right with the government. This new program makes good sense for taxpayers still hiding assets overseas and for the nation’s tax system.”
Also, the IRS made note of American citizens living in other countries who did not realize they had run afoul of U.S. law by failing to report certain assets. “The IRS recognizes that its success in offshore enforcement and in the disclosure programs has raised awareness related to tax filing obligations,” the release said. “This includes awareness by dual citizens and others who may be delinquent in filing, but owe no U.S. tax. The IRS is currently developing procedures by which these taxpayers may come into compliance with U.S. tax law.”
In light of the numerous probes and summonses against several foreign banks, including HSBC, it is imperative that U.S. accountholders seriously consider entering the new IRS OVDP program for protection against civil (and criminal) penalties.
Patel Law Offices has assisted numerous taxpayers with offshore asset planning and filed dozens of OVDI applications last year. Patel Law Offices is a law firm dedicated to helping clients resolve complicated tax, criminal tax, and international tax problems. Our firm assists (and defends) clients and their advisors to legally disclose (and legitimize) foreign accounts.
In a fact sheet (IRS FS-2011-13) released last week, the IRS reminded U.S. citizens and dual citizens of the United States and foreign countries who live abroad about U.S. filing requirements, including Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). No new developments are provided, only reminders of existing laws and regulations.
Some dual-citizen taxpayers may have only recently learned about their obligation to file U.S. income tax returns or FBARs, the IRS said in the fact sheet.
Generally, FBAR must be filed by U.S. persons having a financial interest in or signature authority or other authority over any financial account in a foreign country if the aggregate value of the accounts exceeds $10,000 at any time during the calendar year. The normal annual filing date for FBAR is June 30. While the Association of Americans Resident Overseas estimates that some 6.32 million Americans live abroad, the Treasury Inspector General for Tax Administration reports that only a little more than 534,000 FBARs were filed in 2009.
FBAR discloses the foreign interest or account to the IRS and does not impose a tax, although failure to file it can incur penalties. Non-willful failure to file may be penalized by up to $10,000 per violation, unless the failure was due to reasonable cause. A willful failure to file can be subject to a higher civil penalty (up to $100,000 or 50% of the balance of the foreign account, whichever is greater) and criminal penalties.
In the fact sheet, the IRS gave examples of factors that, considered along with all the facts and circumstances, could point to reasonable cause for non-willful failure to file an FBAR and therefore a lesser or no penalty:
Reliance upon the advice of a professional tax adviser who was informed of the existence of a foreign financial account;
A lack of any intentional effort to conceal income or assets related to an unreported foreign account that was established for a legitimate purpose; and a lack of any material tax deficiency related to an unreported foreign account.
Factors identified as potentially weighing against a finding of reasonable cause, on the other hand, were:
Failure by the taxpayer to disclose a foreign financial account to his or her tax return preparer; Background and education of the taxpayer indicating that he or she should have known of the FBAR reporting requirements; and A tax deficiency related to the unreported foreign account.
The fact sheet advised taxpayers who learn belatedly of their FBAR filing requirement for earlier years (within the six-year statute of limitation) to file the delinquent FBARs and attach a statement explaining why they are late.
The fact sheet also advised of basic federal income tax filing and payment requirements and related penalties and described reasonable-cause factors for those lapses. It reminds U.S. citizens and dual citizens that they are required to report their worldwide income on their federal tax return.
In addition, the fact sheet reminds taxpayers that Foreign Account Tax Compliance Act reporting of specified foreign financial assets on income tax returns will be required starting in 2012. Notice 2011-55, issued last summer, suspended the requirement until a final version of Form 8938 is released. The IRS has said it intends to release the form, along with new guidance, before the end of this month.
Although, the IRS provided no new developments and only reminders of existing laws and regulations, the announcement re-affirms the IRS’ aggressive stance on tax enforcement of offshore activities.
Patel Law Offices is a law firm dedicated to helping clients resolve complicated tax, criminal tax, and international tax problems. Our firm assists (and defends) clients and their advisors to legally disclose (and legitimize) foreign accounts.
Earlier this month Credit Suisse Group AG, Switzerland’s second-biggest bank, told U.S. clients it is giving confidential client account data to the Swiss tax authorities, who will decide whether to disclose it to the Internal Revenue Service. The U.S. is probing whether Credit Suisse helped Americans evade taxes, and the IRS used a 1996 tax treaty to request data for certain accounts held between 2002 and 2010, according to a November 2nd letter sent to a client by the bank. The IRS sought data for accounts owned through domiciliary companies in which clients are the beneficial owners, according to the letter.
The Swiss Federal Tax Administration issued an “immediately executable” order to the Zurich-based bank, which has no right to appeal, according to the letter. Taxpayers can consent to the SFTA handing over their account data to the IRS, or they can use the Swiss legal system to appeal a ruling by the SFTA that their account must be given to the IRS, according to the letter.
“Please be advised that Credit Suisse is not able to provide any information on whether or not information with respect to a specific account will be provided to the IRS,” according to the letter, signed by managing directors Michel Ruffieux and Stephan Gussmann. “In connection with the IRS treaty request, the SFTA has issued an order directing Credit Suisse AG to submit responsive account information to the SFTA,” the bank said in a statement.
Credit Suisse stated on July 15th that it is a target of a criminal probe by the Department of Justice over former cross-border private-banking services to U.S. customers. On July 21, seven Credit Suisse bankers were indicted on a charge of conspiring to help U.S. clients evade taxes through secret accounts.
The U.S. is conducting criminal probes of 11 financial institutions. U.S. and bank officials are concluding talks on a civil settlement that will probably require banks to pay billions of dollars and hand over the names of thousands of Americans who have secret accounts. Those people who have had their accounts disclosed will be subject to civil tax penalties by the IRS and potential prosecution by the Justice Department.
U.S. taxpayers can avoid prosecution by voluntarily disclosing their account to the IRS. Though the OVDI program window has closed, taxpayers with undisclosed foreign assets may still be able to file a traditional voluntary disclosure via the IRS VDP program that would allow them to avoid potential criminal prosecution.
In February 2009, UBS AG, the biggest Swiss bank, avoided criminal prosecution by paying $780 million, admitting it fostered tax evasion and giving the IRS data on more than 250 accounts to avoid criminal prosecution. It later turned over data on another 4,450 accounts and in October 2010, the U.S. dropped its criminal case against UBS. The Justice Department is pursuing new criminal cases against Swiss banks after American customers provided information on them through a U.S. voluntary-disclosure program. The U.S. crackdown against offshore tax evasion has led to charges against UBS AG, at least 21 foreign bankers, advisers and attorneys and at least 36 U.S. taxpayers.
It is predicted that other Swiss and many other banks (including HSBC) under investigation will eventually settle with the U.S. For U.S. citizens or residents who have not paid taxes on offshore assets, the hope of hiding from tax authorities seems increasingly unlikely.
Patel Law Offices is a law firm dedicated to helping clients resolve complicated tax, criminal tax, and international tax problems. Our firm assists (and defends) clients and their advisors to legally disclose (and legitimize) foreign accounts.
A federal grand jury in San Jose, California, last week indicted Ashvin Desai of San Jose on three counts of tax evasion, two counts of willfully aiding the preparation of materially false tax returns and three counts of failing to file Reports of Foreign Bank and Financial Accounts (FBARs), the Justice Department and Internal Revenue Service (IRS) announced.
According to the indictment, Desai, the owner of a medical device company, his wife and his two adult children maintained millions of dollars in undeclared bank accounts in India at The Hongkong and Shanghai Banking Corporation Ltd. (HSBC). During 2009, Desai maintained approximately $8.8 million in his undeclared accounts at HSBC in India. Desai attempted to evade his income taxes for tax years 2007-2009 by filing false tax returns that failed to report $1,306,810 of interest income, and that falsely reported that he did not have an interest in, or signature authority over, bank accounts located in a foreign country. Desai also prepared false tax returns for his children for tax year 2009 that failed to report approximately $189,000 of interest income paid by HSBC in India, and that falsely reported that the children did not have an interest in bank accounts located in a foreign country.
The indictment further alleges that during 2009 Desai closed an account he maintained at HSBC in England and directed that the funds from that account be transferred to a bank account maintained at HSBC in Dubai in the name of one of his children, and that, for tax years 2007-2009, Desai failed to file FBARs to report his foreign bank accounts to the Department of Treasury.
As alleged in the indictment, United States citizens have an obligation to report to the IRS on Schedule B of their United States Individual Income Tax Return, Form 1040, whether they had a financial interest in, or signature authority over, a financial account in a foreign county in a particular year by checking “Yes” or “No” in the appropriate box and identifying the country where the account was maintained. They further have an obligation to report all income earned from foreign financial accounts on the tax return and to pay the taxes due on that income. Separately, United States citizens with a financial interest in, or signatory authority over, a foreign financial account worth more than $10,000 in a particular year, must also file an FBAR form with the Treasury disclosing such an account by June 30 of the following year.
Each tax evasion charge carries a maximum penalty of five years in prison and a $250,000 fine. The false tax return charges each carry a maximum penalty of three years in prison and a $250,000 fine. The failure to file an FBAR charges each carry a maximum penalty of 10 years in prison and a $500,000 fine.
While an indictment is merely an allegation and Mr. Desai is presumed innocent, several other HSBC India clients this year have been indicted and subsequently pled guilty to tax evasion.
This case is being prosecuted by Senior Litigation Counsel John E. Sullivan and Trial Attorney Melissa S. Siskind of the Justice Department’s Tax Division. Mr. Sullivan, who has also previously prosecuted several other Swiss bank customers, is leading prosecutions in numerous HSBC India tax evasion cases. The Justice Department’s Tax Division seems to be replicating its 2009 prosecutorial successes against UBS Swiss bank customers again with HSBC India account holders.
Earlier this year, the U.S. District Court for the Northern District of California issued an order authorizing the Internal Revenue Service to serve a “John Doe” summons requesting information from HSBC regarding U.S. residents who may be using accounts at HSBC in India to evade federal income taxes. If HSBC produces these records, which is likely, it may be too late for U.S. taxpayers with undisclosed HSBC accounts to take advantage of the IRS Voluntary Disclosure Program for offshore accounts. The IRS says there are 9,000 high net worth Indian US residents who maintain at least $100,000 in their bank accounts in HSBC India but few of them have disclosed details of their accounts.
The Desai indictment and HSBC summons should persuade offshore accountholders who cannot decide whether to disclose past foreign account noncompliance to the IRS via the IRS Voluntary Disclosure Practice (VDP) program, which remains in effect after OVDI’s expiration, for protection against civil (and criminal) penalties. In light of recent indictments, quiet or no disclosures are not viable options for such individuals. Our law office, which represents many taxpayers throughout the U.S. and around the world with undisclosed offshore accounts, believes that the recent indictments and large penalties should encourage more U.S. taxpayers with undisclosed offshore accounts, especially held at HSBC, to come forward before the government contacts them.
Patel Law Offices is a law firm dedicated to helping clients resolve complicated tax, criminal tax, and international tax problems. Our firm assists (and defends) clients and their advisors to legally disclose (and legitimize) foreign accounts.
Under the 2011 OVDI voluntary disclosure program, the penalties for failing to timely file Foreign Bank Account Reports, (FBAR’s) and the penalties for failure to file information returns (such as Controlled Foreign Corporation tax returns) were combined into a single miscellaneous civil penalty. The penalty combined the FBAR penalty which is established under the Bank Secrecy Act (BSA) with penalties assessed under the Internal Revenue Code (Code) and the combined penalty is assessed under the Code. This is combination to be administered under the Code avoids the requirement that the FBAR be brought as a civil case in the United States District Court, rather than under the assessment provision of the Code.
The IRS in its FBAR Frequently Ask Questions (No.51 ) discusses the basis upon which a taxpayer might “opt out” of the offshore voluntary disclosure program. The IRS uses the term “reasonable cause” in defining whether a taxpayer’s conduct is willful or non-willful. Because of the integration of BSA and Code penalties, the participants in the OVDI program should explore the tax cases that define reasonable cause may be the basis for determining whether it makes sense for taxpayers to “opt out” of the an offshore voluntary disclosure program when faced with failure to file Information Returns as well as failing to file FBAR’s.
A recent case out of the United States District Court for the Eastern District of Texas is instructive on how the IRS will approach “reasonable cause” defenses in failure to file information returns involving controlled foreign corporations. Congdon v. U.S. 108 AFTR 2d 2011. Congdon was argued on what constituted reasonable cause for failure to file a substantially complete Form 5471, Controlled Foreign Corporation Return in accordance with Treas. Reg. §1-6038-2(k). Under Code section 6038(b) the taxpayer has the burden of showing that the failure to file appropriate information returns was due to reasonable cause and that the taxpayer substantially complied with Code section 6038. According to the court, there is no statute or regulation on what constitutes “reasonable cause” under 6038. In the absence of a statute or regulation, the court referred to the Internal Revenue Manual (I.R.M. 20.1.1 and 20.1.9.1(4) for guidance. The IRM states:
Reasonable cause is based on all the facts and circumstances in each situation and allows the IRS to provide relief from a penalty that would otherwise be assessed . Reasonable cause relief is generally granted when the taxpayer exercises ordinary business case and prudence in determining their tax obligations but nevertheless is
unable to comply with those obligations. I.R.M. 20.1.1.3.1 (1). The issues of
reasonable cause therefore comes down to a question of fact. New York Guangdong Finance Inc. v. Commissioner, 588 F.3d 889,896(104 AFTR 2d 2009-7492 (5th Cir 2009). Among the facts which the IRS in the IRM cites as examples of reasonable cause are: the taxpayer is unable to obtain records, or death or serious illness or unavoidable absence I.R.M. 20.1.1.3.1.2.4; I.R.M. 20.1.1.3.1.2.5; I.R.M. 20.1.1.3.2.4, but ignorance of the law, in and of itself, does not constitute reasonable cause. I.R.M. 20.1.1.3.1.2.1, but ignorance of the law may establish reasonable cause when combined with other facts. The most important factor was whether the taxpayer acted in good faith is what effort the taxpayer made to report the proper tax liability. Treas. Reg. §1.6664-4(b)(1); I.R.M. 20.1.5.6.2. This will be a pivotal point of inquiry for practitioners in advising clients on whether their conduct will be deemed reasonable. The question is what are the consequences for offshore voluntary disclosure participants who “opt out” and then cannot establish a reasonable cause defense?
One of the consequences is the likelihood that the taxpayers conduct will be viewed a
potentially “willful” in which case the FBAR penalties dramatically increase. As stated in FBAR FAQ No. 10 “the civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation. A penalty for failing to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under IRC §§ 6035, 6038 and 6046.The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.” These are the civil penalties and in an “opt out” there is still the potential for a criminal action for “willful” conduct.
The U.S. Supreme Court deals with the issue of “willfulness” in U.S. v. Pompino, et al., 38 AFTR 2d 76-5905 (97 S.CT.22) 10/12/1976. In Pompino, the Court held that the word “willfully” means voluntary violation of a known legal duty. An example of how such an argument would be made is a taxpayer who answers ‘No’ to the questions on Schedule B of Form 1040 which ask if the taxpayer has signature authority over a foreign financial account when the proper answer was ‘Yes’.
FBAR FAQ’s 51.1 –51.3 discuss in limited detail the benefits and risks of “opting out” but as in all matters taxation, a full and careful understanding of what was done, when and why is essential to making any recommendation to a client to “opt out”.
Our firm has become aware of a “phishing” scam, related to the filing of Report of Foreign Bank and Financial Accounts (FBAR). Under the scam, taxpayers receive an email notice, purportedly from the IRS Chief of Criminal Investigations, indicating there are issues with their filing and requesting disclosure of all their “domestic and international financial accounts.” The notice instructs the recipient to fax this information to 888-265-4730 (not an IRS number).
Taxpayers who receive such a notice should not reply. The IRS has asked that all unsolicited email claiming to be from the IRS be reported to phishing@irs.gov. Additional information can be located at the IRS website.
Earlier this week, two Julius Baer Group Ltd. client advisers were charged with helping U.S. customers
of the Zurich- based bank evade taxes, according to an indictment and a person
with knowledge of the matter.
Daniela Casadei and Fabio Frazzetto conspired with more than 180 U.S. clients and
others at the bank to hide at least $600 million in assets from the Internal
Revenue Service, according to the indictment in federal court in New York and
the person, who wasn’t authorized to speak about the matter. The indictment
refers to the bank as Swiss Bank No. 1.
Baer, the Alpine country’s fifth-biggest wealth manager, said it cannot comment on the
indictments or the U.S. government investigation. Casadei and Frazzetto were not
available for comment through a call to the bank, and Martin Somogyi, a Baer
spokesman, declined to put Bloomberg in touch with either.
The charges come amid a U.S. crackdown that includes grand jury investigations of
eight foreign banks. Prosecutors have filed tax charges against three dozen
former U.S. clients of UBS AG and Credit Suisse Group AG, Switzerland’s two
biggest banks, and London-based HSBC Holdings Plc, Europe’s biggest bank. At
least 21 bankers, advisers and attorneys also have been charged.
The charges appear to be just the beginning of numerous expected charges against
various foreign banks stuck in the crackdown. The bank clients are especially
vulnerable to exposure during the crackdown. Our law firm represents many such customers involved with the foreign banks in OVDI and VDP disclosures to avoid future possible complications and prosecution.
The new indictment cites 15 clients, without identifying them, who allegedly used
Casadei or Frazzetto to hide their accounts. About 30,000 U.S. taxpayers have
avoided prosecution since 2009 by voluntarily disclosing offshore accounts to
the IRS. The Justice Department has interviewed many of them in building new
criminal cases.
Baer’s Casadei worked at the bank from the early 1990s through last year, and
Frazzetto worked there from 2005 until last year, according to the new
indictment. Both men, who live in Switzerland, are charged with conspiracy and
face as long as five years in prison.
They opened undeclared accounts for taxpayers under fictional names such as
“Hydrangea” and “Red Rubin”. Casadei, Frazzetto and others told U.S. clients that their accounts would not be disclosed to the IRS because of the Swiss long tradition of bank secrecy, the bank no longer had offices in the United States, making it less vulnerable to pressure from U.S. law enforcement authorities than other Swiss banks with a presence in the U.S.
Patel Law Offices is a law firm dedicated to helping clients resolve complicated tax, criminal tax, and international tax problems. Our firm assists (and defends) clients and their advisors to legally disclose (and legitimize) foreign accounts.
Although the OVDI program has expired, a U.S. taxpayer can still make a voluntary disclosure of foreign accounts pursuant to the IRS’s general voluntary disclosure policy. For over 50 years, the IRS has maintained a voluntary disclosure policy, under which taxpayers can disclose, and rectify, any form of tax noncompliance. To make a voluntary disclosure, a taxpayer must make a truthful, timely, and complete disclosure of past noncompliance; cooperate in the determination of the correct tax liability; and pay, or make a good faith arrangement to pay, any tax, penalties, and interest determined to be due. A voluntary disclosure is generally considered to be “timely” if it is made before the government has initiated an investigation or audit of the taxpayer (or a related party), and before the government has received information from a third party (i.e., HSBC bank subpoena) about the taxpayer’s noncompliance. In essence, a voluntary disclosure is “a race to the government” – whoever gets there first wins.
Therefore, taxpayers who have unreported offshore accounts should give serious consideration to making a voluntary disclosure, even after the expiration of the IRS’s OVDI program. While the civil penalties may be different (could be higher or lower than the penalties that were imposed under the OVDI program based on circumstances) they will certainly be less than the penalties that would be imposed if the IRS were to learn of the offshore bank account from another source.
Heightening the risk of discovery by the IRS, and the attendant increased penalties and criminal exposure, is the Foreign Account Tax Compliance Act (FATCA) recently passed by Congress. Under FATCA, which goes into effect in 2013, all foreign banks that have any dealings with the U.S. financial system (that is, almost all banks) will be required to provide information to the IRS about all U.S. account holders or face a withholding regime that would require all other financial institutions to withhold 30 percent of the payments made to noncompliant banks. The intent of this punitive withholding rate is to get most, if not all, foreign banks to comply and report their U.S. clients. This approach will likely work, and by 2013, foreign banks will be reporting their U.S. clients to the IRS in a manner similar to that of 1099 tax reporting.
Estate Planning
Making a voluntary disclosure and becoming compliant also brings with it the opportunity to engage in estate planning with respect to the offshore assets. The potential for meaningful estate planning has never been better. The gift and estate tax exemption has grown to $5 million per person for 2011 and 2012. After 2012, the exemption is scheduled to decrease to $1 million. Additionally, under current law, significant valuation discounts (25-35 percent) may be utilized when transferring family-owned business units (such as real estate owned through limited liability companies). Finally, under current law, trusts may be established as so-called “dynasty trusts,” so that there is no transfer tax when the trust assets are distributed to future generations. However, legislation has been proposed to eliminate or limit these benefits.
Most important, making a voluntary disclosure provides peace of mind, the ability to bring the offshore funds to the U.S., and the knowledge that one’s children and grandchildren will not be left to deal with a potentially explosive situation.
Patel Law Offices is a law firm dedicated to helping clients resolve complicated tax, criminal tax, and international tax problems. Our firm assists (and defends) clients and their advisors to legally disclose (and legitimize) foreign accounts.