Over the past several years, the U.S. government has undertaken a sustained offensive against unreported offshore assets and income. Since the 2009 deferred-prosecution agreement between the U.S. Department of Justice and UBS AG, Switzerland’s largest bank (which UBS agreed to pay a $780 million fine to settle), the U.S. has steadily been working to eliminate the ability of U.S. taxpayers to hide offshore accounts and income from the IRS.
Several other Swiss banks have had to close their doors following investigations by the U.S. government, and a dozen or more are still the subject of investigation. Credit Suisse is reportedly nearing completion of a deal to pay the U.S. over $1 billion to settle allegations the bank helped Americans evade U.S. taxes. Several other large Swiss banks are expected to reach settlements with the U.S.
In addition, the Justice Department (“DOJ”) has unveiled a program designed to encourage Swiss banks that are not already under active investigation to cooperate in the DOJ’s investigations into tax evasion. Depending on the extent to which each bank sought out and/or held unreported accounts to help U.S. taxpayers evade U.S. taxes, the banks can obtain non-prosecution agreements from the DOJ if they pay substantial penalties to the U.S. and provide information related to the unreported accounts held at the bank by U.S. persons. In order to reduce their own penalties that would apply under this program, participating banks are encouraging U.S. account holders to enter the IRS’ Offshore Voluntary Disclosure Program (“OVDP”) to come into compliance with all U.S. tax laws. At least 106 Swiss banks have indicated that they will be participating in the DOJ program, and many of these banks have sent letters to clients advising that they enter the OVDP.
The DOJ has said, “[We are] committed to using every tool available to identify, investigate, and prosecute those who hide income and assets in offshore bank accounts.” The DOJ’ Swiss bank program is just one of several ways the U.S. government is gathering troves of information about unreported foreign financial accounts.
Since 2009, the IRS has offered a series of partial amnesty programs that allow U.S. taxpayers with unreported foreign financial accounts to make a voluntary disclosure of their unreported accounts and income in order to receive reduced penalties for their U.S. tax noncompliance. The OVDP is the current such IRS program. More than 43,000 taxpayers have entered the various programs, and the IRS is expected to collect more than $10 billion from those taxpayers. The IRS is also using information gathered through these amnesty programs to search for other banks and advisors that are helping U.S. persons conceal foreign accounts. Several other countries are implementing similar voluntary disclosure programs.
The IRS has also been obtaining “John Doe Summonses” that force various banks to provide information on individuals who may have violated U.S. tax law, even when the identity of these individuals is not known. Recent John Doe summonses have targeted foreign banks that held a large number of accounts reported in earlier versions of the OVDP.
As a result of various U.S. legal actions, a number of foreign bankers and investment advisors have pleaded guilty to helping Americans evade U.S. taxes. Many of these bankers and advisors are reportedly making deals with the U.S. government to provide information and cooperate with U.S. investigations in return for reduced sentences. In March, U.S. Senators Carl Levin and John McCain wrote a letter urging the DOJ to seek extradition of a few dozen Swiss bankers who are charged with helping Americans conceal foreign financial accounts and who have failed to appear in U.S. courts.
By early next year, foreign financial institutions will begin reporting certain information on accounts held by U.S. persons to the U.S. government, as the Foreign Account Tax Compliance Act (“FATCA”) begins to be implemented for the first time. FATCA requires U.S. financial institutions to withhold 30% of certain payments made to a foreign financial institution (“FFI”) unless that FFI has entered into an agreement with the IRS to report information to the IRS on its U.S. account holders or is located in a country that has entered into an agreement to share information with the U.S. The goal of the 30% withholding is to encourage FFIs to disclose information about U.S. account holders, thereby making it impossible for U.S. persons to hide assets at participating FFIs and evade U.S. taxes.
Withholding on payments made to non-participating banks will begin on July 1, 2014, but the first information reports to the IRS are due in March 2015 (related to the 2014 tax year). As a result of the regulatory burden of FATCA compliance, many FFIs are limiting the services they will provide to U.S. persons, or are refusing or “firing” U.S. clients.
While other countries were initially outraged by the passage of FATCA, some may implement similar laws. The G-20 recently agreed to implement a global standard for automatically exchanging information between tax authorities by the end of next year. Financial institutions in these countries will report various information directly to the governments involved.
With the looming implementation of FATCA and other ongoing efforts by the IRS and DOJ to root out U.S. taxpayers who have unreported foreign financial accounts, it may no longer be possible for U.S. persons to conceal unreported foreign accounts. If you have foreign financial accounts and have not fully reported them to the IRS on U.S. tax returns and Foreign Bank Account Reports (“FBARs”), you should seek professional assistance immediately.
Since 2009, The Wolf Group has assisted several hundred clients in coming into U.S. tax compliance and avoiding the draconian penalties that the IRS may impose on U.S. persons with undisclosed accounts. Please call Fan Chen at 703-502-9500 if you would like to schedule a consultation.