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Hiding Assets and Income in Offshore Accounts Again Made the IRS “Dirty Dozen” List

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On February 5, 2016, the IRS again stated that avoiding U.S. taxes by hiding money or assets in unreported offshore accounts remains on its annual list of tax scams known as the “Dirty Dozen” for the 2015 filing season.

The problem with offshore accounts is two-fold. On the one hand, there are numerous con-artists who use offshore accounts to lure taxpayers into scams and schemes. The second and a much larger problem for the IRS is the fact that many U.S. taxpayers used offshore account to hide assets and income from the IRS.

Fighting the strategy of using offshore accounts to hide assets and income has been one of the top priorities of the IRS since the early 2000s. The problem has been complicated by the fact that there are many legitimate reasons for having an offshore account – a fact that, unfortunately, has been largely ignored by journalists and the public opinion in the United States. Therefore, it is necessary for the IRS to approach the problem of offshore accounts carefully in order to avoid hurting innocent people.

Over the years, the IRS (with the help of Congress) has chosen five different and interrelated strategies to fight tax evasion through offshore accounts.

1. IRS Civil and Criminal Enforcement

IRS examinations, audits, subpoenas, and criminal enforcement play a central role in the IRS war against using offshore accounts to hide assets and income. The ability of the IRS to enforce U.S. tax laws is amazingly broad and the IRS will use it whenever it wishes.

Since 2009, the IRS conducted thousands of offshore-related civil audits that have produced tens of millions of dollars. The IRS has also pursued criminal charges leading to billions of dollars in criminal fines and restitutions.

Hence, brute force still looms large in fighting tax evasion through offshore accounts and creates enormous (and fully justified) fear in the hearts of many U.S. taxpayers. This fear is also central to the IRS ability to use the other four strategies listed below.

2. Extensive Reporting Requirement for Owners of Offshore Accounts

As owners of offshore accounts have already noticed, the number of reporting requirements with respect to offshore accounts has risen dramatically. In addition to FBAR (which has existed since the 1970s), FATCA introduced Form 8938 in 2011. Furthermore, Form 8621 and Schedule B to Form 1040 have been modified to require additional reporting with respect to offshore accounts. Other forms also indirectly require reporting of foreign accounts (through reporting of ownership or a beneficial interest in a foreign entity or a foreign trust).

By forcing U.S .taxpayers to do extensive reporting with respect to their offshore accounts, the IRS has achieved two goals at the same time. First, it has collected an enormous amount of information with respect to U.S. offshore accounts and their owners. This information can be used in a later investigation to track fund and identify patterns of behavior. In a short while, due to the implementation of FATCA in many jurisdictions around the world, this information will also be used to compare the banks’ information with the information provided by the taxpayers on their information returns.

Second, the enormous fines associated with offshore accounts reporting can create huge tax liabilities for noncompliant taxpayers. This provides the IRS with a financial incentive to pursue these taxpayers. These potentially disastrous noncompliance fines also serve to deter many taxpayers from engaging in risky tax evasion schemes.

Of course, one of the biggest problems associated with these reporting requirements is that the majority of persons, including tax accountants, never heard of them until they were already in trouble. When the IRS pressure started to rise, it was already too late for a lot of U.S. taxpayers to do simply current compliance and they had to pay fines to the IRS. It is important to emphasize that the process is by no means over – on the contrary, as the complexity of U.S. tax compliance continues to rise, a lot of taxpayers (and their accountants) still do not know about a lot of these requirements.

3. Voluntary Disclosures

In order to alleviate the reporting noncompliance nightmares for U.S .taxpayers, the IRS created a number of voluntary disclosure programs. The early programs were not very successful; however, after the IRS stunning victory in the 2008 UBS case, the 2009 Offshore Voluntary Disclosure Initiative (OVDI) turned out to be a huge success. The 2011 OVDP, 2012 OVDP and 2014 OVDP with 2014 Streamlined Compliance Procedures followed in quick succession and with even bigger success. Since 2009, more than 54,000 OVDP disclosures took place and the IRS has collected more than $8 billion; this is not taking into account the huge surge in Streamlined disclosures since 2014.

The information that has been collected through OVDP is used to identify noncompliant individuals and entire schemes to evade U.S. taxes through offshore accounts. The IRS then uses this information to pursue taxpayers with undeclared offshore accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas using offshore accounts. The IRS works closely with the Department of Justice (DOJ) to prosecute these tax evasion cases.

4. Swiss Bank Program

In addition to the voluntary disclosure program for individuals, the IRS also created a voluntary disclosure program for Swiss banks. Such voluntary disclosure program is, of course, an unprecedented event – never in history did one country force another country’s entire bank system to do a voluntary disclosure on the territory of that other country.

While the debate over this breach of Swiss sovereignty (although, technically, the Swiss government agreed to the Swiss Bank Program) is interesting, for the purposes of this article, it is important to note that Swiss Bank program was a huge step forward in attacking the usage of offshore accounts to hide assets and income.

By the end of February of 2016, about 80 Swiss banks went through Category 2 voluntary disclosure and paid penalties to the U.S. government. They also turned over enormous amount of information regarding their U.S. accountholders and the various schemes that Swiss bankers developed to hide assets and funds from the IRS. In essence, the Swiss bankers turned over to the IRS substantially all of the blueprints for tax evasion that they had created.

5. FATCA

The final major strategy for fighting the practice of using offshore accounts to hide assets and income from the IRS is the famous Foreign Account Tax Compliance Act or FATCA. Ever since FATCA entered into force, it has changed the global landscape of international tax compliance. One of the most salient features of FATCA is the fact that it forces foreign banks to report to the IRS all of the offshore accounts that they can identify as owned by U.S. persons.

This groundbreaking piece of legislation has had an enormous impact on the ability of the IRS to identify noncompliance by U.S. persons, because foreign banks now act as its agents and voluntarily disclose U.S. persons and their offshore accounts.

Contact Sherayzen Law Office for Help With Your Offshore Accounts

If you have undisclosed offshore accounts, you should contact Sherayzen Law Office as soon as possible. We have helped hundreds of U.S. taxpayers to bring their U.S. tax affairs in order while saving millions of dollars in potential penalty reductions. We furthermore help to reduce your income tax liability as a result of your voluntary disclosure and post-voluntary disclosure tax planning.

Contact Us NOW to Schedule Your Initial Consultation!

Four Swiss Banks Sign Non-Prosecution Agreements

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On May 28, 2015, four Swiss Banks – Société Générale Private Banking (Lugano-Svizzera), MediBank AG, LBBW (Schweiz) AG and Scobag Privatbank AG – signed Non-Prosecution Agreements under the Department of Justice Swiss Bank Program. These four Swiss banks now increased the list of the Swiss Banks that reached the resolution under the Program to the total of seven as of May 31, 2015.

Four Swiss Banks and Swiss Bank Program

The Swiss Bank Program was announced on August 29, 2013. It offered a path to Swiss banks to resolve all of their potential criminal liabilities in the United States in exchange for voluntarily turning over information regarding certain activities and detailed information regarding US-help financial accounts. Category 2 banks were also supposed to pay certain penalty under the rules specified by the Program.

All of the four Swiss Banks entered the Program and signed the Non-Prosecution Agreements on May 28. Under the program, the banks made a complete disclose of their cross-border activities, provided detailed account-by-account information for US-held accounts (direct and indirect interest), promised to cooperated with any treaty requests regarding account information, provided detailed information as to other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed, agreed to close accounts of accountholders who fail to come into compliance with U.S. reporting obligations, and paid appropriate penalties.

Compliance History of the Four Swiss Banks

The DOJ gave a fairly detailed history of all four Swiss Banks.

The largest of the four Swiss Banks – Société Générale Private Banking (Lugano-Svizzera) SA (SGPB-Lugano) – was established in 1974 and is headquartered in Lugano, Switzerland. Through referrals and pre-existing relationships, SGPB-Lugano accepted, opened and maintained accounts for U.S. taxpayers, and knew that it was likely that certain U.S. taxpayers who maintained accounts there were not complying with their U.S. reporting obligations. Since Aug. 1, 2008, SGPB-Lugano held and managed approximately 109 U.S.-related accounts, with a peak of assets under management of approximately $139.6 million, and offered a variety of services that it knew assisted U.S. clients in the concealment of assets and income from the Internal Revenue Service (IRS), including “hold mail” services and numbered accounts. Some U.S. taxpayers expressly instructed SGPB-Lugano not to disclose their names to the IRS, to sell their U.S. securities and to not invest in U.S. securities, which would have required disclosure and withholding. In addition, certain relationship managers actively assisted or otherwise facilitated U.S. taxpayers in establishing and maintaining undeclared accounts in a manner designed to conceal the true ownership or beneficial interest in the accounts, including concealing undeclared accounts by opening and maintaining accounts in the name of non-U.S. entities, including sham entities, having an officer of SGPB-Lugano act as an officer of the sham entities, processing cash withdrawals from accounts being closed and then maintaining the funds in a safe deposit box at the bank and making “transitory” accounts available, thereby allowing multiple accountholders to transfer funds in such a way as to shield the identity and account number of the accountholder. SGPB-Lugano will pay a penalty of $1.363 million.

Created in 1979 and headquartered in Zug, Switzerland, MediBank AG (MediBank) provided private banking services to U.S. taxpayers and assisted in the evasion of U.S. tax obligations by opening and maintaining undeclared accounts. In furtherance of a scheme to help U.S. taxpayers hide assets from the IRS and evade taxes, MediBank failed to comply with its withholding and reporting obligations, providing “hold mail” services and offering numbered accounts, thus reducing the ability of U.S. authorities to learn the identity of the taxpayers. After it became public that the Department of Justice was investigating UBS, MediBank hired a relationship manager from UBS and permitted some of that person’s U.S. clients to open accounts at MediBank. Since Aug. 1, 2008, MediBank had 14 U.S. related accounts with assets under management of $8,620,675. MediBank opened, serviced and profited from accounts for U.S. clients with the knowledge that many likely were not complying with their U.S. tax obligations. MediBank will pay a penalty of $826,000.

Of the four Swiss banks, it appears that LBBW (Schweiz) AG (LBBW-Schweiz) had the largest average balances per US-help account. Since August 2008, LBBW-Schweiz held 35 U.S. related accounts with $128,664,130 in assets under management. After it became public that the department was investigating UBS, LBBW-Schweiz opened accounts from former clients at UBS and Credit Suisse. Despite its knowledge that U.S. taxpayers had a legal duty to report and pay tax on income earned on their accounts, LLBW-Schweiz permitted undeclared accounts to be opened and maintained, and offered a variety of services that would and did assist U.S. clients in the concealment of assets and income from the IRS. These services included following U.S. accountholders instructions not to invest in U.S. securities and not reporting the accounts to the IRS and agreeing to hold statements and other mail, causing documents regarding the accounts to remain outside the United States. LBBW-Schweiz will pay a penalty of $34,000.

Headquartered in Basel, Switzerland, Scobag Privatbank AG (Scobag) was founded in 1968 to provide financial and other services to its founders, and obtained its banking license in 1986. Since August 2008, Scobag had 13 U.S. related accounts, the maximum dollar value of which was $6,945,700. Scobag offered a variety of services that it knew could and did assist U.S. clients in the concealment of assets and income from the IRS, including “hold mail” services and numbered accounts. Scobag will pay a penalty of $9,090.

It is interesting to note that, out of the four Swiss Banks, LBBW-Schweiz and Scobag paid the least penalties. Undoubtedly, the reason lies in the mitigation of penalties due to accounts disclosed by US person as part of their OVDP compliance.

Non-Prosecution Agreements and Four Swiss Banks

According to the terms of the non-prosecution agreements signed today, each of the Four Swiss Banks agreed to cooperate in any related criminal or civil proceedings, demonstrate its implementation of controls to stop misconduct involving undeclared U.S. accounts and pay the penalties in return for the department’s agreement not to prosecute these banks for tax-related criminal offenses.

“[These Non-Prosecution] agreements reflect the Tax Division’s continued progress towards reaching appropriate resolutions with the banks that self-reported and voluntarily entered the Swiss Bank Program,” said Acting Assistant Attorney General Caroline D. Ciraolo of the Department of Justice’s Tax Division. “The department is currently investigating accountholders, bank employees, and other facilitators and institutions based on information supplied by various sources, including the banks participating in this Program. Our message is clear – there is no safe haven.”

Contact Sherayzen Law Office for Professional Help With Your Voluntary Disclosure

As Swiss Banks (in addition to the four Swiss Banks mentioned in this article) sign Non-Prosecution Agreements and turn over information to the DOJ, the US taxpayers with undisclosed accounts in Switzerland, Cayman Islands, Israel, Lebanon, Panama, Singapore and other related foreign jurisdictions are operating under the increased risk of the IRS detection. Moreover, the on-going FATCA compliance introduces a similarly insupportable risk to US taxpayers worldwide.

The IRS discovery of your undisclosed foreign accounts may result in potentially catastrophic consequences, including criminal penalties and incarceration.

This is why, if you have undisclosed foreign financial accounts and any other foreign assets, contact Sherayzen Law Office professional help. Our experienced legal team will thoroughly analyze your case, determine your existing penalty exposure, analyze your voluntary disclosure options and implement the entire voluntary disclosure plan (including preparation of tax forms and legal documents).

Contact Us Today to Schedule Your Confidential Consultation!

FBAR Penalties vs Offshore Voluntary Disclosure Program Penalties

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There is a great confusion among international tax attorneys and Offshore Voluntary Disclosure Program (OVDP) applicants with respect to the OVDP Offshore Penalty and how it differs from the FBAR penalties. I already described in another article the OVDP penalties. In this article, I would like to compare and contrast some of the major features of the OVDP Offshore Penalty with the FBAR penalties.

FBAR Penalties

FBAR is one of the most unforgiving forms on the planet. The penalties associated with delinquent FBARs can be terrifying.

At the apex of the penalty structure are the criminal penalties that are imposed in association with a willful violation of the FBAR filing requirements under 31 U.S.C. section 5322(a), 31 U.S.C. section 5322(b), or 18 U.S.C. Section 1001. The criminal penalties may be up to 10 years in jail and $500,000 in fines.

Willful (i.e. where a person willfully fails to report an account or account identifying information) civil penalties equal to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation. See 31 U.S.C. section 5321(a)(5). Note, that a penalty in this case applies to each violation which is defined as each undisclosed account per year.

Even where the violation is non-willful, a person may be subject to a civil penalty of $10,000 per violation. Again, note that this is a penalty per violation – i.e. per each unreported account per each year.

For the purposes of this article, it is also important to note that the penalties apply only to “foreign financial accounts”. This term is defined broadly to include various types of accounts which are not normally associated with the word “account” (for example: a precious metals storage or a life insurance policy with a cash-surrender value). Nevertheless, the FBAR penalty would not apply to real estate or a business interest; it would apply only to foreign financial accounts – i.e. the balances on the foreign financial accounts and the number of these accounts constitute the primary penalty base for the calculation of the FBAR penalties.

OVDP Offshore Penalties

In contrast to traditional FBAR penalties, OVDP Offshore Penalty may mean a completely different penalty range and penalty base.

Offshore Penalty Range

Unlike the FBAR penalties, OVDP Offshore Penalty is a limited penalty – i.e. there is a certain penalty that you have to pay by virtue of participating into the program. It is very important to understand that most individual circumstances, willfulness, non-willfulness and reasonable case have virtually no impact on the calculation of the Offshore Penalty.

There are three tiers of the OVDP Offshore Penalty. First, there is a 5% penalty tier. There are various possibilities how one would be entitled to such a favorable treatment; a detailed discussion of the 5% penalty possibilities is described elsewhere on sherayzenlaw.com.

Second, there is a 12.5% penalty tier. An OVDP applicant would be entitled to this penalty tier only if, during each of the years covered by the OVDP, the taxpayer’s penalty base (see below for detailed explanation of what “penalty base” means) is less than $75,000.

Finally, if neither 5% nor 12.5% penalty tiers apply, the default penalty of 27.5% of the penalty base will apply.

Penalty Base

As important as the penalty range, it pales in comparison to the determination of the OVDP Offshore Penalty base, because these calculations can be vastly different from the FBAR penalties.

First, the Offshore Penalty is imposed only once on the highest amount of the penalty base during the Voluntary Disclosure period (i.e. years covered by the OVDP which sometimes can be quite tricky to figure out).

Second, the base for the Offshore Penalty includes a wide variety of assets including foreign bank accounts, the fair market value of assets in undisclosed offshore entities, and the fair market value of any foreign assets that were either acquired with improperly untaxed funds or produced improperly untaxed income. The general rule is that the offshore penalty is intended to apply to all of the taxpayer’s offshore holdings that are related in any way to tax non-compliance, regardless of the form of the taxpayer’s ownership or the character of the asset.

This means that the Offshore Penalty may include such assets as business ownership interests, stocks, artwork, automobiles, patents, trademarks, and (very important) real estate. Even ownership of U.S. businesses acquired with tainted funds may be open to the Offshore Penalty.

In other words, the penalty base of the OVDP Offshore Penalty may include a much greater variety of assets in addition to the assets already covered by the FBAR.

Penalty Differences Between FBARs and OVDP Should Influence Your Voluntary Disclosure Options

Given the tremendous differences in the range of penalties and the calculation of the penalty base, it is highly important (and I cannot stress this point enough) to properly analyze the potential tax liabilities under both methods before making the decision on whether to enter the OVDP or pursue a reasonable cause (so-called “noisy” or “modified”) voluntary disclosure. It is highly important that the client understands the differences in the calculations and the potential risks of pursuing either option.

Contact Sherayzen Law Office for Professional Help With the Disclosure of Your Foreign Financial Accounts

If you have undisclosed foreign financial accounts or other offshore assets, contact Sherayzen Law Office for legal help. Our experienced international tax law firm will thoroughly analyze your case, calculate your potential tax liabilities, present you with a range of options, and implement your voluntary disclosure plan (including preparation of all tax forms and legal documents).

No FBAR Penalties – Q&A 17 of the OVDP

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There are some taxpayers who should not be using the official IRS Offshore Voluntary Disclosure Program (OVDP) now closed. The IRS expressly singled out one category of such taxpayers in its Q&A 17 of the OVDP Rules.

Q&A 17 only applies to the taxpayers who reported and paid tax on all their taxable income for prior years but did not file FBARs. The key to the application of Q&A 17 is that there should be no underreported tax liabilities by the taxpayer and the taxpayer was not previously contacted regarding an income tax examination or a request for delinquent returns. In such a situation, the IRS is not likely to impose a penalty for the failure to file the delinquent FBARs.

Whether your situation falls within the scope of Q&A 17 should be determined by a tax attorney experienced in the area of voluntary disclosures. If your attorney determines that Q&A 17 applies to your case, you do not need to use the OVDP. Rather, your attorney should file the delinquent FBAR reports according to the FBAR instructions and attach a statement explaining why the reports are filed late.

While Q&A 17 appears to have a clear application, there are plenty of gray-area cases that almost reach the scope of this OVDP provision but still fall short of meeting all of the requirements. In such case, it will be up to the taxpayer’s attorney to determine the proper course of his client’s voluntary disclosure.

Contact Sherayzen Law Office for Voluntary Disclosure Help with Undisclosed Offshore Accounts

If you have unreported offshore accounts, contact Sherayzen Law Office for help with your voluntary disclosure options. Our experienced international tax firm will thoroughly review your case, assess your FBAR liability, identify the available voluntary disclosure options and implement the agreed-upon strategy (including preparation of all legal and tax documents).

2011 Form TD F 90-22.1 (FBAR) is Due on June 30, 2012

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Pursuant to the Bank Secrecy Act, 31 U.S.C. §5311 et seq., the Department of Treasury (the “DOT”) has established certain recordkeeping and filing requirements for United States persons with financial interests in or signature authority (and other comparable authority) over financial accounts maintained with financial institutions in foreign countries. If the aggregate balances of such foreign accounts exceed $10,000 at any time during the relevant year, FinCEN form 114 formerly Form TD F 90-22.1 (the FBAR form) must be filed with the DOT.

The FBAR must be filed by June 30 of each relevant year, including this year (2012). Thus, 2011 FBAR must be received by the DOT on June 30, 2012.  This rule is contrary to your regular tax returns where the mailing date determines whether the filing is timely.  There are no extensions available – the FBAR must be received by June 30 or it will be considered delinquent.

If the FBAR becomes delinquent, it may be subject to severe penalties.

Contact Sherayzen Law Office for FBAR Assistance

If you have any questions or concerns regarding whether you need to file the FBAR or how to prepare the form, please contact Sherayzen Law Office directly.  If you have not previous filed the FBARs and you were required to do so, contact our experienced international tax firm to schedule a consultation now.  We will assess your situation, determine your potential FBAR liability, explain the available options and guide you through this complex process of voluntary disclosure.