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2015 UBS Probe Poses Threat to US Owners of Undisclosed UBS Accounts

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This week, UBS Group AG confirmed that it was under a new investigation over whether the Switzerland bank sold unregistered securities to US taxpayers in violation of US law. This article will discuss the new UBS probe and the threat it poses to US owners of undisclosed UBS accounts who never went through an offshore voluntary disclosure. This article is not intended to convey tax or legal advice.

Prior Investigations and 2009 Deferred-Prosecution Agreement

The 2015 bearer bond investigation of UBS is the latest in the series of DOJ investigations of UBS. Previously, in 2009, as a result a landmark DOJ victory that started the today’s rout of bank secrecy laws throughout the world, UBS paid a $780 million dollar fine and disclosed 250 previously undisclosed UBS accounts of US taxpayers to the DOJ (some of the owners of these undisclosed UBS accounts were later criminally prosecuted by the IRS). The bank promised that it would be compliant with US law under its deferred-prosecution agreement with the DOJ. The agreement expired in October, 2010. This was a critical agreement for the US owners of undisclosed UBS accounts, and we will come back to this subject below.

In addition to the deferred-prosecution agreement in 2009, UBS also settled an antitrust case in 2011 concerning the municipal-bond investments market, and resolved a 2012 DOJ investigation involving alleged rigging of the London interbank offered rate (Libor). UBS was granted an agreement to extend the term of its non-prosecution deal in the latter investigation until later this year. Additionally, in a probe not involving the DOJ, UBS paid US, UK and Swiss authorities nearly $800 million in November to settle allegations that they did not have satisfactory controls to prevent traders from attempting to rig Forex dealing.

The DOJ also has reportedly also opened a new investigation concerning certain currency-linked structured products sold by UBS. International tax attorneys who worked with undisclosed UBS accounts for their US clients in the past know how common it was for UBS to sell these products to their US clients.

The 2015 UBS Investigation

As noted above, the new investigation is being conducted by the U.S. Attorney’s Office for the Eastern District of New York and from the U.S. Securities and Exchange Commission. UBS stated in its fourth-quarter report, “In January 2015, we received inquiries from the U.S. Attorney’s Office for the Eastern District of New York and from the U.S. Securities and Exchange Commission, which are investigating potential sales to U.S. persons of bearer bonds and other unregistered securities.” UBS added that it was cooperating with the authorities in the probes. According to various new sources, the bank is also being probed as to whether the alleged sales occurred while the bank was under DOJ supervision from its earlier 2009 tax evasion case.

Bearer bonds can be redeemed by anybody physically holding them. Because of the ease with which these instruments can be transferred, they are a potentially useful tool for enabling individuals to hide assets and evade taxes. While bearer bonds were not deposited on undisclosed UBS accounts, some US owners of undisclosed UBS accounts were owners of these unregulated instruments.

Undisclosed UBS Accounts and the 2015 UBS Investigation

According to various sources, if UBS is found to have breached the agreement by selling the unregistered bearer bonds to US persons in violation of US law during the time period in which the agreement was still in effect, it is possible that the DOJ will prosecute the bank under the original conspiracy charge, in addition to filing new charges and penalties.

The significance of this scenario lies in the fact that there may still be US taxpayers with undisclosed UBS accounts (whether owned directly, indirectly or constructively). Many of these taxpayers were trying to hide in the relative safety of the UBS 2009 Deferred-Prosecution Agreement, hoping that the worst was over for UBS.

Moreover, because UBS was classified as a Category 1 bank, it could not participate in the DOJ Program for Swiss Banks. This gave a wrong type of encouragement to some US owners of undisclosed UBS accounts not to come forward and go through a voluntary disclosure program.

In reality, however, due to the fact that UBS was the first bank that succumbed to the pressure from the US DOJ and disclosed previously undisclosed UBS accounts owned by US persons, the DOJ’s deal with UBS was relatively mild compared to the later penalties on other large Swiss Banks (such as Credit Suisse). Hence, there is a great incentive for the DOJ to re-open the investigation into UBS to force the bank to pay an amount equivalent to its other Swiss peers.

This means that, if the 2015 investigation is successful and the DOJ can get around the 2009 Deferred-Prosecution Agreement, the UBS may, in a new deal with DOJ, conduct a wholesale disclosure of the US owners of undisclosed UBS accounts – not only the current owners, but also the US owners who had undisclosed UBS accounts in the years 2008-2010.

What Should the US Owners of Undisclosed UBS Accounts Do?

Thus, the 2015 DOJ investigation of UBS could have disastrous consequences for US persons who owned undisclosed UBS accounts between the years 2008 and the present time. The premature disclosure of undisclosed UBS accounts may foreclose very important voluntary disclosure options for the US owners of these undisclosed UBS accounts. The subsequent investigations by the IRS may result in draconian civil penalties and even criminal prosecutions.

This is why US persons who owned undisclosed UBS accounts should contact an experienced international tax attorney to discuss their voluntary disclosure options as soon as possible.

Contact Sherayzen Law Office for Help with Your Undisclosed Foreign Accounts

If you are have not disclosed your foreign accounts (including undisclosed UBS accounts) to the IRS, you are advised to immediately contact the experienced international tax law firm of Sherayzen Law Office, Ltd. For many years now, we have been helping US taxpayers like you to bring their US tax affairs into full compliance, and we can help you.

Contact Us to Schedule Your Initial Consultation! Remember, contacting Sherayzen Law Office is Confidential!

BCGE FATCA Letter

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In a previous article, I started the discussion of various FATCA letters issued by banks around the world by concentrating on the HSBC FATCA letter. In this article, I would like to shift focus to a different part of the world and discuss the Swiss format with BCGE FATCA Letter.

BCGE FATCA Letter: General Format

BCGE (Banque Cantonale de Geneve) is determined to comply with FATCA. For this purpose, it developed its own format of a FATCA letter which closely follows the format adopted by most Swiss banks.

BCGE FATCA Letter follows what I call “comprehensive format” (as opposed to the “reference format” followed by HSBC). This means that BCGE FATCA Letter contains all of the main questions within the body of the letter and references only supplementary US forms (like W8BEN and W9). Thus, BCGE FATCA Letter allows BCGE to collect all of the information necessary for its own FATCA compliance in one place and without the need to create any other specialized forms.

It should be noted that the description of the format so far concentrated on the most common BCGE FATCA Letter for individuals, but there are variations in the form for trusts and corporations. Furthermore, there is a variation for the form for certain other circumstances. Since most US account holders who receive a BCGE FATCA are individuals, I will concentrate on the most common format only.

Let’s review each part of the common BCGE FATCA Letter.

BCGE FATCA Letter: Personal Information

The BCGE FATCA Letter commences with the confirmation of the identity and personal information (including place of residence) of the account holder. This section also commences the examination of the account holder’s US tax status by requiring the account holder to list all of his nationalities and the country of birth.

BCGE FATCA Letter: “Per Se” US Status

This is the most critical part of BCGE FATCA Letter because it focuses on the main designations of US person. In particular, this part of BCGE FATCA Letter asks whether the account holder has US national, is a US tax resident (which is asked in two different ways which mean the same thing – lawful permanent resident and the “green card” test), and whether the substantial presence test is satisfied. Definition for the later is provided in a footnote.

If there is at least one affirmative answer to these first four questions, BCGE will automatically classify the account holder as a US person subject to FATCA reporting. Once this determination is made, BCGE FATCA Letter requires the account holder to submit Form W-9 and a special BCGE Form 6387 “Consent to the disclosure of data according to FATCA”. Failure to complete Form 6387 may result in the BCGE designation of the account under FATCA as belonging to a “recalcitrant account holder”.

Please, note that once a status of US person is established, BCGE is very likely to close any securities accounts of a US account holder.

BCGE FATCA Letter Questions 1.5-1.8 on Potential US Status

If the account holder negatively answered the first four questions, the next part of the BCGE FATCA Letter asks a series of questions to see if the account holder if a US person in some other way. Most of these questions also require a submission of Form W-8BEN (with a non-US passport) or W-9.

BCGE FATCA Letter usually contains the following questions. First, whether the account holder was born in the USA or in a US territory (a definition is provided for this term). If the answer is “yes”, but the account holder believes that he is still not a US person, then he must submit Form W-8BEN, a non-US passport or a similar document, and a copy of the certificate of loss of US nationality. If the certificate cannot be produced, BCGE FATCA Letter automatically classifies the account holder as a US person and requires him to submit Form W-9 and a Consent to the disclosure of data under FATCA.

Second, BCGE FATCA Letter asks whether the account holder is a US taxpayer for any other reason – this a “catch all” question to make sure that BCGE does not miss a potential FATCA requirement. BCGE FATCA Letter lists a number of possibilities of how one becomes a US person : joint tax status with a US spouse, in the process of renouncing US nationality or green card, effectively connected income and owner of a US property. Again, supporting documentation or Form W-9 with the Disclosure Consent under FATCA are required.

Finally, BCGE FATCA Letter addresses the remaining potential for the account holder to be a US taxpayer such as US mailing address, care-of address, postbox, and fixed or mobile telephone number. If the account holder has any of these items, then BCGE FATCA Letter asks him to provide Form W-8BEN with a non-US passport (or similar documentation).

BCGE FATCA letter: Confirmation of Beneficial Ownership Status

By signing BCGE FATCA Letter, the account holder affirms that he is the beneficial owner of the bank account.

BCGE FATCA Letter: Treaty Relief Considerations

If it is established that the account holder is NOT a US person, BCGE FATCA Letter contains a fairly unique aspect – discussion of the possibility of claiming a favorable tax status with respect to investments into US Securities. Most other banks usually discuss this important issue in a separate letter, but BCGE FATCA Letter actually incorporates this issue within its body. Form W-8BEN is required to proceed.

BCGE FATCA Letter: Notice and Reimbursement Requirements Imposed on Account Holder

Finally, a BCGE FATCA Letter usually contains another interesting topic – the shift of risk to the account holder through imposition of notice requirements. Since this is a tactic which is adopted increasingly by foreign banks, it is useful to explore this requirement with specificity.

BCGE FATCA Letter states that, by signing the Letter, the account holder “undertakes to inform the Bank of any changes in circumstances resulting in a change of tax status, as the one indicated below and transmit the necessary documents or forms within 30 days after the change in circumstances.” BCGE FATCA Letter sets forth three such changes: change of residence, change of nationality and amendment of the account holder’s tax status (such as receipt of green card, substantial presence in the United States, et cetera).

BCGE FATCA Letter goes on to state that if the declarations made by the account holder in the Letter become invalid for some reason (such as belated discovery of U.S. status), the account holder must transmit to BCGE a new declaration of status with a Form W-9 and FATCA waiver.

The key phrase, however, is with respect to what happens if the information submitted by the account holder within the BCGE FATCA Letter turns out to be incorrect or incomplete. In such a case, the account holder “undertakes to indemnify the Bank for all damages it may suffer” as a result of relying on the incorrect declarations made in the BCGE FATCA Letter. It is unclear whether failure to comply with the Notice requirement is equally subject to this reimbursement requirements, but it seems to be the case.

Thus, it appears that BCGE FATCA Letter decisively shifts all risk of an incorrect declaration (even if non-willful due to belated discovery) from BCGE to the account holder. This is why it is important for the account holder’s attorney to carefully review this document and negotiate the necessary changes.

Contact Sherayzen Law Office for Help With FATCA Compliance

If you received a FATCA letter regarding an undisclosed personal or business account, contact Sherayzen Law Office for professional help. Our team of international experts will thoroughly review your case, analyze your current FBAR and FATCA exposure, recommend the proper voluntary disclosure plan and help you implement it (including preparation of all necessary legal documents and tax forms).

Contact Us to Schedule Your Confidential Consultation Now!

IRS Notice 2014-52 Regarding Inversions and “Hopscotch Loans”

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On September 22, 2014, the Department of the Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) issued Notice 2014-52, “Rules Regarding Inversions and Related Transactions” (“Notice”) in the wake of recent inversions conducted by many US companies such as by Medtronic, Chiquita Brands, Pfizer and others.  Treasury and the IRS highlighted in the Notice that they were “concerned that certain recent inversion transactions are inconsistent with the purposes of sections 7874 and 367 of the Internal Revenue Code… certain inversion transactions are motivated in substantial part by the ability to engage in certain tax avoidance transactions after the inversion that would not be possible in the absence of the inversion.”

To address these concerns regarding inversions, Treasury and the IRS announced in the Notice that they intend to issue new regulations under Internal Revenue Code (“IRC”) Sections 304(b)(5)(B), 367, 956(e), 7701(l), and 7874. In this article we will briefly explain the new regulations intended to be issued under IRC Section 956 that seek to prevent the avoidance of tax in this section “[T]hrough post-inversion acquisitions by controlled foreign corporations (“CFC’s”) of obligations of (or equity investments in) the new foreign parent corporation or certain foreign affiliates”. Such obligations are also commonly referred to as “Hopscotch loans”. Notice Section 3.01, “Regulations to Address Acquisitions of Obligations and Stock that Avoid Section 956” specifically addresses such issues.

This article is intended to provide explanatory material regarding the new inversion regulations as they relate to IRC Section 956 aspects; the article does not convey legal or tax advice. Please contact experienced international tax attorney Eugene Sherayzen for questions about your tax and legal needs.

Inversions and the Use of “Hopscotch Loans” to Avoid U.S. Taxation under Pre-Notice Rules

In general, under IRC Section 956, if a CFC subsidiary of a U.S. parent makes a loan to (or equity investment in) the U.S. parent, it will be treated as a deemed repatriation of the CFC’s earnings and profits, even though no actual dividend may be distributed. IRC Section 956(c)(1) specifically provides that U.S. property is “[A] any property acquired after December 31, 1962, which is… (B) stock of a domestic corporation; (C) an obligation of a United States person…” (See Section 956 for additional definitions of “U.S. property” for the purposes of this provision).

This deemed repatriation will be taxable to the CFC’s U.S. shareholders. As stated in the Notice, the taxable amount for any taxable year is the lesser of, “(1) the excess (if any) of—(A) such shareholder’s pro rata share of the average of the amounts of United States property held (directly or indirectly) by the controlled foreign corporation as of the close of each quarter of such taxable year, over (B) the amount of earnings and profits described in section 959(c)(1)(A) with respect to such shareholder, or (2) such shareholder’s pro rata share of the applicable earnings of such controlled foreign corporation.”

This is why many U.S. parents and CFC subsidiaries sought to avoid taxation by doing inversions in which new foreign parent companies would be formed that were not CFCs; the existing CFC would then make a loan to the new foreign parent (the “Hopscotch loan”), and the amount could at some future point then be lent to the former U.S. parent. As Treasury and the IRS stated in the Notice, “The ability of the new foreign parent to access deferred CFC earnings and profits would in many cases eliminate the need for the CFCs to pay dividends to the U.S. shareholders, thereby circumventing the purposes of section 956.”

Changes to Inversions under Notice 2014-52, Section 3.10(b)

Under IRC Section 956(e) the Treasury Secretary is directed to prescribe regulations to prevent tax avoidance of the provisions of section 956 through reorganizations or otherwise, and the Notice specified that inversions constitute such transactions. To address the inversions strategy, Treasury and the IRS noted that they intend to issue regulations, “[P]roviding that, solely for purposes of section 956, any obligation or stock of a foreign related person (within the meaning of section 7874(d)(3) other than an “expatriated foreign subsidiary”) (such person, a “non-CFC foreign related person”) will be treated as United States property within the meaning of section 956(c)(1) to the extent such obligation or stock is acquired by an expatriated foreign subsidiary during the applicable period (within the meaning of section 7874(d)(1)).”

An “expatriated foreign subsidiary” is defined in the Notice (except as provided in the succeeding paragraph) as a “CFC with respect to which an expatriated entity… is a U.S. shareholder”, but it does not include a “CFC that is a member of the EAG immediately after the acquisition and all transactions related to the acquisition are completed (completion date) if the domestic entity is not a U.S. shareholder with respect to the CFC on or before the completion date” (“EAG” is defined in the Notice to mean an “expanded affiliated group”). Additionally, under the Notice, “[A]n expatriated foreign subsidiary that is a pledgor or guarantor of an obligation of a non-CFC foreign related person under the principles of section 956(d) and §1.956-2(c) will be considered as holding such obligation.”

Effective Dates of the New Regulation Concerning Inversions

Subject to certain exceptions, the regulations under Notice section 3.01(b), “[W]ill apply to acquisitions of obligations or stock of a non-CFC foreign related person by an expatriated foreign subsidiary completed on or after September 22, 2014, but only if the inversion transaction is completed on or after September 22, 2014.”

Contact Sherayzen Law Office for Help With International Tax Matters

International tax matters often involve very complex issues, and it is advisable to seek the assistance of a tax attorney in this area. If you have questions regarding taxation of CFC’s, are in need of international tax planning, or have any other tax and legal questions, please contact Sherayzen Law Office, Ltd.

Treatment of Business Profits under the Canada-US Tax Treaty

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In this article we will briefly examine the treatment of the business profits of a resident of a contracting State under the Canada-US Income Tax Convention, and the important definition of a “permanent establishment” for purposes of determining the potential taxability of income of such profits.

This article is intended to provide informative material for US taxpayers involved with US-Canada cross-border businesses, and is not intended to constitute tax or legal advice. Please contact the experienced international tax law firm of Sherayzen Law Office, Ltd. for issues involving the Canada-US Tax Treaty.

Business Profits under the Canada-US  Tax Treaty

Under the US-Canada Tax Treaty, the business profits of a resident of a Contracting State, “[S]hall be taxable only in that State unless the resident carries on business in the other Contracting State through a permanent establishment situated therein.” (See the definition of “permanent establishment” in next section). Hence, if the resident of a Contracting State carries on, or has carried on, such business, then the business profits of the resident may be taxed in the other State but only to the extent attributable to the permanent establishment.

In determining the business profits of a permanent establishment, certain deductions incurred for the purposes of the permanent establishment, such as executive and general administrative expenses (whether in the State in which the permanent establishment is situated, or elsewhere) may be allowed. However, under the Canada-US Tax Treaty, a Contracting State is not required to allow the deduction of an expenditure which is not generally deductible under the taxation laws of such State.

Additionally, the Canada-US Tax Treaty states that “no business profits shall be attributed to a permanent establishment of a resident of a Contracting State by reason of the use thereof for either the mere purchase of goods or merchandise or the mere provision of executive, managerial or administrative facilities or services for such resident.”

Definition of Permanent Establishment under the Canada-US Tax Treaty

Article V of the Canada-US Tax Treaty provided the original definition of the term “permanent establishment”. As stated in the Canada-US Tax Treaty, the term is defined to mean “[a] fixed place of business through which the business of a resident of a Contracting State is wholly or partly carried on.” Under the Canada-US Tax Treaty, permanent establishment includes: (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; and (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources. Furthermore, a building site or construction or installation project constitutes a permanent establishment provided that it lasts more than 12 months. In addition, “A person acting in a Contracting State on behalf of a resident of the other Contracting State other than an agent of an independent status to whom paragraph 7 applies shall be deemed to be a permanent establishment in the first-mentioned State if such person has, and habitually exercises in that State, an authority to conclude contracts in the name of the resident.” (Please see Article V of the Canada-US Tax Treaty for more specific examples of a “permanent establishment”).

The Fifth Protocol (the “Protocol”) to the Canada-US Tax Treaty, signed in September of 2007 and entered into force on December 15, 2008, further modified the definition of permanent establishment. Under the Protocol (Article 3, Paragraph 2), an “enterprise of a Contracting State” that provides services in the other Contracting State may be deemed to have a permanent establishment if it meets at least one of the following conditions:

“(a) Those services are performed in that other State by an individual who is present in that other State for a period or periods aggregating 183 days or more in any twelve-month period, and, during that period or periods, more than 50 percent of the gross active business revenues of the enterprise consists of income derived from the services performed in that other State by that individual; or (b) The services are provided in that other State for an aggregate of 183 days or more in any twelve-month period with respect to the same or connected project for customers who are either residents of that other State or who maintain a permanent establishment in that other State and the services are provided in respect of that permanent establishment.”

Further, the diplomatic notes of Annex B to the Protocol added that, “[t]he principles of the OECD Transfer Pricing Guidelines shall apply for purposes of determining the profits attributable to a permanent establishment”.

Elimination of Article XIV of the Canada-US Tax Treaty

The Protocal had further important impact with respect to services defined as “Independent Personal Services” – Article 9 of the Protocol eliminated Article XIV of the Canada-US Tax Treaty (“Independent Personal Services”). Under previous Article XIV a resident of a Contracting State performing independent personal services in the other Contracting State could be taxed if such “individual has or had a fixed base regularly available to him in that other State but only to the extent that the income is attributable to the fixed base.” The business profits rules explained above and the various definitions of permanent establishment now determine the taxability of such cases.

Contact Sherayzen Law Office for legal help with respect to Canada-US Tax Treaty

Treaty interpretation, international tax resolution and international tax planning may involve very complex issues, and it is advisable to seek the assistance of an international tax attorney in this area. This is why it is advised that you contact Sherayzen Law Office to secure professional legal help involving issues related to Canada-US Tax Treaty.

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Quiet Disclosure: The Russian Roulette of FBAR Disclosures

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There used to be a time when quiet disclosures with respect to offshore income and accounts were routinely recommended by accountants and even attorneys. Even as the tide turned against non-compliant U.S. taxpayers with offshore accounts in 2008-2009 with the spectacular IRS success in the UBS case and the announcement of the 2009 Offshore Voluntary Disclosure Program, these tax professionals persisted in advising their clients to follow the “quiet” course of action. Amazingly enough, even in March of 2014, I still see clients who have been advised to conduct quiet disclosures without adequate assessment of risks that such course of action entails.

In this article, I will argue that the era of quiet disclosures is over and a non-compliant taxpayer who embarks on this course is assuming the risks comparable to engaging in a game of a Russian Roulette with the IRS.

Definition of “Quiet Disclosure”

The definition of what constitutes “quiet disclosure” has changed over time; at some point, there were tax professionals who used it in such as a broad manner as to include something that we would not consider as quiet disclosure today but rather “reasonable cause disclosures” (also known as “modified voluntary disclosures” or “noisy disclosures”).

Today, the term generally refers to disclosures where a taxpayer would file amended returns, pay any related tax and interest (oftentimes, the payment of accuracy-related penalties is included in such a disclosure) for previously unreported offshore income, and file the current year’s information returns without otherwise notifying the IRS.

Note the two critical aspects of this definition that differentiate quiet disclosures from any other types of voluntary disclosures. First and foremost – “without otherwise notifying the IRS”. This is the “quiet” aspect of the disclosure. At no point is the taxpayer notifying the IRS about his non-compliance; he just simply hopes to pay the tax with interest without attracting IRS attention to his prior non-compliance.

The second critical aspect of quiet disclosures is compliance with current year’s information returns (such as FBARs, Forms 5471, et cetera), but not prior years’ information returns. Filing prior years’ information returns would imply providing IRS with evidence of prior non-compliance and, without adequate explanation, a set of penalties may be imposed on the taxpayer. This is why, in a quiet disclosure, the non-compliant taxpayer only files the current year’s FBAR.

Current International Tax Enforcement of FBAR Compliance; Impact of FATCA

It is my argument that, in the current international tax enforcement environment, the quiet discloser strategy is likely to have a counter-productive effect and may actually lead to disastrous results later. So, what is so different about today’s world versus the one in 2007?

Two words summarize the difference: “UBS” and “FATCA”. The IRS victory in the UBS case in 2008 marked a radical change to the worldwide tax compliance and completely overthrew the traditional conception of the bank secrecy laws (at least, with respect to U.S. taxpayers). The IRS proved that it can get to U.S. taxpayers wherever they have their accounts despite the sovereign objections of other countries; most shockingly, the IRS proved it in a country the name of which was synonymous with “bank secrecy” for centuries. This is one of the reasons why the 2009 OVDP, 2011 OVDI and the current 2012 OVDP programs proved to be such a success.

If the UBS case seriously crippled the bank secrecy laws in Switzerland, the enaction of the Foreign Account Tax Compliance Act (“FATCA”) by the U.S. Congress in 2010 dealt a death blow to the bank secrecy laws worldwide with far reaching consequences. FATCA not only swept away the bank secrecy considerations in Switzerland, but the great majority of other jurisdictions such as Liechtenstein, Monaco, Jersey Islands, Lebanon, Panama, the various Caribbean islands, and other places where bank secrecy laws protected non-compliant U.S. taxpayers.

Moreover, by turning foreign banks into U.S. reporting agents who voluntarily report information on all of their U.S. accountholders, the IRS is gradually achieving its long-term goal of worldwide tax compliance with only a fraction of the costs that would otherwise be necessary if the IRS were to investigate each bank in the world individually (something that the IRS simply would not have the resources to do).

In such a tax enforcement environment, it is dangerously naive to expect prior FBAR non-compliance would not be discovered by the IRS – an assumption that forms the core of the quiet disclosure strategy.

Swiss Program for Banks; Willful and Criminal Penalties

In addition to the tectonic shifts in the international tax compliance as a result of the UBS Case and FATCA, the U.S. government pushed the concept of the “voluntary compliance” to the extreme through the U.S. Department of Justice (“DOJ”) Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks (the “Program”). In essence, this is a voluntary disclosure program for the Swiss Banks, where the Swiss Banks have to disclose information with respect to U.S. taxpayers in exchange for the DOJ”s promise not to sue them.

There is one particular aspect of the Program that I want to emphasize because of its relevance to the quiet disclosure strategy – the disclosure of U.S. accountholders goes back to August 1, 2008. This means that if a U.S. taxpayer with unreported Swiss accounts from 2008 made a quiet disclosure in the tax year 2009, his former non-compliance will be exposed by the Program.

Not only that, but, at this point, his prior non-compliance is likely to be considered willful and the prospect of gigantic willful civil and criminal penalties becomes almost imminent (especially, if his ability to enter the OVDP is hindered for one reason or another). See, for example, this passage from the FAQ instructions to OVDP: “When criminal behavior is evident and the disclosure does not meet the requirements of a voluntary disclosure under IRM 9.5.11.9, the IRS may recommend criminal prosecution to the Department of Justice” (see FAQ 16).

It is important to note that there are very good reasons to believe that the “Swiss Program for Banks” scenario is likely to be repeated elsewhere with uncertain look-back periods.

FBAR Quiet Disclosure Is Likely to Lead to Untenable Willful FBAR Non-Compliance in the Event of IRS Discovery

Now, we are approaching the core reasoning behind my earlier argument that quiet disclosure is similar to playing a Russian roulette. We have already established that the possibility of the IRS discovery of prior non-compliance has become increasingly likely under FATCA. We have also determined that willful failure to file an FBAR under the quiet disclosure strategy may lead to the imposition of willful civil and, possibly, criminal penalties. Finally, we also considered that a third-party disclosure (most likely, a bank that discloses under FATCA or the Program) is likely to prevent the taxpayer from entering the OVDP.

The effect of putting these three propositions together is obvious and explosive at the same time: engaging in a quiet disclosure policy may result in the discovery of prior FBAR non-compliance, such non-compliance is likely to be considered by the IRS as willful, and the taxpayer is likely to lose the safe harbor of the OVDP. The end result may be absolutely disastrous: FBAR willful civil penalties of up to $100,000 per account per year with potential FBAR criminal penalties (huge monetary penalties and incarceration).

The IRS has stated this openly in its FAQ instructions to the OVDP: “Taxpayers are strongly encouraged to come forward under the OVDP to make timely, accurate, and complete disclosures. Those taxpayers making ‘quiet’ disclosures should be aware of the risk of being examined and potentially criminally prosecuted for all applicable years” (see FAQ #15).

Contact Sherayzen Law Office of Professional Help With Your Offshore Voluntary Disclosure of Foreign Assets and Foreign Income

If you have undisclosed foreign account or other assets, do not fall prey to the Russian Roulette quiet disclosure solution.

Rather, you should contact the international tax law firm of Sherayzen Law Office. We are a team of experienced tax professionals who have an expertise in the voluntary disclosure of offshore assets and income. We can help you.

Contact Us to Schedule a Confidential Consultation NOW.