The End of Secret Offshore Banking
At the start of our new millennium, banking secrecy in various havens around the world, notably Switzerland, appeared to be untouchable. Yet just a few years later that secrecy is in tatters, with most of those countries (that relied heavily on banking for their income and prosperity) agreeing to inform the US government about US-connected individuals (US citizens, permanent residents and work visa holders) who currently or who previously had, accounts in their banks and financial institutions. This campaign for transparency (and the end or weakening of Swiss bank secrecy) came about when the US used its criminal codes to indict a series of Swiss banks and bankers, beginning most notably with the Union Bank of Switzerland (UBS) for conspiring with US customers to evade taxes.
Why did the US decide to go after UBS after decades of knowing that billions of dollars had been stashed in its accounts by US citizens and residents? That decision coincided with the Great Recession and financial crisis that began in 2007, when US government revenue was falling and expenses increasing. In short, the US needed the tax revenues and undeclared foreign account earnings were too juicy a target to ignore any longer.
UBS, the Swiss bank, with its survival as an international bank at stake, soon caved in to the US demands. It sought and received approval from the Swiss parliament to reveal formerly-private information about certain US-based account holders. With this first hole in the wall of Swiss banking secrecy opened, the US Department of Justice opened direct investigations into approximately one dozen additional specific banks (such as Credit Suisse, Wegelin, Zurcher Kantonalbank, and others) and then, on DATE, a broader “Swiss Bank Program” into which over 100 banks entered and began a self-audit of practices and accounts relating to US persons and US tax evasion. This unraveling of bank secrecy was then mirrored worldwide through the slow-but-steady implementation of a US law known as FATCA (Foreign Account Tax Compliance Act) which required every bank of every one of the 100-plus signatory countries, to review its account-holder data for indications of potential connection to the US, and where it finds those connections, seek clarification from those account-holders.
Foreign Bank Secrecy Is Done: Your Foreign Accounts Must Be Disclosed to the US
Today there is nearly nowhere in the world to stash funds or securities out of scrutiny from the US taxman. But it gets worse: even if the owner moves the assets from one bank to another or home to the US, many banking institutions and countries have or will be compiling ‘leaver lists’ – literally lists of those who left the country or institution ahead of US tax enforcement. These records will be made available – some already have been – to the US authorities. These lists will eventually be used for tax enforcement and even criminal enforcement action.
Offshore Tax Evasion Penalties
The penalties for offshore tax evasion are severe. Willful evasion is a criminal offense and prison terms can be – and have – been imposed. And while not every instance of offshore tax evasion leads to criminal prosecution, the legal fees for a defense attorney who will campaign to avoid prosecution, can easily exceed $100,000.
Even if you successfully avoid criminal prosecution, the financial penalties associated with undisclosed foreign accounts are breathtaking.
While in general, unpaid tax can only be assessed by the IRS for the last three (and less often, six) tax years, the tax code has in more recent years been mined with several exceptions to that general rule, not least among them the provision that for tax returns from 2007 forward which should have contained an international information return (e.g. Forms 3520, 3520-A, 5471, 8621 or 8938), an assessment of unpaid tax due may always be made, forever, until three years after the filing of that needed return. (We might call this the ‘frozen statute of limitations.’)
Additionally or alternatively, assessment may be made for any year in which the tax return was fraudulent in nature – and while this is a rare claim, it does exist.
Importantly, as to any year where the statute for assessment remains open, the taxpayer will be made to pay not just unpaid tax and interest, but may also be assessed with a seemingly limitless variety of penalties.
If all this weren’t bad enough, residents of states with income taxes, such as California, can expect to pay mirroring tax on those income amount. Fundamentally, though, it is the IRS that poses an existential danger to undeclared foreign account holders, because it is federal law which allows for penalties that, in extremis, can equal or exceed the literal value of the account itself. This is a bleak prospect for any account holder, and underscores how seriously this matter should be taken.
The IRS has set up a variety of voluntary disclosure programs to those who make contact with the IRS before the IRS learns the taxpayer’s name. See Offshore Account Disclosure Basics – Part 2, Tax Amnesty: The IRS 2012 Offshore Voluntary Disclosure Program for a discussion of the IRS’ 2012 Offshore Voluntary Disclosure Program (known as OVDP), and related tax matters.