by Brian Mahany
We are never surprised anymore when the feds announce a new wave of indictments against taxpayers with unreported accounts. Until 2008, the IRS didn’t look very hard and prosecutions were few. As the economy has soured, tax authorities around the world have become quite creative in finding new revenue streams.
To enforce the tax laws, the IRS relies primarily on a system of voluntary compliance. The government assumes that most people will do the “right thing” and not cheat on their taxes. All of us have some larceny in our hearts, however, and the feds know that too.
The IRS operates one of the most effective publicity machines in the nation. Every year Uncle Sam makes sure that a mix of tax cheats are prosecuted. High profile, the guy next door, whites, blacks and in each of the 94 federal judicial districts. Why? The governments wants to make examples out of people. If we read that Joe the local barber went to jail for cheating on his taxes we may worry just enough to not cheat or at least keep the cheating to a minimum.
When it comes to foreign accounts, the IRS has been prosecuting not only taxpayers but the accountants, lawyers and bankers that helped the taxpayer set up an unreported account. The bigger question is how do the feds with guns and calculators (IRS’ Criminal Investigations Division) find the people to prosecute?
Great question and the answer gets more and more complex daily.
The IRS indicts bankers and accountants primarily to compel them to cooperate and give up the names of their U.S. clients with unreported accounts. If you were a banker facing prison wouldn’t you “sing” in exchange for a lighter sentence? Most do.
Beginning next year Congress requires foreign banks to disclose the names of account holders with ties to the U.S. Those ties may include a U.S. passport, U.S. mailing address or even a U.S. accountant. Technically, Congress doesn’t have jurisdiction to regulate foreign banks but no bank is isolated anymore and all transfer money to or from the U.S.
We are also good at convincing our international allies to assist us with our enforcement efforts. After all, they are in the same boat we are and busy looking for their own citizens with hidden accounts.
Some clients they were smart in how they repatriate their unreported funds. Instead of having a check mailed here (checks and wire transfers leave paper trails) they instead simply use a debit card or credit card to spend money here. One problem, though… those cards are either part of a debit card network or are cleared through Visa, Master Card and Discover. Yup, those organizations are subject to the IRS’s subpoena power.
The government has also been signing tax exchange agreements with many, many countries. All the nations are doing it. When the U.S. negotiated a new agreement with Panama it wasn’t long before we stationed IRS agents there.
Panama? Yes, it has been a favorite place for expats to hide. We also have agents in many other countries as well.
With a tax exchange treaty, the IRS can just have the [fill in the blank] cops do their dirty work.
One of the most aggressive nations in unearthing the identities of citizens with hidden accounts is Germany. Last week Swiss banking giant Julius Baer advised its German customers that an employee may have stolen sensitive client data. Germany frequently pays for stolen client lists. Unfortunately for those in the U.S. with unreported accounts, Germany shares it data with the IRS.
According to a recent Bloomberg report, UBS, Coutts (Scotland) and Merrill Lynch Bank Suisse SA have all reportedly investigated thefts related to the identity of foreign account holders. (None have reported finding any problems.)
What’s next? Who knows. One thing is certain, however, Uncle Sam and the rest of the developed world is getting better at finding unreported accounts.
If you have an unreported foreign account, take advantage of the IRS’ current amnesty program. For a one time penalty (plus tax, of course, on any unreported income), taxpayers avoid audit, criminal prosecution and huge civil fines and penalties – penalties that can be far in excess of the highest historical account balance.
The amnesty, called the Offshore Voluntary Disclosure Program (OVDI for short) has no end date but you are only eligible if you enter the program before the IRS finds you. If they knock on your door or get your name from a foreign bank first, all bets are off.
Many of our clients truly had no idea that foreign bank accounts must be disclosed annually. For these folks, a traditional disclosure might eliminate all or most penalties. There are no guarantees and you must really be able to prove that your failure to file an FBAR each year was not intentional. (FBAR is short for Report of Foreign Bank and Financial Accounts).
There are other options too for small accounts (under $75,000), “accidental Americans” and certain narrowly defined “low risk” taxpayers.
Our best advice is to consult with a really good tax lawyer who concentrates in foreign tax reporting.
The tax attorneys at Mahany & Ertl have helped many foreign taxpayers, dual nationals and American expats. Foreign partnerships and corporations, FBARs, tax amnesty, voluntary disclosures and criminal investigations are all things we know and handle daily.
For more information contact attorney Bethany Kroes at or by telephone at (414) 223-0464. All inquiries are fully protected by the attorney – client privilege and kept in strict confidence.
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and coming soon, San Francisco, California.