[Post Updated 2020] U.S. taxpayers are required to report offshore financial holdings. This includes bank accounts, certificates of deposit, offshore brokerage accounts and even some life insurance products. Reporting is done annually on a Report of Foreign Bank and Financial Accounts, more commonly known as an FBAR form. (Depending on how those assets are held, there may be a host of other forms required as well.) While some people think of secret numbered Swiss bank accounts when thinking about offshore finances, many Americans have accounts, hedge fund holdings and insurance products in the Cayman Islands.
Coming directly on the heels of the IRS’ agreement with Switzerland to access Swiss bank records, the United States and the Cayman Islands have reached a similar accord. The Caymans becomes one of the newest countries to sign on to the Foreign Account Tax Compliance Act (FACTA). Congress passed FATCA in 2010 to require foreign banks and financial institutions to provide information about accounts with ties to the United States.
The IRS hopes that FATCA will force more people to comply with the existing FBAR laws. Failure to file an FBAR can subject taxpayers to prison (unlikely) or fines as high as $100,000 or 50% of the highest account balance over the last 8 years. FATCA imposes penalties on banks that don’t turn over records.
The traditional bank secrecy jurisdictions such as the Cayman Islands are quickly becoming more transparent. At the same time, the IRS is getting much better at ferreting out unreported foreign accounts.
In announcing the decision to join FATCA last month, Cayman’s Minister for Financial Services Wayne Panton said, “As an international financial centre that contributes to the efficient functioning of global markets, the initialling and subsequent signing of the [FATCA agreement] with the United States will again demonstrate Cayman’s commitment to engage in globally accepted tax and transparency initiatives”.
In lieu of individual banks and other financial firms directly reporting to the IRS, the Cayman government negotiated to be the collector of information. They will then provide the information to the IRS.
The automatic reporting provisions of FATCA and the agreement with the Cayman Islands begins next year. Banks will be required to do a look back to catch anyone who simply elected to close their account or transfer their money in anticipation of the new law.
Update: In March 2016, the Justice Department and IRS prosecuted two Cayman financial institutions. Cayman National Securities Ltd. and Cayman National Trust Co. Ltd. pled guilty to criminal conspiracy charges related to helping Americans hide more than $130 million in offshore accounts from the IRS and to evade U.S. taxes on the income earned in those accounts.
After the convictions, a senior Justice Department official said, “Today’s convictions make clear that our focus is not on any one bank, insurance company or asset management firm, or even any one country. The Department and IRS are following the money across the globe – there are no safe havens for U.S. citizens engaged in tax evasion or those actively assisting them.”
Despite the two high profile convictions, Americans still try to hide money in the Cayman Islands and apparently there are still banks and corporate service companies happy to help them. A 2019 report from the Caribbean Financial Action Task Force gave the Cayman Island’s banking sector low marks for “a lack of controls for beneficial ownership information, holes in the regulation and supervision of financial institutions, a lack of independence for the Financial Reporting Authority (FRA) and a lack of safeguards and regulations for cash couriers.”
The reference to a lack of controls for beneficial ownership information is particularly significant. Tax cheats often create shell companies in jurisdictions that don’t have robust reporting requirements. That allows the taxpayer to hide money in a corporate name, especially if the country where the account is located doesn’t require identification of the company’s beneficial owners.
IRS Whistleblower Program and Offshore Tax Cheats
Despite FATCA and the growing number of information exchange agreements between the United States and other countries, tens of thousands of taxpayers continue to evade taxes and hide money offshore.
Owning an offshore account is not illegal. Under US law, these accounts must be reported, however. In fact, there are often legitimate reasons for doing so. In our experience, many offshore accounts are used by tax cheats and are not reported.
Under the IRS Whistleblower Program, whistleblowers with inside information about unreported offshore accounts may be entitled to cash rewards. Rewards are also available for information about companies and individuals using offshore shell companies and other constructs to evade taxes. Rewards may even be available for reporting banks, accountants and lawyers that help taxpayers set up unreported accounts or shell companies.
To learn more, visit our IRS offshore tax fraud claims page. Ready to see if you have a case? Contact us online, by email or by phone 202-800-9791. All inquiries protected by the attorney – client privilege and kept confidential. We accept IRS whistleblower program cases worldwide.