by Brian Mahany
Currency controls – or the fear of them – is what causes many people to move wealth outside the United States. It is also what can cause you to lose all or most of your money. Twice in the last week we wrote about Cyprus. Although most people would not be surprised to find accounts nationalized in some third world country, few expected Cyprus to freeze accounts. They have. Including accounts of foreigners.
Part of the European Union, Cyprus has long been a well established financial center and destination of many people seeking protection for their capital. As the events of last week showed, nothing is safe in desperate times with desperate politicians. Yesterday, Cyprus obtained a bailout from the international monetary community but at a steep price. Bank deposits are subject to a huge “one time” tax levy and long term currency controls are likely.
Currency controls? Yes. Cyprus’ two largest banks are likely to see deposits hit by a massive levy. The BBC reports the levy may be as high as 40%! The government promises that accounts under ¢100,000 will be spared the loss. The Wall Street Journal notes that currency controls will cut off businesses and depositors from their money for months. Already, the government is limiting withdrawals to just over $100 US per day.
Banks have been closed since March 16th but are expected to reopen today. Depositors are not likely to be able to take their money out of the country, however.
Cyprus has long been a popular banking haven for Russians seeking to diversify their holdings and protect their month. Yesterday’s decision to seize deposits, however, spells the end of Cyprus’ reputation as banking center.
Moving money outside the United States makes sense for many people. Some are worried that a banking collapse within the country could cause the government here to seize deposits. Now that it has happened once, other governments will be tempted to fix their financial woes with similar one time fixes.
Other people send money overseas because that is where their families live. The U.S. is home to millions of foreign born Americans and dual nationals. Millions more Americans were born here but choose to live, work or retire in Canada, Mexico or overseas.
Opening a foreign bank or financial account – that includes brokerage accounts, hedge funds, annuities and other financial products – is legal as long as you report the account to the IRS. Foreign financial assets are reported on a Report of Foreign Bank and Financial Accounts, often called an FBAR or TD F 90-22.1 form.
Failure to file FBARs is a crime and could result in massive IRS civil penalties. Penalties so high that they can easily wipe out the entire account.
Recent events in Cyprus and Switzerland have reinforced two very important lessons. First, make sure you properly file FBARs and report your account. If you have not filed FBARs and were required to have done so, consult with a tax attorney. The IRS has said that simply filing missing FBARs (a so-called “quiet disclosure”) will not eliminate the penalties.
The other lesson is to carefully choose where you deposit your money. Make sure that both the bank and the country where the bank is located are financially stable.
If you have an unreported foreign account, contact us immediately. There are still ways to avoid possible prosecution and penalties but time is running out. Beginning next year, the Obama administration’s new FATCA law requires foreign banks to identify and report accounts with ties to the United States. FATCA – short for the Foreign Account Tax Compliance Act – also requires banks to perform a “look back” so simply closing your account today isn’t likely to eliminate your risk.
For more information, contact attorney Bethany Kroes at or by telephone at (414) 223-0464. All inquiries are protected by the attorney – client privilege and kept in strict confidence. The consultation is free and most services can be handled on a flat fee basis.
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and San Francisco, California. IRS tax services available worldwide.
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