Ask most Americans to identify the top so-called tax havens and you will hear Switzerland, the Cayman Islands, Singapore and maybe Liechtenstein. The answer from the experts, however, may shock you. Captive Review magazine says Great Britain and the United States are the easiest countries to set up “puppet” or nominee entities. With the implementation of FATCA just months away, the prospect of domestic based tax evasion looms large.
Decades ago, Congress passed the Bank Secrecy Act which requires U.S. taxpayers with over $10,000 in foreign financial assets to report those assets to the IRS. Reporting is done annually on a Report of Foreign Bank and Financial Accounts (FBAR). The IRS wants to know about foreign accounts to insure that taxpayers aren’t using these accounts to evade taxes. (Owning an offshore account is completely legal if reported.)
Because so many taxpayers – primarily resident aliens (green card holders), dual nationals and Americans living overseas – haven’t filed FBARs, Congress passed another law in 2010 to increase compliance – the Foreign Account Tax Compliance Act or FATCA. That law requires foreign banks and financial firms to review their accounts and look for indicia of American ownership or signature authority. Beginning next year, those accounts must be reported to the IRS.
Many people hiding money offshore use a nominee account to disguise the true ownership of the account. Nominee accounts are typically in the name of a foreign trust, international business company or limited liability company. Holding assets in a trust or corporate name makes it harder for creditors to find one’s assets. It is harder for the IRS too.
FATCA was designed to make foreign banks, hedge funds, insurance companies and others become the eyes and ears of the IRS. While that might help capture some hidden income, Captive Review says the real problem is under our very noses. They claim a study by researchers at Griffith University in Queensland, Australia found that those selling shell companies in the offshore financial centers were more likely to comply with international rules than those based in the U.S.
Said one of the researchers, Jason Sharman,”The overwhelming policy consensus is that offshore centres provide strict secrecy and lax regulation, especially when it comes to shell companies. This consensus is wrong.” He says it is three time harder to set up a shell company in a so-called tax haven than in the U.S. In fact, things here are so bad that the study says only Kenya has a worse compliance score. (Great Britain scored 13th from the bottom.)
What does this mean? While the U.S. may have a bad compliance record, many offshore promoters worldwide make it pretty easy to set up nominee or puppet entities. Creating a nominee entity may be easy to do but FATCA will require foreign banks to ask some tough questions on who are behind these entities. The U.S. Patriot Act and other laws impose similar barriers on people trying to open accounts in the U.S. using a corporate or trust name.
Most of the people who have unreported foreign accounts are dual nationals, Americans living or with business interests overseas or foreign born Americans. FATCA will help identify these people but will only be a moderate help in finding the true tax evaders that deliberately game the system.
One of the biggest criticism of FATCA is how the IRS tends to treat both tax evader and innocent violators alike. Luckily, there is an amnesty program and the ability to come forward and make a voluntary disclosure. These alternatives only work if you get to the IRS first, however. With FATCA just months away, time is running out for those that wish to comply and take advantage of amnesty programs.
A few readers may conclude that creating a nominee account is a great way of hiding money from Uncle Sam. While having an unreported account is a crime, using a nominee account to hide one’s assets is considered an affirmative act of evasion by the IRS, a far more serious felony.
If you questions about FATCA or have an unreported foreign account, give us a call. We will gladly help you explore your options. Our tax lawyers have helped many taxpayers with a wide variety of foreign reporting problems including FATCA and unfiled FBARs.
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.
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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Post by Brian Mahany, Esq.