[Post updated June 2020] In May 2014, Kathryn Keneally, America’s top tax prosecutor, announced she was leaving the Justice Department but not before taking another shot at Americans with unreported foreign accounts. “It is a high priority for the [DOJ] to find those who continue to shirk their tax obligations, as well as those who would profit by helping them do so. The best deal for these folks is to come in and ‘get right’ with the IRS, before either the IRS or the [DOJ] finds them. Sitting it out at this point is extremely dangerous.”
Many American taxpayers mistakenly believe that the IRS and Justice Department have only focused on undeclared Swiss accounts but that is simply myth.
In 2014, Credit Suisse pleaded guilty to conspiracy to defraud the IRS and paid agreed to pay a $2.6 billion fine. In discussing the prosecution, Keneally said, “It’s fair to say we know where the tax haven countries are, you’ve got Singapore, you’ve got the Cook Islands.” She also said that investigators were looking at accounts and transfers to Lichtenstein, Luxembourg, the Cayman Islands, India and Israel. [We have personally seen several investigations surrounding banks in Israel, India and the Bahamas.]
Fast forward to 2018 and finally, most of the developed nations have begun automatically sharing financial account information. While the OECD hailed the bank account exchange agreement as the end of tax evasion, it has been anything but.
In June 2020, the OECD says the information exchange resulted in $11 trillion in offshore bank accounts “uncovered,” tax evasion remains alive and well. Of 194 countries in the world, about 100 are part of the information exchange. Many small countries – some notorious tax havens such as Vanuatu and Trinidad – are not cooperating.
Obligation to Report Offshore Bank Accounts
U.S. taxpayers have been required to report foreign accounts since the Bank Secrecy Act was passed by Congress in the early 1970’s. Enforcement was spotty, however, until the Justice Department began investigating Swiss bank UBS in 2008. Since then, the IRS has become very aggressive in ferreting out unreported accounts. While much of the media attention has been focused on Swiss accounts, most unreported offshore accounts are located elsewhere.
Unreported Offshore Accounts Are Illegal!
Having an offshore account is not illegal but having an unreported offshore account is a felony. There are many valid reasons to have offshore accounts including dual nationals who send money “home”, green card holders living in the U.S., Americans living abroad (ex pats) or U.S. businesses with overseas interests.
When the United States first began enforcing the rules on unreported foreign accounts, many people with such accounts simply didn’t know the rules. Today its hard to believe that anyone with unreported offshore accounts doesn’t know they must be disclosed.
The willful failure to file a Foreign Bank Account Report (FBAR) carries a penalty of up to the greater of $100,000 or 50% of the historical highest account balance. In some cases, non FBAR filers can also be criminally prosecuted. The IRS also requires foreign financial accounts be disclosed on one’s tax return and on a separate FATCA form. (If you don’t know the rules, don’t rely on income tax software to get it right, see a CPA that specializes in foreign tax reporting for help. We can recommend someone if you can’t find someone.)
The IRS Whistleblower Program pays cash whistleblower rewards to people who report tax cheats. This includes those with unreported offshore accounts or taxpayers who fail to disclose foreign income. Generally the rewards are only available for larger tax cheats although the IRS can pay rewards in smaller cases.
The world is certainly getting smaller. By that we mean it is easier for tax authorities anywhere in the world to fine hidden offshore accounts. Even after the 2018 bank account information exchange program, however, tax evasion is alive and well.
Today, sophisticated tax cheats don’t simply open a Swiss account. They use shell companies or bearer shares or third party nominees to mask their identity. Now more than ever American needs whistleblowers to ferret out these cheats.
Tax evasion isn’t a victimless crime. Although no one enjoys paying taxes, most of us dislike even more the tax cheats that doesn’t pay his fair share. For every dollar I don’t pay, you and other taxpayers must make up the difference.
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