1. Grand jury subpoenas directly to taxpayers suspected of income tax evasion surrounding foreign accounts, assets or business activity
Perhaps the most aggressive strategy for combating foreign income tax evasion surrounding foreign accounts or assets is where the government is currently issuing subpoenas to individuals suspected of housing funds in Swiss or other off-shore bank accounts that demand copies of their foreign bank statements dating all the way back to 2003.
These subpoenas are out of the ordinary in that they ask the investigated individuals themselves rather than the foreign banks for the statements. These grand jury generated subpoenas specifically asks for copies of statements depicting the highest annual balance for each year since 2003. Anyone who fails to comply with the terms of the subpoena risks being held in contempt of court and facing fines or jail time which often will not end until the jailed individual agrees to comply with the terms of the subpoena.
U.S. taxpayers have attempted to decline to comply with these subpoenas on the basis of the Constitution’s Fifth Amendment privilege against self-incrimination. However, the “required records” exception has recently been used in the Ninth and Seventh Circuits to allow prosecutors to compel someone to produce offshore account data even if it is self-incriminating. Moreover, in the event the account holder does not have the records, he or she must go to the bank and request the records for the government. Under the required records exception, Fifth Amendment rights are not violated if: 1) the government’s inquiry is essentially regulatory, 2) the information is a preserved record of a kind customarily retained, and 3) the records have taken on public aspects making them analogous to a public document.
In this context, it is not necessary for the government to target an ascertainable person. If the IRS cannot identify a particular taxpayer, it has the option of using a “John Doe” summons. For a John Die summons, the IRS need only establish that the summons relates to an identifiable group or class, there is a reasonable basis to believe such person(s) have unreported income, and the information sought is not readily available through other sources. In April 2011, a U.S. court authorized service of a John Doe summons on HSBC USA, seeking records from the bank with regard to thousands of suspected non-compliant citizens that used banking services in India.
2. Investigations surrounding switzerland’s banking industry
When ever the U.S. Justice Department obtains evidence of wrongdoing by one or more employees of a corporate entity, through the principle of respondeat superior, the United States has a legal basis to file criminal charges against the entity itself. Using the threat of indictment, the U.S. can leverage disclosures of accountholder information and often targeted banking institutions will yield to the request rather than risk the fallout and possible damage to its brand or reputation.
Switzerland’s perceived role as being the world capital in suborning and facilitating U.S. income tax evasion via its 1934 law mandating total privacy of bank accounts has been ground zero for the US government’s attack on income tax and foreign asset noncompliance. It is estimated that Switzerland houses $2 trillion in global capital.
UBS, the biggest Swiss bank, paid $780 million and turned over details concerning 4,450 U.S. account holders to end prosecution by the U.S. Government. The U.S. Justice Department is currently conducting criminal investigations of 11 other Swiss Banks including Credit Suisse, Julius Baer and Basler Kantonalbank.
Switzerland’s Wegelin & Co. was the employer of three Swiss bankers charged with conspiring to help U.S. clients hide more than $1.2 billion from American tax authorities by making sales pitches to U.S. taxpayer-clients who were fleeing UBS. The indicted bankers allegedly told American clients not to worry about the I.R.S. because their bank “had a long tradition of bank secrecy,” adding that they had advised “their U.S. taxpayer-clients that the bank was less vulnerable to United States law enforcement pressure because, unlike UBS, the bank did not have offices outside Switzerland.”
3. Investigating correspondent banking
The Wegelin & Co indictment shed light on an obscure corner of hidden offshore wealth concerning the relationships some smaller banks have with bigger banks for moving clients’ money around the world called correspondent banking. In correspondent banking, the smaller bank is the customer of the larger bank, which acts as an agent, or conduit, by accepting deposits, processing other wire transfers and handling other business transactions on behalf of the smaller bank’s clients. Correspondent banking is a staple of the global financial system which allows smaller banks around the world without an overseas presence to send money to clients in other countries via larger banks in those countries.
Details in the Wegelin & Co. indictment surrounding this perceived “shifting activity” signals that U.S. authorities are increasingly probing correspondent banking relationships.
The gravity of this development is compounded when you consider that nearly every large-to-mid-sized bank in the United States and other countries provides correspondent services which fuel transfers in the billions of dollars daily around the world. It is currently believed that the Wegelin & Co. indictment is ultimately aimed at building evidence against the smaller banks around the world that ultimately place amounts on deposit in Switzerland and against the U.S. clients of the smaller banks around the world. Moreover, in 2001, a report by the Senate Permanent Subcommittee on Investigations, an investigative panel, found correspondent banking was a main conduit for money launderers.
4. Pending settlement with Swiss banking industry and Swiss Government
A large sector of the Swiss banking industry and the Swiss Government is attempting to hammer out a civil settlement with the U.S. Government covering any wrongdoing. As part of any such settlement, the U.S. Treasury Department is expected to obtain the identity of all Swiss accounts owned by U.S. taxpayers. In order to facilitate the identification of U.S. account holders the banks are increasingly using sophisticated technology, such as face recognition software, to prevent depositors from hiding their true identity.
5. The implementation of FACTA
The new tax rules that are a part of the Foreign Account Tax Compliance Act (FACTA) of 2010, which applies to individuals and financial institutions, were specifically enacted as part of an effort to cut down offshore tax evasion. Banks worldwide are bracing for new U.S. regulations aimed at reducing tax evasion, which are expected to affect hundreds of billions of dollars’ worth of deposits worldwide. “The stated policy objective of FACTA is to have transparency so that worldwide governments can work together to avoid offshore tax evasion,” says Manal Corwin, deputy assistant secretary for international tax affairs at the U.S. Treasury Department.
6.The implementation of form 8938 for the 2011 tax filing season
A new filing requirement for 2011 is that if the value of your foreign assets is greater than $100,000 at the end of 2011, or if they exceeded $150,000 at any point during 2011, then you need to file Form 8938, Statement of Foreign Financial Assets. This form is specifically designed to identify Foreign Income Generating Assets that have previously not been reported for tax purposes.
7. Scrutiny over those that renounce citizenship
More and more Americans living outside the United States are renouncing their US citizenship on account of increasing tax obligations and stringent reporting requirements. In the Philippines during 2010 for example, more than 1,500 people gave up their US citizenships. Citizens suspected of doing so for the sole purpose of avoiding taxes are barred from re-entering the US under a little known provision in immigration reform called the “Reed Amendment,” which was enacted in 1996. Additionally, if a taxpayer decides to leave the U.S. and declare a different country as their tax home in an attempt to avoid paying U.S. taxes, they must follow an official exit procedure.
8. Foreign non-filer investigations
The US has income tax treaties with more than 42 countries through which the IRS can ferret out foreign tax filing information by US citizens living in those countries and thus compile a list of persons who have not been filing their U.S. income tax returns. Tax delinquents who subsequently return to the US after living abroad for so many years may likely find themselves swamped by tax assessments and penalties and may be faced with property seizures.
9. Expats in Asia under investigation
American expats living in Asia are specially coming under close inspection, with their Asian bank accounts being targeted and criminal investigations being intensified since there are suspicions that a lot of overseas companies were set up specifically to avoid payment of US taxes.
10. Treaties and mutual information exchange agreements
The United States is not the only nation seeking greater compliance and preservation of its taxing authority. There is increasing international pressure for greater transparency with regard to foreign account financial information. The Organization for Economic Co-operation and Development (OECD) and the EU has pushed for the adoption of a model agreement containing provisions allowing for information exchange. In general terms, the model agreement provides for information exchange “without regard to whether the conduct being investigated would constitute a crime under the laws of the requested party if such conduct occurred in the requested party.” Additionally, the agreement would also allow for tax examiners from the requesting country to travel to the requested country to conduct its investigation, including interviews of witnesses and document review.
