IRS will soon be able to detect previously undisclosed foreign accounts

The IRS is attempting to close a perceived $300 billion tax gap that has been plaguing the federal government for the past several years. They’ve invested $20 billion in a Foreign Bank Account Reporting (FBAR) program designed to thwart efforts by US citizens to commit income tax evasion by underreporting U.S. income and then hiding the cash related to the unreported income in undisclosed Foreign Bank Accounts. In addition the IRS has expanded in sheer size by 40% over the last few years in response to this issue.

As part of this FBAR program, which has included the use of paid whistleblowers like Bradley Birkenfeld who blew the whistle on UBS by stealing and then selling US account holders names to the US government and the copy cats that are certain to follow, the IRS is attempting to catch income tax evaders. Recently, HSBC, Europe’s biggest bank, reported that data on up to 24,000 Swiss client accounts had been stolen by a former employee and ended up in the hands of authorities in France, where the ex-worker fled. U.S. authorities are currently rumored to be negotiating with the French through a treaty request to get the names of any U.S. HSBC clients involved. Following on the heals of this news on HSBC, Linda J. Osuna, an IRS Special Agent in Charge of the Tampa Field Office, told reporters that the U.S. was building a case against an unnamed foreign bank, which she declined to name, for “the same behavior that got UBS in trouble.” The HSBC events are unfolding just like the events that led to the prosecution of UBS even through at present no official accusation of wrong doing against HSBC has been brought forth by the U.S. Government.

The unnamed foreign bank about to be sued by the U.S. Government could have also been identified as part of the approximately 15,000 voluntary disclosures submitted by U.S. citizens with offshore accounts who came clean under a voluntary amnesty program that ended on October 15, 2009. Since October 15, 2009 the IRS has been culling through these voluntary disclosures which apparently have provided the IRS a treasure trove of information with which to identify other institutions that have encouraged income tax evasion in the same or similar manner as UBS had.

Here are some other recent events that point toward the IRS discovering non-complaint foreign accounts on its own:

  • The announcement by a multitude of offshore jurisdictions that they will exchange tax information with the U.S. including the identities of previously undisclosed U.S. account holders that have deposits with their foreign banking institutions.
  • The hiring and training of 800 special agents to investigate foreign accounts by the IRS.
  • Erosion of foreign banking secrecy laws established by the case law precedent value of the UBS litigation
  • Recent legislation targeting foreign accounts, and increasing the IRS budget and manpower to pursue undeclared money offshore,
  • Pending IRS investigation of Credit Suisse
  • Organization for Economic Co-operation & Development initiative against tax havens
  • The IRS suit against UBS is expected to reveal the identities of up to 52,000 U.S. account holders and IRS Commissioner Douglas Shulman has publicly stated that once the Swiss authorities transmit the information, “We will immediately follow up on the information we receive from the Swiss and we will vigorously enforce the laws against those who have attempted to evade their tax responsibilities by hiding their assets offshore.”

WHAT NOT TO DO!

The two worst things that you could do if you did not take advantage of the FBAR voluntary disclosure program that ended October 15, 2009 is to attempt to bring your foreign funds back in cash without reporting the existence of the foreign account where required to or to make a quite rather than a loud disclosure.

CASH SMUGGLING:

After Andrew B. Silva received notification From HSBC that it would no longer house his account after HSBC identified his account as one that would possibly draw the wrath of the US government, as is happening with foreign banks all over the world in the wake of the UBS litigation and the voluntary disclosure program ended October 15, 2009, Silva attempted to send the money back through the mail in increments of less than $10,000 in an attempt to evade U.S. cash reporting rules. Unfortunately for Mr. Silva, U. S. law bars the structuring of a series of transactions designed to evade U.S. reporting requirements of amounts greater or equal to $10,000.

Silva, was prosecuted for conspiracy to defraud the U. S. Government when he was caught smuggling in close to $250,000 in cash payments to the U. S. and in the process he falsely reported to U. S. Customs Inspectors that he had not mailed U. S. currency from Switzerland to the United States. Silva currently faces the possibility of serving five years in prison on the conspiracy count and another five for the false statements made to U.S. Customs for his cash smuggling actions alone.

GOING QUITE:

Some US taxpayers with previously undisclosed foreign accounts are attempting to avoid detection by amending their past years tax returns to include previously unreported foreign income generated by previously undisclosed foreign accounts without making a Voluntary Disclosure to the IRS of their previous noncompliance.

On May 8 2010, at the meeting of the American Bar Association Tax Section, an IRS representative discussed “quite disclosures” concerning foreign bank accounts. A quite disclosure occurs where a taxpayer files amended tax returns for past years with making a required Voluntary Disclosure (loud disclosure). The IRS takes a dim view of quite disclosures related to foreign accounts and publicly stated that taxpayers who make a quiet disclosures will not be eligible for favorable terms including the avoidance of criminal prosecution available to taxpayers who make a formal or “noisy” disclosure which is made by knocking on the front door of the Criminal Investigations Division of the IRS and self reporting the taxpayer’s previous noncompliance.

While the IRS still has not advised what the penalties will be for people who come forward now with previously undisclosed foreign accounts as they did with the FBAR Voluntary Disclosure Program ended October 15, 2009. The IRS has been adamant that a quite disclosure carries with it no IRS concessions, reduced penalties and most importantly, no agreement that criminal prosecution related to a taxpayer’s noncompliance surrounding a foreign account will be avoided.

Additional problems created by a quiet disclosures is that the amended returns only address payment of back taxes and interest related to previously undisclosed income but not the penalties surrounding the reporting requirements for Foreign accounts required on U.S. Treasury Form TD F 90-22.1 (also known as a Foreign Bank Account Reporting – FBAR) which can run as high as 50% of the undisclosed foreign account balance. Additionally the amended returns do not address what the IRS considers as a “badge of fraud” where a taxpayer consistently fails to “check the box” on 1040 Schedule B which would have indicated that the taxpayer had a foreign account on back tax returns thus effectively preventing discovery of the foreign account by the IRS in previous tax years. Purposely hiding the existence of a foreign account by not annually competing the TD F 90-22.1 and not checking to box on Schedule B of 1040 while committing income tax evasion to fund the undisclosed foreign accounts are criminal acts which can only be mitigated down to civil infractions by making a Voluntary Disclosure.

As further reasoning for making a loud voluntary disclosure rather than going quietly via amended returns, be aware that the IRS has stated publicly that it is examining amended tax returns reporting increases in income related to foreign bank accounts, to determine if criminal tax enforcement action is appropriate.

Additionally the IRS has stated that upon receipt of delinquent TD F 90-22.1′s (FinCen 114) the IRS will be checking to see if a Voluntary Disclosure is in place as part of processing the delinquent FBAR’s.

WHAT TO DO!

As the content above establishes, there is no longer any offshore banking secrecy available and detection of US taxpayers with previously undisclosed foreign accounts is just a matter of time. The IRS is dead serious about going after tax cheats using foreign accounts. Thousands of taxpayers that failed to take advantage of last year’s FBAR Voluntary Disclosure program ended October 15, 2009 that offered a temporary reduction of penalties in exchange for the disclosure are currently scrambling to seek advice on how to avoid sanctions which include criminal prosecution, seizure of all or a portion of their foreign accounts and other civil penalties. This is a complicated matter and you need expert tax representation from professionals with specific expertise and experience with offshore tax evasion defense. Taxpayers with previously non-declared and non-compliant foreign accounts have no practical choice but to come forward and make a Voluntary Disclosure to avoid criminal prosecution.

If you have funds overseas, and have not yet disclosed them to the IRS your only prudent move is to approach the IRS with the issue before they approach you. I recommend that a Voluntary Disclosure only be made by legal tax counsel, experienced in offshore compliance with proven I.R.S. negotiation skills.