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What Do the Paradise Papers Reveal About Offshore Tax Havens?

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    You may recall that in May 2016, anonymous whistleblower “John Doe” leaked approximately 11.5 million documents revealing the offshore activities of numerous politicians, businesspeople, and entertainers from around the world. The documents, which came to be known as the “Panama Papers,” caused an instant media sensation, tying celebrities and political figures to criminal activities such as tax evasion, fraud, and money laundering. In a case of history repeating itself (albeit in a less sensational fashion), a similar leak, made under similar circumstances, recently produced a similar cache of offshore tax information. The latest set of leaked documents, not to be confused with last year’s Panama Papers, has been dubbed the “Paradise Papers.” Though less controversial in that they do not appear to reveal extensive criminal activity, the Paradise Papers may have significant consequences – not only for the individuals named therein, but also for potential whistleblowers, as well as any taxpayer who engages in undisclosed offshore banking, inheritances, and the associated income tax evasion related to unreported foreign business or investment income.

    What Are the Paradise Papers, and What Tax Information Do They Reveal?

    In November 2017, barely a year after the original Panama Papers made headlines, the Paradise Papers were made public following a leak of approximately 13.4 million documents to German newspaper Sueddeutsche Zeitung – incidentally, the same publication which obtained the Panama Papers in 2016. The newspaper then contacted the International Consortium of Investigative Journalists (ICIJ) to spearhead a deeper investigation. ICIJ is being assisted by nearly 100 other media outlets spanning 67 countries, notably the BBC and British newspaper the Guardian.

    Though Sueddeutsche Zeitung has yet to reveal its source, marking another similarity to last year’s leak, the bulk of the information can be traced back to Appleby, an international offshore legal service provider with an office in Bermuda, which is as well known as a tax haven as it is a vacation destination.

    Unlike the Panama Papers, the Paradise Papers do not seem to expose extensive criminal tax violations – at least, not yet. In a public statement issued November 5, the full text of which can be read here, Appleby defended its role in the controversy, asserting, “The journalists do not allege, nor could they, that Appleby has done anything unlawful. There is no wrongdoing. It is a patchwork quilt of unrelated allegations with a clear political agenda.” (The statement also noted that, contrary to representations in various media reports, “We do not have a headquarters. It is not correct to state that Appleby has its headquarters in Bermuda.”)

    Though the Paradise Papers have not spawned any criminal charges as of early December 2017, they have managed to stir negative publicity for such world leaders as Queen Elizabeth in the United Kingdom, Prime Minister Justin Trudeau in Canada, and President Donald Trump in the United States, with each figure tangentially connected through the financial activities of support staff. In the Queen’s case, for instance, the USD equivalent of approximately $13 million was invested in funds in Bermuda and the Cayman Islands by the Duchy of Lancaster, which has been managing and providing income to the British Sovereign since the fourteenth century.

    Potential Consequences of the Paradise Papers Leak

    In the interest of maintaining accuracy and avoiding sensationalism, it is important to reiterate that the Paradise Papers have not yielded evidence of illegal activities or international tax law violations by Queen Elizabeth, Donald Trump, or other public figures named therein. (As Appleby stressed in the statement linked above, “Appleby has thoroughly and vigorously investigated the allegations and we are satisfied that there is no evidence of any wrongdoing. We are a law firm which advises clients on legitimate and lawful ways to conduct their business.”)

    Nonetheless, the leak – which Appleby was quick to characterize as an “illegal computer hack” – may have at least three distinct effects:

    1. It is possible that criminal charges could result from the Paradise Papers in the future, namely tax evasion and money laundering. As our international tax attorneys have discussed on numerous occasions, failure to disclose offshore income can lead to civil or even criminal penalties, though the consequences of nondisclosure can be avoided or lessened by filing an FBAR, filing the appropriate FATCA forms, and/or participating in the Offshore Voluntary Disclosure Program (OVDP).
    2. Related to the previous point, the leak (or hack, depending on what information comes to light) could encourage tax whistleblowers to file claims, potentially leading to prosecutions. 26 U.S. Code § 7623(a) authorizes the government to pay whistleblowers for “detecting underpayments of tax” (26 U.S. Code § 7623(a)(1)) or “detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws or conniving at the same” (26 U.S. Code § 7623(a)(2)). The financial rewards for whistleblowers can be great: as much as 15% to 30% of the collected proceeds, in accordance with 26 U.S. Code § 7623(b)(1). At the same time, would-be whistleblowers must tread with caution so as to avoid breaching legal and/or ethical standards, such as violations of the attorney-client privilege.
    3. Whatever the leak’s other repercussions may be, the resulting public outcry may encourage the Internal Revenue Service (IRS) to apply even stronger pressure to taxpayers who engage in tax evasion or tax avoidance by banking with foreign financial institutions, then fail to disclose their global assets or income. You may wish to review the difference between tax evasion and tax avoidance.

    International Tax Attorneys for Expatriates and U.S. Citizens with Foreign Income

    The Paradise Papers should, if nothing else, serve as a reminder that even lawful offshore activities can trigger a serious and stressful tax controversy between the taxpayer and the IRS. If you have been selected for an audit, or even placed under an IRS criminal investigation, due to an alleged failure to report foreign income or assets, you require immediate assistance from an IRS tax audit lawyer or tax crime attorney who can evaluate your situation, formulate an effective legal strategy, and take aggressive measures to defend your rights and deal with the IRS while easing you back into compliance with the U.S. Tax Code.

    At the Tax Law Office of David W. Klasing, our respected Attorneys-CPAs have more than 20 years of experience helping California residents, other U.S. taxpayers, and expatriates report foreign income, minimize their tax liabilities, resolve international tax controversies, and utilize tax havens in a safe, lawful manner. To arrange a reduced-rate consultation with an experienced tax attorney, contact us online, or call the Tax Law Office of David W. Klasing at (800) 681-1295 today.

    Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices in San BernardinoSanta BarbaraPanorama City, and Oxnard! You can find information on all of our offices here.

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