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Swiss bank under investigation? Here’s what to do

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July 7, 2015
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Swiss bank under investigation? Here’s what to do

The IRS is actively investigating foreign banks that they suspect promoted income tax evasion by U.S. citizens in the past. Typically foreign banks assisted U.S. citizens in committing income tax evasion by promising not to report the existence of their customer’s foreign account, or the income that is generated or run through that account, to the U.S. government. These banks typically aided such activity to induce individuals and entities to deposit money in their banks.
Jack Townsend recently published a list of the fourteen Swiss banks currently under criminal investigation by the IRS. The IRS has reason to believe that each of these banks assisted individuals and entities evade U.S. taxes and FBAR reporting requirements. The following is a copy of that list.

Bank Frey
Bank Hapoalim (Switzerland)
Bank Julius Baer
Bank Leumi (Switzerland)
Basler Kantonalbank
Credit Suisse AG
HSBC Private Bank (Suisse)
Liechtensteinische Landesbank (Switzerland) Ltd.
Mizrahi-Tefahot (Switzerland)
Neue Zürcher Bank
Pictet & Cie
Rahn & Bodmer
Schroder & Co Banque SA
Zürcher Kantonalbank

If you have undeclared foreign account(s) with any of these banks and do not come forward voluntarily, you very well could go to jail  for at least 3 to 5 years and additionally could be forced to pay crippling civil penalties and interest. The IRS can use the most damaging civil penalty under the FBAR statute, 31 USC 5321(a)(5), to assess a person or entity it deems to be willful in not reporting their foreign accounts on TDF 90-22.1 with 50% of the balance of the undisclosed account for each year of willful non-compliance. Thus if you have had a foreign account for a multiple of years, you may end up owing several times the balance of your undisclosed foreign account in penalties.

For example, assume you have an undisclosed foreign account, with a balance of $1,000,000 in it. Under the FBAR statute, the IRS can charge you $500,000 per year on this account for the willful nondisclosure. If you have held this account for the past six years, the IRS could conceivably charge you a total penalty of $3,000,000 ($500,000 x 6 years).

This issue is no joke – Taxpayers that either just learned they have a problem with the IRS due to an undisclosed foreign account or know they have committed tax evasion and have willfully chosen to pass on entering the 2009 or 2011 voluntary disclosure programs have the following options. However, option number four (making a voluntary disclosure by entering into the OVDI program) is the only option that will allow you to avoid serving jail time with near certainty if you meet and comply with the terms of the program.

  1. Do nothing
  2. Comply with the FBAR reporting requirements prospectively, but do nothing about your what the IRS might deem potentially criminal actions
  3. Make a quite disclosure (or take no further action where a quiet disclosure was already made)
  4. Make a loud disclosure by entering into the OVDI program

The first option, doing nothing, is a gamble that no educated individual should pursue. In 2010, Congress enacted FATCA. Starting this year, FATCA will coerce all foreign banks into reporting the existence of U.S. account holders by subjecting them to a 30% withholding tax for not offering transparency to the U.S. Government. In addition, many countries have already signed, have pending, or are negotiating bilateral FATCA information sharing agreements. If you do nothing, it is only a matter of time until your name is reported to the U.S. Government. Once you are under investigation by the IRS, your risk of criminal prosecution increase 10 fold.

The second option, complying with the FBAR reporting requirements on a prospective basis, is just as bad as doing nothing. Prospectively complying with FBAR requirements does not change the fact that you previously committed tax evasion if you did not report taxable income related to the foreign account nor does it decrease the penalties for not disclosing your foreign bank account in previous years. In fact, this may be a worse option than doing nothing since you are likely alerting the IRS Criminal Investigation Division (CID) that you did not report income in prior years since they will question how you spontaneously acquired this money especially if the offshore balances are large. As a result, the CID will have reason to criminally investigate you.

The third option, making a quiet disclosure, entails amending prior tax returns to report the previously omitted foreign income reflected in the offshore account(s) without alerting the CID of your disclosure.  The problem with this approach is that the IRS has publicly stated that they will criminally prosecute any taxpayer that makes a quiet disclosure and use the amended returns as additional badges of fraud and as a criminal admission. Moreover, this approach does not address the severe penalties relating to the omitted FBARs (TDF 90-22.1) Pursuing this option is effectively gambling that the IRS does not have the resources to detect your actions. If they detect your quiet disclosure, you could face criminal charges.

Although, you may have already made a quiet disclosure the CID has not yet caught up with, it is still possible to convert your quiet disclosure into a loud disclosure by entering into the 2012 OVDI program.

The fourth and final option, making a loud disclosure under the 2012 OVDI program, is the best option because it is the only way to ensure the avoidance of criminal prosecution. Making an offshore voluntary disclosure entails disclosing in writing to the CID that you have an unreported foreign account, a description of your past actions that may or may not rise to the level of outright criminal behavior, and that you wish you correct these actions. In exchange for your promise to correct all foreign and domestic noncompliance issues with U.S. tax law through full compliance with the IRS’s civil division, the CID will promise not to prosecute you for any applicable tax crimes. This deal will require your full, honest, and complete effort to correct your prior income tax returns.

While you will have to pay any additional taxes, penalties, and interest under this option, if you pursue any other option, it is only a matter of time until the CID catches up with you and at best more severe civil penalties are inflicted upon you and at worst you could face jail time.

Danger!  There are a handful of documented cases where a taxpayer made an offshore voluntary disclosure and was subsequently criminally prosecuted anyway.  What they all have in common is that the taxpayer was caught cheating in the process of coming clean.  For example one prosecution surrounded a person that made a voluntary disclosure of an account with UBS that they knew was under investigation but failed to voluntarily disclose their other foreign accounts. Another involved a taxpayer the corrected their foreign non-compliance but did not clean up their previous fraud committed domestically at home. If you’re considering entering the 2012 OVDI program ALL noncompliance (foreign and domestic) must be cleaned up.

You need an experienced tax attorney if you have an undisclosed foreign account – especially if you have an account in one of the Swiss banks previously mentioned. The Tax Law Offices of David W. Klasing can help you make a loud voluntary disclosure and avoid a criminal investigation and conviction for tax crimes by the IRS.  Click here to learn more about our practice.