Archive for November 2010
The news is filled with reports of investors with offshore accounts at UBS AG now facing criminal indictments and entering into plea agreements. These stories, which are likely to continue into 2011, often reference "tax evasion" or "offshore tax evasion" in their headlines.
Despite the sensational headlines, however, most of the cases being reported relate to omissions involving two very specific tax and information reporting requirements. The first requirement applies to any United States citizen or resident who owns a financial account valued at more than $10,000; such persons must report the account using Treasury Department Form TD F 90-22.1 ("FBAR"). The second requirement relates to the United States "worldwide income" reporting system under which all income earned from foreign assets must be reported on the owner's U.S. federal income tax return. Any taxpayer who fails to timely file an FBAR, or to report all income earned from foreign assets, can face very substantial civil, and even criminal penalties.
The Background
During 2008 the United States Department of Justice and the IRS instituted legal proceedings against UBS
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), a Swiss bank that allegedly had been assisting U.S. taxpayers to hide offshore assets and income. In early 2009 the IRS reached an agreement with UBS for the disclosure of certain U.S. UBS customers. In connection with this agreement, along with its expanding investigation of offshore tax evasion, the IRS then launched a limited voluntary disclosure agreement ("VDA") program under which taxpayers were offered reduced penalties, including significantly reduced exposure to a criminal indictment, if they came forward and voluntarily disclosed their previously unreported assets and income from foreign accounts. The formal VDA program closed on Oct. 15, 2009.
The UBS Names
On Nov. 16, 2010, pursuant to a settlement agreement, UBS released more than 4,000 names of U.S. customers to the IRS. This disclosure marked the end of a long and consistent history of Swiss bank secrecy, along with the beginning of what is expected to be aggressive IRS enforcement action. Any person included in the list disclosed by UBS who has not already begun a voluntary disclosure is likely to face a comprehensive civil audit and some form of criminal investigation.
What Now?
Without exception, United States taxpayers should report all income and fully comply with United States financial reporting and income tax laws. Understanding this clear mandate, it is important to note that for owners of foreign accounts that may not have been disclosed properly, there is increased risk that the Department of Justice or the IRS will obtain information about the foreign account or accounts. The DOJ, the IRS, and Congress have all identified "offshore tax evasion" as a primary enforcement target, and the success with the UBS enforcement effort has energized government efforts in these cases.
For more on tax enforcement, visit Forbes' new IRS Watch blog.
As 2010 comes to a close, the formal VDA program is no longer an option, and the IRS has obtained the names of many United States owners of foreign accounts. For any foreign account owner who has not entered into some form of voluntary disclosure arrangement with the IRS, a good offshore account strategy generally should consist of three elements:
1. Investor-specific factual analysis;
2. Foreign country and financial institution-specific analysis; and
3. The use of attorney-client privilege