Another Leak Of Taxpayers Allegedly Involved In Hiding Assets Offshore – What You Need To Know About The “Paradise Papers”

A compilation based on more than 13.4 million documents dated from 1950 to 2016, uncovers a large number of global corporations, government leaders, and prominent people and their use of offshore accounts to avoid taxes or otherwise hide ownership of assets.

On November 5, 2017 the International Consortium Of Investigative Journalists released what is now dubbed the “Paradise Papers”.  The reporting is similar to the Panama Papers, which in 2016 exposed cases involving celebrities and business executives who reportedly moved large chunks of their wealth into offshore tax havens.  The source of documents in the Panama Papers came from 11 million documents secured from the Panamanian law firm of Mossack Fonseca.  The Paradise Papers is even more extensive as it is based on more than 13.4 million documents dated from 1950 to 2016 from Bermuda including the Appleby Law Firm and the Asiaciti Trust Company.

Several members of Trump’s inner circle, including Secretary of State Rex Tillerson and chief economic adviser Gary Cohn, were mentioned in the Paradise Papers.  Now while it’s not necessarily illegal to distribute wealth across secret companies, which can be used by the super wealthy as legitimate forms of holding their wealth, shell companies can be used to evade taxes and disguise illegal behavior. Also just because someone is mentioned in the Paradise Papers, it doesn’t necessarily mean their business holdings are illegal or they did anything illegal. Unfortunately, when one is mixed in with a basket of bad apples, you know how people will tend to judge the whole harvest.

Nevertheless, this leak is another huge hit the offshore world has taken. The Panama Papers included connections to families and associates of Syrian President Bashar Assad, former Libyan dictator Moammar Gadhafi, and former Egyptian President Hosni Mubarak. The Panama Papers also confirmed that associates of Russian President Vladimir Putin have funneled as much as $2 billion through offshore accounts, banks and shadow companies.  Some well-known celebrities were also identified in the Panama Papers that include Jackie Chan, Micheline Roquebrune and Lionel Messi.

So as government tax officials start reading the Paradise Papers, you can expect in the coming months that many new names will come out that the IRS will be interested in targeting.

Filing Requirements If You Have Foreign Accounts

By law, many U.S. taxpayers with foreign accounts exceeding certain thresholds must file Form 114, Report of Foreign Bank and Financial Accounts, known as the “FBAR.” It is filed electronically with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN).

Taxpayers with an interest in, or signature or other authority over, foreign financial accounts whose aggregate value exceeded $10,000 at any time during a calendar year must file FBARs. It is due by the due date of your Form 1040 and must be filed electronically through the BSA E-Filing System website.

Generally, U.S. citizens, resident aliens and certain non-resident aliens must report specified foreign financial assets on Form 8938 if the aggregate value of those assets exceeds certain thresholds. Reporting thresholds vary based on whether a taxpayer files a joint income tax return or lives abroad. The lowest reporting threshold for Form 8938 is $50,000 but varies by taxpayer.

By law, Americans living abroad, as well as many non-U.S. citizens, must file a U.S. income tax return. In addition, key tax benefits, such as the foreign earned income exclusion, are only available to those who file U.S. returns.

The law requires U.S. citizens and resident aliens to report worldwide income, including income from foreign trusts and foreign bank and securities accounts. In most cases, affected taxpayers need to complete and attach Schedule B to their tax return. Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires U.S. citizens to report the country in which each account is located.

Penalties for non-compliance.
Civil Fraud – If your failure to file is due to fraud, the penalty is 15% for each month or part of a month that your return is late, up to a maximum of 75%.

Criminal Fraud – Any person who willfully attempts in any manner to evade or defeat any tax under the Internal Revenue Code or the payment thereof is, in addition to other penalties provided by law, guilty of a felony and, upon conviction thereof, can be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than five years, or both, together with the costs of prosecution (Code Sec. 7201).

The term “willfully” has been interpreted to require a specific intent to violate the law (U.S. v. Pomponio, 429 U.S. 10 (1976)). The term “willfulness” is defined as the voluntary, intentional violation of a known legal duty (Cheek v. U.S., 498 U.S. 192 (1991)).

Additionally, the penalties for FBAR noncompliance are stiffer than the civil tax penalties ordinarily imposed for delinquent taxes. For non-willful violations it is $10,000.00 per account per year going back as far as six years. For willful violations the penalties for noncompliance which the government may impose include a fine of not more than $500,000 and imprisonment of not more than five years, for failure to file a report, supply information, and for filing a false or fraudulent report.

Lastly, failing to file Form 8938 when required could result in a $10,000 penalty, with an additional penalty up to $50,000 for continued failure to file after IRS notification. A 40% penalty on any understatement of tax attributable to non-disclosed assets can also be imposed.

The Solution.

The IRS has special programs for taxpayers to come forward to disclose unreported foreign accounts and unreported foreign income. The main program is called the Offshore Voluntary Disclosure Program (OVDP). OVDP offers taxpayers with undisclosed income from offshore accounts an opportunity to get current with their tax returns and information reporting obligations. The program encourages taxpayers to voluntarily disclose foreign accounts now rather than risk detection by the IRS at a later date and face more severe penalties and possible criminal prosecution.

For taxpayers who willfully did not comply with the U.S. tax laws, we recommend going into the 2014 Offshore Voluntary Disclosure Program (OVDP). Under this program, you can get immunity from criminal prosecution and the one-time penalty is 27.5% of the highest aggregate value of your foreign income producing asset holdings.

For taxpayers who were non-willful, we recommend going into the Streamlined Procedures of OVDP. Under these procedures the penalty rate is 5% and if you are a foreign person, that penalty can be waived. This is a very popular program and we have had much success qualifying taxpayers and demonstrating to the IRS that their non-compliance was not willful.

What Should You Do?

Don’t delay because if the government finds out about you first, you could be in the same hot water as Rex Tillerson and Gary Cohn.  Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County, San Francisco and other California locations resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.