IRS getting more muscle in its fight against offshore tax evasion

In a recent legal battle with UBS, the IRS has exerted its dominance once again by demanding transparency and exposure of international tax evasion and avoidance at some of the most powerful foreign financial institutions. The IRS previously reached an unprecedented settlement with UBS, one of the largest Swiss banks lauded for its powerful position in the foreign bank-secrecy landscape. Following that settlement UBS agreed to surrender client records for a U.S. citizen holding substantial assets in an account in Singapore. What happened in that case serves as a foreboding of what may be to come for many individuals with unreported foreign income or other offshore bank accounts.

With Thousands To Go, This Is Just The Tip Of The Iceberg

In the UBS case, authorities claimed rights to access this information as a means of appropriately addressing tax evasion by evaluating all relevant data. The client, Ching-Ye Hsiaw, had recently shifted assets from his UBS account in Switzerland to a new Singapore account in light of the increased focus of the IRS on the Swiss banking front. Indeed, the IRS has recently expanded efforts to detect, deter, and discipline instances of tax evasion in numerous international jurisdictions. In response to the Foreign Account Tax Compliance Act (FATCA), UBS turned over thousands of taxpayers’ records of accounts previously hidden from the IRS. In fact, UBS turned over nearly one-fifth of the American-sourced accounts held at the institution. These accounts represent many taxpayers who not only paid a premium for the secrecy they believed Swiss bank laws could protect, but also hoped that the IRS would not discover their willful efforts at tax evasion in the first place. Some taxpayers, whose accounts have been submitted to the IRS under these efforts to unveil both individual and corporate attempts at tax evasion, feared the discovery of their foreign bank accounts, but did not know how to properly bring these accounts back to the United States without facing steep civil penalties and even criminal persecution. These first few victories by the IRS under FATCA should alert individuals as cautionary tales of the importance of understanding the implications of holding assets in foreign financial institutions (FFIs).

One FAT check for FATCA

Upon the notable shift of American sourced income out of domestic financial institutions, the IRS sought out the money hidden in tax havens, tax shelters, and tax “nothings”. When Swiss bank-secrecy laws forbade FFIs from reporting American client’s account information without the client’s consent, the U.S. government passed the Foreign Account Tax Compliance Act or more commonly known as FATCA in 2010. The law presented a counter to bank-secrecy laws – if Switzerland would refuse to release information about income rightfully (or so the IRS believed) taxed by the U.S. government, the United States would implement a 30% withholding tax on American investments by other nations. The tax was, and still is, steep enough to prompt cooperation by FFIs if they want any access to the United States capital market. Effects on individuals with unreported foreign income represents only one facet of the effort; focus on multinational entities permeates the IRS agenda. FATCA mirrors other international efforts to eliminate international non-taxation of income, such as the Base Erosion And Profit Shifting (BEPS) project of the Organization for Economic Cooperation and Development. The BEPS project, much like FATCA, seeks transparency and full disclosure of the source and storage of monetary assets. With the spotlight on tax evasion constantly broadening and brightening, both American corporate entities with complex ownership structures and individuals with rather simple investments and income abroad must become and remain informed about similar IRS efforts.

Pay Up: Penalties and Fines for Tax Evasion

As the government becomes increasingly strapped for cash, the focus on derailing the effectiveness of foreign bank secrecy elevates. In order to place extreme emphasis on the priority the IRS has given FATCA enforcement, the government has placed steep civil and criminal penalties on those convicted of tax evasion, especially willful evasion. Tax evasion can result in prison sentences up to 5 years in duration as well as monetary fines of $250,000 for individuals and $500,000 for corporations. Failure to indicate on Schedule B of your Form 1040 that you hold assets in a foreign bank account, if discovered, may bear such repercussions.

The United States government acknowledges the difficulty of affording to bring assets back to the U.S. home soil, both from the perspective of facing an increased continuing tax rate on this income as well as facing steep civil and criminal charges. As such, the government has implemented occasional amnesties. An amnesty is somewhat comparable to forgiveness by the U.S. government, whereby a taxpayer can retrieve assets from foreign accounts and remit them to domestic banks while paying only a portion of usually assigned penalties or no penalties at all. However, these “Welcome Home!” gestures are not often as warm as they seem and often, not as frequent as tax evaders would hope. As referenced by many politicians and persecutors in Washington, there are many completely legal ways to participate in activities that avoid taxation either completely or to some smaller degree. However, as Mr. Hsiaw and UBS would likely agree, knowledge of the nature, legal landscape, and potential punishment for unreported foreign earnings and similar offshore bank accounts and investments are a necessity in the increasingly omniscient reach of the IRS.