…Belgium charged UBS with money laundering and tax fraud alleging that UBS sought to convince Belgian citizens to set up structures aimed at evading taxes.
Offshore Winds of Change Part I
In January of 2016 the IRS updated Form 14653.
What, might you ask, is Form 14653? This obscurely numbered form is otherwise known as Certification by US Person Residing Outside of the United States for Streamlined Foreign Offshore Procedures and is at the heart of the Streamlined Foreign Offshore Procedures.
A (Non — Comprehensive) History of Offshore Reporting
The offshore hunt for money began in the early 2000s. A series of “John Doe” summonses, a procedural technique by which the IRS can issue a summons where the name of the taxpayer under investigation is unknown (consider it a fishing expedition) were issued to major credit card companies such as VISA , Mastercard and American Express for account information in about 30 different countries for the tax years 1998 to 2001. The IRS also issued summonses to airlines, hotels, car rental agencies and internet providers for information on transactions using these credit cards. As a result the IRS obtained millions of records that were then examined. Many cases were then referred for criminal investigation.
In 2003, the IRS implemented the first of several “Offshore Voluntary Compliance Initiatives”. It essentially gave the opportunity for scofflaws to voluntarily step forward and clear up their liabilities with the IRS. If one voluntarily stepped forward the IRS might excuse them of any tax crimes, but if the IRS caught you, woe betide!
The 2003 Voluntary Compliance Program ended on April 15, 2003 with mixed results. The perceived benefits of a voluntary disclosure versus the perceived belief of continued anonymity offshore resulted in only 1,500 disclosures collecting a mere $170 million. The motivation to come clean wasn’t strong enough.
UBS Whistleblower
The effort to locate offshore hidden funds got a significant boost in 2007 when a disgruntled former executive of UBS, one of Switzerland’s largest banks, disclosed to US investigators how the bank conspired to help Americans evade US taxes. This led to UBS to admit in early 2009 that it had fostered tax evasion, and in order to avoid prosecution, agreed to pay $780 million in fines and turn over data on 250 Swiss accounts. UBS was later to provide information on another 4,450 accounts. In August 2009, IRS Commissioner Doug Shulman stated “As this agreement [with UBS] demonstrates, the world of international taxes has dramatically changed, and people hiding assets and income offshore and from the IRS need to get right with the government now.”
Offshore Take Two
In 2009 the IRS announced a new amnesty program called the “Offshore Voluntary Disclosure Initiative” (later known as the 2009 OVDI) that allowed taxpayers who had not yet disclosed offshore accounts to come clean, avoid some of the more hefty fines and also avoid criminal prosecution. The program offered that in lieu of the plethora of penalties that the IRS could lobby at the scofflaw, the IRS would merely assess an accuracy penalty of 20% of the tax owed and an additional penalty equal to 20% of the largest balance in the foreign bank account during the last six years. This was further reduced to 5% under certain conditions. The program was announced on March 26, 2009 and was set to run until September 23rd 2009.
Quietly Noisy
Some taxpayers thought that instead of risking these penalties, they would “quietly” amend their returns and report increases in income thus avoiding the penalties. The IRs caught wind of this and in May of 2009 publicly noted that they would track these types of returns and that the filers risked being examined and criminally prosecuted.
Wild Things
The IRS estimated they would receive 1,000 disclosures, obviously based on the dismal results of the 2003 program. By September the IRS had received almost 4,800 submissions. The program was further extended until October 15th of 2009 during which almost 9,900 applications were submitted. In addition the IRS estimated an additional 10,000 applications incomplete as of December 1, 2009. The IRS had to handle some 55,000 unexpected, high priority income tax returns!
Offshore Winds of Change Part II
On February 8, 2011 the IRS announced another offshore program, now the 2011 Offshore Voluntary Disclosure Initiative. The deadline was set for September 9, 2011 and the terms were tightened. With the close of the program an additional 12,000 new applicants came forward pushing the total disclosures since the 2009 program to over 33,000 disclosures. As of January 2012, the IRS had netted $4.4 billion on the two programs.
Offshore 2012
On the heels of the success generated by the prior programs, the IRS announced the 2012 Offshore Voluntary Disclosure Initiative. Unlike the others, this one was an open — ended program with the IRS able to increase penalties or limit eligibility to the program. Once again the IRS upped the fines and penalties. IF it wasn’t clear until now, it was certainly getting very clear that (a) the IRS was aggressively chasing after people hiding assets and (b) the stakes were going up, and (c) the IRS was not going away.
One of the key limitations of the OVDI program was the one-size-fits-all approach. This was especially problematic for many taxpayers that were American merely by birth but had not lived at all in the United States. The option to enter an OVDI would be punitive and could severely harm savings accumulated legally in the country that they had grown up in. Many taxpayers opted to remain noncompliant rather than pay the penalties.
Maybe recognizing this inherent inequity, the IRS introduced the Streamlined Filing Compliance Procedure for taxpayers who were considered “low compliance risk.” To be eligible for this procedure one had to;
1. Be considered “low risk” (owing $1,500 or less)
2. Have resided outside the US since January 2009
3. Have a valid US tax identification number.
Swiss Cheese
Meantime the Justice Department began to actively pursue the Swiss banking industry. By December 2011 the DOJ had initiated 150 investigations, with 36 client cases charged, 31 guilty pleas entered, 2 convictions and 5 awaiting trial. In addition 13 bankers and 2 attorneys were awaiting trial with one advisor and one banker convicted. The aggressive enforcement was a major blow to the much vaunted Swiss banking secrecy. Banks were forced to disclose clients or to force them to fess up to the IRS or risk being fined punitively as well as not being able to do business in the US. In August of 2013, Switzerland and the US issued a joint statement regarding Swiss banks and US tax evasion investigations and established a program for non-prosecution of Swiss banks.
2014 Offshore Voluntary Disclosure Program
Beginning July 1, 2014, the disclosure program was updated once again. The OVD program fines were increased to 20% accuracy penalties on unreported offshore income and assets were subject to a 27.5% penalty of the highest aggregate value. This was further increased on August 4, 2014 to 50% for taxpayers who, at the time they step forward their bank/facilitator had already been indicted or was cooperating with the DOJ. Currently there are 95 banks, mainly located in Switzerland but also located in Hong Kong, Singapore, the Caribbean, Lichtenstein and Israel that fall in this category.
Simultaneously, the rules were relaxed for the Streamlined Filing process making it easier to be eligible for this option. Additionally, Form 14653 was introduced. This requires that the taxpayer certifies under penalties of perjury that their failure to file was not “willful”. Exactly what that meant wasn’t entirely clear, but in general it meant the taxpayer did not intentionally fail to file.
The IRS stated that the program is subject to change at any time.
2016 Developments
In January of 2016, Form 14653 was revamped. First, in order to be eligible to do an offshore streamlined filing one has to assert that the taxpayer was not present in the US at least 330 days of each year being filed. Furthermore, the IRS now requires a much more detailed narrative explaining why the taxpayer failed to file. The logic governing the 330 days rule is that the IRS is of the opinion that if you spend in excess of 35 days a year in the US you should have become aware of the requirement to file and if you still didn’t file you are considered willful.
This would seem to signal that the IRS is beginning to get tougher. Given the amount of publicity the offshore programs have garnered, it begins to stretch one’s credulity that there are actually people who are still not aware of the requirement to file tax returns and FBAR reports. It would not be surprising if the program requirements are tightened and that the program is even eventually phased out. Either way, burying one’s head in the sand in the hope that it all goes away is not an option.
Having seen the success of the US, many European countries have begun their own disclosure programs. On February 26, 2016 Belgium charged UBS with money laundering and tax fraud alleging that UBS sought to convince Belgian citizens to set up structures aimed at evading taxes.
Panamania
Fast Forward to April 2016. Just when you might have thought it was safe to go back into the water, news broke of a massive leak of information from the Panamanian legal firm Mossack Fonseca. 11.5 million documents were leaked detailing efforts of wealthy individuals throughout the world who attempted to hide money in all sorts of shell companies and offshore havens. The reverberations were felt throughout the world. France vowed to prosecute anyone evading taxes and promptly reinstated Panama as a tax haven and thus subject to scrutiny. The Prime Minister of Iceland was forced to resign after his name turned up on the Panama Papers and In the UK six members of the House of Lords were implicated. Naturally the IRS has been combing through the papers with dire warnings to anyone caught hiding money.
Writing on the Wall
The age of banking secrecy is over. As more countries jump onto the FATCA bandwagon, the ability to evade taxes by hiding assets overseas is rapidly waning. Those who have avoided getting straight with the IRS are strongly encouraged to do so before the window of opportunity closes forever. As the number of countries that sign FATCA agreements with the US increases, it is logical to assume that the next step would be increased cooperation in enforcement and in punitive measures. Time is running out on taxpayers who have not yet come forward.
If you are one of those, find a good accountant and take care of your problem before it becomes too late. To save time and money, download the Taxfyle app today, and start chatting with a CPA for free.
Aron Epstein CPA, proud and busy father, occasional skier, leader of pleasant life!
