Why is this Topic Important to Wealth Managers? This topic discusses the potential consequences of not playing by the rules; it is important to constantly keep in mind the balance between providing the most efficient and effective services to clients and crossing the line into illegal territory. Clients may not realize the harsh penalties associated with offshore activity, and although when performed by expert planners under the proper circumstances, that some offshore transactions may be legal and beneficial, it is the job of informed wealth managers to keep clients abreast of information that is useful in making long-term financial decisions.

Four bankers at an international bank incorporated and with its headquarters in Zurich, Switzerland, with offices worldwide, including New York City and Miami, were indicted by a federal grand jury in the Eastern District of Virginia and charged with conspiring with other Swiss bankers to defraud the United States, the Justice Department and the Internal Revenue Service (IRS) announced Wednesday.

According to the indictment, the international bank’s managers and bankers engaged in illegal cross-border banking that was designed to assist U.S. customers evade their income taxes by opening and maintaining secret bank accounts at the bank and other Swiss banks. As of the fall of 2008, the international bank maintained thousands of secret accounts for customers in the United States with as much as $3 billion in total assets under management in those accounts.

The Justice Department announced the scheme dates back to 1953 and involved two generations of U.S. tax evaders including U.S. customers who inherited secret accounts at the international bank.

The indictment asserts that four foreign individuals, members of senior management, bankers and others assisted U.S. taxpayers in evading their U.S. taxes through the use of secret bank accounts in Switzerland.

According to the indictment, the defendants and their co-conspirators solicited U.S. customers to open secret accounts because Swiss bank secrecy would permit them to conceal from the IRS their ownership of accounts at the bank and other Swiss banks. It is further alleged that they provided unlicensed and unregistered banking services and investment advice to customers in the United States in person while on travel to here, including at the international bank’s representative office in New York City and by mailings, e-mail and telephone calls to and from the United States.

The indictment further alleges that the defendants and their co-conspirators caused U.S.  customers to travel outside the United States, to destinations including Switzerland and the Bahamas, to conduct banking related to their secret accounts; opened secret accounts in the names of nominee tax haven entities for U.S. customers; accepted IRS forms that falsely stated under penalties of perjury that the owners of the secret accounts were not subject to U.S. taxation; advised U.S. customers to structure withdrawals from their secret accounts in amounts less than $10,000 in an attempt to conceal the secret account and the transactions from American authorities; and advised U.S. customers to utilize offshore credit, and debit cards linked to their secret accounts and provided the customers with such cards, including cards issued by American Express, Visa and Maestro.

According to the indictment, after the bank decided to close the secret accounts maintained by U.S. customers, the defendants encouraged and assisted the customers to transfer their secret accounts to other banks in Switzerland and Hong Kong as a means of continuing to hide their assets from the IRS and discouraged the customers from disclosing their secret accounts to the IRS through the Voluntary Disclosure Program.  In addition, one observer notes the coincidence that this announcement comes not long after the announcement of the second Voluntary Disclosure Program initiative made earlier this month.

A criminal indictment is only an accusation and a defendant is presumed innocent until proven guilty. If convicted, the defendants each face a maximum of five years in prison and a maximum fine of $250,000.

Tomorrow’s blogticle will discuss important planning aspects of 2011.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts

NB: This work or parts thereof originated from previous official Federal Government publication available to the public.

Wikileaks is set to release confidential Swiss banking documents, and although the scope of information included in the documents isn’t yet clear, the release could pave the way for a new IRS surge against tax evaders.  Similar disclosures by bank insiders were at the heart of the Justice Department’s UBS investigation.   This most recent leak came from a former senior private banker and chief operating officer of Julius Baer’s Caribbean operation.   He’s currently on trial in Switzerland for allegedly leaking client documents in 2005.

… the statute of limitations for criminal tax offenses is generally three years, but there are a number of exceptions that extend the statute to six years, including “willfully attempting to evade or defeat any tax.” Leaked documents from prior to 2002 would reveal activities that would generally fall outside the six-year statute of limitations; however, the six year statute only begins to run on the day the last affirmative act is committed by the defendant, so criminal prosecution of accountholders revealed by the leak may still be viable.  Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the IRS’s offshore enforcement efforts in Advisor’s Journal, see Offshore’s Limited Shelf Life (CC 10-47), IRS Proposed FATCA Guidance Expands Offshore Compliance Initiatives (CC 10-52), and IRS Planning New Voluntary Disclosure Program for Offshore Assets (CC 10-118).

Why is this Topic Important to Wealth Managers? Discusses alternative tax and interest calculations available to certain taxpayers with regards to Passive Foreign Investment Company income as part of the Voluntary Disclosure Programs. 

A significant number of Offshore Voluntary Disclosure Practice cases (remember the Swiss Bank Accounts) involve Passive Foreign Investment Company (PFIC) investments.  A lack of historical information on the cost basis and holding period of many PFIC investments, the Service notes, may make it difficult for taxpayers to prepare statutory PFIC computations and for the Internal Revenue Service to verify them.  As a result, resolution of many Disclosure Practice cases are said to be unduly delayed.  Therefore, for purposes of this initiative, the Internal Revenue Service is offering taxpayers an alternative to the statutory PFIC computation that will resolve PFIC issues on a basis that is consistent with the Mark to Market (MTM) methodology authorized in Internal Revenue Code section 1296 but will not require complete reconstruction of historical data. [1]

The terms of the alternative resolution offered by the Internal Revenue Service are as follows:

• If elected, the alternative resolution will apply to all PFIC investments in cases that have been accepted into the Disclosure Practice and that qualify for the special civil penalty framework announced by the IRS on March 23, 2009.  [2]
• The initial MTM computation of gain or loss under this methodology will be for the first year of the Disclosure Practice application but could be made after 2003 depending on when the first PFIC investment was made.  Generally, under the terms of the March 23, 2009 framework, the first year of the Disclosure Practice application will be for the calendar year ending December 31, 2003.   This will require a determination of the basis for every PFIC investment, which should be agreed between the taxpayer and the Service based on the best available evidence.  
• A tax rate of 20% will be applied to the MTM gain(s), MTM net gain(s) and gains from all PFIC dispositions during the Disclosure Practice period. [3]
• A rate of 7% of the tax computed for PFIC investments marked to market in the first year of the Disclosure Practice application will be added to the tax for that year. [4]
• MTM losses will be limited to unreversed inclusions (generally, previously reported MTM gains less allowed MTM losses) on an investment-by-investment basis in the same manner as section 1296. During the Disclosure Practice period, these MTM losses will be treated as ordinary losses [5]and the tax benefit is limited to the tax rate of 20%.  This limitation is accomplished by multiplying the MTM loss by 20% and applying the result as a credit against the tax liability for the year. 
• Regular and Alternative Minimum Tax are both to be computed without the PFIC dispositions or MTM gains and losses.  The tax from the PFIC transactions (20% plus the 7% for 2003, if applicable) is added to (or subtracted from) the applicable total tax, either regular or AMT, whichever is higher.  The tax and interest (i.e., the 7% for the first year of the Disclosure Practice) computed under the Disclosure Practice alternative MTM will then be added to the applicable total tax. 
• Generally, underpayment interest and penalties on the deficiency are computed in accordance with the Internal Revenue Code and the terms of the Disclosure Practice.
• For any PFIC investment retained beyond 12/31/2008, the taxpayer must continue using the MTM method, but will apply the normal statutory rules of section 1296 as well as the provisions of sections 1291-1298, as applicable.

However, if the taxpayer does not elect to use the alternative PFIC computation, then the PFIC provisions of Sections1291-1298 apply.  The IRS recommends for those considering the alternative calculation to seek professional tax advice with regards to these Disclosure Practices.    

Next week’s blogticles will discuss new hot topics in 2011.  

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

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[1] Internal Revenue Service.  Offshore Voluntary Disclosure Initiative: Passive Foreign Income Company Investment Computations.  September 2010.   http://www.irs.gov/taxpros/.  Last Accessed 1/27/2011.

[2] See generally, Statement from IRS Commissioner Doug Shulman on Offshore Income.  http://www.irs.gov/newsroom/article/0,,id=206014,00.html, Last Accessed 1/27/2011; IRM 9.5.11.9, Revised IRS Voluntary Disclosure Practice. http://www.irs.gov/newsroom/article/0,,id=104361,00.html.  Last Accessed 1/27/11. 

[3] This arrangement is in lieu of the rate contained in section 1291(a)(1)(B) for the amount allocable to the current year and section 1291(c)(2) for the deferred tax amount(s) allocable to any other taxable year.

[4] This arrangement is in lieu of the interest charge mechanism described in sections 1291(c) and 1296(j).

[5] Under IRC 1296(c)(1)(B).

Taxpayers who want to come clean with the IRS about offshore assets may get a second chance.

Although taxpayers with undisclosed offshore accounts cannot count on getting deals like those offered under previous voluntary disclosure programs, a new program is in the works. A new disclosure regime will also be available to the 3,000 plus taxpayers who came forward after the October 2009 expiration of the previous disclosure program.

The numbers back up the Commissioner’s confidence, with a total of 18,000 taxpayers with undeclared offshore assets coming forward since the earlier disclosure program was launched.  The program enticed taxpayers to reveal themselves by offering significantly reduced penalties to taxpayers who voluntary disclosed previously undisclosed offshore assets.

The new voluntary disclosure program will still offer decreased penalties for those who voluntarily declare their offshore assets to the IRS, but penalties will be stiffer than those offered under the former program.  Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of FATCA in Advisor’s Journal, see Offshore’s Limited Shelf Life (CC 10-47)and IRS Proposed FATCA Guidance Expands Offshore Compliance Initiatives (CC 10-52).

Why is this Topic Important to Wealth Managers? Presents information useful to wealth managers who incorporate offshore activities into clients’ personal and business planning. Discusses, specifically, Foreign Bank and Financial Account reporting and compliance requirements.

There is no specific Federal law that prohibits an individual from owning any interest in a financial account in foreign jurisdictions.  “However, because offshore financial accounts can be used to hide criminal proceeds or evade taxes, federal law does require disclosure of such accounts.” [1]

“Congress has directed the Secretary of the Treasury to require residents and citizens of the U.S., or persons in and doing business in the U.S., to maintain records and file reports of transactions and relations with foreign financial agencies.” [2]

Specifically, every “U.S. citizen, resident and businessperson who has a financial interest in, or signatory authority over, one or more bank accounts, securities accounts or other financial accounts in a foreign country”, must “report that relationship to the U.S. Department of the Treasury if the aggregate value of the accounts exceeds $10,000 at any time during the calendar year”, annually through Form TD F 90-22.1. [3]

For each foreign account, the Form TD F 90-22 must include:

• The name in which the account is maintained;
• The account number or other account designation;
• The name and address of the foreign bank or other person with whom the account is maintained;
• The type of account; and
• The maximum value of the account during the calendar year. [4]

Recently, the well known UBS situation highlighted the Foreign Bank and Financial Account or FBAR requirements, where U.S. account holders “held in the name of offshore trusts and other sham entities”, funds at the Bank. [5] In what was thought of by many as unprecedented the Swiss Bank agreed “provide the IRS with the identities and account information of certain U.S. clients.” [6] Federal criminal and civil suits soon followed “resulting in a scramble by thousands of holders of offshore accounts to come clean through an IRS partial amnesty program that was available until October 15, 2009.” [7]

“However, the IRS estimates that for every person who files an FBAR, four persons fail to file a required FBAR in any calendar year.” [8]

Nevertheless, any person who willfully violates the FBAR reporting requirements, or any person who willfully causes such a violation, is subject to a civil money penalty in the amount of $100,000 or 50 percent of the balance in the account at the time of the reporting violation, whichever is greater. [9]

Furthermore, any person who willfully violates the FBAR reporting requirements, or any person who willfully causes such a violation, is subject to criminal fine of up to $250,000 and/or imprisonment for up to five years. [10] Moreover, if the “violation occurs while the person is violating another federal law or as part of a pattern of unlawful activity involving in excess of $100,000 in a one-year period, the person is subject to up to a $500,000 fine, up to ten years imprisonment, or both.” [11]

The new reporting requirement discussed yesterday is similar to the information furnished in an FBAR report but is slightly different.  “For example, a beneficiary of a foreign trust who is not within the scope of the FBAR reporting requirements because his or her interest in the trust is less than 50 percent may nonetheless be required to disclose the interest in the trust with his or her tax return if the value of his or her interest in the trust together with the value of other specified foreign financial assets exceeds $50,000.” [12]

Tomorrow’s blogticle will discuss additional international planning considerations.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] Steven Mark Levy.  Federal Money Laundering Regulation: Banking, Corporate and Securities Compliance (FMNYL) § 10.02. Wolters Kluwer.  2010.

[2] 31 U.S.C. § 5314(a).

[3] 31 U.S.C. §§ 5314(a), 5314(b); 31 C.F.R. § 103.24, 31 C.F.R. § 103.27(c), (d),

[4] 31 C.F.R. § 103.32.

[5] FMNYL § 10.01.  Citing, IRS Chief: Swiss Deal Shows U.S. Resolve. August 19, 2009. National Public Radio.  Interview.  Douglas Shulman IRS Commissioner.

[6] Id.

[7] Id.

[8] Department of the Treasury, Report to Congress in Accordance with § 361(b) of the USA Patriot Act, at 6 (April 26, 2002).

[9] 31 U.S.C. §§ 5321(a)(5)(C)(i).

[10] 31 U.S.C. § 5322(a); 31 C.F.R. § 103.59(b).

[11] FMNYL § 10.09. Citing, 31 U.S.C. § 5322(b); 31 C.F.R. § 103.59(c).

[12] Joint Committee on Taxation, Technical Explanation of the Revenue Provisions Contained in Senate Amendment 3310, the “Hiring Incentives to Restore Employment Act,” under consideration by the Senate (JCX-4-10), Page 60.  February 23, 2010.

Why is this Topic Important to Wealth Managers?   Updates wealth managers who may have clients who may or may not have participated in last year’s voluntary disclosure program of offshore accounts.  Provides an initial report of the direction tax payers can expect to see from the government regarding offshore accounts in the future.    

Recently the discussion of Foreign Bank and Financial Accounts (FBAR) has been reinvigorated with a recent federal district court decision regarding civil penalties the government sought to impose for against one taxpayer for willfully failing to “check the box” on Schedule B on Form-1040. [1] 

“The U.S. District Court for the Eastern District of Virginia held that the federal government could not recover civil penalties for…failure to report…interest in two Swiss bank accounts because [the] action was not willful.” [2]  The government accused the taxpayer’s lack of properly filing his Schedule B to intentionally failing to disclose his offshore Swiss bank accounts.  The government contended that the taxpayer was civilly liable for each account separately “of not more than the greater of the amount (not to exceed $100,000) involved in the transaction (if any) or $25,000.” [3]

The court decision favored the taxpayer and although its rule is not binding on other courts, some wealth managers and practitioners feel the case was a small victory for taxpayers who hold offshore account interests in general.  “The case [] presents a middle-of-the-road approach between the government’s position that all unreported Swiss accounts are willful acts and taxpayers’ claims of ignorance of reporting requirements.” [4]  In addition, “the case illustrates the difficulty the government will have in establishing willfulness for the truly draconian FBAR penalty.”

Some other wealth managers feel that the decision changes their client’s position in regards to voluntary disclosure programs similar to the one available through late last year.  “A possible outcome of the decision is that some taxpayers will be encouraged to opt out of the voluntary disclosure initiative and take their chances with the normal FBAR penalty regime.” [5]

At the other end of the spectrum, it was recently reported that one taxpayer agreed to pay fines and penalties in excess of over $20 million.  In 1967 the individual made a “$200,000 deposit into an account with UBS in Vaduz, Liechtenstein, in the name of a Swiss foundation.” By the end of 2007 the account had grown to more than $41 million (or an average growth rate of 14% annually). 

Despite the significant return on assets, partially attributable to tax deferred growth in the foreign jurisdiction, sometime in 2008, the taxpayer voluntarily disclosed his accounts for the first time in over 40 years, sending along with the reporting form a one million dollar payment (which was later found unnecessary as withholding was properly followed at UBS).  The taxpayer claimed to lose half the value of the accounts caused by the financial calamity.  Notwithstanding,  the 84 year-old’s position, his attorney, said his client had to muster up significant personal funds, to pay the fines and penalties, wiping out almost 80% of the client’s net worth. [6]  The report also noted another recent tale of a “California real estate developer [who] paid $52 million in back taxes, fines and civil fraud penalties for hiding more than $200 million offshore.”

So what is required from your client’s with foreign accounts to comply with the FBAR report rules?  We will address this in a future blogticle.

Next week’s blogticles will discuss taxation and national fiscal policy. 

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] 2010 TNT 171-8; Once the taxpayer does agree to the offshore account interest he is required to file form TD F90-22.1. 

[2] 59 Tax Notes International 847.  Sept. 13, 2010.  (Lexis Nexis). 

[3] 31 U.S.C. § 5321.  (2004). 

[4] 59 Tax Notes International 847. 

[5] Id. 

[6] Forbes.  “How A $200,000 UBS Account Grew Into A $21 Million Penalty”.  http://blogs.forbes.com/janetnovack/2010/09/22/how-a-200000-ubs-account-grew-into-a-21-million-penalty/?boxes=Homepagechannels.  September 22, 2010.  Last Accessed September 26, 2010. 

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