Offshore Banks, Required Records and Secret Funds Transfers: a Receipe for Disaster


Recently, two Israeli banks are reported to have agreed to cooperate in criminal tax investigations being conducted by the Criminal Tax Division of the U.S. Department of Justice. The specific actions allegedly involve a conspiracy between the banks and depositors to hide offshore accounts and repatriate those funds through what are disguised as loans. The consequences of the bank actions, the actions of now revealed names of U.S. taxpayers are worth considering.

First, many more such “discoveries” are likely as a result of information provided by U.S. taxpayers who have entered the Voluntary Disclosure programs offered by the IRS. There have been three versions of the offshore voluntary disclosures, beginning in 2009, then modified in 2011 and finally the 2012 program. Each has produced “leads” on how U.S. taxpayers may have worked with offshore banks and financial institution personnel to transfer funds to the institutions and then use those funds.

Second, from the “leads” have come information about U.S. taxpayers who have not come forward. Many of those taxpayers are now under audit or soon will be. These audits, conducted by the IRS are looking at income tax and Bank Secrecy Act, (FBAR) reporting and disclosures. The audits are proceeding in interesting and perhaps problematic ways for some taxpayers. Among the tactics being used are summonses for accountants records and in some cases a Grand Jury subpoena compelling the accountant to testify. Another tactic is to summons the taxpayer to appear before the Grand Jury and give testimony about and produce record of the foreign accounts. The testimony of taxpayers in these cases is being compelled under the Required Records Doctrine and does not, according to the appellate courts, violate the Fifth Amendment privilege against self-incrimination. The IRS is looking for evidence of “willful” conduct. If it finds sufficient evidence of “willfulness” significant penalties will be assessed.

The Required Records Doctrine arises under the Bank Secrecy Act. A U.S. taxpayer must maintain records of offshore accounts for five years. The failure to maintain and produce records is a factor in determining whether conduct is “willful”. A determination of “willful” conduct can result in either criminal prosecution or civil penalties under the Bank Secrecy Act and under the Internal Revenue Code. The Bank Secrecy Act penalties arise as a result of failing to file FBAR’s. A “willful” failure to file and FBAR may result in a civil penalty of the great of 50% of the highest account balance of $100,000 per year per account. A “non-willful” violation may result in a civil penalty of $10,000 per year per account. Penalties under the Internal Revenue Code vary depending on whether the conduct is deemed “willful” meaning a civil fraud penalty or simply negligent, meaning an accuracy related penalty.

Adding to the complexity of sorting out “willful” and “non-willful” conduct will be factors like the source of the funds used to establish and maintain the offshore accounts. For some, the tracing will be straightforward. For others who used secret networks to transfer funds from their country of origin to the ultimate financial institution the process will be difficult. Those taxpayers who used what are known as “informal value transfer systems” aka the “Hawala” may find themselves unable to prove source of funds. This could be an important fact in sorting out “willful” and “non-willful” actions.

As we approach April 15, 2013, the due date for income tax returns and June 30, 2013 which is the next due date for FBAR’s taxpayers need to consider their exposure to penalties and prosecution for not reporting offshore financial accounts. The 2012 Offshore Voluntary Disclosure Program is still open for those who come forward before being discovered. By entering the program taxpayers can limit their penalty exposure and avoid prosecution. Or taxpayers can wait for offshore financial institutions to agree to cooperate and produce records and it will be too late.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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