Crackdown on US Tax Evaders With Secret Offshore Accounts Leads to International Banking Reforms

by Latham & Watkins LLP

Miriam Fisher, global Co-chair of the firm's Tax Controversy Practice, focuses her practice on federal tax controversy and litigation, including complex civil and criminal tax matters. Fisher spoke at the November 6, 2013 American Institute of CPAs National Tax Conference about the role the US Department of Justice’s (DOJ) Tax Division plays in current criminal tax enforcement initiatives, including offshore banking.

“In less than five years, international banking and bank secrecy have gone through a remarkable change driven largely by US tax enforcement,” explains Fisher. “Thus, run-of-the-mill US tax avoidance has been the catalyst for changing the world of international banking, including increased global coordination and regulation of international banking and the elimination of bank secrecy.”

“These groundbreaking US tax compliance programs were largely motivated by the Internal Revenue Service (IRS),” said Fisher. “But the corresponding enforcement strategy followed by the DOJ Tax Division has been aggressive, creative and enormously effective.”

How did the US government bring an end to Swiss banking secrecy?

Fisher: The DOJ’s Tax Division started by applying pressure on prominent Swiss banks to turn over the names of US account holders. At the same time — in 2009, 2011 and 2012 — the IRS announced a series of voluntary disclosure programs inviting US holders of undisclosed foreign bank accounts to come forward, pay a penalty and avoid prosecution.

In response 38,000 people have come forward and paid billions of dollars in taxes and penalties to get straight with the US government through the voluntary disclosure initiatives. The program participants encompass a broad spectrum of culpability — ranging from the honestly uninformed to intentional wrong-doers. While certain cultures historically may have been more tolerant of safekeeping and accumulation of funds “offshore,” it is inconsistent with US policies of financial disclosure and global taxation.

The IRS disclosure program requires depositors to provide the US government with information about the foreign banks holding their undisclosed accounts and about any facilitators of secret foreign banking. Working in parallel with the IRS, the DOJ has taken the unusual step of criminally investigating certain foreign banking institutions and the foreign advisers, lawyers and bankers identified by the disclosure program. Those charged are generally alleged to have conspired with US taxpayers to violate US tax law by failing to disclose to the IRS their overseas assets and earnings.

How has the DOJ Tax Division’s strategy evolved to cast a wider net?

Fisher: In August 2013, the Tax Division, along with the Swiss government, invited any eligible Swiss bank to come forward and turn over to the DOJ all records of US depositors, have the data verified by an independent examiner, in some instances pay penalties and in all cases avoid prosecution. Many Swiss banks are preparing to enter the new program and are in the process of notifying US depositors, asking them to participate in the IRS disclosure program if they have not done so already.

What role does FATCA play in this tax compliance strategy?

Fisher: The use of foreign financial institutions to facilitate US tax avoidance also led to the passage of the Foreign Account Tax Compliance Act (FATCA) in March 2010. FATCA, set to become effective in 2014, essentially forces foreign banks with US money to enter into an advance agreement to share US depositor information with their government, which has agreed to share that information with the United States. Absent participation in this treaty-based process, the foreign bank may be subject to 30 percent withholding on any US-sourced payment destined for that bank. FATCA participation is widespread and will significantly reduce the potential worldwide for US taxpayers to hide funds offshore.

Do you expect this enforcement initiative to spread beyond Switzerland?

Fisher: Yes — it already has. A decade ago, the DOJ first obtained the names of noncompliant US credit cardholders from a handful of offshore banks; congressional hearings ensued on the use of offshore trusts in tax avoidance, and the efforts evolved into the ongoing and successful foreign account enforcement program. The recent disclosure programs have developed leads around the world, and US enforcement initiatives are already focused beyond Europe to Southeast Asia, the Middle East, South America and beyond.

Why has the number of jail sentences been so low?

Fisher: The DOJ has brought more than 100 criminal cases against taxpayers and enablers. About 60 percent of those have ended in plea agreements. Most of the depositors’ sentences have not been particularly severe; a number are elderly and the facts surrounding the establishment of their offshore accounts are sympathetic. There have been just under 20 cases brought against foreign bankers, advisors and lawyers to date. The DOJ has also seized a Swiss bank’s funds held in a US correspondent account, and one bank was prosecuted and went out of business.

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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