Brian Wynne, CPA

We’ve invited Davis Burroughs of JD Katz, a Bethesda-based law firm, to share some tax law insights with our readers.  This post reviews the latest developments in offshore reporting requirements in advance of FATCA’s implementation later this year.  For more information on JD Katz, visit www.jdkatz.com.  If you are interested in guest-posting for It’s Taxing, contact us.

A new report (PDF) from the Senate Permanent Subcommittee on Investigations (SPSI) ripped into several ongoing endeavors by the Securities and Exchange Commission (SEC), Department of Justice (DOJ), and Internal Revenue Service (IRS) to punish and collect from foreign tax dodgers. The report was released in advance of the Senate’s March 6 hearing, which focused on holding Swiss banks and their U.S. clients accountable for failing to pay taxes on billions of dollars in hidden assets.

The SPSI report focuses heavily on the government’s handling of Credit Suisse Group AG, a Swiss holding company which has helped around 20,000 U.S. based clients evade taxes between 2008 and now. Over 95% of the company’s American accounts were hidden from U.S. authorities through a series of exit projects conducted to shield its clients from prosecution. To date, the DOJ has received less than 1% of the identities of Credit Suisse account holders.

The good news for legislators came last Friday, when Credit Suisse agreed to a $196 million settlement with the SEC. The bank admitted to breaking U.S. securities laws by failing to register with the SEC before providing financial services to American taxpayers. Credit Suisse is also expected to reach a settlement with the DOJ, which could topple the $780 million paid by Swiss bank UBS in 2009 to avoid prosecution on similar charges.

“An Ineffective Approach”

Rather than relying on “John Doe Summons,” an investigation mechanism which helped the U.S. extract the identities of 4,700 names of likely non-compliant accounts at UBS, the DOJ is now utilizing tax treaties and working collaboratively with the Swiss government and Swiss courts as a means to get information on Credit Suisse’s American clients.
By working through Swiss courts, critics argue, decisions are more likely to be made in favor of protecting traditional methods of Swiss banking secrecy.

That tactic has “bogged down” the fight against offshore tax evasion, according to Sen. Carl Levin (D-Mich), chairman of SPSI. Sen. John McCain (R-AZ), the ranking Republican on SPSI, also called it an “ineffective approach,” and expressed the need to use “every legal tool at their disposal to hold these banks fully accountable.”

For those few secret Swiss bank accounts that have been turned over to the IRS, very few of their owners have been criminally prosecuted by DOJ. According to a Joint Statement (PDF) released by James M. Cole, Deputy Attorney General and Kathryn Keneally, Assistant Attorney General of the United States Department of Justice Tax Division, the DOJ has charged just 73 account holder and 35 bankers with “violations arising from offshore banking activities.”

Amnesty for Banks

This summer, the DOJ announced a program allowing Swiss banks not currently under criminal investigation to come clean and pay a penalty relative to the amount of American account holders who they may have helped violate U.S. tax law. For each bank customer who entered the IRS’ Offshore Voluntary Disclosure Program (OVDP), the bank earned a credit towards their total fine amount.

Learn More: Offshore Voluntary Disclosure Program

The OVDP program is not without its critics. “These 100 banks get immunity from prosecution, Levin protested, “They don’t have to disclose names. What they disclose is bits and pieces and they tell us `you go on a treasure hunt, a wild goose chase.’”

FATCA Loopholes

The SPSI report also lashes out against the Foreign Account Tax Compliance Act (FATCA) – a cross-border information sharing agreement launched in response to the UBS scandal.

Switzerland signed a FATCA agreement with the United States last year that allows its banks to comply with the law.

“Among other problems, the FATCA regulatory loopholes will require disclosure of only the largest dollar accounts,” the SPSI report says, “they will permit banks to ignore, in most cases, bank account information that is kept on paper rather than electronically; they will allow banks to treat accounts opened by offshore shell entities as non-U.S. accounts even when the entity is owned by a U.S. taxpayer; and the remaining disclosure requirements can be easily circumvented by U.S. persons opening accounts below the reporting thresholds at more than one bank.”

The SPSI found that neither FATCA, the U.S.-Swiss tax treaty, nor the DOJ’s amnesty program can be relied upon to produce the names of U.S. persons guilty of curbing their tax liability through Swiss banks.

Why Still Come Forward?

The scathing report from SPSI should not be considered a relief for U.S. persons who have deposited monies in Switzerland or in any other offshore account. As Forbes contributor Robert Wood put it, “Most foreign countries and their banks are getting in line to take their medicine from the IRS. So don’t count on bank secrecy anywhere.”

The OVDP, which has already collected over $6 billion in penalties and back taxes, could end anytime, subjecting those with unreported assets to much harsher FBAR penalties and criminal prosecution.

Since 2009, the IRS has and will continue to ramp up its efforts to combat foreign tax evasion by both individuals and businesses. The trove of U.S. data compiled from banks, witnesses, foreign disclosures, and whistleblowers is steadily increasing. Moreover, FATCA officially takes effect this summer, which means participating countries will be increasingly likely to become compliant or face a stiff 30% tax on U.S. investment income. If you have unreported foreign assets, consider seeking advice from a tax professional immediately.

Written by: Davis Burroughs for JDKatz, P.C.  JDKatz, P.C. is a Bethesda-based law firm specializing in business and tax law, tax controversy, estate planning, and civil and estate and trust litigation. Our attorneys are experienced in international tax law work. Learn more at http://www.jdkatz.com.