Unreported Offshore Accounts: You’re Going to Get Caught

The following is a guest post from Brian Mahany, an attorney and principal in Mahany & Ertl, LLC, a boutique law firm concentrating in fraud litigation, asset recovery and tax matters.  I’m happy to post it here both because it provides a cautionary tale about what can happen when when you try to hide assets.  At any rate, Brian’s post follows:

I would be a rich man if I had a nickel for every time a potential client with unreported foreign bank accounts asked me if I thought they would be caught. Back in 2008, my answer might have been different. Not today. While not everyone may get caught – a few people always slip between the cracks – the odds now greatly favor the IRS and not taxpayers. 

Yesterday I had the chance to attend a presentation by Seton Hall University School of Law Professor Tracy Kaye. Like me, she also believes that odds favor the government. With penalties that include prison and $100,000 (or much more) per year for each year an account is unreported, smart taxpayers are coming forward and making peace with the IRS. 

After the event, we had a chance to discuss some of the ways folks get caught.  Here is my list (and in no specific order). 

First, the government pays snitches. A lot. Former UBS and Credit Suisse banker Bradley Birkenfeld was recently paid $104 millionfor providing information about former UBS clients with Swiss accounts. Even though Birkenfeld is a convicted felon and served time for helping Americans evade taxes, the government still paid him. 

He is not the only one and the U.S. is not alone in such tactics. Previously we reported on how Germany paid a Swiss banker for account documentation stolenfrom Swiss private bank Julius Baer. Reportedly the German tax authorities also provided witness protection for the banker. (Stealing is still a crime.) There is not much difference between paying whistleblowers and knowingly purchasing stolen data. Actually, there is no difference as Germany and the U.S. share tax intelligence. 

If paying for information doesn’t work, there is always indicting foreign bankers. The U.S. Department of Justice does that routinely. If a foreign banker knowingly assisted a U.S. taxpayer in concealing a foreign account or evading taxes, the banker can be charged with conspiracy to defraud the United States Treasury. Given the choice between prison or cooperation, most bankers will always choose the latter. 

Earlier we talked about whistleblowers who are paid for their information like Bradley Birkenfeld. Not all whistleblowers are motivated by money. Many are business folks who were harmed by unscrupulous fraudsters. Others are competitors, jilted spouses, jealous boyfriends, pissed off employees, the recently laid off and an entire list of others who feel disenfranchised or who hold a grudge. Chances are that someone knows about your foreign account. How sure can you be of their loyalty? 

The 4th risk is the Foreign Account Tax Compliance Act. FATCA is the 800 pound gorilla in the room. Passed by Congress several years ago, FATCA will soon require foreign banks to review their accounts and report to the United States anyone who is a U.S. citizen or has indicia of ties to the U.S. 
If you think that you can quickly close your account or move the money, don’t count on that. The IRS plans on asking for retroactive account data. How far back they will go remains to be seen. 

Already, the U.S. has tax exchange agreements with many countries. Even the Swiss are negotiating with the IRS. Sooner or later every bank will be forced to cooperate or risk being shunned worldwide. 

There is always someone who believes they are smarter than the feds. We have seen people open accounts in the name of a foreign trust or nominee. Do that and get caught and expect a relatively quick indictment. Intentionally hiding assets through phony names or entities is an affirmative act of evasion. That could earn you two felonies instead of one.

Lawyers and accountants are now bound by IRS Circular 230. Although your conversation with a lawyer may be protected by the attorney – client privilege, lawyers and accountants are prohibited from assisting others in evading taxes. We lose our license if we help you commit a crime. We can confidentially advise you of your options but can’t help you hide money from the feds. 

Some folks still try to open up accounts in the name of Panamanian corporations, Belize IBC’s, etc. It may work for awhile but how do you get your money back into the U.S.? The Treasury folks are already looking at wire transfers, check clearinghouses, credit card records and the like. You may have a credit card from a foreign bank but it clears through Visa or Mastercard and those entities are subject to U.S. law enforcement subpoena power. Ditto for ATM networks like PULSE and NYCE that process debit card cash advances.

The world is getting smaller by the day. Each week we learn of new methods used by the feds to track down unreported offshore accounts. About the only method left is filling a suitcase with cash and hiding it in a coffee can in some other country. Not the wisest of strategies. 

Not all people with unreported accounts are felons. In fact, most of our clients are dual nationals, foreign born Americans, green card holders or Americans who live or retired overseas. Many of these folks simply don’t understand the reporting laws and requirement to file annual FBARs (Report of Foreign Bank and Financial Accounts).

Whether your failure to report was intentional or accidental, time is quickly running out. As noted above, the penalties for unreported accounts are huge. Often they exceed the value of the account.

The IRS is currently running an amnesty program called the Offshore Voluntary Disclosure Program or “OVDI.”  For those who knew what they were doing when not reporting their account, its a great deal. Come into compliance, avoid an audit, pay reduced penalties and even get the proverbial “Get Out Of Jail Free” card. As with most IRS programs, there is a catch. You need to get to the IRS before they find you. Once your name has been turned over to them or they send you an audit notice, all bets are off and amnesty is no longer an option. 

For those who truly didn’t know of the foreign account reporting requirements a traditional disclosure or “opt out” may be better. The penalties for negligent violations are $10,000 per year and often are waived entirely. 

There are special programs for those with small accounts (aggregate balance less than $75,000), the so-called “accidental Americans”, those who inherited accounts but didn’t access the money and those who live overseas but are still required to file US returns. With so many options, it is best to speak to a knowledgeable tax attorney. 

The IRS can look back 8 years and reportable accounts include brokerage accounts, certain foreign mutual funds, offshore hedge funds, foreign CDs and even some foreign insurance products and property owned through an entity. Again, seek competent legal help if you have questions. 

If you received bad legal or accounting advice and find yourself in a problem because of that advice, seek help too. 

If you walk away from this article with anything, it should be this- Don’t wait! Chances are you will get caught.

Brian Mahany is a tax attorney based in Milwaukee, Wisconsin. He represents taxpayers in a wide variety of offshore and foreign tax reporting issues. Brian works with other lawyers and CPAs and has been named by CPAmerica as their exclusive legal services provider for offshore and international tax issues. He welcomes questions and can be reached through his law firm, Mahany & Ertlat brian@mahanyertl.comor by telephone at (414) 704-6731.