Tax planning for US Customers: Compliance, Compliance, Compliance

By Denis Kleinfeld Esq, Miami, Florida, and Howard Fisher Esq, Beverly Hills, California (01/04/2011)

The United States Government is keeping on the pressure to crackdown on undisclosed offshore accounts.  As has been well publicised because of the US and Swiss political battle over the UBS case, the efforts to find and tax secret foreign accounts includes not only people who are US tax payers but also those who the government sees as the facilitators even if they are not US persons.


Following on the heels of a number of criminal cases, the US Department of Justice announced the indictment of four more Swiss bankers.  The basic charge is that the bankers helped US taxpayers use accounts that were kept secret so that their customers - the US taxpayers - could evade paying US taxes.  The press reports indicate that in this instance the bank under investigation is Credit Suisse and that it is fully cooperating will all governmental authorities.


However, it is not only Credit Suisse that has been caught up in these criminal proceedings.  The bankers and their managers were charged with engaging in cross-border banking, which involved a number of other foreign institutions.  Reportedly, these include three other Swiss banking operations.  The indictment makes the charges that the bank maintained thousands of secret accounts going as far back as 1953. This included, in some cases, at least two generations of US customers who evaded taxes and had inherited the accounts.  The US government claims that some US$3 billion in total assets were held under management by those accounts.


The allegations of the complaint, as may be expected, are that the defendants and their co-conspirators solicited US customers to open the accounts because Swiss secrecy law would permit them to conceal from the US tax authorities the true ownership of the accounts.  The indictment is a bit unclear as to who exactly the co-conspirators are, as they were just left unnamed in the indictment, although it is indicated that they are from various places in the United States. 


One interesting fact alleged is that the bank decided to close the secret accounts maintained by the US customers, the defendants encouraged and assisted those customers in moving the accounts so as to still keep them a secret from the US. In particular, the defendants were charged with discouraging those customers from entering into the then existing IRS Voluntary Disclosure Program.  That specific Voluntary Disclosure Program has since ended.


However, the IRS apparently has found that the offering of a voluntary disclosure program does have its benefits, so the IRS has announced that a second voluntary disclosure program is being offered, which will run until August 31, 2011.  This will allow people to avoid criminal prosecution although they will still be paying hefty civil penalties. To make sure that the program is well read, the IRS has made all the relevant information available in eight major foreign languages since the government recognises that for some US taxpayers English is not their primary language.  These languages are Chinese (traditional and simplified), German, Korean, Spanish, Farsi, Hindi, Russian, and Vietnamese. 

In order to take advantage of this second Voluntary Disclosure Program the taxpayer or the taxpayer’s representative may obtain a pre-clearance by faxing to the IRS Criminal Investigation Lead Development Center the taxpayer's name, date of birth, social security number and address. If the taxpayer is being represented (and it is hard to imagine a case where somebody would not hire an experienced attorney for this) an executed Power of Attorney must be included. The IRS will then notify the taxpayer or his or her lawyer whether they have been pre-cleared to participate in the program.  Anyone with questions can call first or can contact their nearest Criminal Investigation Office.


A Memorandum by the Department of the Treasury, Internal Revenue Service, sets out the procedure for the government directors of this program to process the voluntary disclosure requests containing offshore issues. To the government "all voluntary disclosure requests are mandatory work."  Initially all voluntary disclosure requests will be screened by the Criminal Investigation to determine if the taxpayer is eligible for the voluntary disclosure program.  If the Criminal Investigation makes the preliminary determination that the taxpayer is eligible, it will forward the request with offshore implications to Examination for processing.  "Those requests will be distributed to and worked by examiners who specialise in offshore examinations." 


The agents performing these civil examinations are authorised to execute agreements to resolve tax liabilities related to offshore issues. The new program makes some changes from the previous program that was offered in 2009.  Basically, the penalty structure is higher so that those who thought they could wait it out will not be rewarded for taking the gamble.  However, this 2011 program does have some new twists which may be helpful in getting matters resolved.


The new penalty framework essentially requires a payment of a penalty of 25 per cent of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the period from 2003 to 2010. In certain circumstances, some taxpayers will be eligible for five per cent or 12.5 per cent.  For example, for a taxpayer who is a foreign resident who is unaware that he or she is a US citizen, the penalty may be only five per cent.  For those who have accounts that are under US$75,000, the penalty may be reduced to 12.5 per cent.  In any event, taxpayers must also pay back taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties. 


The IRS has also released a 28 page FAQ (Facts and Questions) to try and more fully explain the application process, how to deal with issues involving Passive Foreign Investment Companies (known as ‘PFICs’), and how the penalty process works.  The FAQ also notes that those who thought they could get away with just filing amended returns -- known as a quiet disclosure -- may still be subject to criminal sanctions if the tax returns are audited and the IRS would then examine years prior to 2003 as well.


As the indictment of the bankers from Credit Suisse shows, the recently enacted part of the health care bill known commonly as the Foreign Account Tax Compliance Act is having its impact.  Americans who have foreign accounts are now finding that the financial institutions are throwing them out if they are not in compliance with US tax law. In fact, it is widely reported that many foreign financial institutions are just avoiding dealing with Americans altogether.  This, if I may make a personal note, is not helpful in times when the United States needs foreign financial institutions to want to deal with the United States and invest here.


Not to be overlooked is the recent issuance of final rules that amend the regulations under the Bank Secrecy Act in the United States regarding the filing of the form that informs Treasury that a US taxpayer has a foreign account.  The United States Treasury has a separate form called TD F-90.22.1 (commonly known as the FBAR), which is a separate form from those usually associated with the taxpayer's regular tax return forms.  The amended regulations clarify the situation when an account is foreign and therefore a reportable foreign financial account and provides a definition for certain terms such as "signature or other authority".  It is expected that the IRS will publish regulations for completing the FBAR form.


Clearly, the United States is going full guns on getting as much tax as it can from previously held offshore secret accounts. While there are no restrictions on Americans having foreign accounts as long as they are reported and tax is being paid, the process taken by Congress and the Treasury in dealing with the offshore financial world clearly has its economic repercussions for the United States.  In the meantime, tax planning for dealing with US customers consists of primarily three things: compliance, compliance and compliance.