Panama Papers Leak Puts Spotlight on Offshore Accounts

Law360, New York (May 2, 2016, 11:19 AM ET) —

Ivan H. Golden %>
Ivan H. Golden

The Panama Papers leak last month is yet another reminder that U.S. taxpayers who are still using undeclared offshore accounts to hide wealth or avoid tax are at serious risk of discovery and should carefully consider disclosing their accounts before it is too late.
On April 3, the International Consortium of Investigative Journalists (ICIJ) reported that it had obtained millions of documents from Panamanian law firm Mossack Fonseca. The leaked documents identified more than 214,000 offshore accounts that government officials, celebrities, athletes and wealthy individuals and families in more than 200 countries used to conceal assets from tax authorities. ICIJ announced on April 26 that it would publish a searchable database of the leaked information on May 9. Although United States taxpayers were not the focus of the leak, the U.S. Department of Justice has opened a criminal investigation into the tax avoidance schemes disclosed by the Panama Papers, and officials from the Internal Revenue Service and the U.S. Department of the Treasury recently participated in a special meeting of the Joint International Tax Shelter Information and Collaboration Network to discuss how to use the leaked information to pursue offshore tax evasion.
The Panama Papers disclosure is the latest in a series of events that highlight the danger to U.S. taxpayers of using offshore accounts to hide assets or avoid U.S. tax. The Department of Justice has been aggressively pursuing offshore tax evasion by U.S. taxpayers since at least 2008, when it began a sweeping investigation of UBS AG, Switzerland’s largest bank. That investigation led to the creation, in 2013, of the program for nonprosecution agreements or nontarget letters for Swiss banks, which ultimately resulted in the Justice Department entering into 78 nonprosecution agreements with 80 Swiss banks and the collection of more than $1.3 billion in penalties. In addition, the Justice Department gained access to voluminous information regarding U.S. taxpayers’ offshore accounts and ensured the participating banks’ cooperation with the U.S. government going forward.
Using information obtained in its investigation of Swiss banks, the Justice Department now is looking beyond Switzerland to banks in the British Virgin Islands, the Cayman Islands, the Channel Islands, Hong Kong, Israel, Liechtenstein, Luxembourg, Panama, Singapore and elsewhere in its efforts to crack down on offshore tax evasion. The Justice Department recently sued UBS AG’s Miami branch to enforce an IRS administrative summons seeking records from UBS’ Singapore branch regarding the accounts of a U.S. taxpayer. Further, several recent initiatives — including the Foreign Account Tax Compliance Act, commonly known as FATCA, and the expanding network of intergovernmental agreements between the United States and other jurisdictions — will allow the U.S. government to obtain more information than ever before about the foreign accounts, assets and activities of U.S. taxpayers.
As a result, U.S. taxpayers who have foreign accounts or assets they have not disclosed should strongly consider making a voluntary disclosure to avoid civil penalties and even criminal liability. The good news for these taxpayers is that it is still possible to make a disclosure on relatively favorable terms — provided that the taxpayer is not already under investigation. Taxpayers who are already under examination or criminal investigation by the IRS are ineligible to make voluntary disclosures. The bad news is that the IRS has begun hinting that taxpayers’ ability to disclose offshore accounts while paying relatively modest penalties may not last forever and, more than seven years after the Justice Department’s investigation of Swiss banks began, the IRS may not take kindly to taxpayers’ claims that they were unaware of their obligation to disclose offshore accounts.
In 2009, not long after the Justice Department’s investigation of UBS AG began, the Internal Revenue Service introduced the Offshore Voluntary Disclosure Program (OVDP), which provided the first organized framework for U.S. taxpayers with undisclosed offshore assets to declare their offshore income, assets and accounts. The original OVDP required taxpayers to file six years of original or amended income tax and information returns; pay tax, interest and an accuracy-related penalty on the undeclared income; and pay a miscellaneous penalty equal to 20 percent of the highest aggregate value of their undeclared accounts and assets. In exchange, the IRS agreed not to refer the taxpayer to the Justice Department for criminal prosecution and to waive certain civil penalties that would otherwise apply. In particular, the IRS agreed to waive the FBAR penalty, which can be as much as 50 percent of the balance in an account at the time of the violation where the failure to disclose the account was willful.
The IRS has since modified the OVDP to make it somewhat less taxpayer-friendly. The terms of the current OVDP require taxpayers to file eight years of delinquent income tax and information returns and pay eight years’ worth of tax, interest and penalties, and the miscellaneous penalty has been increased to 27.5 percent from 20 percent. If a foreign financial institution at which the taxpayer has or had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement has been publicly identified as under investigation or as cooperating with the government, the miscellaneous penalty is increased to 50 percent. Nevertheless, the terms are still advantageous for many taxpayers, particularly those whose failure to report offshore income and assets was willful and who are therefore at risk of criminal prosecution and may be liable for the onerous willful FBAR (Report of Foreign Bank and Financial Accounts) penalties.
In addition, for taxpayers whose failure to report income, assets or accounts was less culpable, the IRS has announced streamlined filing compliance procedures. Generally, a taxpayer qualifies to make a streamlined disclosure if his or her failure to report offshore accounts was nonwillful, and he or she meets certain other requirements relating to U.S. residency and general U.S. tax compliance. Under the streamlined procedures, taxpayers generally must file three years of delinquent income tax returns and six years of delinquent information returns, pay three years’ worth of delinquent income tax and interest and pay a miscellaneous penalty of, at most, 5 percent of the highest aggregate balance in their offshore accounts.
Since the OVDP’s introduction in 2009, the IRS has received more than 54,000 voluntary disclosures and more than 30,000 streamlined disclosures and has collected more than $8 billion in tax, penalties and interest. Although the programs remain open-ended, Justice Department and IRS officials recently suggested that time is running out for taxpayers to make voluntary disclosures. As a result, U.S. taxpayers (including U.S. persons who live overseas) who still have undisclosed foreign income, assets or accounts should carefully consider making a voluntary disclosure while they are still able to do so.
—By Ivan H. Golden, Schiff Hardin LLP
Ivan Golden is an associate in Schiff Hardin’s Chicago office.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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