Update on Unreported Foreign Bank Accounts and Self Disclosure Under the 2012 OVDI
Since February 2009, when Swiss banking giant UBS agreed to disclose the names of certain U.S. customers as part of a deferred prosecution agreement with the U.S. Department of Justice (“DOJ”) involving allegations of tax fraud, centuries of offshore bank secrecy practices have continued to erode. Offshore banking has been a focus of U.S. tax enforcement ever since.
More and more banks in Switzerland, Israel and Asia are reaching agreements with the U.S. and are disclosing information on their U.S. customers, both current and former. In addition, foreign banks around the world have begun complying with the upcoming withholding requirements imposed on them by FATCA (Foreign Account Tax Compliance Act), which will take effect in July 2014, and which require the U.S. customers of foreign banks to sign Forms W-9 or other documents consenting to the disclosure of their names and account information to the IRS.
U.S. taxpayers are learning that undisclosed foreign bank accounts can be extremely risky and expensive in the long run. Since 2009, more than 39,000 such taxpayers have participated in the Offshore Voluntary Disclosure Programs of the IRS and have paid over $5.5 billion in taxes, interest and penalties. While disclosing an offshore account involves financial costs, these taxpayers who have disclosed have avoided potential intensive audits, criminal investigations and prosecutions. Conversely, more than 100 U.S. accountholders, foreign bankers and other professional advisors have been prosecuted. More prosecutions seem certain to follow as more banks and foreign bankers reach agreements with the IRS and the DOJ in order to avoid criminal prosecution themselves. A key aspect of all such agreements (as in the UBS case) often will be a requirement to disclose the names and account information of their U.S. customers.
The 2012 Offshore Voluntary Disclosure Initiative (2012 OVDI) was announced in January 2012. Unlike the two prior disclosure programs, it has no announced expiration date. To date, the response to the 2012 OVDI program has been more measured in comparison to the response to the two previous programs, which each had over 15,000 participants. Possibly, this is because less people are still not in compliance. However, another possible explanation is that some individuals who remain non-compliant still believe that the IRS will never find them – a hope that has a decreasing basis in reality, and which may put the taxpayer in the untenable position of continuing to be non-compliant with their ongoing tax reporting obligations.
Those who are still non-compliant and who had Swiss accounts and moved them either to smaller Swiss banks or out of Switzerland, now have an additional reason for concern. In August 2013, the DOJ announced a program for the Swiss banks not already under investigation (approximately 350) to gain non-prosecution status. In order to avoid criminal charges, these banks must pay steep monetary penalties (20% to 50% of the highest balance in their U.S. customers’ accounts) to the IRS based on when they first opened the account in question for each U.S. customer. The banks also must provide information to the DOJ about their U.S. customers, and send letters to those customers advising them of the bank’s entry in the program and of the availability of the IRS OVDI program. If someone already closed the account, the information that must be provided includes information about where and how the money was transferred.
By December 31, 2013, approximately 106 Swiss banks had notified the DOJ of their intent to seek non-prosecution agreements. To obtain such an agreement, the banks must cooperate with the DOJ in quantifying the number and dollar value of its U.S. customer accounts, and with subsequent DOJ efforts to identify the account holders. The banks also must pay a penalty equivalent to a percentage of the highest balance in such accounts; the percentage varies from 20 to 50% depending on when the account was first opened. The only way for the banks to avoid the penalty is if the U.S. account holder has come forward and participated in the IRS’ 2012 OVDI. To encourage the customers to make voluntary disclosures, the banks have begun sending letters to their U.S. customers notifying them of the bank’s intention to enter the DOJ program, and that the customer has been identified by the bank as a U.S. citizen or resident whose account information will ultimately be provided to the DOJ.
Looking to history as a guide, the IRS is expecting that these letters will cause an influx of people applying to participate in the 2012 OVDI. In September 2009, after UBS agreed to provide the IRS with names of thousands of its U.S. account holders, UBS notified those account holders that their names made the list. The result was a flurry of new entrants into the 2009 program. The timing for U.S. taxpayers is now important, because once a bank turns over the account holder’s name, it is likely too late for the taxpayer to participate in the 2012 OVDI program. For taxpayers with undisclosed accounts who chose not to enter the 2012 OVDI, they run the risk of being contacted by IRS auditors, or, even worse, special agents conducting a criminal investigation.
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If you have any questions concerning the enforcement efforts aimed at U.S. taxpayers who have undisclosed foreign accounts, or if you have clients who have concerns regarding their own offshore accounts, please contact Post & Schell Principal Peter Hardy at (215) 587-1001 or PHardy@postschell.com. Mr. Hardy is available to meet with such taxpayers and attempt to assist them in assessing both their risks and their opportunities to attempt to minimize those risks under the 2012 OVDI program.
Peter D. Hardy is a Principal in Post & Schell's Internal Investigations & White Collar Defense Group. He has focused legal knowledge and experience in tax fraud and voluntary disclosures to the IRS. A former federal prosecutor, he served for six years as an Assistant United States Attorney for the U.S. Attorney's Office in Philadelphia, and for five years as a Trial Attorney for the Department of Justice, Tax Division in Washington, D.C. He is also the author of a national treatise, Criminal Tax, Money Laundering, and Bank Secrecy Act Litigation. Learn More >>
T: (215) 587-1001
E: PHardy@postschell.com