The Veil is Lifted on Swiss Bank Accounts

Recently, Swiss bank UBS and the IRS reached an agreement which severs long-held tradition of banking secrecy in Switzerland. Under the agreement, the Swiss government will give names to the IRS of suspected U.S. tax evaders who have accounts at UBS, which are estimated to total around $18 billion dollars. According to the statement from the US Justice Department, the IRS will submit a treaty request to the Swiss government asking for details on specific accounts. The Swiss government will then tell UBS to turn over the information. In addition, the IRS will receive information on accounts of various sizes and types, including bank-only accounts, custody accounts in which securities or other investments were held and offshore company nominee accounts that allowed an individual to indirectly hold beneficial ownership in the accounts.

After the decision, IRS Commissioner, Douglas Shulman, stated, "We will be receiving an unprecedented amount of information; this agreement represents a major step forward with the IRS's efforts to pierce the veil of bank secrecy and combat offshore tax evasion." Most likely, the IRS will continue to leverage its efforts by using this decision and the patriot act, which gives US authorities the ability to monitor all off shore accounts owned by Americans and aggressively pursue all foreign bank accounts in places like the Bahamas and Cayman Islands which have similar banking practices like the Swiss.

Back in March, the IRS rolled out a leniency program to encourage taxpayers to come forward with foreign bank accounts and take advantage of its voluntary disclosure practice program. In providing guidance, the IRS wanted to separate the good from the bad. Those who wanted to comply and those who still wanted to avoid their tax responsibility. Let’s take a look at the reporting requirements first and then look at the voluntary disclosure practice program next.

Who must file and how? Each United States person who has a financial interest in or signature or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts, in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, must report that relationship each calendar year by filing this report with the Department of the Treasury on or before June 30, of the succeeding year. Information is reported on IRS Form TD F 90-22.1, a Report of Foreign Bank and Financial Account (FBAR) and mailed to Department of the Treasury in Detroit, Michigan.

Do I have a Foreign Financial Account? If you own or have authority over a foreign financial account, including a bank account, brokerage account, mutual fund, unit trust, or other types of financial accounts, then you may be required to report the account yearly to the Internal Revenue Service. Under the Bank Secrecy Act, each United States person must file a Report of Foreign Bank and Financial Accounts (FBAR).

Who is a United States Person? “United States person" includes a citizen or resident of the United States, or a person in and doing business in the United States. The term "person" includes individuals and all forms of business entities, trusts, and estates.

What constitutes signature or other authority over an account? A person has signature authority over an account if such person can control the disposition of money or other property in it by delivery of a document containing his or her signature (or his or her signature and that of one or more other persons) to the bank or other person with whom the account is maintained.

For some taxpayers, they have been reporting all of their foreign income on their requisite tax forms as well as filing IRS Form TD F 90-22.1 by its due dates. But for others, they reported all their taxable income and were not aware of their FBAR reporting obligations. These taxpayers are not required to enter into the voluntary disclosure practice program because they have reported all of their taxable income in prior and current years. These taxpayers should file the delinquent FBAR reports according to the instructions and attach a statement explaining why the reports are filed late. In addition, they need to send copies of the delinquent FBARs together with copies of tax returns for all relevant years, by September 23, 2009, to the Philadelphia Offshore Identification Unit. The IRS will not impose a penalty for the failure to file the FBARs. In addition, taxpayers whose only interest are signature authority or have a financial interest in a hedge fund or other co-mingled account do not have to report until June 30, 2010 for tax year 2008.

On the other hand, taxpayers who have not reported their foreign accounts and earnings can use the IRS voluntary disclosure practice program. According to the IRS, a taxpayer should mail a letter to the nearest Special Agent in Charge, IRS Criminal Investigation stating you want to make a voluntary disclosure. The letter should contain all your identifying information, including name, address, Social Security Number or other Taxpayer Identification Number, passport number and date of birth, and should also include an explanation of any previously unreported or underreported income or incorrectly claimed deductions or credits related to undisclosed foreign accounts or undisclosed foreign entities, including the reason(s) for the error or omission. It should also include a power of attorney (Form 2848). Of course there is no free lunch with the IRS when it comes to taxes. Here is a breakdown of tax obligations for taxpayers who use and do not use the IRS’s voluntary disclosure practice program.

Taxpayers who are accepted into the disclosure program will incur the following civil penalties:

1) Taxes & Interest for the past six years (2003 – 2008) will be assessed. The taxpayer must file and or amend all returns including Form TD F 90-22.1, Report of Foreign Bank and Financial accounts (FBAR).

2) The IRS will either assess either an accuracy or delinquency penalty for all affected years. No reasonable cause exception is available under this provision.

3) The IRS will assess a penalty equal to 20 percent of the amount in a foreign bank account or entity in the year with the highest aggregate account or asset value. The penalty is reduced to five percent if:

a) The taxpayer did not open them or cause them to be opened or formed;

b) There has been no activity during the period the accounts/entities were controlled by the taxpayer; and

c) All applicable U.S. taxes have been paid on the funds in the accounts and only the earnings have escaped U.S. taxes.

Taxpayers who elect not to use the disclosure program will most likely incur the following criminal penalties:

1) A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000.

2) Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000.

3) A person who fails to file tax return is subject to a prison term of up to one year and a fine of up to$100,000.

4) Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.

The era of banking secrecy is over with the recent appetite for transparency. With budget shortfalls and record deficits, Congress is supporting the United States Treasury Department to ferret out taxpayers who still choose to evade paying taxes by creating offshore bank accounts. Taxpayers are confronted with complying or taking the risk of not getting caught. The later looks like a losing hand.

If you need help or have questions, please e-mail or call

mstevens@rdwarnercpa.com
561.686.8666