The U.S. taxes income regardless of where it is earned. After a whistleblower came forward in 2008, the IRS learned that certain banks around the world had created profit centers that advised Americans on how to evade taxes.
In 2009, the Justice Department was able to "pierce the veil of Swiss banking secrecy," UBS agreed to settlement of $780 million and disclosure of accountholder names to avoid criminal prosecution. More information was gleaned by pursuing similar strategies with banks and financial firms in Switzerland, Liechtenstein, the Caribbean and Israel. Hiding funds offshore moved to tiny islands with unreliable advisers/banks systems.
High profile criminal prosecutions combined with an amnesty program
At the beginning of the offshore account crackdown, the IRS pursued more than 150 individuals. Many of these cases concluded with jail sentences and stiff civil penalties - the billionaire creator of Beanie Babies reportedly paid $53.6 million. The civil penalty for failing to file an FBAR disclosure on a foreign financial account with more than $10,000 is up to half the value of the account.
Then the IRS began to offer an amnesty program called the Offshore Voluntary Disclosure Program (OVDP) with reduced penalties that avoided criminal prosecution. The first iterations were open for only limited amounts of time. The most recent was open ended, but will now close on September 28, 2018.
More than 56,000 taxpayers took advantage of the opportunity to come back into compliance through OVDP paying $11.1 billion in fines.
Better detection tools and more information
Over the last decade, the IRS has developed better tools to detect structures like trusts and loan schemes. U.S. legislation - the Foreign Account Tax Compliance Act (FATCA) - and intergovernmental agreements have increased the flow of financial information as well. Interest may be shifting to East Asia, but schemes that involve chains of individuals can make it even more complicated to uncover true account ownership.
Even though amnesty is ending, some options still exist that we discussed in a previous blog post.
Limit risks tied to undisclosed foreign accounts. Get legal advice from a tax attorney, however, before starting the process to return to compliance.