Maryland Business Litigation Lawyer Blog
United States citizens have an obligation to report to the IRS on Schedule B of their U.S. Individual Income Tax Return, Form 1040, whether they had a financial interest in, or signature authority over, a financial account in a foreign county in a particular year by checking “Yes” or “No” in the appropriate box and identifying the country where the account was maintained. They further have an obligation to report all income earned from foreign financial accounts on the tax return and to pay the taxes due on that income.
Separately, U.S. citizens with a financial interest in, or signatory authority over, a foreign financial account worth more than $10,000 in a particular year, must also file a Foreign Bank and Financial Accounts form (FBAR) with the Treasury disclosing such an account by June 30 of the following year. Failing to report such accounts or file required FBAR forms carries significant civil and potential criminal penalties.
Many foreign bank account holders are middle-class citizens with families living abroad, who either inherit funds (held in foreign bank accounts) from those families, or who send money from their paychecks to those families through a foreign bank account. Most such bank account holders are not even aware of the foreign bank account reporting requirement. Then there are those foreign bank account holders who are not only aware of the reporting requirements, but who also specifically seek out foreign banks who promise to provide secrecy to their clients and shield their money from detection from the IRS. The IRS Criminal Investigation Division and the United States Department of Justice work together to identify and prosecute such individuals and the banks assisting them.
In 2009, after deferring a tax evasion conspiracy prosecution against Swiss bank UBS in exchange for the bank agreeing to pay a $780 million fine, the United States filed civil suit against the bank to force disclosure of the banks’ 52,000 American customers suspected of being part of the tax evasion scheme. In June 2010, Swiss lawmakers approved a deal to reveal the banks’ client data and account details to the United States. In 2011, the United States notified Credit Suisse, Switzerland’s second-largest bank, that it is part of a criminal investigation for similar tax evasion practices. As a result of the Switzerland lawmakers authorizing its banks to disclose client information, many Americans face investigation for using foreign bank accounts to evade taxes.
On November 6, 2012, Christos Bagios, formerly employed by both UBS and Credit Suisse, pleaded guilty to aiding Americans in hiding millions of dollars from U.S. tax authorities. As part of his guilty plea, Bagios agreed to assist federal authorities in their ongoing investigations into banks and individuals.
Last year, on December 6, 2011, a federal criminal indictment was filed against Amir Zavieh, a naturalized U.S. citizen, for failing to report financial interest and/or signatory authority over a Swiss bank account. According to the indictment, in 1989, Zavieh opened a secret Swiss bank account with UBS AG in Zurich, Switzerland. In 2000, Zavieh executed a document that directed UBS not to disclose his identity and ownership of the account to the IRS. Zavieh concealed the secret account at UBS by placing his domestic assets in the name of a nominee and failing to file income tax returns. One year in which Zavieh did file an income tax return, he failed to report on the return either the secret Swiss account or the income generated by that account. Zavieh is part of an ongoing investigation into the secrecy practices of a larger Swiss bank organization.
As a result of its investigations into foreign bank accounts and hoping to bring taxpayers who have used undisclosed foreign accounts and undisclosed foreign entities to avoid or evade tax into compliance with United States tax laws, the IRS offered its second offshore account disclosure program in 2011 (the 2011 Offshore Voluntary Disclosure Initiative). The amnesty program enabled foreign bank account holders to become compliant, avoid substantial civil penalties and generally eliminated the risk of criminal prosecution if they voluntarily disclosed the existence of funds in the bank account(s) before the program’s expiration date.
The OVDI expired in September 2011, and although taxpayers may not receive as good a deal as they would have had they participated in the initiative, voluntarily disclosing the existence of such accounts may still be better than the consequence of not reporting and being discovered.
So what to do? Fail to report the account and hope to remain undetected? Quietly begin checking the “yes” box on the Form 1040 (also known as a “quiet disclosure”) and, if necessary, filing the required FBAR form? The IRS discourages both, and has stated that taxpayers making such quiet disclosures will not avoid the substantial civil penalties (which could exceed the balance amount in the bank account), and still run the risk of criminal prosecution.
Whether you are a multi-millionaire funneling income to a hidden offshore account, or an individual merely sending a portion of a paycheck overseas to family, consideration should be given to disclosing the existence of the account(s) to the IRS to avoid potentially devastating tax liabilities upon discovery. Although the amnesty program was temporary and has since expired, the IRS is interested in bringing every taxpayer into voluntary compliance; one could hope to escape detection, and certainly some will, but if you are one of the few who do not, the IRS will not be inclined to cut you any breaks concerning the tax due and owing, interest, and severe civil, and potential, criminal penalties.
For more information on voluntarily disclosing foreign bank accounts to the IRS, or other tax issues, contact our firm for a free consultation with an experienced tax attorney.