Tax Compliance Update: IRS Aggressively Pursues Foreign Banks; Offshore Voluntary Disclosure Programto Remain Open Indefinitely
In our most recent discussion of the IRS’s Offshore Enforcement Initiatives, found here, we discussed the John Doe Summons recently issued by the U.S. Department of Justice to Wells Fargo seeking information about First Caribbean National Bank and how it could affect foreign account holders in the U.S. We went on to discuss the IRS’s Offshore Voluntary Disclosure Program (“OVDP”), how it worked, and some issues that foreign account holders and foreign entities should consider when deciding whether or not to participate in the program. In this article, we explore how the most recent John Doe summons made its way to the Caribbean and why the IRS has become so interested in pursuing offshore account holders. We begin our discussion with a brief history of what has transpired since the establishment of the IRS’s OVDP back in 2009.
The IRS’s Criminal Manual has encouraged the voluntary disclosure of hidden offshore accounts for many years preceding the establishment of the OVDP. However, prior to the 2009 OVDP, the IRS had no formalized method for determining penalties. This lack of uniformity in making penalty determinations resulted in non-compliant taxpayers being reluctant to disclose information that would expose them to unpredictable financial liability. In response to these concerns and to promote transparency and uniformity, the IRS established the OVDP as a centralized means of processing voluntary disclosures that offered a uniform penalty structure, consistency, and predictability for taxpayers; see IRS discussion of OVDP objectives here.
The IRS’s efforts to increase offshore account transparency through the OVDP have been extremely successful. Since the establishment of the OVDP, the IRS and Tax Division of the Department of Justice have collected a wealth of data regarding previously undisclosed accounts and used this information to aggressively pursue U.S. taxpayers attempting to evade U.S. taxes and violate the Bank Secrecy Act.
Most notably, in February 2009, the Union Bank of Switzerland (“UBS AG”), Switzerland’s then largest bank, entered into a deferred prosecution agreement with the Department of Justice on charges of conspiring to defraud the United States by impeding the IRS. As part of this agreement, UBS AG paid the U.S. $780 million and surrendered data for nearly 5,000 U.S. clients who held United States securities in UBS AG accounts. Due to the intense pressure from U.S. law enforcement, most Swiss banks appear to have abandoned the practice.
Wegelin & Co. (“Wegelin”), the oldest Swiss private bank, saw this as an opportunity to capture market share and allegedly, at the direction of senior management, made efforts to attract old UBS AG clients. Under the assumption that there was no nexus between itself and the U.S. and its compliance with Swiss laws, Wegelin believed itself to be safe from exposure to U.S. prosecution. However, as noted in our previous discussion on this topic, when foreign banks assist U.S. taxpayers in committing tax evasion, a lack of physical nexus is irrelevant.
Wegelin guessed wrong and paid the ultimate price. In January 2013 the bank plead guilty to facilitating U.S. tax evasion by helping over 100 U.S. taxpayers hide more than $1.2 Billion in undeclared assets between 2002 and 2011. In total, Wegelin was required to pay the U.S. about $74 million in restitution, fees, and penalties and was ultimately forced to close. We previously reported on Wegelin’s indictment here and the final penalty issued to Wegelin here.
The success of the OVDP is unquestionably influencing the IRS’s continued focus on tracking down individuals involved in illegal offshore tax evasion. Following UBS AG’s deferred prosecution agreement, the flood gates opened for voluntary disclosure, resulting in the IRS collecting a treasure trove of information and forcing approximately 38,000 disclosures and well over $5 billion in taxes, interest, and penalties. Undoubtedly, the huge volumes of information and disclosures in the wake of the UBS AG indictment are leading to increased identification of key players and institutions that facilitate illegal offshore account activity for U.S. taxpayers.
The continued success of this program has clearly led the IRS to keep the OVDP active indefinitely; see the IRS’s announcement regarding the program remaining open indefinitely here. The IRS’s commitment to the initiative is clear; it seems to have found a formula for promoting disclosure of hidden foreign accounts that is working and it has no intentions of easing up.
The attorneys at Fuerst, Ittleman, David & Joseph have extensive experience working with taxpayers who have undisclosed foreign bank accounts and who have availed themselves of the IRSs voluntary disclosure program. We will continue to monitor the development of this issue, and we will update this blog with relevant information as often as possible. You can reach an attorney by calling us at 305-350-5690 or emailing us at firstname.lastname@example.org.