The Internal Revenue Service is closing its net around thousands of Americans who have ducked taxes on foreign bank accounts. In recent days, the U.S. government signed an information-sharing treaty with 15 other countries, although the biggest fish — Switzerland — got way.
As part of the treaty it signed, the U.S. will network with 15 other government agencies around the world. The treaty, known as the Convention on Mutual Administrative Assistance in Tax Matters, lets the countries communicate about tax fraud, money laundering and other financial-related issues.
For example, under the new information-sharing system, if an American citizen relocates to France, the IRS can access a variety of reporting documents from that country that would tell authorities if someone was working and whether they earned a regular paycheck or the French equivalent of a Form 1099. The same applies to offshore bank account activity.
“The U.S. is aggressively pursuing the discovery of taxpayers with foreign accounts that are not tax compliant,” said Mary Hoyt, a certified public accountant and partner at Blum Shapiro, an accounting and business consulting firm with offices in West Hartford and Shelton.
“I believe that foreign accounts are on their radar screen and we have just seen the tip of the iceberg at this time,” said Hoyt. “Any U.S. citizen who chooses not to report their worldwide income is breaking the law and in my opinion, playing with fire.”
Switzerland, a country known for secret bank accounts, did not sign the agreements last month. That means the IRS must depend on U.S. citizens to report their income and assets and pay taxes accordingly.
It is not illegal for Americans to have a foreign bank account, explains Anthony Parent, founding partner of Wallingford-based IRS Medic. In fact, he said there are valid reasons for a U.S. citizen to have an overseas bank account, such as they inherited it from a passing relative or use it as a separate source for vacation or second home expenses.
“I see a lot of people in Connecticut who have foreign accounts all over the world,” said Parent. “They might have their business headquarters in Europe and a local office here. We see a lot of families that go back and forth throughout the year and like to have a local bank account when they are home in Germany or France.”
The law, however, is clear about offshore bank accounts, regardless of the value, said Parent. U.S. citizens are required to declare them and report any income that is derived from the account on their income taxes and a separate form goes to the IRS once a year for accounts that exceed $10,000.
Hoyt recommends taxpayers with undisclosed offshore bank accounts seek professional assistance.
“A voluntary disclosure to the IRS can only be done if the IRS is unaware of the account,” she said. “If the IRS has knowledge of an account’s existence, the disclosure is no longer voluntary.”
Hoyt said the difference of disclosing sooner verses later can be the difference in whether or not the IRS recommends criminal prosecution to the Department of Justice.
And if a U.S. citizen inherits an offshore bank account, they should confirm as soon as possible whether it’s been disclosed or not.
“The account is passed on to the owner’s beneficiaries and the tax noncompliance issue becomes their problem and liability,” said Hoyt. “I recommend that foreign account owners become compliant now. Do not leave the problems for their loved ones to fix.”
The U.S. says it loses $8.5 billion annually in tax revenue. Currently it is impossible for the IRS to know if there is an offshore account somewhere unless taxpayers or holding banks notify the agency.
The U.S. has accused UBS, and as many as 20 other offshore banks, with helping wealthy Americans hide as much as $20 billion worth of income and assets from the Internal Revenue Service through foreign accounts in Switzerland in recent years.
In February 2009, regulators sued Switzerland’s largest bank — which reportedly has 52,000 accounts with U.S. connections — but later dropped the tax evasion charges when the financial company promised to pay a $780 million penalty.
UBS also agreed to hand over names of thousands of American clients suspected of tax evasion. As it turns out, giving that much information to U.S. officials would have violated Swiss bank secrecy laws; all American regulators received out of that initial deal was 250 names.
The long-standing dispute between the two countries came to a halt in June when Swiss lawmakers rejected a deal that would have allowed banking giant UBS AG to disclose to American authorities the names of 4,450 U.S. citizens suspected of tax evasion.
Despite the setback, Hoyt suggested U.S. citizens with foreign bank accounts should comply with the law. “I believe that these offshore account holders should be seeking professional advice now and not read into the UBS decision anything that gives them a false feeling of safety.”
Parent agrees. “The IRS might not get all the names they wanted. The Swiss legislature, at least for now, has rejected the information sharing deal. Now, this is not the final decision, so folks who haven’t disclosed to the IRS yet are not out of the woods by any means.”
“The thing to really think about for those who have not been discovered yet is that the IRS got a treasure trove of information. They have names and numbers of people involved in advising people to open a UBS account.”
The IRS offered American clients with offshore bank accounts a chance to file voluntary disclosure statements for any unreported income last year while it negotiated with UBS for information. Filers were granted amnesty, although it didn’t provide total relief from penalties.
The IRS said delinquent filers would have to pay back taxes and interest for six years but would not face jail time. The response was overwhelming with 14,500 people, according to Parent.
“So while having all the account holder information would be a grand slam for the IRS, what they still got is amazing. They will have secondary ways of proving the existence of offshore accounts at UBS and others. The information they have been learning is gold. They have learned who the biggest players are and what bank they are using.”
