Since the 2012 Offshore Voluntary Disclosure rules were passed, my office has spoken to hundreds of US persons who have undisclosed offshore accounts. Some have decided to roll the dice because of a belief based on a that goes something like this:
"I have two passports: a US passport and an Iranian passport. I opened a bank account in Dubai with my Iranian passport. Therefore, I am safe from detection, as the United Arab Emirates bank will not disclose any of my information to the IRS because the bank will have no way of knowing that I am in fact, a US person subject to the universal tax jurisdiction of the IRS."
Unfortunately, a foreign passport will not shield you from IRS detection.
Your foreign bank must be in the US market
Despite the US being in the worst recovery of all time, the rest of the world is in the same boat. The US is still the strongest, largest economy, by far. If a bank wants to be a global player, it must be in the US market. If it wants to be in the US market, it must be able to comply with the Foreign Account Tax Compliance Act (FATCA).
FATCA's Purpose
Unlike other withholding rules that apply to payments by US persons to foreigners, the goal of withholding under FATCA is not to collect taxes, but to compel foreign recipients of payments to provide the US tax authorities information about their US account holders or US owners.
What is your bank's allegiance
Your bank wants to make money, first and foremost. Your foreign bank can't make money if it can't have access to US capital and US clients. While people at your bank may really like you, and your family could even have a personal long-term relationship with your banker — get one thing straight: when push comes to shove, you will be sold out if they feel you are threatening their access to the US market.
Your banker may pay for a round of golf with you in the morning, and then by the afternoon, be forced to sell you out to the IRS. These are the stakes involved.
Due Diligence
FATCA requires foreign banks to conduct due diligence to see if there are US persons with foreign bank accounts. FATCA was specifically passed into law to expose those who are trying to use the dual passport trick. In order to stay in good graces of the IRS, the foreign banks must put into place procedures to weed out account holders who are American even though the passport they opened the account with said otherwise. These are the questions you need to ask yourself:
- Are there any US address associated with your account?
- Are there any US phone numbers with your account?
- Is your birthplace listed as somewhere in the US?
- Have you made more than one wire in or out from the US?
If you answered yes to any of those questions there is a significant chance that your bank will disclose your account to the IRS. If you are detected by the IRS before you made an Offshore Voluntary Disclosure, expect the harshest penalties. The IRS has invested everything in this program. It operates by fear and intimidation. It has the law, and the political clout. In Congress, no one is standing up for international community — quite the opposite.
Bank accounts in the Central and South America, the Mideast and the Far East — Panama, Ecuador, Argentina, Venezuela, Taiwan, South Korean, Thailand, Dubai, Malaysia, Singapore, Hong Kong, China, India — these are the targets of FATCA. Remember, the US already had information sharing agreements with European banks. FATCA was put in place to find out these account holders.
Other risks of hiding money other than the IRS.
Clearly, for a US person who has a bank in a foreign jurisdiction that is hostile to the US, like Iran, for example, there is little chance that there will be direct reporting to the IRS. But holders of unreported Iranian accounts face another risk. For now, even though the interest rates paid on savings have always been high to accommodate inflation, it appears as if this can no longer continue. In Iran, the high-interest rates paid are paid from new money, the new money leads to more inflation. Some are reporting that Iranian Rial has hit the hyperinflation point of no return. If you think a 27.5% of account value is a large amount to pay over to the IRS in order to come clean, it still beats losing 27.5% (or more) of account value through inflation and still be in serious threat of imprisonment.
Additionally, sources of mine are fairly certain that the Iranian regime will need to start imposing high taxes — not just on income, but on wealth. (The same could be said of Venezuela as well — it also has high inflation and an entrenched regime)
Conclusion
Pretending you're safe when you're not is hardly a plan for security. For those with unreported foreign accounts, serious attention must be paid to the true risks of non-compliance with the US government. The penalties for coming clean are significant but limited. On the other hand, the penalties for getting caught by the IRS can be a complete loss of wealth and freedom.
