Certain financial institutions — not just in Switzerland — are threatening and actually freezing bank accounts for lack of US tax and bank reporting compliance. In this article, we will explain why bank accounts are usually frozen and the action you may be able to take to regain access to your funds once again.
Isn't this a violation of international law? Why do non-US jurisdictions have to comply with US laws?
The reason for compliance with US laws is generally the threats that the Foreign Account Tax Compliance Act (FATCA) pose. Failure to abide by it has dire consequences for non-US banks.
Several Swiss and other offshore banks around the world have threatened, in numerous letters, to freeze bank accounts those they suspect of American customer unless they prove they are, or have taken steps to become tax compliant. These banks are hurrying to resolve a tax-evasion dispute with the IRS, or are attempting their best to comply with the Foreign Account Tax Compliance Act (FATCA). As stated in an article in the Financial Times:
"The moves – made by a number of banks, according to three people familiar with the situation who did not disclose the identity of the banks involved – come ahead of a deadline at the end of July for banks in a programme set up by the US Department of Justice last year to show which American clients conform to US tax requirements. However, the validity of the banks’ approach has split legal experts."
Some (most?) US bank account holders acted innocently
Many of our clients actually didn't know they had a reporting obligation until they received a "FATCA letter" from the bank this past year.
Some of our clients have told us their Swiss bank advised them NOT disclose in 2009 or 2011 (the years of the first two OVDPs). That is, certain banks told taxpayers who did not know any better,to continue to hide assets by moving the funds into new accounts, or to use a Swiss Foundation or shell company as an alter-ego.
This was created by an odd situation where many international bankers assumed the worst about the US customer. They acted in accord with this worst assumption. No one talked about it openly, as talking openly would be evidence of a criminal conspiracy.
While some US taxpayers knew they were evading taxes, many did not. These Swiss bankers quietly advised US taxpayers on how to avoid detection. In many cases, taxpayers had great reasons not to think they were doing anything illegal. They trusted the advice of their Swiss bankers. These bankers did not expressly state that what they were doing was illegal. Why? Because they assumed their customers wanted to act illegally — and now these same institutions are threatening to freeze a Swiss bank account!
How could these customers be ignorant to the requirements? There are many reasons, including:
- The money was inherited and the taxpayer did not know they needed to report the income nor knew anything about an FBAR form.
- There was no tax due to the US because of certain foreign tax credits, thus you assumed no reason why to do anything.
- The money was in a trust the taxpayers did not understand has reporting requirements.
- They were green card holders, dual citizens, or Visa holders.
- A tax professional told them that they didn't need to worry about their offshore accounts.
- They were expatriates and didn't know investment income was subject to US taxes.
- The taxpayer had no idea that the US has universal tax jurisdiction — in fact, no other country in the world has a taxing system like the US.
- The taxpayer didn't think you needed to do anything unless you withdrew funds; you thought you could automatically defer any income earned abroad.
What if you didn't act so innocently?
Just allowing the bank to keep your account frozen may not fix the problem and the IRS and/or US Department of Justice may still be interested in further contact. You may have more to worry about — unless you have a second passport, no US investment ties, no intent to travel to the US, and are not a likely target for criminal charges.
Now if you feel you are a likely target for criminal charges but live in a country that informs you that are absolutely sure you will not be extradited to the US, is that a protection? Perhaps. For instance, some US account holders have sought refuge in Russia. Based on our conversations with them they are absolutely confident that they are unextractable. To which we ask, whatever Russia's extradition policy is now, will it change in the future? If US-Russian relations improve, could the US expect (or demand) a change in the extradition policy?
If you are in an IRS disclosure program and a bank is threatening to freeze your account.
If you are in an OVDP, or completed an OVDP, providing the right kind of proof that you are in compliance is critical, bt does not always solve the issue. Sometimes lawyers need to get involved. If you need assistance, contact us. We can help.