In 2009, UBS agreed to hand over the names of 4,450 tax evaders to the IRS. The UBS case arguably "launched a US crackdown on offshore tax evasion by US persons." The number was record at the time, but has been trumped many times over in a recent case involving HSBC and one of its IT personnel.
Herve Falciani, an IT worker at HSBC's Geneva branch, stole the names of 24,000 HSBC customers with private accounts and in 2008 he gave that data to Christine Lagarde, the former Finance Minister of France, and current head of the International Monetary Fund. Lagarde shared that list – often referred to as the "Lagarde List" – with the IRS and several EU authorities. As a result of the revelation, many HSBC account holders now face the threat of prosecution for tax evasion by the IRS and have a limited amount of time to come clean or risk detection.
Falciani relocated to Spain after compiling and disseminating the Lagarde List. Swiss authorities requested that Falciani be extradited to Switzerland to face charges of breaching bank secrecy and revealing secrets, but Spain's national court sided with Falciani. They ruled against extraditing him because of his cooperation in investigations concerning tax evasion, money laundering, and terrorism financing.
So what should you do if you are one of the 24,000 HSBC bank account holders who has not disclosed foreign accounts?
For willful violations for failing to report a foreign financial account the penalty can be serious: 50% of your unreported bank account, whichever is for each violation. The criminal penalties are even more extreme – a criminal violation of the FBAR requirements could result in up to a $500,000 and ten years in jail. HSBC account holders from the U.S. who attempted to conceal their accounts but ended up on the Lagarde list may have much to worry about, since France's finance minister has shared the list with the IRS.
Any gain that could be imagined in attempting to sneak money away in offshore accounts is offset by the enormous civil and criminal penalties that could crop up. With the increased risk of discovery, holders of offshore financial accounts must be wary of falling off a legal cliff. The IRS is active in ferreting out holders of offshore, undisclosed foreign accounts. Whistle-blowers like Falciani represent just one way in which the IRS obtains its information.
With the passage of the Foreign Account Tax Compliance Act (FATCA), the IRS will expand its access to those with undisclosed foreign accounts. Having an unreported foreign account does not mean the account holder is automatically required to pay the FBAR penalties. Realizing that not every such account holder is attempting to evade taxes, the IRS created a number of compliance programs. Participating in the Offshore Voluntary Disclosure Program, often abbreviated OVDI or OVDP, is one of the most commonly used methods to become compliant and avoid substantial civil and criminal penalties.
With the OVDI a taxpayer can avoid potential jail-time, evade an audit, and receive only a limited penalty of 27.5% (of the highest aggregate value of all foreign bank accounts during the period covered by the voluntary disclosure) in lieu of any other penalties that would otherwise apply. For many taxpayers who willingly failed to report their foreign financial accounts, OVDI is an attractive option.
The only safe options: Using the OVDP or Streamlined, if available.
Voluntary disclosure may be superior to the OVDI for taxpayers with smaller balances, and for American ex-pats living abroad. Unlike the OVDI, the process comes with no guarantees. The taxpayer must prove his failure to report was unintentional – this carries the risk that government will remain unpersuaded and prosecute the taxpayer with a charge of tax evasion.
The so-called option of "soft-disclosure" has proven to be disappointing, a course of action we have long advised against. The latest GAO report identified about 10,000 soft disclosures filed. The IRS will be investigating those and will be looking to punish those taxpayers and professionals who advised such course of action. In considering the high civil and criminal penalties attached to tax evasion and errors in FBAR compliance, tax payers must be aware that owning offshore financial accounts comes with unique filing responsibilities. Issues arising from tax evasion and FBAR violations are highly time-sensitive, and anyone with concerns regarding an offshore account can certainly contact us for a confidential consultation.