Streamlined Filing Compliance Procedures

Today the Justice Department’s Tax Division announced that it has reached final resolutions with the remaining “Category 3 and 4” Swiss banks who had enrolled in the Swiss Bank Program. Originally unveiled in August 2013, the Swiss Bank Program provided a path for Swiss banks to resolve potential criminal liabilities in the United States, and to cooperate in the Justice Department’s ongoing investigations of the use of foreign bank accounts to commit tax evasion. The Swiss Bank Program also provided a mechanism for those Swiss banks that were not engaged in wrongful acts but nonetheless wanted a resolution of their status. Banks already under criminal investigation related to their Swiss-banking activities and all individuals were expressly excluded from the Swiss Bank Program.

The Swiss Bank Program established four categories of Swiss financial institutions, as follows:

Category 1 included Swiss banks already under investigation when the program was announced, and therefore, were not eligible to participate.  Banks in this category include UBS AG, Credit Suisse AG, Wegelin & Co., Zurcher Kantonalbank, among others.

Category 2 was reserved for those banks that advised the department by Dec. 31, 2013, that they had reason to believe that they had committed tax-related criminal offenses in connection with undeclared U.S. related accounts. In exchange for a non-prosecution agreement, the Category 2 banks made a complete disclosure of their cross-border activities, provided detailed information on accounts in which U.S. taxpayers have a direct or indirect interest, are cooperating in treaty requests for account information, are providing detailed information as to other banks that transferred funds into hidden accounts or that accepted funds when those secret accounts were closed, and must cooperate in any related criminal and civil proceedings for the life of those proceedings. The banks were also required to pay appropriate penalties.

Category 3 was designed for banks that established, with the assistance of an independent internal investigation of their cross-border business, that they did not commit tax or monetary transaction-related offenses and have an effective compliance program in place. Category 3 banks were required to provide the Department with an independent written report that identified witnesses interviewed and a summary of each witness’s statements, files reviewed, factual findings, and conclusions. In addition, the Category 3 banks were required to appear before the Department and respond to any questions related to the report or their cross-border business, and to close accounts of accountholders who fail to come into compliance with U.S. reporting obligations. Upon satisfying these requirements, Category 3 banks received a non-target letter pursuant to the terms of the Program.

Category 4 of the Program was reserved for Swiss banks that were able to demonstrate that they met certain criteria for deemed-compliance under the Foreign Account Tax Compliance Act (FATCA). Category 4 banks also were eligible for a non-target letter.

Between March 2015 and January 2016, the Justice Department executed non-prosecution agreements with 80 Category 2 banks and collected more than $1.36 billion in penalties. The Justice Department also signed a non-prosecution agreement with Finacor, a Swiss asset management firm, reflecting what the government described as its “willingness to reach fair and appropriate resolutions with entities that come forward in a timely manner, disclose all relevant information regarding their illegal activities and cooperate fully and completely, including naming the individuals engaged in criminal conduct.”

Today’s announcement revealed that between July and December 2016, four banks and one bank cooperative satisfied the requirements of Category 3, making them eligible for Non-Target Letters. No banks qualified under Category 4 of the program. The Justice Department did not announce the names of any of the qualifying Category 3 banks, nor did it release the names of the banks which failed to qualify as Category 4 institutions. Earlier this year, Swiss bank Thurgauer Kantonalbank announced that it had received a non-target letter from the Justice Department, thus qualifying as a Category 3 institution.  And just last week, Vontobel announced that it had reached a resolution with the Justice Department as a Category 3 bank.

The Swiss Bank Program has been an unqualified success for the U.S. government’s aggressive campaign to crack down on offshore tax evasion. Never before had the Justice Department offered what is essentially a tax evasion “amnesty” program to an entire country’s financial industry, leading some critics to initially question whether any Swiss banks would come forward. Those critics have been resoundingly proven wrong, given the overwhelming demonstration of interest in the program by Swiss banks and the significant amount of information that the program has generated for the Justice Department and Internal Revenue Service.

Today’s announcement does not, however, mark the conclusion of the Swiss Bank Program. Instead, the program is now in what the Justice Department calls its “legacy phase,” pursuant to which all participating Swiss banks are cooperating with ongoing civil and criminal investigations in the United States. The Swiss Bank Program is undoubtedly affording U.S. prosecutors and IRS agents a wealth of leads that they will use to “follow the money” around the globe and continue to seek to hold financial institutions, advisors, and account holders liable if they engage in evasion of U.S. tax laws. In this regard, Principal Deputy Assistant Attorney General Caroline D. Ciraolo issued the following statement today:

“The completion of the resolutions with the banks that participated in the Swiss Bank Program is a landmark achievement in the Department’s ongoing efforts to combat offshore tax evasion. We are now in the legacy phase of the Program, in which the participating banks are cooperating, and will continue to cooperate, in all related civil and criminal proceedings and investigations. The Tax Division, working closely with its colleagues throughout the Department and its partners within the Internal Revenue Service (IRS), will continue to hold financial institutions, professionals, and individual U.S. taxpayers accountable for their respective roles in concealing foreign accounts and assets, and evading U.S. tax obligations.”

IRS Large Business & International Division Commissioner Douglas O’Donnell further explained how the IRS is mining all of the data it is receiving from the Swiss Bank Program and other sources to further ongoing and new investigations:

“Offshore compliance remains an important area of tax administration. We are evaluating incoming information to detect accountholders who have evaded reporting overseas assets and income, and we are using this information to further untangle the web of financial institutions and intermediaries helping with this evasion. We have expanded our investigations to other regions of the world, and we will continue to apply these techniques to help protect honest taxpayers.”

Today’s announcement is replete with statements from other high-ranking government officials touting the success of the Swiss Bank Program, including Attorney General Loretta E. Lynch:

“The Swiss Bank Program has been and continues to be a vital part of the Justice Department’s efforts to aggressively pursue tax evasion. This groundbreaking initiative has uncovered those who help facilitate evasion schemes and those who hide funds in secret offshore accounts; improved our ability to return tax dollars to the United States; and allowed us to pursue investigations into banks and individuals. I want to thank the Swiss government for their cooperation in this effort, and I look forward to continuing our work together to eradicate fraud and corruption.”

Principal Deputy Associate Attorney General Bill Baer echoed those sentiments:

“Working with the Swiss government, we have made financial institutions reform the way they do business. We are moving toward an era of global financial transparency, and those seeking to violate our nation’s tax laws, or the laws of our treaty partners, will find that the days of hiding funds abroad are over.”

Taxpayers who have still not “come clean” and declared their offshore assets may still take advantage of various IRS voluntary disclosure programs, such as the Offshore Voluntary Disclosure Program or the Streamlined Filing Compliance Procedures, but time is of the essence. Noncompliant taxpayers should consider taking immediate action because these programs may not be available if the U.S. government receives information about their offshore assets before they start the voluntary disclosure process. Please feel free to contact a member of Fox Rothschild’s tax controversy and litigation practice to discuss voluntary disclosure options.

Effective today, 47 new names have been added to the Internal Revenue Service’s ever-expanding list of “Foreign Financial Institutions or Facilitators” which trigger a significantly higher penalty for participants in the Offshore Voluntary Disclosure Program (OVDP).  Under the current OVDP terms, individuals making a voluntary disclosure about offshore bank accounts and assets can avoid criminal prosecution by filing amended returns and FBARs and paying back taxes, interest, and penalties.  The standard penalty applicable to OVDP participants is 27.5 percent of the highest aggregate value of undisclosed offshore assets during the eight-year lookback period.  Taxpayers who maintained accounts, or were clients of, financial institutions or facilitators identified on the IRS list are subject to a substantially increased penalty calculated at 50 percent of the highest balance.

Since the OVDP terms were modified in 2014, the IRS has maintained a list of financial institutions and facilitators on its website that trigger the higher penalty.  Initially, that list was compromised of a handful of foreign banks (mostly Swiss) which were the subject of U.S. government scrutiny, such as UBS, Credit Suisse, HSBC India, and Bank Leumi, among others.  Over time that list grew steadily, as Swiss banks who participated in the DOJ’s Swiss Bank Program resolved their potential exposure for U.S. tax offenses and had their names added to the list.  Eventually, the names of 78 Swiss banks were added to the list, and taxpayers who had accounts at any of those institutions became subject to the 50 percent penalty.  Other banks were added to the list as a result of the issuance of “John Doe” summonses, including institutions in Belize and the Cayman Islands.

The 47 new names added to the list effective today consist of 40 individuals and 7 entities.  The new additions include some familiar and well-known names, including UBS whistleblower Bradley Birkenfeld and Swiss financial advisor Beda Singenberger.  A large number of Swiss bankers are among the newly-added individuals, including employees of UBS, Credit Suisse, Julius Baer, Wegelin, and smaller banks such as Zuercher Kantonalbank, Bank Frey, and Rahn & Bodner Banquiers.  The list also includes a number of professional advisors, such as attorneys and asset managers from Switzerland and Liechtenstein, and includes individuals who assisted U.S. taxpayers in moving funds out of larger Swiss banks like UBS and Credit Suisse into smaller financial institutions (the so-called “leavers” that are the subject of great interest by the IRS and Justice Department).  Today’s additions to the facilitator list are not limited to Switzerland, however; other countries implicated by the additions include the Cayman Islands, Turks & Caicos, and Belize.  The seven companies added to the list are from Belize and were utilized as part of securities and tax fraud schemes orchestrated by a Belize-based individual named Robert Bandfield who has pleaded guilty to money laundering conspiracy in federal court in Brooklyn.

With the addition of these 47 new names, the total number of financial institutions and facilitators for which the 50 percent penalty applies is 144.  The complete list can be found here.

Today’s action by the IRS confirms once again that U.S. taxpayers with undisclosed offshore accounts or assets should take immediate action.  For taxpayers who still have not voluntarily corrected past misdeeds with respect to offshore assets, the window of opportunity for voluntary disclosures remains open but time is of the essence.  Both the OVDP and the related “Streamlined Compliance Procedures” remain available to non-compliant taxpayers at this time, but only if the taxpayer initiates the voluntary disclosure process before the IRS receives information about a taxpayer’s non-compliance (such as through third-party disclosures mandated by FATCA or the Swiss Bank Program).  Once the IRS learns of a taxpayer’s non-compliance, voluntary disclosure options are generally off the table.  And, the IRS has said that it may terminate the OVDP and streamlined procedures at any time, without advance notice.  Non-compliant taxpayers with offshore assets who fail to take immediate action now do so at their peril.  This is especially so for taxpayers who had dealings with any of the institutions or individuals identified on the growing IRS facilitator list.

The Internal Revenue Service has achieved another milestone in its long-running campaign to crack down on offshore tax evasion, announcing that more than 100,000 taxpayers have voluntarily returned to compliance and paid more than $10 billion in back taxes, interest, and penalties. At the same time, the IRS warned non-compliant taxpayers that its international compliance efforts – both criminal and civil – will continue unabated.

In a press release touting its latest successes, the IRS announced that 55,800 taxpayers have utilized the Offshore Voluntary Disclosure Program (OVDP) to resolve their tax obligations. The IRS unveiled the OVDP in March 2009, following its landmark resolution with Swiss bank UBS AG, affording taxpayers with secret offshore bank accounts the opportunity to avoid criminal prosecution if they voluntarily filed amended tax returns and paid a hefty financial penalty.  The current version of the OVDP requires participants to file eight years of amended tax returns and pay a penalty calculated at 27.5 percent (or 50 percent, in certain cases) of the highest aggregate value of their undisclosed offshore assets.  Since 2009, taxpayers participating in the OVDP have paid the U.S. Treasury more than $9.9 billion in taxes, interest, and penalties, rendering the OVDP by far the most successful voluntary disclosure initiative ever offered by the IRS.

In June 2014, in response to widespread criticism that the OVDP’s “one size fits all” settlement terms did not adequately take into account the varying facts and circumstances of each individual case, the IRS announced an alternative voluntary disclosure option: the Streamlined Filing Compliance Procedures.  Like the OVDP, this program was designed to provide a vehicle for taxpayers with undisclosed offshore assets to return to compliance.  Unlike the OVDP, however, the streamlined program takes account of a taxpayer’s state of mind, and taxpayers who can demonstrate that their non-compliance was attributable to “non-willful” conduct – as opposed to intentional or deliberate behavior – can qualify for the streamlined program’s favorable settlement terms.  Taxpayers eligible for the streamlined procedures need only file three years of amended tax returns, six years of foreign bank account reporting forms (commonly known as FBARs).  Taxpayers residing in the U.S. are required to pay a financial penalty of five percent of the highest aggregate value of their undisclosed foreign assets.  Taxpayers residing outside of the U.S. do not have to pay any financial penalty.

Since their unveiling in the summer of 2014, the streamlined procedures have been enormously popular, as the latest IRS statistics confirm. Approximately 48,000 taxpayers have utilized the streamlined procedures to correct prior non-willful omissions and meet their federal tax obligations, paying approximately $450 million in taxes, interest, and penalties.  In its short two and one-half year existence so far, the streamlined program has had nearly as many participants as the OVDP, which has been in existence for nearly three times as long.  These statistics illustrate what many practitioners have long suspected:  many more non-compliant taxpayers are taking advantage of the streamlined procedures than the OVDP, even if they may not satisfy the “non-willful” criteria.

At the same time it was celebrating its latest voluntary disclosure benchmark achievement, the IRS warned non-compliant taxpayers that they should take immediate corrective action to avoid potentially harsh enforcement activity. “As we continue to receive more information on foreign accounts, people’s ability to avoid detection becomes harder and harder,” said IRS Commissioner John Koskinen.  “The IRS continues to urge those people with international tax issues to come forward to meet their tax obligations.”  The Justice Department’s Tax Division issued a similarly stern warning for taxpayers who falsely claimed their conduct was “non-willful” in order to qualify for the streamlined procedures.  Caroline D. Ciraolo, Principal Deputy Assistant Attorney General, stated in a speech on October 28 that taxpayers who “lied their way through a streamlined narrative” will be criminally prosecuted.  Ciraolo added that “[I]t’s our job to make sure that those people who chose the streamlined program chose appropriately.”

The risks for taxpayers with undisclosed offshore assets is at an all-time high now, as the IRS and the Justice Department now have access to an unprecedented amount of information and data regarding the offshore activities of U.S. taxpayers. As a result of the Foreign Account Tax Compliance Act (FATCA), and its network of bilateral treaties (known as inter-governmental agreements) between the U.S. and more than 100 partner countries, automatic annual reporting of foreign account data to the IRS has entered its second year.  In addition, account information continues to pour into the U.S. government as a result of the Justice Department’s ground-breaking Swiss Bank Program, pursuant to which 80 banks in Switzerland entered into resolutions to avoid criminal prosecution in the U.S. and agreed to hand over details about their U.S. customers to the Justice Department.

For taxpayers who still have not voluntarily corrected past misdeeds with respect to offshore assets, the window of opportunity for voluntary disclosures remains open but time is of the essence. Both the OVDP and the streamlined procedures remain available to non-compliant taxpayers at this time, but only if the taxpayer initiates the voluntary disclosure process before the IRS receives information about a taxpayer’s non-compliance (such as through third-party disclosures mandated by FATCA or the Swiss Bank Program).  Once the IRS learns of a taxpayer’s non-compliance, voluntary disclosure options are generally off the table.  And, the IRS has said that it may terminate the OVDP and streamlined procedures at any time, without advance notice.  Non-compliant taxpayers with offshore assets who fail to take immediate action now do so at their peril.