After well more than a year of doggedly pursuing wealthy and not-so-wealthy individuals with hidden bank and investment accounts in Switzerland, the Internal Revenue Service and U.S. Justice Department are now stepping up their foreign account crackdown.

Their new hunting ground is Asia.

It has been recently reported that the DOJ has sent letters to U.S. taxpayers with undisclosed accounts in India and Singapore, advising them that they are the subjects of criminal investigations. The letters should not come as a surprise. The IRS and DOJ have long warned that Switzerland is not the sole focus of the crackdown and that investigations will take place in other countries, particularly those in Asia. Moreover, the IRS has opened criminal investigation offices in Beijing, Sydney and Panama City, which will inevitably be used to aid in these investigations. Such offices already exist in Hong Kong and Barbados.

This new effort comes on the heels of the well-publicized and highly successful offshore voluntary disclosure initiative, which ended on October 15. (See "The Cost Of Secrecy," PW July/August 2009, and "Coming Clean On Offshore Accounts," PW January/February 2010.) Some 15,000 taxpayers opted into the program, agreeing to file amended income tax returns for 2003 through 2008 to report interest, dividends, capital gains and any other income earned in bank and investment accounts around the world and also agreeing to offer up foreign bank account reports (FBARs) for the same period. Although it is believed that a high percentage of these accounts were in Switzerland, many were elsewhere. Often the account holders had assets in numerous other countries. Their disclosures provided information and leads to other jurisdictions and financial institutions that allowed the government to identify patterns of evasion and pockets of substantial U.S. depositor activity.

The voluntary disclosure information, which included the names of the foreign bankers, investment trust companies, lawyers and other contacts who advised U.S.
clientele, as well as the dates and places of meetings, shined a light on how the U.S. market was solicited and how the foreign accounts were promoted and structured to ensure secrecy. Moreover, once the integrity of Swiss bank secrecy came into question and many large Swiss banks were no longer hospitable to U.S. clientele, some bankers and foreign investment advisors steered their non-disclosing customers to other places to drive their funds further underground and keep them off the IRS radar screen. Most of the U.S. taxpayers that were investigated, prosecuted and convicted of tax and bank secrecy crimes provided information about these operations to prosecutors in an effort to reduce their sentences. Some advisors did the same. As in any criminal prosecution, leads beget leads, which helps investigators find other wrongdoers.

Among the more egregious taxpayer violators are: the failure to pay tax on business proceeds; the funneling of such proceeds to foreign accounts; the concealment of  accounts in sham entities established in Asia, the Caribbean, Liechtenstein, Switzerland or Panama; the movement of the funds from one of these foreign countries to another; and the spending of the hidden funds by the taxpayers or the repatriation of the funds to the U.S. through phony business arrangements. Less egregious are mere transfers of funds-from, say, Switzerland to Hong Kong or other countries. As IRS Commissioner Douglas H. Shulman stated on October 26, in his remarks before the AICPA National Conference on Federal Taxation: "Our future offshore efforts will also be focused on multiple points around the globe, including funds flowing out from Europe to Asia, Central America and the Caribbean."

The government has also received tips about Asia from whistleblowers-former bank personnel who stole customer account data and then sold it to foreign governments, publicized it on the Internet or just gave it to U.S. tax authorities. Several large financial institutions have been the victims of such informants, including UBS, AG, HSBC, Bank Julius Bäer and Credit Suisse. The information produced by these informants, which often consists of detailed account records, has been a bonanza for law enforcement officials. Some of those taxpayers who received "subject letters" about their accounts in India and Singapore were no doubt detected through this leaked information. It is not a leap in logic to surmise that India and Singapore were places where some of those who made voluntary disclosures under the IRS initiative had one or more accounts during the six-year disclosure period. Similar patterns can be expected for those with accounts in Hong Kong, China and other countries in the Pacific Rim, where it has been reported that an estimated $700 billion in untaxed wealth is located.

What does this mean for U.S. taxpayers with undisclosed offshore accounts in Asia? For people with unreported legacy accounts-those who inherited or were gifted foreign funds, who were the beneficiaries of foreign trusts or who had historic accounts overseas from years before their immigration to the U.S.-the continued crackdown should be cause for concern. The U.S. government's tax enforcement assault has targeted such people, where income earned in the foreign accounts was not reported, where foreign bank account reports were incomplete or never filed or where there was some circumstantial evidence of the taxpayers' knowledge of their non-compliance. For those who engaged in machinations to move untaxed business revenue or other income abroad, engaged in fraudulent conduct or secreted passive income-producing accounts in structures designed purely to hide the assets, prosecution is virtually assured if the government uncovers the accounts. As we've noted, the risk of being detected has risen exponentially in the last year. U.S. tax authorities have more information, more leads, more clout, more support from Congress and the president and more cooperation from other governments than at any time in the past. Moreover, the IRS has more financial support. The 2011 fiscal year budget approved by the Senate Appropriations Subcommittee gave a significant funding increase to the IRS, and President Barack Obama wants a large part of that increase to go toward hiring additional IRS auditors and boosting programs targeting offshore tax evasion. In the current economic climate and with the pressing need for revenue, one would expect such tax enforcement efforts to continue full bore.

Given this reality, non-compliant taxpayers need to consider voluntary disclosures, even without an initiative in place. To make a voluntary disclosure, one must first determine whether he's eligible for the program. He is not if he is under any federal tax audit for his income tax returns or those of any related entities, such as corporations or partnerships. The source of the undisclosed funds cannot be illegal, and the taxpayer cannot be under criminal prosecution for any crime. If the IRS already has obtained information about the taxpayer's non-compliance, the taxpayer will be ineligible for voluntary disclosure even if no formal audit has been commenced and even if the taxpayer is unaware of it. As part of the voluntary disclosure process, one must generally file six years of amended income tax returns reporting any income earned in foreign accounts or from foreign activities and pay the resulting tax, penalties and interest. One must also file or amend six years of FBARs to identify any previously undisclosed accounts. If this is accomplished, the errant taxpayer will avoid criminal prosecution. Although the concept of voluntary disclosures is simple, the process and traps for the unwary make it imperative that an experienced criminal tax lawyer guide a taxpayer in the process.

With the IRS devoting more resources to enforcing the tax laws, with international cooperation growing among tax administrators around the globe, and with new legislation enacted this year that impacts both U.S. account holders with foreign accounts and the foreign financial institutions themselves, the time is ripe to examine one's foreign activities, review past compliance with the tax laws, assess the risks associated with the foreign holdings and embark on a cleanup mission.    

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