Wegelin & Co. Account Holder Sentenced to Prison Term

Kordash received cash distributions from his undeclared account at Wegelin and used the account for his antiques business in New York.  Kordash opened the account decades ago, when he was a Russian citizen living in Russia.  He came to the U.S. in 1984, and later became a U.S. citizen.
Wegelin & Co. was the oldest private bank in Switzerland.  In January 2013, the bank pleaded guilty to felony tax charges, thus becoming the first foreign bank to do so.  The bank admitted to conspiring to defraud the United States by helping U.S. account holders hide assets from the IRS in undeclared accounts.  A federal district court also authorized the IRS to issue a “John Doe” summons that allowed the United States to determine the identity of U.S. taxpayers who held accounts at Wegelin and other banks based in Switzerland to evade federal income taxes.

LETTERS FROM ABROAD: U.S. Taxpayers Receiving Letters from Their Foreign Banks May Have One Last Opportunity to Avoid Criminal Prosecution and Increased Civil Penalties

Authors: Matthew D. Lee, Jeffrey M. Rosenfeld & Jennifer L. Bell

Foreign banks from around the world are sending letters to account holders that they believe have, or had, a U.S. tax nexus (or other U.S. connection) requesting information to determine whether such account holders have disclosed their foreign bank accounts to the Internal Revenue Service (“IRS”). The letters from foreign banks generally require an account holder to disclose whether the account has been declared to the IRS through the filing of a Report of Foreign Bank and Financial Accounts (commonly known as the “FBAR”) form and/or a Form 1040 personal income tax return, participation in the various IRS Offshore Voluntary Disclosure Programs, or otherwise. Sometimes foreign banks request that the account holder submit an IRS Form W-9, which is generally required to be completed by U.S. account holders for tax reporting purposes.

The receipt of such a letter from a foreign bank typically prompts many questions, and this article seeks to answer some of the most frequently asked questions.

Why am I receiving a letter from my foreign bank?

The Foreign Account Tax Compliance Act (“FATCA”), a law enacted by Congress in 2010 and effective beginning July 1, 2014, is intended to identify noncompliance by U.S. taxpayers using offshore accounts. Under FATCA, foreign financial institutions will generally be required to comply with certain due diligence and annual reporting requirements regarding their U.S. account holders and enter into information sharing agreements with the United States. Foreign financial institutions that do not provide such information to the United States will face a stringent penalty—withholding of 30 percent of certain U.S. source payments such as interest and dividends.

Many U.S. taxpayers are receiving these letters because, in advance of the effective date of FATCA, foreign banks are undertaking the process of identifying account holders that have a U.S. tax nexus. A foreign bank may find that a taxpayer has a U.S. tax nexus through indicia such as having a phone number affiliated with an account that appears to be U.S.-based or a U.S. mailing address. If a foreign bank has identified an account as potentially having a U.S. tax nexus, the foreign bank is likely to send a letter to the account holder requesting the information discussed above.

What are the consequences of receiving a letter from my foreign bank?

If you have received a letter from a foreign bank, your account has likely been identified as potentially having a U.S. tax nexus. FATCA generally requires foreign banks to identify accounts with a U.S. tax nexus, and, as discussed above, in order to avoid significant penalties, beginning July 1, 2014, FATCA will require the foreign bank to submit to the IRS certain information related to the accounts that have been identified as having a U.S. tax nexus.

The consequences of the IRS receiving a U.S. taxpayer’s foreign account information can be dire if the U.S. taxpayer has not previously reported the foreign account on an FBAR and/or has not reported all of the income associated with the foreign account on a U.S. tax return. First, and perhaps most significant, once the IRS receives a U.S. taxpayer’s foreign account information, the U.S. taxpayer may no longer participate in the IRS offshore voluntary disclosure programs that are outlined below (assuming that the U.S. taxpayer has not already enrolled in such programs). As a result, the U.S. taxpayer may no longer be eligible for criminal amnesty and potentially lesser civil penalties. Also, the receipt of a U.S. taxpayer’s foreign account information may lead to an IRS tax audit, which can be extremely time consuming and expensive.

For these reasons, it is not in a U.S. taxpayer’s interest to simply ignore a letter received from a foreign bank. Though every case is different, a U.S. taxpayer may instead be better served by participating in one of the voluntary disclosure programs set forth below. It is also not in a U.S. taxpayer’s interest to close a foreign account in response to the letter and transfer the funds to another foreign bank. Aside from the civil and criminal penalties that might be imposed as a result of such conduct, the implementation of FATCA has dealt a severe, perhaps fatal, blow to bank secrecy, and U.S. taxpayers with undeclared foreign bank accounts can no longer assume that they will be protected by foreign bank secrecy laws or remain undetected by the U.S. government. Thus, simply closing a foreign account and transferring the funds elsewhere is a dangerous proposition.

What are my best options if I receive a letter from my foreign bank?

U.S. taxpayers with undeclared foreign bank accounts should immediately consult with knowledgeable tax counsel to review their options. Often the best option is to enroll in the IRS’ Offshore Voluntary Disclosure Program (the “OVDP”), the current amnesty initiative offered by the IRS. This may be the last opportunity for many U.S. taxpayers to enter into the program because, as discussed above, the implementation of FATCA (and associated influx of foreign bank account information that the IRS will receive under FATCA) may effectively eliminate the OVDP as a viable option for many U.S. taxpayers.

The OVDP is designed to encourage U.S. taxpayers with undisclosed foreign bank accounts and unreported income associated with those accounts to come into compliance with U.S. tax laws and avoid criminal prosecution. Taxpayers accepted into the OVDP must file amended tax returns for an eight year period and pay all back taxes, interest, and an accuracy related penalty of 20 percent of the taxes due, and a civil penalty equal to 27.5 percent of the highest aggregate value of the U.S. taxpayer’s foreign bank accounts during the eight-year period (subject to certain exceptions). Currently, there is no deadline for participation in this program, although the IRS has stated that it could end the program, or modify its terms, at any time.

Another option for U.S. taxpayers who live overseas (including dual citizens) and have not filed U.S. returns is the IRS’ streamlined non-resident compliance procedure. U.S. taxpayers that are eligible for this procedure are generally required to file delinquent tax returns for the past three years and delinquent FBARs for the past six years. All submissions are reviewed by the IRS, but the intensity of the review varies according to the level of compliance risk presented by the submission. For those taxpayers presenting a low compliance risk, the review will be expedited and the IRS generally will not assert penalties or pursue follow-up actions. Submissions that present a higher compliance risk are not eligible for the procedure and will be subject to a more thorough review and possibly a full examination (which in some cases may include more than three years), as well as the imposition of tax, interest and penalties.

Many U.S. taxpayers have sought to “roll-the-dice” and avoid civil penalties by attempting what is known as a “quiet disclosure.” In a quiet disclosure, a U.S. taxpayer may report previously-excluded foreign income on a tax return and/or report a previously-unreported foreign bank account on an FBAR on a going-forward basis pursuant to normal reporting procedures, without attempting to address noncompliance in previous tax years. Alternatively, a U.S. taxpayer may attempt to address past noncompliance by filing amended tax returns and/or delinquent FBARs for past tax years pursuant to normal reporting procedures. U.S. taxpayers should be aware that quiet disclosures may not be in their best interests because (1) quiet disclosures can trigger IRS audits, (2) quiet disclosures do not provide amnesty from criminal prosecution, and (3) the civil penalties imposed on a taxpayer who is audited can be substantially greater than the penalties that would have been assessed if the taxpayer entered into one of the voluntary disclosure alternatives set forth above.

Individuals with questions about FBAR or FATCA reporting, or who are considering making a voluntary disclosure to the IRS regarding foreign financial accounts, should consult experienced tax counsel to understand the benefits and the risk of the voluntary disclosure process. Blank Rome’s FBAR and FATCA compliance team has significant experience with FBAR and FATCA reporting obligations and the IRS voluntary disclosure programs, and can assist individuals in navigating these complicated reporting regimes.

To ensure compliance with IRS Circular 230, you are hereby notified that any discussion of federal tax issues in this advisory is not intended or written to be used, and it cannot be used by any person for the purpose of: (A) avoiding penalties that may be imposed on them under the Internal Revenue Code, and (B) promoting, marketing or recommending to another party any transaction or matter addressed herein. This disclosure is made in accordance with the rules of Treasury Department Circular 230 governing standards of practice before the Internal Revenue Service.