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New York based attorneys with Spodek Law Group PC represent US residents in matters involving the Foreign Bank Account Report regulations anywhere in the country. We have represented numerous clients accused by the IRS of failing to file a foreign bank account report.
Many American citizens keep foreign bank accounts for business or personal reasons, often relying on foreign bank secrecy laws (or assuming that they will benefit from those secrecy laws). Those foreign account holders must be aware of some major differences between secrecy of bank records in the United States and other countries.
The main issue is that in the United States bank records are not privileged, not protected, and are open for inspection by the government. There is very little you can do to keep government investigators away from your bank records. Additionally, banks must report some transactions to the government, such as cash deposits of $10,000 or more.
Many other countries, on the other hand, take bank account privacy much more seriously. One good example, obviously, is Switzerland. The Swiss Banking Code makes it a crime for banks or their employees to divulge secrets entrusted to them by their customers, including bank account information.
It is also a serious crime under the Swiss law to obtain secret bank information or secret business information in order to pass it on to a foreign government or an organization. Bank customers whose privacy rights have been violated by divulging their secret banking and business information may sue for damages in Swiss courts.
In the past, many U.S. taxpayers had used European and other countries enhanced banking privacy laws to avoid tax liability in the United States. In order to avoid clashes between court systems, the U.S. entered into tax treaties with some countries, most importantly with Switzerland. The two principal US-Swiss agreements in this area are the United States-Switzerland Income Tax Convention and the Swiss-United States Treaty on Mutual Assistance in Criminal Matters.
Even with these treaties, there is no automatic cooperation by the Swiss with the U.S. law enforcement. The Swiss will not assist the American government if the investigation or criminal charges involve tax evasion but they will provide help in cases of tax fraud, the difference being that fraud (as understood by the Swiss) involves more affirmative steps, such as falsifying records.
There are also similar treaties between the United States and some other countries. It is important to understand that any secret banking information obtained by the US government, even in violation of the laws of the country in which the information was obtained will be admissible in the U.S. courts.
Many Americans who have unreported foreign bank accounts don’t realize that they can be subject to both civil and criminal penalties if they don’t file a Foreign Bank Account Report. The government’s fiscal problems have apparently resulted in aggressive crackdowns by the IRS on unreported foreign bank accounts.
First, let’s talk about the criminal penalties. If you willingly fail to file the foreign bank account report, you could face up to 5 years in prison and pay a fine of up to $250,000. The typical federal criminal charges associated with cases like these are filing false tax returns, conspiracy, and failing to disclose foreign bank accounts. In addition to criminal penalties, there may be heavy civil penalties. For willful violations occurring after October 22, 2004, the maximum civil penalty is either $100,000, or 50 percent of the balance of the account at the time of the violation, whichever is greater.
For example, if the account balance was $2,000,000 at the time of the violation. The maximum penalty could potentially be $1,000,000. However, the seriousness of the penalty is that the IRS can impose it each year the account is not reported. So, in a few years time, you can end up giving everything to the IRS.
Hoping that the IRS won’t find out about your offshore accounts, or won’t prosecute you once they do find out, is a big gamble. A common belief is that the IRS only goes after larger offshore accounts, and will not pursue and prosecute smaller monetary accounts. In actuality, especially in the current fiscal landscape, the IRS may aggressively pursue all types of unreported offshore accounts holders, both civilly and criminally, and if you find yourself the target of an IRS inquiry, having the right legal guidance to help you navigate this process can make an enormous difference on the criminal and financial penalties you may face.
Minimizing the financial penalties a client is facing is always a huge priority, but the first goal we have when dealing with unreported offshore bank accounts is to prevent criminal prosecution. One approach is using the IRS Offshore Voluntary Disclosure Program. In this program you pay back taxes and penalties, but you will not be prosecuted. This typically involves paying taxes, interest, and a 20% penalty on previously unreported income, and at the end of the case, you pay 27.5% of the highest account balance over 8 years. This may sound steep, but it is certainly better than paying 150% or more, which is not unheard of in an IRS tax evasion prosecution. So, how can a good defense attorney help you mitigate the damages. In a recent case, we had a client who was targeted by the IRS for not reporting multiple foreign bank accounts. The question really was whether this was a willful failure. We convinced federal prosecutors that the client failed to file the FBAR due to a reasonable cause. This prevented criminal prosecution and allowed us to settle the civil penalties. This is just one example of how this can be resolved.
Recent prosecutions by the United States DOJ have shown that foreign banks can no longer consider themselves immune from tax fraud prosecution. It has long been the practice of some U.S. citizens (or other persons or entities liable for U.S. taxes) to evade taxes by hiding their funds in a foreign bank account. While these individuals who sought to avoid paying taxes were prosecuted, previously the banks have not been involved in the prosecutions.
However, as of now, the U.S. DOJ has been going after banks who make it their business to shelter American tax avoiders and charging them with conspiracy to commit tax fraud. While jurisdiction may be an issue in such cases, it is not usually an insuperable barrier. A bank does not need to have branches in the U.S.; even just the use of the U.S. banking system is enough to confer jurisdiction and allow the bank to be prosecuted by U.S. authorities.
Another issue that frequently arises in such cases is the extent to which the bank’s employees subject the bank itself to liability.
A foreign bank that helps U.S. citizens evade taxes can face criminal charges in the U.S., potentially resulting in restitution payments to the IRS, astronomical fines, and forfeiture of any profit made by the bank in the course of its activities in assisting in tax evasion.
One of the ways in which some foreign banks may help U.S. citizens evade taxes is by establishing secret accounts for them, the funds and income from which go unreported to the IRS. While many foreign banks have stopped allowing this practice due to pressure by the U.S. government, banks that continue to allow these hidden accounts are now being vigorously prosecuted by U.S. prosecutors.
U.S. prosecutors typically uncover the identity of the banks while investigating and prosecuting U.S. tax evaders. If the tax evaders being prosecuted are based in New York City, then the case against the bank will also be in an NYC federal court, since the bank is being brought in as a conspirator or accomplice to the U.S. citizen’s crime of tax fraud. Even if the bank has no branches in the United States, depending on circumstances, U.S. courts could still have authority to hear a criminal case against that bank. Just because a bank has no branches in the U.S., that does not mean it will be shielded from U.S. prosecution.
When a bank’s financial advisors help U.S. citizens set up undeclared accounts, and the bank services these accounts, such activity is generally taken as a clear indication that the bank is a knowing accomplice to the tax fraud. Some banks have been known to go further and explicitly promise their U.S. clients that the bank accounts would not be disclosed to U.S. authorities, actually making this promise as part of the banks strategy to gain these clients. When these promises are made by senior management personnel, or other sufficiently high-level employees or officers, this may be enough to subject the bank to liability, and will make it difficult to claim that the tax fraud acts were committed by unauthorized employees and should not subject the bank to criminal liability.
Activities that may subject a foreign bank to U.S. tax fraud liability include
Some banks have also channeled the hidden funds back to their clients? U.S. accounts, sending the funds in batches of less than $10,000 to avoid reporting.
In addition to the bank’s criminal liability, the bank’s officers or managers who knowingly participate in the tax fraud may be subject to individual liability; penalties may include time in prison, as well as sizeable fines.
When a financial adviser, employed by the bank, counsels a client to open an undeclared account, will the bank be at fault?
While there is no broad line that clearly marks where the bank’s responsibility begins, there are some factors that will be taken into account when deciding this issue. Courts will inquire how widespread the practice was, who among the bank’s senior employees was aware of the fraudulent conduct, and the extent to which the bank’s practices and policies made it easy for fraud to go undetected and/or unaddressed.
To this end, one of the most important things a bank can do to protect itself from prosecution is to have a sound compliance policy that establishes procedures that guard against fraudulent practices in the bank whether they be official bank policy or attempted fraud by a bank employee.
If your bank deals with U.S. citizens or is otherwise involved in U.S. banking or business, your bank and its senior employees may be vulnerable to prosecution. Consequences may include crippling fines and severe curtailment of your bank’s ability to operate in the United States.
Our experienced tax fraud and banking attorneys can help you review existing policies and assist you in crafting a compliance policy that protects you without hobbling your operations. If your bank is being investigated for or charged with tax fraud in the United States, our New York City defense attorneys will protect your rights and fight for the best possible outcome in your case.
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