The U.S. crackdown on offshore tax havens is making the act of hiding money overseas a thing of the past. Foreign financial institutions are now required to report information regarding their U.S. account holders. Tens of thousands of U.S. taxpayers have paid massive penalties for undeclared foreign accounts and many have been criminally prosecuted as well.
The IRS has many tools at its disposal to obtain a taxpayer’s financial information from foreign countries. Here are a few:
Summons
The IRS’ authority to examine tax information extends to a foreign financial institutions and U.S. taxpayers residing overseas. In addition, a designated summons under IRC 6503(j)(1) may be issued to corporate taxpayers and will freeze the limitation period on assessment. John Doe summonses are used to pursue account holders at foreign financial institutions whose identities the IRS does not (yet) know. In fact, it was John Doe Summons that crack the Swiss Bank secrecy back in 2009.
Formal Document Requests
If a taxpayer is noncompliant with an Information Document Request (“IDR”), the IRS may utilize a Formal Document Request (“FDR”) under IRC 982 to obtain foreign-based documentation (documentation which is outside the U.S. and which may be material or relevant to the tax treatment of a particular item being examined). FDRs are typically used to obtain information regarding ownership of foreign assets and trusts, foreign tax credits, and investments in partnerships and foreign corporations, to name a few.
The FDR is not a routine information-gathering tool; an IDR must precede the issuance of an FDR, and the FDR may not ask for more than what was requested in the IDR. The FDR must be sent by registered or certified mail and the recipient has 90 days from the date of mailing to comply or to commence proceedings to quash the request.
Foreign Account Tax Compliance Act (FATCA)
Since 2010, The Foreign Account Tax Compliance Act (FATCA) has required U.S. taxpayers residing abroad to file yearly reports to the Financial Crimes Enforcement Network (FinCEN) on their non-U.S. financial accounts. It also requires foreign financial institutions to report the identities and assets of U.S. taxpayers to the Department of the Treasury.
Qualified Intermediary (QI) Program
Since 2001, foreign banks have been forced to act as IRS informants through the Qualified Intermediary (QI) Program. Requirements have tightened since the 2008 UBS Swiss banking scandal and the QI Program now obligates more than 77,000 banks and investment companies worldwide to actively investigate and report U.S. foreign account owners to the IRS – as well as withhold and pay over to the IRS any U.S. taxes due (typically at a 30% rate).
Section 1441 Qualified Intermediaries are also subject to a periodic IRS or external audit to confirm compliance. Failure to comply means denial of access to the American banking system.
The Hague Service Convention
An IRS summons, demand for information or inquiry may be served upon an American expatriate outside consular or diplomatic channels pursuant to The Hague Convention on the Service Abroad of Judicial and Extra Judicial Documents in Civil and Commercial Matters (“Hague Service Convention“). Many subpoenas are served in this manner. Currently more than 70 states are contracting parties.
Tax Treaties and Agreements
The U.S. has tax treaties with around 65 foreign countries. These treaties include:
- Tax Information Exchange (TIE) Agreements, bilateral agreements between countries aimed at curbing tax abuses. Numerous countries have signed TIE Agreements with the United States. Refusal to sign means denial of access to the international banking system.
- Mutual Legal Assistance Treaties (MLATs), agreements between two or more countries or regions to gather and disclose information (including information about bank accounts) in investigations of serious crimes such as tax fraud. MLATs facilitate the exchange of information relevant to ongoing investigations in participating countries.
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