HSBC Offshore Accounts Targeted


Recently, the Justice Department requested a federal court to force the London-based bank, Hongkong and Shanghai Banking Corporation (HSBC), to disclose the names of account holders who they suspect are evading taxes by hiding their money in offshore accounts in India. The Justice Department wants information regarding 9,000 U.S. residents holding high-value accounts through HSBC India from 2002 to 2010. The federal district court granted the Justice Department’s request on April 7th and the IRS was given permission to serve a “John Doe” summons on HSBC Bank USA. A John Doe summons is used when the government does not know the true name of the taxpayer under investigation and therefore substitutes his name for John Doe.

Other Banks the Target of IRS

HSBC is not the only foreign banking institution being currently scrutinized by the IRS and Justice Department. Swiss Cantonal Banks and Credit Suisse are also on the government’s list, and we believe that there are more to come. Due to the loss of tax revenue owed to the recession, the IRS has recently expended more resources to enforce disclosure and tax payments from foreign account holders.

UBS was Focus of IRS in 2009

Swiss bank UBS was the target of the IRS’ legal action in 2009. UBS paid $780 million in a legal settlement after the IRS accused it of assisting thousands of Americans with committing tax fraud. It also furnished information regarding thousands of its account holders. Some of those and other account holders were given the opportunity to participate in voluntary disclosure programs rather than be subject to investigation and/or prosecution.

Offshore Accounts Must Be Disclosed

Residents of the United States are not committing a crime by keeping their wealth in offshore accounts. However, offshore account holders are violating the law if they do not make the appropriate annual disclosures to the IRS and fail to pay annual taxes on any income from such accounts. Specific accounts holding certain amounts of money must be disclosed, generally on IRS Form 90-22.1 (Report of Foreign Bank and Financial Accounts, “FBAR”), and any person with money in a foreign bank account should be sure to know what is required of them to avoid any wrongdoing.

In addition to the filing of the FBAR, the US Department of Treasury also requires individuals holding interests in certain foreign assets with an aggregate value of over $50,000 will have to attach to their tax returns an additional disclosure statement.  Additional penalties will be assessed for failure to make the required disclosures.

Amnesty Programs for Offshore Holdings

One option that foreign account holders have is taking advantage of the 2011 Offshore Voluntary Disclosure Initiative (see Unreported Offshore Accounts post) created by the IRS, which will run through the end of August 2011. California’s Franchise Tax Board was also given authority to institute a voluntary compliance initiative (see Voluntary Compliance Initiative) for the months of August, September, and October of this year. California’s initiative will have important differences from the federal 2011 Offshore Voluntary Disclosure Initiative and disclosure under both programs should be completed only after extensive research or consultation with a legal tax professional.

We have represented and currently represent hundreds of clients with offshore accounts. Special reporting and disclosure requirements exist for offshore investments. The IRS is currently offering an Amnesty Program (2011 OVDI). The 2011 OVDI may limit criminal prosecution and civil penalty exposure to taxpayers with undisclosed offshore accounts and assets. Absent a disclosure agreement, taxpayers discovered with unreported foreign bank accounts, unreported foreign income, and certain undisclosed foreign assets face the possibility of paying harsh penalties such as 1) a penalty for failing to report a foreign account which could be as high as the greater of $100,000 or 50 percent of the total balance of a foreign account in each year held; 2) a fraud penalty equal to 75 percent of an unpaid tax; and 3) penalties for the failure to file information returns. Furthermore, individuals with undisclosed foreign income and accounts face the possibility of criminal prosecution. Relevant processes and procedures seem to change frequently and timing is critical as certain programs will likely not be available after August 31, 2011.

Many taxpayers will decide to participate in the OVDI based on a personal desire to come into compliance now that they are aware of the FBAR and other foreign account reporting requirements. Others recognize an opportunity to repatriate stagnant foreign funds into a domestic recessionary economy or may simply want to move on with their lives. The ability to properly advise a client regarding participation in the 2011 OVDI requires an understanding of the potentially applicable foreign-related penalties for nonparticipants, the historic IRS and Department of Justice voluntary disclosure practice and policies, and a healthy respect for the ongoing governmental international tax enforcement efforts within a shrinking global community.

Understand and benefit from your rights. If you have any questions or concerns regarding foreign income, foreign bank account(s), reporting issues, the amnesty program, or any other legal issue, we urge you to call (415) 394-7200 and schedule a complimentary attorney-client privileged consultation.