Tax Law Center Blog

By Parag P. Patel, Esq. | Updated April 8, 2016

The U.S. Justice Department is reviewing reports about the offshore financial arrangements of global politicians and public figures based on 11.5 million leaked files from Panamanian law firm Mossack Fonseca, a department spokesman said yesterday. The department is determining whether the findings point to evidence of corruption and other violations of U.S. law.

“The U.S. Department of Justice takes very seriously all credible allegations of high level, foreign corruption that might have a link to the United States or the U.S. financial system,” said Peter Carr, spokesman for the Justice Department’s criminal division.

The International Consortium of Investigative Journalists published the investigation based on documents from the Panama-based Mossack Fonseca law firm, which specializes in creating offshore accounts. The “Panama Papers” revealed financial arrangements of tens of thousands of rich and powerful people, including friends of Russian President Vladimir Putin, relatives of the prime ministers of Britain, Iceland and Pakistan, and the president of Ukraine.

The news about the Panama Papers is emerging as the U.S. continues to ramp up efforts to thwart illegal practices involving offshore accounts. Agreements signed with other countries under the Foreign Account Tax Compliance Act (FATCA) have cracked open access to bank information previously held in secret in other countries. If a foreign bank refuses to disclose information about account holders required by FATCA, it may be assessed a 30% withholding tax on certain U.S. source payments, whether or not the recipient is a U.S. taxpayer.

In addition, U.S. taxpayers are required to report holdings in foreign banks and other financial institutions for any year in which their total assets exceed $10,000. The FBAR (Report of Financial Bank and Financial Accounts) for the 2015 tax year must be filed by June 30, 2016. Beginning with the 2016 tax year, FBARs must be filed by April 15 to coincide with the income tax filing deadline.

U.S. taxpayers are ALSO required to report holdings in foreign banks and other financial institutions for any year in which their total assets exceed generally $100,000 (there are many other applicable limits) on another Form 8938. The Form 8938 is filed with the normal income tax return filing.

Beware: Punitive penalties (including criminal prosecution) apply in cases of delinquent or non-filing of the aforementioned forms.

Taxpayers who desire to disclose to the US government a foreign account have a choice between the OVDP, and the newer streamlined procedures.  The OVDP remains the safest and most foolproof program, with amnesty even for willful acts. But for those with the right facts, the IRS Streamlined program for non-willful violations is far simpler and much less costly.  The Streamlined programs came with the 2014 improvements to the OVDP, which sparked and renewed interest in cleaning up offshore accounts.

The two programs are mutually exclusive, and a taxpayer must choose between them. The key difference in participating in the streamlined procedures requires a certification of non-willfulness. A false certification filed under the streamlined procedures could lead to possible criminal liability. Most US taxpayers who enter the IRS OVDP to resolve undeclared offshore accounts will pay a penalty equal to 27.5 percent of the high value of the accounts. The IRS updated its list of foreign banks where accounts trigger a 50% (rather than 27.5%) penalty in the IRS’s long-running Offshore Voluntary Disclosure Program (OVDP). This penalty is based on the highest account balance measured over up to eight years.

Whether a taxpayer’s conduct is non-willful is a critical question of fact and law, based largely on the taxpayer’s particular facts and circumstances. Taxpayers with foreign accounts would be wise to retain experienced tax legal counsel, to better analyze the taxpayers’ position and recommend one of the two programs to clean up their mess. Most importantly, account holders become ineligible to enter the voluntary disclosure programs after the US government contacts them, which becomes more worrisome in light of leaks like the Panama Papers.

About the Author

Parag P. Patel, Esq. brings over three decades of experience to individuals and businesses facing complex tax problems. Holding advanced degrees from Georgetown University Law Center (J.D.) and New York University School of Law (LL.M. in Tax Law), the nation’s top tax programs, Mr. Patel delivers sophisticated and creative strategies in complicated federal and state audits, penalty abatements, and foreign asset/income reporting. His practice emphasizes international tax matters, specifically foreign financial account reporting (FBAR), voluntary disclosures, and penalty defense.

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