Pandora’s Box Has Opened: Pandora Papers

An unprecedented leak of financial records known as the Pandora Papers has revealed the offshore financial assets of dozens of current and former world leaders and hundreds of politicians from Asia and the Middle East to Latin America. The International Consortium of Investigative Journalists (ICIJ) obtained 11.9 million confidential documents from 14 separate legal and financial services firms, which the group said offered “a sweeping look at an industry that helps the world’s ultrawealthy, powerful government officials and other elites conceal trillions of dollars from tax authorities, prosecutors and others.”

Using an offshore company is legal, as long as the owner declares it to the tax authorities in the country where they reside. These companies benefit from low taxation, anonymity and the absence of records of the accounts or the real owners.

The ICIJ said the 2.94 terabytes of financial and legal data, which makes this leak larger than the 2016 Panama papers release, shows the “offshore money machine operates in every corner of the planet, including the world’s largest democracies,” and involves some of the world’s most well-known banks and legal firms.

Here are some of the biggest revelations in the release:

South Dakota, Nevada havens

One of the most “troubling revelations” for the U.S. was the role of South Dakota, Nevada and other states that have adopted financial secrecy laws that “rival those of offshore jurisdictions” and demonstrate America’s “expanding complicity in the offshore economy,” said the Washington Post, one of the ICIJ’s media partners. A former vice president of the Dominican Republic finalized several trusts in South Dakota to store his personal wealth and shares of one of the country’s largest sugar producers, the paper said.

Pakistan’s political elite

Several members of Pakistani Prime Minister Imran Khan’s inner circle, including current and former cabinet ministers, “secretly owned an array of companies and trusts holding millions of dollars of hidden wealth,” the group reported. That could create a political headache for the former cricket star, who campaigned for the South Asian country’s highest office as the head of a reformist party that promised a strong anti-corruption agenda. Before the release of the Pandora papers, a Khan spokesperson told a news conference Khan had no offshore company, but ministers and advisers “will have to be held accountable” for their individual acts.

Law firms: the key to accessing the offshore world

The offshore service providers at the center of this investigation represent the main cog in the machinery that moves money outside conventional circuits. Without them, it would not be so easy to hide assets such as those unearthed in the Pandora Papers: bank accounts, private jets, yachts, mansions and works of art by Picasso or Banksy.

As government tax officials start reading the Pandora Papers, you can expect in the coming months that many new names will come out that the IRS will be interested in targeting.

Filing Requirements If You Have Foreign Accounts

By law, many U.S. taxpayers with foreign accounts exceeding certain thresholds must file Form 114, Report of Foreign Bank and Financial Accounts, known as the “FBAR.” It is filed electronically with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN).  Taxpayers with an interest in, or signature or other authority over, foreign financial accounts whose aggregate value exceeded $10,000 at any time during a calendar year must file FBARs.

Generally, U.S. persons must also report specified foreign financial assets on Form 8938 if the aggregate value of those assets exceeds certain thresholds. Reporting thresholds vary based on whether a taxpayer files a joint income tax return or lives abroad.

The law requires U.S. citizens and resident aliens to report worldwide income, including income from foreign trusts and foreign bank and securities accounts. In most cases, affected taxpayers need to complete and attach Schedule B to their tax return. Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires U.S. citizens to report the country in which each account is located.

Penalties for non-compliance.

The penalties for FBAR noncompliance are higher than the tax penalties ordinarily imposed for delinquent taxes. For non-willful violations it is $10,000 per account per year going back as far as six years. For willful violations the penalties for noncompliance which the government may impose include a fine of not more than $500,000 and imprisonment of not more than five years, for failure to file a report, supply information, and for filing a false or fraudulent report.  Failing to file Form 8938 when required could result in a $10,000 penalty, with an additional penalty up to $50,000 for continued failure to file after IRS notification.

If your failure to file is due to fraud, the penalty is 15% for each month or part of a month that your return is late, up to a maximum of 75%. Any person who willfully attempts in any manner to evade or defeat any tax can be criminally prosecuted.

The IRS has special programs for taxpayers to come forward to disclose unreported foreign accounts and unreported foreign income. Affected persons should not delay because if the government finds out about you first, you can be subject to criminal prosecution. 

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