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Banking prosecutions expand to Cayman Islands

For the past decade U.S. government investigators have been ferreting out hidden financial accounts across the world. Much has been written about Department of Justice agreements with Swiss banks starting with UBS. Last year, the agency finalized the last of the non-prosecution agreements under the Swiss Bank Program that involved almost 80 banks.

Earlier this month, the DOJ announced two Cayman Island financial institutions - Cayman National Securities Ltd. And Cayman National Trust Co. Ltd. - pleaded guilty to helping U.S. taxpayers avoid their tax liabilities. Apparently, more than $130 million was hidden in offshore accounts.

As part of the plea agreement, CNS and CNT will turn over information on the all non-compliant U.S. taxpayers. The financial firms must also pay $6 million in penalties.

Broad reach underscores the need to disclose foreign financial accounts

The DOJ's Tax Division stressed that the breadth of their investigation stating "our focus is not on any one bank, insurance company or asset management firm, or even one country."

Generally, taxpayers who have more than $10,000 in assets in a foreign bank need to e-file a Report of Foreign Bank and Financial Accounts (FBARs) - FinCEN Form 114 with the Financial Crimes Enforcement Network (FinCEN). Failure to file is a crime punishable by civil and criminal penalties. Word is getting out and last year the number of these forms topped one million.

Severe civil and criminal penalties are common in prosecutions of individual taxpayers related to the willful failure to disclose offshore accounts. Fines range up to $100,000 or 50 percent of the total value of the account, whichever is greater. Criminal tax evasion charges and prison time are often on the table as well.

Voluntary and quiet disclosures

There have been several voluntary disclosure programs that allow taxpayer to come forward and pay a reduced penalty. These are not available, however, once the Internal Revenue Service initiates an examination. For those who have accounts with either of the banks in the plea agreement it might be too late. This underscores the importance of coming into compliance.

Some people have tried to make "quiet" disclosures by filing past FBARs without going through a formal voluntary disclosure program. The Service could soon start a closer review of these disclosures. Anyone who has gone this route should speak with a tax attorney to minimize potential liabilities.

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