For many years, Americans were able to hold money in offshore accounts without worrying about being prosecuted by U.S. authorities. All of that has changed in the past few years. Since the United States began its intense crackdown on undisclosed offshore accounts in 2009, it has used its long-arm to force foreign banks intro compliance with U.S. tax regulations.
One of most effective tools has been the Foreign Account Tax Compliance Act, commonly referred to as FATCA, which requires each foreign financial institution to report information about its American clients to the Internal Revenue Service. This, combined with several highly publicized cases of U.S. authorities criminally and civilly prosecuting Swiss banks, has caused a chill among foreign banks. Many foreign banks are now hesitant to engage in dealings with American taxpayers altogether.
Long known for its strict privacy laws with regards to banking, Switzerland has fallen under the microscope of the federal government more than any other country in this recent initiative. In 2009, UBS AG paid a $780 million fine and turned over the names of its American clients to U.S. authorities, in a deal to avoid criminal prosecution. Since then, other Swiss banks have either been successfully prosecuted by the United States or have been scared into complying with the demands of the U.S. government. A recent example is Wegelin & Co., which was the oldest bank in Switzerland until it shut down this year after pleading guilty to charges of tax evasion and money laundering in a United States District Court.
Switzerland is not the only country that is cooperating with the United States to identify Americans with undisclosed offshore accounts. Nineteen countries have either signed agreements with the United States to provide information about American account-holders or are in final negotiations to do so. These countries include the UK, Spain, Mexico, Canada, Cayman Islands, Italy, Bermuda, Germany, and others. Many more countries have begun exploring the possibility of following suit.
Under U.S. law, American taxpayers (citizens and permanent residents) must report all foreign income. Further, if more than $10,000 was kept in offshore accounts at any time during the year, a form referred to as the "FBAR" must be filed, disclosing all foreign accounts. Many U.S. taxpayers are simply unaware of these complex reporting requirements, rather than intentionally avoiding them. The penalties for non-compliance can be harsh. If the government believes that the failure was willful, criminal charges can be brought. Additionally, a civil FBAR penalty of the greater of $100,000 or 50% of the account balance can be levied. For failures that are deemed non-willful, the penalty can be less.
With a focus on future compliance, the IRS rolled out its Offshore Voluntary Disclosure Initiative in 2009, which allows taxpayers to voluntarily disclose their offshore accounts and pay taxes and penalties, in exchange for immunity from prosecution. The program was renewed in 2011 and extended on an indefinite basis in 2012, now referred to as the Offshore Voluntary Disclosure Program (OVDP).