Proposed Tax Evasion Laws May Ensnare Those with Foreign Accounts

Savvy businesspeople and affluent individuals have utilized offshore money management strategies for years to take advantage of the significant tax savings that can be realized through the dynamic use of foreign accounts. However, navigating the murky waters between appropriate accounting and tax evasion can be a challenge, to say the least.

Two new bills proposed by Senator Carl Levin, a Michigan Democrat, could impact thousands of corporations and individuals who hold offshore assets. If passed, the laws would seek to deter tax evasion and recapture revenue lost to shady accounting. But, in an area of tax law where even IRS officials have trouble drawing the line between evasion and avoidance, countless parties with good intentions could be inadvertently swept into the fold.

Provisions of the Bills

The first bill, known as the “Stop Tax Haven Abuse Act,” would set up a framework empowering the U.S. government to incentivize cooperation with tax enforcement efforts by foreign banks and jurisdictions. These measures could broadly expand the power of the U.S. Treasury Department. For instance, the Treasury Department could forbid American banks from dealing with foreign financial institutions in nations that fail to foster tax enforcement. Even simple transactions, like honoring credit cards issued by banks in offending jurisdictions, could be disallowed.

The Incorporation Transparency and Law Enforcement Assistance Act is also part of Senator Levin’s legislative agenda. This bill would be more focused on cleaning up domestic corporate secrecy as a precursor to expanded foreign enforcement-as Senator Levin notes, it is difficult to promote transparency in tax-haven nations without similar measures in place at home. Under the Incorporation Transparency and Law Enforcement Assistance Act, state authorities would be compelled to gather the names of the owners of every company formed in their jurisdiction (under current law, this information is sometimes hidden). Upon being subpoenaed, states would then have to provide these names to law enforcement officials or the IRS.

Potential Problems

Both the Stop Tax Haven Abuse Act and the Incorporation Transparency and Law Enforcement Assistance Act have been considered in the Senate before. The Stop Tax Haven Abuse Act was originally introduced in a modified form over half a decade ago, when it failed to build enough steam to pass into law. Since then, the legislation has resurfaced a few times, never quite garnering the political support necessary to make it through the legislature.

So why have these proposed laws never come to fruition? For one thing, the laws could create a so-called “blacklist” of some 30 plus jurisdictions that may be unfairly labeled as tax evasion nations; in fact, the financial privacy and banking secrecy guaranteed by law in nations like Switzerland may be based more on national autonomy and tradition than some unexpressed desire to undermine U.S. tax collection. Additionally, there is a serious concern among some experts that the laws would establish a dangerous presumption in which citizens and corporations who carry on any business in offshore “tax haven” jurisdictions would be assumed to be tax evaders based solely on that involvement.

Why Now?

Despite past failures, Senator Levin’s crusade against offshore accounting may finally be gathering enough support to become law. Senator Levin chairs the Senate’s permanent subcommittee on investments; in 2006, this subcommittee estimated that quashing offshore tax dodging could mean an extra $100 billion in the nation’s coffers. Irrespective of the legitimate concerns with the Stop Tax Haven Abuse Act and similar legislation, saying no to a potential $100 billion in tax revenue (all without a rate increase) could be difficult for any lawmaker amid today’s heavy budget cuts and spiraling deficit.

Those Affected

If these bills become law, just about any company or individual with funds in offshore accounts would need to reevaluate their possible tax liability. Since the line between tax avoidance and tax evasion in this context is already a blurry one, the threat of presumptive criminal scrutiny even for those practicing good-faith foreign banking strategies could have far-reaching impacts.

If you or your company may be facing tax evasion charges or simply have questions about IRS entanglements, it is important to get in touch with a tax attorney as soon as possible. An experienced tax attorney can handle negotiations with the IRS or defense in criminal tax matters, and can even help you implement compliance strategies that could save you thousands in future tax litigation costs.

While the viability of Senator Levin’s offshore banking bills remains uncertain, prudent preparation could save you and your company from being caught off-guard by overenthusiastic IRS collection efforts if and when new legislation goes into effect.