It’s been more than a year since the international “Panama Papers” scandal hit where 11.5 million documents disclosed the true owners of more than 214,000 offshore “shell” companies. Postmortem tidbits from the Panama Papers provide insight into the genuine risks offshore investors, international businesses, US expats, and foreign nationals living and working in the United States all face: the requirement to file an IRS FBAR if the accumulated balance of all of your offshore bank and investment accounts exceeds $10,000 at any point in the tax year. A recent analysis of the key players at the core of the Panama Papers investigation shows the most severe risk many faced was imprisonment for the failure to file required IRS FBAR reports.
Basically, Panamanian “foundations” were established and US citizens “contributed” to the Panamanian foundation and these contributions are shielded from U.S. legal claims under Panamanian law. The Panama law firms appoint their employees as officers of the foundation, but the real beneficiary is the US citizen. The law firm moves these funds through accounts in various offshore former tax havens such as the British Virgin Islands, Switzerland, Andorra and Panama. The foundation is named as a shareholder of various shell corporations—which are listed as the owners of the offshore accounts—to further obscure the beneficial ownership of the assets. The US Citizen’s cash moves to and from the foundation and the accounts owned by the shell companies, ordering payments back in the US at any time. Upon death, remaining funds are distributed to contingent beneficiaries, and the cycle continues.
The whole point was to obscure who actually held the beneficial ownership interest in these offshore companies and accounts. Additional postmortem tidbits from the Panama Papers showed that while the above “foundation” and shell company structures may have been legal, the failure to report the resulting income was not. To establish a case of felony tax evasion, the government would have to prove that a US taxpayer willfully failed to report all of his income and performed “an affirmative act constituting an evasion or attempted evasion of the tax”—also referred to as a “badge of fraud.” In this case, the badge of fraud is a false tax return that omits income, but it could also be any affirmative step by the taxpayer to conceal his or her ability to pay taxes or to remove assets from the reach of the IRS. The taxpayer also faced prosecution for misdemeanor tax evasion, where the government only needs to prove willful failure to accurately report income.
So where is the real teeth behind these activities? That’s right, IRS FBAR reporting requirements and the implications of FATCA. Today, the vast majority of banks and international investment houses around the world are providing information directly to the IRS regarding accounts held by US taxpayers including balances, transactions and associated income. So those running the Panama Paper shell corporation game may have somewhat legally deployed their money, they did not report their income and it is the failure to disclose these offshore accounts associated with their foundation and all the shell companies on the IRS FBAR that provides a nail for the coffin. That is what the postmortem tidbits from the Panama Papers revealed.
The IRS FBAR form doesn’t only require US taxpayers to report accounts where they have “direct” ownership, it inquires whether the filer has any “indirect” interest in any foreign accounts. That’s where the Panama foundation and shell company plan collapses as the US taxpayer now faces the criminal penalties for failing to file an FBAR which are quite draconian: up to five years in prison, a fine of $250,000, or both, or up to 10 years in prison, a fine of $500,000 or both if the failure to file an FBAR is part of a pattern of illegal activity.
Now the IRS can assess at least a 50% penalty or $100,000 per incidence whichever is higher for each unreported account for each year it went unreported with a look back period of at least six years, and in the case of fraud even futher back than that. In addition, the leverage of a criminal tax evasion charge carrying 5 to 10 years in prison awaits.
The lesson of the postmortem tidbits from the Panama Papers is clear: The IRS is receiving direct input from the banks and financial houses where the accounts in offshore tax havens are located. They are tying all of that information directly back to the US taxpayer. If you haven’t come into compliance with IRS FBAR reporting requirements your time is running short. IRS FBAR reporting requirements extend to all US taxpayers including US expats as well foreign nationals living and working in the US.
We invite you to contact Allen Barron for a free consultation at 866-631-3470. Ask about the protections of the attorney-client privilege.