TAXLITIGATOR – Tax Controversy (Civil & Criminal) Report

The Panama Papers. A massive law firm data breach of otherwise secretive financial information supposedly involving numerous high-ranking government officials and others around the world was disclosed online Sunday evening by the International Consortium of Investigative Journalists (ICIJ). Having been recently obtained by the German newspaper Suddeutsche Zeitung, the data includes emails, financial spreadsheets, passports and corporate records revealing the secret owners of financial accounts and companies in 21 jurisdictions ranging from Singapore to the British Virgin Islands to Nevada.

Almost forty years of confidential information from 1977 to December 2015 was somehow obtained by an anonymous source from the internal database of Panama-based law firm Mossack Fonseca & Co. and apparently includes approximately 11.46 million files comprising approximately 2.6 terabytes (the equivalent of approximately 600 DVDs) of otherwise confidential financial data. The BBC reported 72 current and former heads of state are linked to data which discloses a day-to-day, decade-by-decade look at how funds flowed through the global financial system.The searchable list of individuals includes billionaires from throughout the world, current and former leaders of countries around the world, former spy chiefs, and relatives of various politicians and public officials.

Mossack Fonseca & Co indicates that recent media reports have portrayed an inaccurate view of their services and, despite their efforts to correct the record, the media continues to misrepresent the nature of their services and role in global financial markets. “These reports rely on supposition and stereotypes, and play on the public’s lack of familiarity with the work of firms like ours.”

Largest Media Collaboration Ever Undertaken. In what ICIJ claims to be the largest media collaboration ever undertaken, more than 370 journalists working in more than 25 languages and over 76 countries combed through the purloined data and traced the transactions involving the law firm’s clients around the world. They shared information and hunted down leads generated by the leaked files using corporate filings, property records, financial disclosures, court documents and interviews with money laundering experts and law-enforcement officials.

ICIJ reported that the news outlets involved in the collaboration did not pay for the documents although there are some reports information has been sold to the German tax authorities and may have been offered to tax authorities in the United Kingdom, the United States and other countries. The United States maintains an active “Whistleblower Program,” which can net the informant up to 30 percent of the additional tax, penalty and other amounts collected.

Offshore Companies. An offshore company can be a logical, legitimate decision for various international business transactions. Mossack Fonseca & Co is well recognized in international business transactions and apparently maintains professional associations in in Hong Kong, Miami, Zurich and more than 35 other places around the globe offering various services in Belize, The Netherlands, Costa Rica, United Kingdom, Malta, Hong Kong, Cyprus, British Virgin Islands, Bahamas, Panama, British Anguilla, Seychelles, Samoa, Nevada, and Wyoming (USA).ICIJ reports that there is no direct evidence of wrongdoing by Mossack Fonseca & Co or that any of the entities disclosed in the data breach were used any for an improper purpose.

Banks, law firms and other offshore professional advisors are generally required to follow legal requirements making sure their clients are not involved in criminal enterprises, tax evasion or political corruption. Major banks, including international giants UBS and HSBC, are referenced by the ICIJ in data creation of nearly 15,600 companies in the British Virgin Islands, Panama and other offshore locations.

Mossack Fonseca & Co. Responds. In response to the ICIJ disclosures, Mossack Fonseca & Co. a leading international company with a presence in over 40 countries and with close to 40 years of history in the legal industry operating through its own and representative offices, responded, in part: “we conduct due diligence on clients at the outset of a potential engagement and on an ongoing basis; we routinely deny services to individuals who are compromised or who fail to provide information we need in order to comply with “know your client” obligations or when we identify other red flags through our due diligence; we routinely resign from client engagements when ongoing due diligence and/or updates to sanctions lists reveals that a party to a company for which we provide services been either convicted or listed by a sanctioning body; we routinely comply with requests from authorities investigating companies or individuals for whom we are providing services; and we work with established intermediaries, such as investment banks, accountancies and law firms, as part of the regulated global financial system.”

And, on their firm site, “All our offices maintain the highest due diligence standards that comply with all international laws and regulations. We are always willing to cooperate with all authorities that require information through legally established channels and in compliance with the requirements of the respective legislation. We shall continue on our nearly 40-year path of servicing the international business, banking, legal and financial communities and we shall maintain our resolve to become ever more efficient and useful to the business world. Our service and research-oriented professionals specialize in trust services, wealth management, international business structures, and commercial law, among other areas.”

Previous Activities of the ICIJ. On June 14, 2013, the ICIJ published a searchable Offshore Leaks Database, containing the names of over 100,000 companies and trusts created in 10 foreign jurisdictions—the British Virgin Islands, Cayman Islands, Cook Islands, Singapore, Hong Kong, Samoa, Seychelles, Mauritius, Labuan and Malaysia—by two offshore service firms, Portcullis TrustNet based in Singapore and Commonwealth Trust Limited based in the British Virgin Islands. ICIJ says it has 2.5 million emails and documents from the two firms covering clients located in more than 170 countries and territories over a 30-year period ending in 2010. The database has been well publicized, and it is reasonable to expect that the IRS will assign personnel to start reviewing the information to ascertain if any of the offshore entities may be related to U.S. taxpayers.

THE FBAR. U.S. taxpayers with an interest in, or signature or other authority over, foreign financial accounts whose aggregate value exceeded $10,000 at any time during 2015 must electronically file Form 114, Report of Foreign Bank and Financial Accounts (commonly referred to as the FBAR, previously Form TD F 90-22.1) with FinCen. A U.S. person may have a reporting obligation even though the foreign financial account does not generate any taxable income. Taxpayers also report their interest foreign financial accounts by (1) completing boxes 7a and 7b on Form 1040 Schedule B; box 3 on the Form 1041 “Other Information” section; box 10 on Form 1065 Schedule B; or boxes 6a and 6b on Form 1120 Schedule N.

The calendar year 2015 FBAR is due by June 30, 2016 and must be filed electronically through the FinCen BSA E-Filing System website. The calendar year 2016 FBAR is due by April 15, 2017 with a maximum extension for a 6-month period ending on October 15 The failure to timely file the FBAR can be subject to civil penalties and possibly criminal sanctions (i.e., imprisonment). The statutory civil penalties might be $10,000 per year for a non-willful failure but a willful failure to file could, by statute, be subject to civil penalties equivalent to the greater of $100,000 or 50% of the balance in an unreported foreign account, per year, for up to six tax years. Non-willful penalties might be avoided if there is “reasonable cause” for the failure to timely file the FBAR.

IRS OVDP. The IRS currently maintains a special “Offshore Voluntary Disclosure Program” (“OVDP“) that permits taxpayers to come forward and disclose previously unreported offshore bank accounts and other assets, pay required taxes, interest and penalties, and provide information about their offshore holdings. In return, participants receive protection from criminal prosecution and a reduction in the otherwise potentially applicable tax penalties. Critically, however, taxpayers are not eligible for the OVDP unless they approach the IRS before the IRS becomes aware of their potential tax non-compliance.

The OVDP is designed for taxpayers seeking certainty in the resolution of their previously undisclosed interest in a foreign financial account. For those who might be considered to have “willfully” failed to timely file an FBAR or similar, the OVDP avoids exposure to numerous additional penalties associated with the income tax returns and various required foreign information reports, a detailed examination, and limits the number of tax years at issue while also providing certainty with respect to the avoidance of a referral for criminal tax prosecution.

IRS STREAMLINED FILING COMPLIANCE PROCEDURES. In addition to the OVDP, the IRS maintains other more streamlined procedures designed to encourage non-willful taxpayers to come into compliance. Taxpayers using either the Streamlined Foreign Offshore Procedures (for those who satisfy the applicable non-residency requirement) or the Streamlined Domestic Offshore Procedures  are required to certify that their failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to “non-willful” conduct.

For these Streamlined Procedures, “non-willful conduct” has been specifically defined as “conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.” For eligible U.S. taxpayers residing outside the United States, all penalties will be waived under the Streamlined Foreign Offshore Procedures. For eligible U.S. taxpayers residing in the United States, the only penalty will be a miscellaneous offshore penalty equal to 5 percent of the foreign financial assets that gave rise to the tax compliance issue under the Streamlined Domestic Offshore Procedures.

Even if returns properly filed under the Streamlined Procedures are subsequently selected for audit under existing IRS audit selection processes, the taxpayer will not be subject to failure-to-file and failure-to-pay penalties or accuracy-related penalties with respect to amounts reported on those returns, or to information return penalties or FBAR penalties, unless the examination results in a determination that the original tax noncompliance was fraudulent and/or that the FBAR violation was willful. Any previously assessed penalties with respect to those years, however, will not be abated. Further, as with any U.S. tax return filed in the normal course, if the IRS determines an additional tax deficiency for a return submitted under these procedures, the IRS may assert applicable additions to tax and penalties relating to that additional deficiency.

WHAT TO DO? Those directly involved in creating and maintaining an undeclared interest in a foreign financial account or asset are the only ones capable of determining their potential non-willful status. If such status is not supported by sufficient objective facts, consider other methods of coming into compliance, including the OVDP, with the applicable reporting and filing requirements.

Anyone, located anywhere, who is potentially impacted by the public release of the ICIJ database should consider contacting competent, experienced tax counsel immediately. Our tax attorneys have handled over 1,000 cases in the past four years involving voluntary disclosures, civil examinations, and criminal investigations arising from unreported interests in foreign bank accounts and assets. If you require further information, contact us at taxlitigator.com

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