For those that are not yet aware, UBS, the Swiss baking giant, has agreed to pay $780,000,000 to the United States government for its complicity in assisting U.S. taxpayers with tax evasion. In addition, and perhaps the bigger blow to Swiss banking, is that UBS has agreed to turn over to the U.S. government account information of its U.S. customers. This unprecedented move brings an end to the longstanding, impenetrable Swiss banking secrecy laws.
According to the documents filed by the U.S. government, UBS assisted U.S. taxpayers in establishing offshore accounts under fictitious names. Although the U.S. taxpayers placed assets in these accounts, upon which they would generate income, the U.S taxpayers failed to report on their U.S. tax returns not only the income generated, but also the existence of the accounts. Consequently, according to the allegations, both UBS and the U.S. taxpayers are guilty of tax evasion and defrauding the U.S. government.
The lessons to be learned from this latest offshore fraud are as follows:
Taxpayers are taxed on worldwide income from whatever source derived. Regardless of where you place your assets, where the income is earned, who the payor is of those earnings, and where the earnings are received, U.S. taxpayers must pay tax on all worldwide income unless there is some exception provided by the U.S. Internal Revenue Code.
Rely on Established Exceptions in the U.S. Internal Revenue Code. In general there are two compliant ways to avoid taxation when dealing with international planning structures. First, is the use of insurance or annuities. Both insurance and annuities are conventional planning techniques in the U.S. to create a tax-free investment structure. The growth of assets in a tax compliant insurance or annuity policy is not subject to tax. Moreover, with a properly formed insurance policy, the earnings can be withdrawn income tax free as well. Second, income tax deferral can also be achieved through entity planning with controlled foreign corporations (CFCs) and non-controlled foreign corporations (non-CFCs). In the proper set of circumstances, foreign entities receiving foreign-sourced income can defer taxation until repatriation. And to clear up a common misperception, “repatriation” is not limited to actually bringing the dollars back into the United States; rather, repatriation includes any actual distribution of assets, or “constructive receipt of assets”, anywhere in the world to or for the benefit of a U.S. taxpayer.
Swiss banking secrecy is no longer absolute. While some have claimed the UBS case marks the end of Swiss banking as we know it, it is probably a misstatement to leap to such a conclusion. However, it is clear that the once impenetrable secrecy laws, which protected clients’ identity and account information at all costs, have been compromised. The proper conclusion to take from this case is that Swiss banks cannot protect U.S. taxpayers who participate in fraud against the U.S. government. It is not clear to what extent, if any, this case will have and adverse impact on disclosure of such information in cases where U.S. taxpayers are not involved in any type of fraud or the case does not involve the U.S. government. In the author’s opinion, the protection of Swiss bank accounts will likely remain intact with respect to non-fraudulent, non-governmental situations.
You must report offshore activities. The government has clearly set forth a series of filing and disclosure obligations for U.S. taxpayers involved with international accounts. Please understand that these filing obligations exist irrespective of income generation, and failure to properly file can have drastic consequences. It is ok to have offshore accounts, businesses, credit cards, investments, etc., but it is imperative in all cases that you disclose these activities on the appropriate return. Compliant offshore planning is still proper and as strong as ever.
Rectifying non-compliant offshore structures. It is expected that the U.S. taxpayers involved in this fraudulent structure will be hit with taxes, penalties, interest, and perhaps, criminal sanctions. This is generally the case if the IRS gets to you first, before you have had a chance to disclose. If you or your clients are involved in any offshore structure that has not been properly reported, the best thing you can do is to take advantage of the IRS voluntary disclosure process. Leniency is generally granted if you get to the IRS first.
Do not engage in complicated offshore planning without experienced counsel. According to the report, the structure that was perpetrated was promoted by UBS personnel and the U.S. taxpayers most likely relied on the advice of UBS in establishing structures. Given the complexities involved and the potential dire consequences for planning improperly it is ill-advised to engage in any international planning without the able counsel of an attorney experienced in these matters.
The shameful part of this case is that with proper planning, most of these U.S. taxpayers probably could have minimized their taxes just the same while reporting the structure openly to the IRS had they used some of the vehicles mentioned above. Please feel free to contact our office if you would like assistance in any of your international planning needs.
James M. Duggan, MBA, JD
DUGGAN BERTSCH, LLC