U.S. efforts to crack down on the practice have been imperfect to say the least.
Over the last decade, the US government has worked hard to prevent Americans from hiding bank accounts offshore in order to avoid paying taxes. But it’s not hard enough. Although keeping hidden accounts has become more difficult, recent examples prove that it is still possible.
People who have dual citizenship, few ties to the United States and a willing accomplice at a bank have the easiest time. Even people who are only citizens of the United States can get away with offshore accounts by employing complicated trusts or soliciting family members in other countries. Having an offshore account isn’t unlawful, but failing to report it to the Internal Revenue Service is.
Former Credit Suisse Group AG executives recently accused the bank of continuing to assist American clients in hiding accounts from the IRS despite paying a large fine and promising to stop in 2014. After identifying further undeclared accounts, a handful of smaller Swiss banks revised their agreements with the US Justice Department and paid extra fines.
And it’s likely that more cases will go through the cracks. According to a report released in May by the Treasury Department, America’s tax gap (the difference between what is owed to the government and what is actually collected) is significantly bigger than the anticipated $600 billion, in part because some taxpayers underreport foreign income.
Before addressing how current policies fall short, it’s important to understand what US regulators have done to target scofflaws since 2008, when tens of thousands of Americans were caught using Swiss banks to avoid paying billions in taxes.
They offered voluntary disclosure programs and made it mandatory for banks in tax havens to share more data, requiring some of the worst offenders to reveal client information.
Congress passed the Foreign Account Tax Compliance Act in 2010, which compels U.S. citizens to report foreign assets exceeding a particular level and non-U.S. financial institutions to reveal the assets of their American clients.
In theory, the IRS should be able to discover anomalies by comparing financial institution data with information submitted by taxpayers. However, the IRS has given up on developing any “comprehensive plan” to use Fatca data to improve compliance, according to a 2019 investigation by the Government Accountability Office.
There’s also the problem of dual citizenship. Banks have been under increasing pressure from regulators to know who their customers are, but for clients who can hide their U.S. ties, such as by holding U.S. real estate through limited liability companies, the banks are sometimes in the dark. People founding LLCs will be required to reveal who the beneficial owner is under a law that took effect earlier this year, but banks will need time to implement the procedure.
Relationships between bankers and their clients make things more complicated. A bank manager may not want to ask too many questions when a customer has a sizable account. Credit Suisse opened accounts for South American clients who claimed dual citizenship, some of which held tens of millions of dollars. However, bank documents failed to indicate that they were also U.S. citizens.
Another method for storing money offshore is through foreign trusts. These are complex structures that come in a variety of shapes and sizes, but they all allow U.S. citizens to make it appear as if their money is controlled by a foreign entity. Trusts are most effective in countries that do not yet have information-sharing agreements with the United States.
An example is Robert Brockman, a Texas software billionaire who, according to US officials, used offshore trusts and entities in Bermuda and Nevis to hide $2 billion in income from 2000 to 2018. It’s the largest tax evasion case in American history.
The use of so-called nominees, family members, or other third parties who are citizens of another country and hold the accounts in their names is one last tax escape strategy.
The use of nominees was highlighted by several taxpayers who took advantage of the IRS’s voluntary disclosure program. But, according to Scott Michel, a tax attorney at Caplin and Drysdale, unless taxpayers admit to the scheme, it can be difficult for the IRS or banks to uncover — especially if no funds are transferred to the United States.
Banks have been tasked with detecting any evidence that accounts are managed by US taxpayers as part of the US clampdown on offshore tax evasion. However, if recent incidents are any guide, some people are still missing — or choosing not to see — the warning signs.