The world's press is flooded with reports that stolen records from LGT Group, the Liechtenstein bank, have been purchased for as much as $7.4 million by the tax authorities of several nations, including the United States, Germany and the United Kingdom. The records reportedly contain data on 1,400 LGT foreign clients, including foundations with more than 4,500 beneficiaries. Despite outrage over the propriety of tax authorities' paying for stolen information, law enforcement is expected to use this information to pursue the holders of alleged secret accounts containing untaxed assets. In the United States, Sen. Carl Levin has called for an investigation into whether US citizens are hiding assets in Liechtenstein.
The investigation of US taxpayers with offshore accounts is nothing new. Recently, the IRS conducted an expansive investigation into US taxpayers' use of debit and credit cards issued by financial institutions located in bank secrecy jurisdictions.1 The US Congress is considering legislation to combat perceived abuses by US taxpayers who use offshore structures to avoid or evade US taxes.2 Civil investigations and criminal prosecutions for the improper use of offshore structures are increasing.
US tax authorities have a variety of means for obtaining information regarding US taxpayers' financial transactions with foreign financial institutions. In the LGT case, US authorities have reportedly obtained a DVD containing information stolen from LGT by a former employee of the bank. More traditional means for securing foreign financial information include subpoenas to the US branch of a foreign financial institution, exchange of information under treaties or tax information exchange agreements and the use of informal information exchange protocols between the United States and foreign jurisdictions. US courts may even order persons within their jurisdiction to authorize the IRS to secure the information from the foreign financial institution, despite local bank secrecy rules.
US citizens and green card holders who conduct their financial affairs through the use of non-US financial institutions face a multitude of complex US tax reporting requirements, many of which are not familiar to non-specialist US tax advisors. Annual reports regarding foreign financial accounts, controlled foreign corporations and foreign trusts are frequently overlooked. Failure to file these reports can lead to the imposition of additional tax, interest and penalties, which when combined may exceed the income earned on the foreign assets and, in some instances, may exceed the total value of the assets maintained in these foreign structures. Criminal prosecutions may be instituted for failure to file these reports or to report the income earned on the foreign assets.
Taxpayers faced with these serious sanctions must be in a position to show that their omissions were due to reasonable cause, thereby mitigating the penalties. Taxpayers facing the possibility of criminal prosecution must consider the IRS Voluntary Disclosure practice as a vehicle for avoiding criminal sanctions.