Here's an irony: Even as the U.S. government is cracking down on illegal foreign accounts, other new laws and proposals could present big incentives for the wealthy to move more money offshore.
New rules affecting 2011 tax returns require taxpayers with assets held offshore to make extensive disclosures to the Internal Revenue Service or risk harsh penalties. The goal: to ferret out secret accounts used to skirt U.S. taxes.
This is only the latest turn in the U.S. government's three-year crackdown on illegal offshore accounts, which already has resulted in 36 convictions since 2009, with four cases awaiting trial and many more expected to come.
Yet despite Uncle Sam's aggressive campaign, some advisers are seeing new tax advantages -- fully legal -- in investments based offshore. That edge could grow if Congress cuts tax deductions for upper-income earners and the 3.8% tax on investment income takes effect in 2013 as scheduled.
So if a taxable investor faces a choice between an offshore investment fund and an onshore version, "we find that many are better served by the offshore version," says Robert Gordon, the chief executive of Twenty-First Securities in New York, an adviser to the wealthy.
The upshot: Both current and future owners of foreign-based assets have much to consider in the new tax year.
What's OK and what's not
Many types of international investments aren't under scrutiny, including foreign assets held in U.S.-based banks and brokerage firms. The IRS already knows about income generated by these accounts.
What's more, there are legitimate reasons for holding offshore assets ranging from vacation homes and business interests to accounts held jointly with family living abroad. But income from foreign-based accounts, and the accounts themselves, must often be disclosed under the U.S. tax code.
The problem is that some people have long taken advantage of lax U.S. enforcement and foreign tax haven secrecy, stashing assets abroad to evade taxes.
In 2009, a scandal at the giant Swiss bank UBS offered a glimpse into the extent of the problem. UBS admitted to helping people evade U.S. taxes, paid $780 million and disclosed the names of more than 4,500 U.S. taxpayers with secret accounts at the bank. A UBS spokesman said the cross-border matter was fully resolved as of the end of 2010, and UBS commitments to U.S. agencies were fulfilled.
The repercussions from the UBS case continue today. Swiss and U.S. officials are negotiating a sweeping agreement to name U.S. account holders from at least 11 more Swiss banks -- including Credit Suisse Group, says Bryan Skarlatos, an attorney with Kostelanetz & Fink in New York who has handled nearly 1,000 confessions of U.S. taxpayers with secret foreign accounts. A spokesman for Credit Suisse declined to comment.
Skarlatos says he also has seen evidence of U.S. investigations into banks in Israel, and he believes investigations are ongoing into Hong Kong and Singapore banks.
The message for U.S. investors: Anyone with an undeclared foreign account should be on high alert.
The IRS has held two limited amnesties for offshore account holders in recent years, and more than 30,000 U.S. taxpayers have stepped forward to pay back taxes and stiff penalties in hopes of avoiding criminal prosecution. Now the IRS is mining data from those confessions and from foreign banks to find others who haven't come clean.
"Agents are conducting what seem to be routine audits and asking about foreign accounts only at the end, before telling taxpayers they have foreign bank records in hand," says David Gannaway, a principal at Citrin Cooperman CPAs in New York.
Some say the IRS has been too heavy-handed.
"In its limited amnesties, the IRS hasn't distinguished between an 84-year-old grandmother who is a Holocaust survivor or a U.S. taxpayer of Indian descent whose father put an account in his name without telling him -- which is common -- and the crooked businessman who skims cash in the U.S. and hides it abroad," says Kevin Packman, an attorney at Holland & Knight who has had handled more than 200 confessions.
In Canada, many generally law-abiding citizens with dual U.S. citizenship are in technical violation of the rules, from small farmers to David Alward, the premier of the province of New Brunswick, who was born in Beverly, Mass.
"I'm not different from thousands of dual citizens in New Brunswick, which has strong ties to the U.S.," he says. "The threat of losing significant assets has been a real concern." To avoid criminal prosecution, some confessors have had to agree to a 25% penalty on the highest value of a wide range of foreign assets since 2003, not just bank accounts -- even if those values have since fallen.
On Dec. 7, the IRS posted comments reminding dual citizens that penalties won't be imposed in all cases. Alward said he is "encouraged by the IRS' latest stance," but "remains concerned."
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