Panama Papers to lead to IRS and international crackdown on offshore assets?

Panama Papers 1 blueThe stars seem to be aligned for a massive shift in the way offshore assets are held and accounted for. The recent leak to the ICIJ media consortium of the Panama Papers, 2.6 Terabytes of information on the offshore holdings of many prominent and wealthy individuals, certainly marks an expansion in the ever growing program to bring transparency (and enforcement) to offshore holdings.

Demise of Offshore Disclosure

In the US, this may be a bellwether for the end of the IRS’s offshore amnesty programs, the OVDP and Streamlined Disclosure. In February of 2016, IRS Commissioner John Koskinen gave a speech in which he said that the streamlined version of the Offshore Voluntary Disclosure Program would come to an end whenever the IRS felt that taxpayers that may have an interest in a foreign bank account that has not yet been disclosed to the federal government have had a chance to take part in the program. (h/t Klasing Associates, “End May Be Near for the Streamlined OVDP“, Feb. 17, 2016)

The Panama Papers open wide what had been an enforcement effort focused largely on Swiss banks. Before the Bradley Birkenfeld revelations about UBS in 2009, offshore reporting received more of a don’t ask, don’t tell level of enforcement from the IRS. Once the UBS case was opened, the US Treasury’s arsenal for enforcing offshore compliance was greatly expanded through the Foreign Asset Tax Compliance Act of 2010 (FATCA, 26 USC 6038, et. seq.) , as well as the Department of Justice’s continued settlements with Swiss banks.

While the Guardian expose is designed to titillate with James Bond-esque stories of massive government wealth transfers, North Korea, and billionaires, one must keep in mind that the vast majority of offshore transactions are perfectly legal and done with no malicious intent whatsoever. This does little to help the fact that the coming months and years will be filled with new talk and new initiatives designed to crack down on illegal tax evasion regardless of the collateral damage.

Steps to take

So, what steps can one take in light of what is likely to be a massive shift in offshore transactions?

One, make sure reporting is correct and up to date. It would not be surprising if the IRS withdraws or changes the Streamlined and OVDP programs within the next 1-2 years. In other words, the current programs may be as good as it is going to get.

Two, those with offshore assets should make sure that they are working with competent counsel who can advise them on staying within the bounds of the law and take the precautions necessary to achieve clients’ lawful goals.

Three, foreign persons contemplating offshore assets might want to consider using the U.S. over less reliable offshore centers. While the U.S. requires accurate reporting, the depth and breadth of U.S. banking and legal markets make the jurisdiction one of the safest in the world. Other offshore centers may provide tax arbitrage, but the cost of disruption must be included when considering offshore transactions.

New and existing clients with offshore assets should contact us to discuss specific issues and this article may not be construed as legal advice.

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