Automatic information exchange will doom the secrecy strategy
U.S. residents with secret bank accounts outside of the United States rely on some weak strategies to keep themselves out of trouble. “How will the IRS ever find out?” is what I hear again and again.
The truth will come out. Maybe not now. But eventually.
Here’s a bullet, headed straight at you. It may not arrive for a few years. But it will arrive.
Automatic information exchanges between governments is coming. In the Cayman Islands, it is mentioned as a possibility in a recent article in The Economist:
Anthony Travers, a former managing partner of Maples and Calder who
chairs the Cayman Islands Financial Services Association, argues that
this bill would damage the American economy, by tempting hedge funds to
move their managers from Connecticut to the Caymans, for example.
Better, he says, would be a “proactive” treaty, with the American
authorities automatically notified of their taxpayers’ offshore
accounts.
Emphasis added.
Automatic data dumps from foreign governments don’t mean that the IRS will find you. But it give them one more way to find out about you.
Secrecy as a tax strategy works well until it fails. And then it doesn’t work at all.
We agree. It is simply a matter of time until technology aids in what is already transparent. Individual Americans do not typically establish bank accounts in the Cayman Islands. Because the Cayman Islands have full tax transparency treaties with the IRS and the European Union jurisdictions and the Cayman Islands cannot therefore be used to evade tax, there is no benefit for individual Americans to have a Cayman Islands account.
Further, The Cayman Islands have far more strict anti-money laundering legislation than exists in the United States. It is so strict, in fact, that it overrides the attorney-client privilege of confidentiality. The Department of Justice has had full treaty power for nearly 20 years to access any information in the Cayman Islands.
PHIL,
I am an American tax lawyer who practices in Germany.
The subject of automatic information exchanges (AIE) between the US and foreign governments has fascinated me for some time.
I have been unable to find anything from public sources concerning how frequently the IRS receives what tax-related information from what foreign countries and in what form. A couple years ago I stumbled across an article or transcript of a hearing in Washington in which someone from Treasury was being grilled by some legislative committee person on the subject of what use, if any, the IRS/Treasury made of the – unspecified – data it was regularly receiving from- unspecified – countries. The embarassing answer then was: none. This, of course, had the committee person in high dudgeon but whatever became of the issue – or the data – I have no idea.
Similarly, I have been given to believe that the IRS automatically sends US source income information (predominantly 1042-S info) to countries with which it has a tax treaty. (The IRS had first announced it was going to voluntarily distribute this info even to all countires but the Florida banking industry mobilized in protest and pointed out – probably correctly – that the Florida banking industry and much of the FL economy was dependent on flight capital from Latin America.)
Over the years I have heard rumors of German citizens getting audited by their local German tax authorities – sometimes years after the fact – concerning unreported US source investment income about which they learned through such automatic information exchanges. Apparently, the data comes on a CD Rom or similar such data carrier but because the identity of the recipient is only in the form of name and address. it can sometimes take years before a single data batch filters down to the loca yokel German tax office responsible for that particular taxpayer.
As you may know last year Germany began issuing all its residents (German and non-German alike) with a unique, 11-digit lifetime taxpayer identification number (tellingly referred to in Germany by the US English initials: “TIN”). Prior to this time, German tax residents got a new tax number every time they moved out of or into a new tax office jurisdiction.
Germany still has no information reporting (e.g. W-2, 1099, etc.) system keyed to the new TIN – but that is clearly on the way.
The new W-8BEN now ask NRAs for “voluntary” disclosure of their home country TIN. My guess is that the US and those of its treaty partners with centrally issued and unique TIN systems – and tax information reporting systems keyed to TIN – will begin to negotiate publicly concerning automatic info swaps – and may even make disclosure and confirmation of a foreign TIN a precondition for claiming treaty benefits on withholding forms. Certification of residence (Form 6166) or the foreign equivalent could also be exchanged electronically to confirm eligibility for treaty benefits in the respective countries.
In any event, if you know anything about the content, timing, etc of current automatic information exchanges between the US and any foreign countries I would be delighted to learn as many details as possible. The near total blackout of information on this subject from official/public sources (US, German or elsewhere) has picqued my curiosity.
It is one thing to tell your clients that secrecy won’t work and then be unable to tell them any details to explain why it won’t.
John Nolan
Frankfurt am Main
011 49 69 97204194
PS
I share your views on the dangers to the US economy represented by what appears to be an expansion of the class of persons subject to FBAR filing to include NRAs. In small ways and large the US is isolating itself from the world financially and it simply cannot afford to do so.
JN
@John – I agree on your comment about the automatic information exchange stuff — there is a stunning lack of information. Geez. You’d think this is almost by design or something.
The most recent information I have seen is at http://taxjustice.blogspot.com/2009/05/netherlands-wants-more-automatic.html which cites Mr. Travers (who commented on this post) and a similar type of pronouncement out of the Netherlands.
The Tax Justice Network blog is a useful place for information, in my experience, even though I disagree with many of the assumptions they work from, and the conclusions they reach.
@Anthony – thanks for the comment. In 27 years of international tax practice I have NEVER had an individual client with an account in the Caymans (or elsewhere, for that matter), unless they were actually resident there. Which of course is a completely different situation.
My experience with the Caymans is that the practices are indistinguishable from what I would expect from doing business in New York, London, or Geneva in terms of know your customer inquiries and general rigor in the documentation.