Credit Suisse hearings focus attention on foreign bank accounts

The chief executive of Credit Suisse recently appeared in front of a Senate subcommittee to answer questions related to the bank's role in aiding tax evasion. A similar hearing in 2008 resulted in a $780 million fine for Swiss bank UBS after the bank admitted helping U.S. taxpayers shield assets to avoid taxes. In conjunction with the record fine, UBS was required to turn over names linked to 4,700 of their accounts.

Credit Suisse could be facing a similar fate. The current Senate investigation found that Credit Suisse bankers used various methods to help wealthy clients avoid taxes. Among the cited tactics used by the bank were shell companies and a Zurich airport branch that allowed customers to fly in specifically to conduct their banking. In 2006, when the inquiry into their practices began, Credit Suisse held as many as 22,000 accounts for U.S. customers. These customers could face international tax issues including fines, tax penalties and possibly criminal sanctions.

What does this mean for those with foreign bank accounts?

A broad law called the Foreign Account Tax Compliance Act will take effect on July 1, 2014. The law will require Foreign Financial Institutions (FFIs) to provide the Internal Revenue Service with information on accounts held by U.S. persons.

If the IRS discovers a U.S. person has not filed the required disclosures, several penalties are possible. For example, criminal sanctions are appropriate in cases where a taxpayer willfully fails to disclose information. In addition, fines of $10,000 per violation along with penalties of up to 50 percent of the value of the account or $100,000 are possible.

There are two main disclosure forms to report foreign bank accounts: the Foreign Bank and Financial Accounts (FBAR or FinCEN Form 114) filed with the Financial Crimes Enforcement Network and Form 8938 filed with the IRS. American citizens, residents and entities with a financial interest in a foreign account which, at any time during the year, exceeds $10,000 need to report the account on an FBAR. A U.S. taxpayer with foreign account assets of more than $50,000 will also need to file Form 8938.

To make matters more complicated, several groups are exempt from the reporting requirements. The following are just a few:

  • The owner, participant or beneficiary of an IRA or retirement plan
  • An individual who has no financial interest in a foreign account by who has signature authority over it
  • Foreign accounts held at a U.S. military banking facility

Foreign bank account reporting is required even if the account produces no taxable income when the asset thresholds are met. The FBAR filing deadline is June 30, but Form 8938 follows the well-known tax deadline of April 15.

Offshore voluntary disclosure program

In 2012, the IRS opened a third round of its voluntary disclosure program. This "safe harbor" provision dictates that a taxpayer can avoid civil fines and criminal penalties if he or she discloses a foreign account. There are limitations, however, and if the IRS has already started an investigation, the program is no longer available to the accountholder.

Failing to comply with the reporting requirements for foreign bank accounts is an incredibly risky proposition, and it is important to exactingly follow those requirements. If you have not kept up with reporting requirements, contact an experienced tax attorney who can guide you through your options.