IRS & Panama Papers: US Taxpayers and Criminal Issues

Part 1 – US Taxpayers

The Panama Papers highlight important IRS issues for US Taxpayers with international (i.e. offshore holdings). Tax issues include:

1) US taxpayers must annually report all of their income both in the US and worldwide.

2) In a divorce action, both spouses must disclose under penalty of perjury, all of their worldwide assets which are owned by them or in which they have a beneficial ownership interest. Assets must be disclosed whether held in their individual names, through trusts, foundations, corporations or through a “straw person” (i.e. a 3rd party nominee who is the “title holder” but not the actual owner in interest).

3) In a divorce, disclosing US financial accounts in a public forum (i.e. divorce court) may reveal transactions with offshore entities which assets may be subject to equitable distribution. In California, community property assets that are not distributed in a divorce remain community property and subject to division as community property under a “Henn action” (case Henn v. Henn);

4) In California, community property is subject to each spouse’s separate property creditors, which include taxing authorities. An unintended consequence of a divorce is that transactions with offshore entities may become public record (in the divorce proceeding) and are subject to investigation, audit and criminal tax prosecution by the taxing authorities.

In the case of the Panama Papers, US taxpayers who are listed (over 2000) now face IRS audits, and US Attorney criminal prosecution for multiple felonies: Tax Crimes (tax evasion, obstruction of tax collection, filing false tax returns, conspiracy with others to commit tax evasion).

In addition they face a trio of “sister felonies” each with a 20 year jail sentence: money laundering (investing the tax evasion proceeds into new assets which they own e.g. house, car, boat, plane, art, jewelry, stocks, bonds), wire fraud (using inter-state wires as part of a “scheme to defraud” which includes wire transfers, and phone calls/fax messages) and mail fraud (using the US mails as part of a scheme to defraud).

5) If a US taxpayer is in bankruptcy, federal US bankruptcy courts have jurisdiction over their worldwide assets. The US bankruptcy court may issue a turn-over order relating to off-shore assets and has the authority to hold a debtor in contempt, subject to jail if the debtor does not comply with the order.

The Bankruptcy Court order in the US is only effective to compel the debtor to individually respond. US Courts (whether federal bankruptcy court or state divorce courts) issue orders that are effective in the US but since these courts do not have jurisdiction outside of the US their orders have no effect on offshore assets and must either be enforced by a foreign government or under a new action filed in the non-US country.

Since wire transfers of assets ($) are instantaneous and legal proceedings may take years, the prospects of a successful offshore enforcement action is remote.

The more compelling resolution is if a US court jails the debtor (spouse with offshore assets) for contempt of court until they repatriate the offshore assets to the US.

Part 2 – Criminal Issues

The IRS may scrutinize the over 2000 US taxpayers named to date in the Panama Papers for numerous complex civil and criminal tax issues. They may open a civil tax audit, a criminal tax investigation (IRS/CID), or refer the matter to the US Dept. of Justice for criminal tax prosecutions for tax evasion, obstruction of tax collection and other tax crimes, and related 20 year felonies: money laundering, wire fraud and mail fraud.

1) Tax Evasion
US citizens and income tax residents are subject to US income tax on their worldwide income and must report all income earned on assets held in off-shore entities (offshore income does not defer or avoid US income tax for US individual taxpayers, unlike subsidiaries of multi-national corporations).

Please see my ebook International Tax Evasion and Money Laundering and related ABA article

2) Tax Disclosure (Fincen Form 114)

US taxpayers must report annually over offshore accounts over $10k (in which they either own or have control e.g. signature authority) by the filing of the FBAR form (Fincen form 114) due by 6/30 yearly.

These FBAR filings (Report of Foreign Bank Accounts) are due for individuals, trusts and estates, and LLCs/Corps owned by US individual taxpayers.

3) FATCA Compliance (IRS Form 8938)

Form 1040 US Taxpayer individual taxpayers must attach Form 8938 to their tax returns to disclose ownership in foreign financial assets over $50k. Foreign bank accounts over $50k require both an FBAR filing (Form 114) and a FATCA filing (Form 8938).

For more information on this subject, please see my ebook, Offshore Tax Evasion: IRS Tax Compliance FATCA/FBAR

4) US Shareholders/Foreign Corporations (Individual Tax Payers)

US taxpayers who as part of a shareholder group of 5 or fewer US shareholders, have tax reporting requirements for annual corporate net income as a Controlled Foreign Corp. (“CFC”/Form 5471) or Passive Foreign Investment Company (“PFIC”/Form 8621). The CFC/PFIC rules are intended as an anti-tax deferral regime which minimizes tax deferral of certain types of income earned from foreign sources.

For more information on this subject, please see my ebook, Offshore Tax Evasion: US Tax & Foreign Entities (co-author Allen Walburn).

5) US Corporations/Foreign Corporations (More than 5 Shareholders)

US Corporations with more than 5 US shareholders (i.e. 10% owners) can take advantage of annual tax deferral by forming subsidiaries in countries where they do business. Foreign subsidiaries of US corporations are not classified as US corporations for US income tax purposes and their shareholder owners are not subject to current US income taxation on annual net income.

US corporate income tax applies when the corporation’s offshore profits are repatriated to the US (e.g. issuance of dividend to US parent). The US parent company may be eligible for a tax credit for foreign taxes paid.

6) Tax Treaties

The US has numerous bilateral income tax treaties with many countries. Each treaty has its own terms and may offer tax-planning strategies which may include: US tax credits for foreign taxes paid, tax exemptions or reduced tax for certain types of income (e.g. dividends, interest) and to reconcile tax rate disparities between countries.


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