HSBC Foreign Account Holder Data Stolen by Whistleblower

HSBC just announced that data from as many as 24,000 clients was stolen by a former employee who, according to the Wall Street Journal, defended his actions saying that he “felt a civic duty to highlight the bank’s role in alleged tax evasion through offshore accounts.” It is quite possible the this information has or will be obtained and used by the IRS to investigate U.S. taxpayers whose failure to report the existence of these foreign accounts on form TD F 90-2.1 (a/k/a the “FBAR”) can be charged as a crime. However, in many cases, the chances of criminal prosecution can be virtually eliminated by participating in the IRS Voluntary Disclosure Program, BEFORE the IRS receives information about them from a third party and BEFORE the IRS initiates an investigation or routine audit. Failure to do so can result in huge fines up to the entire maximum balance that was in the account and prison sentences of up to 10 years…

Here are answers to some of the frequently asked questions I get from CPAs and my clients who were unaware or thought they were exempt from the obligation to report foreign bank accounts:

Not Just for U.S. Citizens. All lawful permanent residents (i.e. “green card” holders), those with a “substantial presence” in the U.S and even some persons “in and doing business in the U.S.” must also report all “offshore” bank accounts that combined together contain $10,000 or more in deposits. Having dual citizenship makes no difference.

Source of Funds is Irrelevant: Reporting is mandatory regardless of the source of the funds, including monies obtained by gift, inheritance or distributions of previously taxed income, and regardless of whether the taxpayer ever withdrew anything from the account or whether someone else opened the account for them.

Located in a Foreign Country: “Offshore” simply means outside the U.S.A., not necessarily some exotic tax haven jurisdiction, and including the foreign branch of a U.S. bank.

Includes Certain Accounts Not Held in the Taxpayer’s Name: Reporting obligations also apply to taxpayers who have signature authority or hold an indirect “beneficial” interest in an account, not just where ownership is held directly in the taxpayer’s name. For example, taxpayers who have established or are beneficiaries of offshore asset protection trusts are typically still required to report the bank accounts held by the trust, regardless of whether they have received any distributions. Accounts held by foreign companies controlled by the taxpayer usually must be reported as well.

The IRS is determined to collect as much tax, penalties and interest as possible, and investigate and prosecute delinquent taxpayers to encourage further compliance from others. Foreign governments have turned over information to the IRS (e.g. UBS), and this HSBC incident is just the latest example of a whistleblower case where bank employees in other countries have disclosed information despite rapidly disappearing bank secrecy laws. Moreover, the U.S. has greatly expanded it’s network of information exchange agreements with tax authorities worldwide making it much easier for the IRS to discover the existence of offshore funds.

Those with unreported foreign HSBC bank accounts should see their tax attorney immediately regarding whether submitting a Voluntary Disclosure would be appropriate. CPAs will normally refer their clients to a tax attorney prior to discussing any Voluntary Disclosure, so the attorney can arrange to protect subsequent communications with the CPA with the attorney-client privilege.

Going forward, please note the deadline to report offshore accounts held in 2009 is June 30, 2010 (regardless of whether the income tax return is on extension) and should be calendared by certain foreigners and anyone who is not allowed to check “No” on their 1040 next to the question: “At any time during 2009, did you have an interest in or a signature or other authority over a financial account in a foreign country…?”