A new batch of stolen data from an offshore services provider has now been released. Dubbed the “Paradise Papers,” the leak consists of more than 13.4 million documents from Appleby’s, an international law firm based in Bermuda.
In many respects, this hacker attack was similar to the huge theft of 11.5 million client documents from the Panamanian law firm of Mossack Fonseca in 2016 (dubbed the “Panama Papers”). In both cases, thieves passed stolen data on to German newspaper Suddeutsche Zeitung. In turn, the newspaper turned to the International Consortium of Investigative Journalists (ICIJ) to help it analyze the data.
Both leaks also revealed that senior politicians in many countries use offshore companies to shield their assets. That’s rather embarrassing, especially if those same politicians have railed against all things offshore. They also revealed that many of the world’s largest corporations use offshore entities to engage in sophisticated international tax planning.
For instance, the 2016 leak revealed that British Prime Minister David Cameron received tax-free income from an offshore investment set up by his father. That was after Cameron led a 2013 effort for greater “transparency” in low-tax jurisdictions. But there’s no evidence that Cameron did anything illegal.
The latest leak – the so-called Paradise Papers – paints a similar picture. For instance, it reveals that US Commerce Secretary Wilbur Ross owns a stake in an energy company co-owned by the son-in-law of Russian President Vladimir Putin. He has continued to hold this investment even after the US and other countries imposed economic sanctions against Russia for meddling in Ukraine.
There’s no evidence that Ross or the vast majority of public figures exposed in the Paradise Papers did anything illegal. And in Ross’s case, his interest in Russian investments has an obvious and completely legitimate (albeit unseemly) source.
Ross is a billionaire hedge fund investor who is best known for buying distressed assets at huge discounts. Not that long ago, Russia had some of the world’s most distressed assets. In 1998, what became known as the “Russian Flu” led to the country to devalue the ruble and default on its debt. Call it vulture capitalism if you like, but it’s hardly surprising that Ross was eager to pick up assets for pennies on the dollar. But there was nothing illegal about it then – or now.
But there is one very important difference between the two leaks. The stolen documents in the Panama Papers showed that about 3,500 shareholders of offshore companies had a US connection. But the most recent leak is much more US-centric. Data for about 31,000 US individuals and companies were exposed.
Frankly, this data is a potential goldmine for the IRS. I suspect the agency is already sifting through it looking for clues of offshore dealings by US taxpayers. My guess is that they’re focusing on unreported offshore accounts, legal entities, or trusts created before FATCA (Foreign Account Tax Compliance Act) came into effect in 2010. Since the enactment of FATCA, the IRS has concluded more than 100 information-sharing agreements with other countries. Any US taxpayer who has reported and paid tax on their offshore investments since 2010, but who was non-compliant in years before that, could get caught in the crackdown.
If you’re one of those individuals, you might think you’re home-free since it’s been more than seven years since FATCA came into effect. And the statute of limitations for the most common reporting violation – failure to file the dreaded “foreign bank account report” form, or FBAR (Form 114, formerly Form TD F 90-22.1) – is only six years. The 2009 FBAR was due on June 30, 2010, meaning the statute of limitations for a civil penalty for failing to fill this form for that year ended June 30, 2016. Most other offshore-related penalties, including criminal penalties, also have a six-year statute of limitations.
But don’t feel too comfortable, because the IRS has other tools at its disposal. For instance, there’s no statute of limitations on civil tax fraud or on failing to file a reporting form if you owned what the Tax Code calls a “controlled foreign corporation.” What’s more, the IRS has successfully argued in court that the statute of limitations never ends if you’re concealing information.
If you’re feeling a little nervous now, that’s completely understandable. Here’s why.
You can be fined up to $10,000 per unreported account for each year you neglect to file the FBAR. If you willfully fail to file, you face a fine of up to $100,000 or 50% of the closing aggregate balance of all of your accounts – whichever is greater – and up to five years in prison.
It’s much easier for the government to prove “willfulness” than you might think. Simply signing a tax return but failing to truthfully answer questions in that return about foreign accounts can be considered willful.
If you’re in this situation, I recommend that you contact a tax attorney – not an accountant – for guidance. The attorney can discuss your options with you and guide you into one of several different IRS initiatives designed to help taxpayers avoid these penalties. Your attorney can then retain an accountant to prepare the necessary returns.