Understanding the Panama Papers

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Over the past few years, the IRS has increased its attention on offshore bank accounts, earmarking much of its limited budget, staff, and resources towards initiatives such as the Offshore Voluntary Disclosure Program (OVDP) and Swiss Bank Program, and pushing strict compliance of foreign bank and financial account reporting through enforcement measures such as the Foreign Account Tax Compliance Act (FATCA). It appears that the IRS was definitely on to something, as the debut of the Panama Papers makes clear.

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The Panama Papers consist of millions of documents that detail countless different strategies that allowed very affluent individuals around the world to take advantage of offshore tax havens. The documents leaked from the world’s fourth largest offshore law firm, Mossack Fonseca, and implicate national leaders, politicians, their family members, friends and associates. The firm, based in Panama, has a worldwide presence. As the documents reflect, major leaders, such as Russia’s President Vladimir Putin, Pakistan’s Prime Minister Nawaz Sharif, and British Prime Minister David Cameron (among many others) have been connected to the secretive offshore tax regimes that the firm helped to establish.

Making use of countries considered “tax havens”, such as the British Virgin Islands and the Bahamas, Mossack Fonseca orchestrated the creation of thousands of companies, of which the firm acted as the registered agent. These companies allowed clients to legally and anonymously open bank accounts or place property in offshore accounts. Mossack Fonseca would administer these companies for a yearly fee, and run daily operations through intermediaries.

It is important to note that the use or creation of an offshore account does not automatically mean that something criminal has occurred. On their own, offshore accounts are legal. It is how they are used that may get an account owner into trouble. For some individuals, offshore accounts are useful tools when considering inheritance and estate planning needs. It is when accounts are used for money laundering and tax evasion that the criminality function of offshore accounts becomes a factor.

As a general rule, the best way to prevent any criminal implication from arising in connection to offshore assets is to meet the filing requirements issued by the IRS. These requirements essentially instruct all US persons to report their worldwide income. Taxpayers with foreign financial accounts that exceed $10,000 at any time during the tax year will need to file a Form 114, Report of Foreign Bank and Financial Accounts. Taxpayers may also be required to file a Form 8938, Statement of Specified Foreign Financial Assets¸ as well. Filing requirements are specific to the taxpayer; holding a foreign account obviously triggers a need to file certain forms, however, ownership in foreign trusts, corporations and partnerships may require their own separate forms. Neither form is considered a substitute for the taxpayer’s ordinary duty to file income tax returns; however, it is extremely important that individuals who may own, or have an interest in, foreign accounts are cognizant of their duty to file the appropriate form, and meet the reporting deadlines.

Undoubtedly, more information about the Panama Papers will continue to unfold over the next few weeks. If you have concerns about your foreign bank accounts, and want to ensure that you are meeting IRS reporting requirements, contact Frost & Associates today.


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