The Panama Papers: Not Just an Issue for “the 1 Percent”

Publication Name:

Bethesda Beat

Media Type: Publication

In April 2016, what is now known as the “Panama Papers” – an unprecedented leak of 11.5 million confidential documents of Mossack Fonseca, one of the world’s largest offshore law firms based in Panama – shed light on the covert world of offshore financial holdings. The Panama Papers leak links such offshore holdings to current and former world leaders, including close associates of Russian President Vladimir Putin, international sports stars, such as soccer legend Lionel Messi, celebrities, such as movie star Jackie Chan, as well as politicians, drug lords, billionaires and Ponzi schemers.

How Do the Panama Papers Affect the Rest of Us?

Though people have reacted to the Panama Papers leak with a mix of anger, disgust or even slight amusement, average citizens should also be wary of their own financial holdings and whether they could find themselves in trouble with U.S. tax authorities.

U.S. citizens, green card holders or residents are required annually to disclose to the IRS, on a Foreign Bank Account Report (FBAR) and/or other forms included in an income tax return, any financial interest in or signatory authority for foreign accounts to the extent their values exceed certain threshold amounts. The interest could be direct or indirect (e.g., your name is added to a relative’s bank account in Europe). The signing authority could be as simple as a Power of Attorney. While bank accounts receive most of the publicity, other assets (e.g., stock or other interests in a foreign company, foreign contracts or foreign life insurance policies) are also subject to disclosure. If certain value thresholds are met, all such interests must be reported, regardless of whether the value was earned overseas or inherited.

Though having such foreign financial interests is legal, failure to report them is not. Such failure could result in hefty civil penalties ranging from $10,000 per account per year to 50% of the balance in the account to criminal prosecution and jail time. Fortunately, if you find that you do have an unreported foreign financial interest, the IRS currently offers a few options for individuals to become compliant – usually with significantly reduced penalties. Program selection – the Traditional Offshore Voluntary Disclosure Program (OVDP) or the Streamlined OVDP – generally depends on the level of “willfulness” of the individual’s failure to disclose and/or whether the foreign financial institution holding the non-disclosed assets is on the IRS’s “bad list.”

Though the IRS encourages individuals to utilize one of its programs to become compliant, these programs could be modified or terminated at any time. If taxpayers miss their opportunity to become compliant under these reduced penalties, they could again be subject to the harsher, standard penalties.

Let the Panama Papers serve as more than a cocktail party discussion.  Instead, use this opportunity to ensure compliance for your own reporting of foreign financial accounts, assets or other holdings.  If you have any questions, please contact a member of Stein Sperling’s tax department at 301-340-2020.

Kendra Merchant is a tax lawyer with Stein Sperling Bennett De Jong Driscoll PC. Kendra's practice focuses on assisting clients with international tax and foreign asset reporting matters as well as business taxation and planning for C and S corporations, partnerships and LLCs, including mergers, acquisitions and other transactions.

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