Senate Committee on Finance Investigation Finds Offshore Account Reporting Loophole – Wealth Management

The death of billionaire Robert Brockman has once again brought so-called offshore tax loopholes to the spotlight. Brockman died earlier this month while preparing to stand trial in whats the largest tax-evasion case against an individual in history. In 2020, the Internal Revenue Service charged Brockman with hiding more than $2 billion in income in a complex, decades-long scheme using overseas accounts, foreign trusts and shell companies.

A new report released by the Senate Finance Committee, led by Ron Wyden (D-Ore), highlights one particular offshore loophole being used by wealthy Americans to hide billions in income. The committee zeroed in on the loophole, the shell bank loophole, following its investigation of Brockman.

Shell Bank Loophole Exposed

The 2010 Foreign Account Tax Compliance Act (FATCA) was designed to crack down on offshore tax evasion, requiring foreign financial institutions to determine if certain accounts are held by U.S. citizens (and report it back to U.S. authorities). The report finds, however, that wealthy individuals, with their savvy tax planners and advisors, can circumvent the requirements using a scheme thats hindering the laws effectiveness. The scheme, as revealed by the Brockman investigation, involves dressing up shell companies as financial institutions.Banks are free of the legal responsibility of determining if certain accounts are held by U.S. citizens if the accounts are held by entities that are themselves financial institutions.

The report also found that obtaining global intermediary identification numbers(GIIN), the numbers assigned by the FATCA registration system to foreign financial institutions, is shockingly easy, with online or paper forms almost always approved without any meaningful due diligenceessentially allowing individuals to self-certify these types of accounts as legal entities and creating ample opportunities for wealthy taxpayers to withhold the reporting of vast amounts of income being held by the accounts.

In the case of Brockman, the banks stated that so long as they can identify the entitys GIIN number on an IRS published list of registered foreign financial institutions, under FATCA they are not required to affirmatively investigate whether accounts are owned or controlled by any U.S. persons or report those accounts to the IRS. This loophole allowed Brockman to funnel large sums of money to banks in Switzerland via wire transfers from the United States without triggering the reporting requirement. The report further highlights the difficulty of detecting the hidden beneficial ownership in offshore bank accounts belonging to wealthy U.S. taxpayers if its layered using shell companies with valid GIIN numbers.

The Tactic Runs Deep

The committee report further found that there are 84,000 entities with GIIN in the Cayman Islands alone, and likely thousands and thousands more of these shell companies disguised as financial institutions overseas that are potentially evading IRS scrutiny and taxation. In addition to tax evasion, theres also a threat of money laundering.

Offshore tax evasion poses a unique challenge because the IRSauthority to compel action by financial institutions or take enforcement action is largely limited by the territorial extent of U.S. tax laws, the report states. The report further calls for Congress and agencies to take additional steps to increase IRS resources to close these loopholes. The recently passed Inflation Reduction Act outlines $80 billion in IRS funding for the understaffed agency, which will hopefully help with this task.

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Senate Committee on Finance Investigation Finds Offshore Account Reporting Loophole - Wealth Management