Credit Suisse Freezes Accounts to Find Non-Reporting U.S. Taxpayers

Credit Suisse Freezes Accounts

If you are a U.S. taxpayer with accounts over seas, you may feel safe not reporting that income. You might assume there is no way the IRS will know. If so, recent activity by the Swiss bank Credit Suisse should give you food for thought.

The Foreign Account Tax Compliance Act makes it easier for the Treasury Department and the IRS to discover tax evasion. It requires U.S. taxpayers to report offshore assets to the IRS using Form 8938, the Statement of Specified Foreign Financial Assets, in addition to FBAR and other reporting requirements. It also requires foreign financial institutions disclose accounts held by U.S. taxpayers or entities with substantial U.S. ownership interest. That is where the Credit Suisse actions come in.

What Accounts are Affected?

Credit Suisse AG recently announced that it would be freezing accounts that may be connected to non-reporting U.S. taxpayers. An account could be flagged if it includes:

  • U.S. phone numbers
  • U.S. addresses
  • Power of attorney

Any accounts with "U.S. indicia" will be closed to transfers into and out of the accounts. However, trades made with assets held in the accounts will continue.

The announcement comes two years after Credit Suisse AG entered a guilty plea and paid $2.6 billion to the Department of Justice for helping U.S. taxpayers evade taxes on foreign income, as well as regulatory violations. In November 2016, Bloomberg reported that the bank had failed to inform the Department of Justice about Dan Horsky, a U.S. client with up to $200 million in Credit Suisse accounts.

Individual Penalties Under the FATCA

Horsky, a citizen of the U.S., the U.K. and Israel entered a guilty plea in early November for conspiring to defraud the IRS. He had investments in several start-up companies through Swiss bank accounts, including Credit Suisse. He filed false income tax returns from 2008 through 2014, omitting at least $73 million in income. By doing so he evaded paying more than $10 million in taxes. After cooperating with the IRS for over a year, Horsky faces up to five years in prison and has paid $100 million for failing to disclose his foreign income.

Banks Are Liable Too

According to the Department of Justice it was "readily apparent" that Horsky was a U.S. resident. Bank employees routinely sent him emails recognizing that he lived in the United States. A co-conspirator was given signature authority on his Credit Suisse accounts in 2012, but he continued to have direct contact with the bank after that time.

Because Credit Suisse did not report Dan Horsky's income to the IRS, the company is now facing renewed scrutiny by the Department of Justice. Horsky's case came to the attention of the IRS from a separate source, after the company had already entered its guilty plea. Now it could face additional civil or criminal consequences for failing to disclose his accounts.

Credit Suisse has already placed five employees on administrative leave, including two who were managers responsible for supervising the bank's Israel desk. These two were suspended directly for their handling of the Horsky account.

FATCA Relies on Bank Disclosures

The FATCA creates a rebuttable presumption that any account with U.S. indicia must be reported to the IRS, and is subject to tax withholding. But the person responsible for that rebuttal is often the banker with whom the U.S. Taxpayer is dealing. Some tax attorneys see this as incentive for banks to look the other way in order to hold on to their accounts. One anonymous lawyer connected with the case told Tax Notes:

FATCA only has teeth if the banks take the internal scrub of their accounts seriously. . . If they're burying their heads in the sand or looking the other way in order to hold on to the account and not designate it as U.S. related, then FATCA might as well not exist.

Credit Suisse appears not to have been taking its reporting requirements seriously, and that mistake could be costly. Even before Horsky entered his plea, the bank had increased its estimate of the aggregate cost of reasonable possible losses connected to its FATCA violations from 2.6 billion in Swiss Francs (around $2.57 billion) from its earlier estimate of 2.1 billion. With the additional scrutiny the bank is facing now, that cost could climb even higher.

Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions regarding the FATCA or FBAR reporting requirements contact Joe Viola to schedule a consultation.