Senate Finance Committee report recommends enhancing IRS whistleblower program to eliminate offshore shell company loopholes

A year long investigation by the Senate Finance Committe resulted in a scathing report. It just released the findings of a year-long investigation into the largest allegedindividual tax evasion scheme involving a “shell bank” loophole in the Foreign Account Tax Compliance Act (FATCA), a loophole that allows banks offshore to accept funds from U.S. persons without reporting them to the IRS.  As a result, the Committe is recommending that Congress immediately strengthen the IRS whistleblower program to close the loophole and give the agency more resources to investigate tax evasion schemes.

“The Finance Committee has uncovered a glaring loophole in one of our most important tools in the fight against offshore tax evasion,” said Senator Wyden. “With little effort, wealthy tax cheats like Robert Brockman are able to convert shell companies into shell banks, and self-certify they are reporting income held in offshore accounts to the IRS. Foreign banks in Switzerland and the Cayman Islands are then exempt from complying with basic FATCA requirements to identify and report U.S. accounts. There are hundreds of thousands of shell companies in offshore tax havens that have been turned into IRS approved banks with virtually no scrutiny by the IRS. It doesn’t take a rocket scientist to see how this loophole leads to billions in tax evasion, particularly after Republicans’ decade long campaign to gut the IRS. Funding for IRS enforcement in the Inflation Reduction Act should focus on increasing scrutiny of partnerships like the ones Brockman used to evade taxes on $2 billion in income. As Finance Chair I’m also working on legislation to close this loophole.” 

Key findings

  • The committee’s investigation uncovered a major loophole in FATCA that allows foreign banks to accept billions from U.S. clients without reporting those accounts to the IRS. Under the current system, a wealthy taxpayer is able to create an offshore shell company, and register the shell company with the IRS as a financial institution. By registering with the IRS as a financial institution, the shell company operates as a “shell bank” and self-certifies reporting of offshore accounts to the IRS for FATCA purposes. This “shell bank” loophole significantly increases the risk that wealthy taxpayers underreport or fail to report large sums of income held offshore.
  • There are hundreds of thousands of possible shell banks in offshore tax haven jurisdictions. In the eight countries where entities linked to Brockman were established, there are more than 128,000 entities registered with the IRS as financial institutions under FATCA. In the Cayman Islands alone, there are more than 84,000 IRS approved financial institutions, more than that nation’s entire population. Due to persistent budget cuts and decade-long campaign to gut the agency, the IRS does not have the personnel or capabilities to adequately monitor whether these offshore entities are properly reporting accounts belonging to U.S. persons. The $80 billion in funding for the IRS in the Inflation Reduction Act should be used to address this problem.
  • The failure to audit large partnerships allows for proceeds from U.S. investment activity to be illicitly sent offshore. A core component of the alleged scheme carried out by Brockman and Smith was the use of foreign partnerships managed by Vista Equity Partners, a major U.S. private equity firm. The two American billionaires used these partnerships to generate billions in investment income in the United States and wire it offshore without IRS detection for more than a decade. The $80 billion in funding for the IRS in the Inflation Reduction Act should be used to address this problem.  
The “Shell Bank” loopholeHow to turn your shell company into an IRS approved shell bank
The key steps:1. Establish a shell company in a FATCA partner jurisdiction, even those in well-known tax haven jurisdictions like Bermuda or the British Virgin Islands.2. Submit IRS form 8957 to register the shell company as a foreign financial institution and obtain a Global Intermediary Identification Number (GIIN).3. Open an account at a bank in Switzerland, or other FATCA partner jurisdiction, in the name of the shell company now registered as a financial institution. Use an attorney or other intermediary as the signatory of the account.4. Invest in private equity firms or other investment vehicles and direct the fund manager to wire proceeds from investment activities in the United States to the shell company’s account in Switzerland or elsewhere.The results:
The Swiss bank is no longer required to report that the account is held by U.S. persons because the account is held in the name of an entity with a valid GIIN number. The Swiss bank is also no longer required to conduct due diligence to determine whether the account has a U.S. nexus.The shell company is now operating as a “shell bank” and can self-certify reporting offshore accounts to IRS for FATCA purposes.In the absence of an audit or other federal investigation, is it highly unlikely the IRS will detect whether these accounts are concealing or underreporting assets held by U.S. persons.
JEFFREY NEWMAN IS A WHISTLEBLOWER LAWYER WITH THE FIRM NEWMAN & SHAPIRO AND CAN BE REACHED AT JNEWMAN@NEWMANSHAPIRO.COM OR AT 978-880-4758