Panama Papers

Panama Papers: Part 2. Law Review Article examines how US Trust Law enables people who had previously sought Panama Papers-like protection from offshore trusts.

As previously covered in this blog here and here, the Panama Papers is a collection of documents and emails from the Panamanian Law Firm, Mossak Fonseca, which specialized in creating offshore trusts and companies to help their clients in hiding money from government detection. 

Here’s a recap of the carnage of public officials caught in the wake of the Panama Papers (approximately 140 politicians, 29 billionaires and at least 33 blacklisted people to 214,000 offshore entities, according to Forbes):

Also interesting are these two articles about how the Panama Papers were leaked:

  • This Wired article discusses size of the data obtained from Mossak Fonseca (2.6 Terabytes)
  • This Forbes article discuss the leak and the data sharing between the journalists, often using open sourced encryption methods to secure the data while the journalists were preparing their articles. 

Since the Panama Papers leaked, Reid K. Weisbord, law professor at Rutgers, has published an article in the Columbia Law Review entitled, “A Catharsis for U.S. Trust Law: American Reflections on the Panama Papers.”  Professor Weisbord’s article summarizes the Panama Papers scandal and the public reaction to the uncovered offshore trust abuses.  He then outlines three trust practices that are permitted in the U.S. that offer similar protections that only offshore trusts were previously able to offer.  He concludes his paper with possible reforms to prevent on shore trust abuses.

In his paper, Professor Weisbord discusses the following trust tools which provide nearly the same protections once found in offshore trusts:

  • Self-Settled Asset Protection Trusts;
  • Tax Breaks through Dynasty Trusts; and
  • Minimal Reporting requirements.
  • Self-Settled Asset Protection Trusts

As explained by Professor Weisbord, traditional trust law allows the trust to be a separate entity from the donor (settlor or creator of the trust) and/or donee (or beneficiary of the trust), so that when a gift is made to a trust, with a spendthrift provision, the trust is not obligated to pay to a donee’s creditors.  The creditors can only reach the assets if the trust pays out to the donee, because the spendthrift provision can limit or restrict payments to the donee if there are creditors present.  

Also as explained by Professor Weisbord, a self-settled asset protection trust would allow the settlor to transfer his assets to the trust, and if there is a spendthrift provision, the settlor’s creditors could not reach the settlor’s assets.  This novel creation by state legislatures has minimized the need to use offshore trusts. 

See this pdf outlining the 17 states with some version of the self-settled asset protection trusts laws.

Tax Breaks through Dynasty Trusts

As most estate planners can tell you, one key outcome of an estate plan is to defer taxes.  While the tax code allows for certain kinds of deferral with respect to estate plans (and as explained by Professor Weisbord) the code changed over time to include a generation skipping tax so that transfers to a donor’s grandchildren and future generations were taxable.  The so called generation skipping tax (“GST”) imposes a transfer tax for gifts to future generations.  However, the GST tax also includes an exemption (approximately $5,000,000).

One other barrier to gifting to future generations through a trust is the rule against perpetuities (or simply put, the law that prohibits a trust from existing beyond a certain period, usually 21 years, following the death of the last named living beneficiary at the time the trust was drafted).  As Professor Weisbord has pointed out, several states have abolished or limited the rule against perpetuities to permit trusts to exist well beyond the death of the last named beneficiary’s lifetime. 

These so called dynasty trusts have enabled creative estate planners to obtain advantages in creating estate plans that were previously limited to using offshore trust.  For a summary of dynasty trusts and the rule against perpetuities, see this law firm’s website.  For a chart of states that have abolished/limited the rule against perpetuities, see this chart.

Minimal Reporting requirements

As stated by Professor Weisbord, states have reduced the reporting requirements of trusts, so that the trust reporting requirements are minimal or non-existent.  This change coupled with the Organization for Economic Cooperation and Development (“OECD”) increased reporting requirements for foreign jurisdictions has spurred moving former offshore trusts back to U.S. trusts.

See this Bloomberg article about the U.S. being the newest/latest tax haven because of its lax reporting and refusal to sign off on the OECD reporting requirements

Weisbord’s Recommendations

Weisbord summarizes his paper with recommendations that he acknowledges are implausible because states that have enacted changes to its laws are highly unlikely to amend them again to prevent the abuses he raises in his paper.  Weisbord does suggest the possibility that the trusts may be invalidated by the bankruptcy code and fraudulent conveyance laws, but, in reality if done right, even these federal laws may not invalidate a trust to prevent people from using the trusts in the US as a tax shelter.

Weisbord’s conclusions/recommendations place at a premium specific and credible information a whistleblower has on a donor/settlor establishing a trust and avoiding taxes (in the U.S. and possibly in other jurisdictions).  With this insider information the IRS may properly assess the tax liabilities of the donor/settlor. 

The IRS will pay a whistleblower for specific and credible information about persons and trusts violating U.S. tax laws.  The IRS pays between 15-30% of the total collected proceeds (tax, interest, penalties, and additional amounts) for specific and credible information that leads to the successful prosecution and collection of collected proceeds from the tax violators.  Contact us to discuss whether you should file a tax whistleblower award claim with the IRS.

Panama Papers: Where are the disclosure of documents of the U.S. wealthiest individuals and their use of offshore trusts and companies to conceal their wealth?

As you may or may not know, on Sunday April 3, 2016, a disclosure of a Panamanian law firm’s records, dubbed the Panama Papers, exposed world leaders and wealthy businessmen/women and their associates that utilized offshore trusts and companies to hide assets from taxation in their respective foreign countries.  (See International Consortium of Investigative Journalists (“ICIJ”) article about the Panama Papers; USA Today article; the Guardian article explaining the Panama Papers; and the German newspaper, Süddeutsche Zeitung (SZ) (which allegedly initially exposed the Panama Papers), article explaining the Panama Papers.  See also an infographic about the world leaders allegedly exposed for their use of offshore entities created/maintained by the Panamanian law firm.  Note: a person “exposed” or “implicated” in the Panama Papers does not automatically mean they are or have done any wrongdoing.  See the Huffpost article with a simple reddit user’s explanation of the Panama Papers through the use of a piggy bank, showing that the use of offshore trusts and companies does not necessarily implicate wrong doing.

As part of the “fallout” from these disclosures, at least one world leader (Iceland’s Prime Minister) has already resigned from his position due to his connection with entities exposed as part of the “Panama Papers". See the Huffpost article about Prime Minister Sigmundur Davíð Gunnlaugsson’s resignation.

The Panama Papers and the exposure it is receiving, raises a serious question, namely: Where is the information about the U.S.’ wealthiest individuals and corporations that might have undertaken similar or same offshore trust and company creation schemes to hide/shield their wealth?  See Craig Murray’s blog post raising the same inquiry. Mr. Murray states that one reason the exposure focuses on Russia and other UN sanctioned countries, is because the ICIJ is funded by the U.S. Center for Public Integrity which is further funded by various U.S. private foundations.  Mr. Murray posits that these entities would never expose the western world’s use of such entities. 

The IRS has estimated that U.S. corporations and wealthiest individuals have been avoiding the payment of taxes in the amount of $385 billion for 2016. Therefore, it begs the question, Are U.S. corporations and individuals utilizing structures implemented by the Panamanian law firm or similar entities in tax haven jurisdictions to generate the Tax Gap as estimated by the IRS?  This inquiry, as stated by Mr. Murray, suggests that the people behind the release of the Panama Papers may be hiding the exposure of “western” corporations and individuals, which may have undertaken the use of the same offshore strategies.

Perhaps the Senate Permanent Subcommittee on Investigations which has begun the process of exposing the U.S. corporations through its investigations of the largest U.S. corporations with offshore profit shifting, including: Microsoft and Hewlett Packard; Apple; and Caterpillar.  PSI also held a hearing on the offshore banks that have assisted individuals in hiding their assets in offshore jurisdictions and evading taxes. 

With the release of the Panama Papers, it would be interesting to see if the other documents by the Panamanian law firm would implicate the entities and individuals investigated by PSI or other prominent U.S. corporations or individuals who have utilized offshore structures to undertake the same tax avoidance schemes identified by PSI and IRS.  Since we do not have access to the source material and can’t search the documents which were recovered, we may never find out if there are other U.S. corporations or individuals.

Another reason for determining whether the Panama Papers expose U.S. entities or individuals is apparently the U.S. is now considered the number 3 tax haven because of its banking secrecy practices.  See the AP article regarding the U.S. as a tax haven for other countries’ tax dodgers.  Therefore, the exposure of U.S. entities or individuals would help IRS and other countries’ tax governing bodies limit/prevent tax avoidance/evasion. 

If you have specific and credible information of individuals and/or corporations utilizing structures described in the “Panama Papers” and would like to file a claim for an award with the IRS tax whistleblower program, please contact us.

The IRS wants IRS whistleblower lawyers and their clients to assist in IRS in the enforcement of the law.

IRS whistleblower lawyers have brought a large number of previously unrecognized tax issues to the attention of the IRS.  A prior report by the Treasury Inspector General of Tax Administration (TIGTA) determined that the cost of assessing and collecting tax is approximately 40% less that what the cost would be without the inside information from IRS whistleblowers.  A number of good tax issues have been brought to the IRS attention by IRS whistleblower lawyers and their clients and the success of the program is up to the IRS.  Some of the more recent large tax issues are -

1.  Offshore Accounts (IRS has instituted several “amnesty” type programs and is expected to reach $5 billion in collection since this issue was brought to its attention of the IRS by a Whistleblower).

2.  Employee v. Independent Contractors - many businesses aggressively classify their employees as independent contractors to avoid billions of dollars of payroll taxes.  A significant number of IRS Whistleblower lawyers and their clients have brought these matters to the attention of the IRS and in response the IRS decided again the best way to handle this tax issue is again to offer an amnesty program.

Identity theft.  This area of the law has gotten lots of attention from the news media for the underlying theft issue, but there are hundreds of millions of dollars of tax that are not being paid by the thieves on the income and the IRS is looking for whistleblowers to bring to its attention large identity theft matters.

4.  Gift Tax.  Most of the population is aware that the very wealthy are transferring great wealth to their children.  This is often done through legitimate tax planning.  However, this can be done through a common means of simply transferring real estate to family members at no cost.  In fact valuable real estate can be transferred at no cost (i.e. a gift) and there are no reporting requirements.  That is, no 1099s, or any other information type returns, are issued to report the land transfers between family members.  In fact, a number of whistleblowers have simply scoured the recorder of deeds, either locally or on the internet, finding land transfers of wealthy individuals to family members that are actually identified as “gift deeds” or simply reflect that the land is being transferred for $1 or the love and affection of the grantee (i.e. the children). 

The IRS recognize that this last issue exists due to the information brought to its attention by IRS Whistleblower lawyers and their clients and have determined that it will put its resources into this issue.

As part of a new initiative in finding gift tax evaders, the Internal Revenue Service asked a federal court for permission to order a California state tax agency to hand over its computer database of everyone who transferred real estate to relatives for little or no consideration.

In response, the federal district court judge gave the IRS permission to serve a “John Doe” summons on the California State Board of Equalization demanding the names of residents who transferred property to their children or grandchildren for little or no money. The IRS wants those names as part of a crackdown on what it believes is the widespread failure to file required gift tax returns when real property is passed between family members.

The IRS has already received information about intra-family property transfers from county or state officials in Connecticut, Florida, Hawaii, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Virginia, Washington state and Wisconsin.

In an affidavit filed in the California case in October, Josephine Bonaffini, the Federal/State Coordinator for the IRS’ Estate and Gift Tax Program, said the agency has so far examined 658 taxpayers identified as transferring property to relatives and concluded that 238 of them should have, but didn’t, file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. Twenty of those delinquent filers have already been assessed extra tax because they had exceeded the amount each person is allowed to transfer gift tax free, she said. Through 2010, that lifetime gift tax exemption was just $1 million. For 2011 and 2012, it has been raised to $5 million. Anyone can give anyone else property or cash worth up to $13,000 a year without that gift counting against the lifetime exemption, but gifts above that $13,000 “annual exclusion” amount must be reported on a Form 709 so the IRS can keep track of how much of his or her lifetime exemption each taxpayer has used up.

With a normal summons (i.e. Form 2039), the IRS seeks information about a specific taxpayer whose identity it knows. A John Doe summons, by contrast, allows the IRS to get the names of all taxpayers who are members of a certain group it has reason to suspect might have broken the law. In the past the IRS has used John Doe summons to seek lists of American taxpayers who have used aggressive tax shelters and of those who have unreported offshore accounts at Swiss Bank UBS and at HSBC’s bank in India.

Again, the IRS whistleblower program is and will continue to be a great success as it brings facts and issues to the IRS

The Tax Whistleblower Law Firm (1-877-404-1040) consisting of former IRS lawyers assist whistleblowers in filing acceptable claims into the IRS Tax whistleblower program by providing well developed facts, issue and law, evaluating the continued confidentiality of the client, as well appealing administratively and judicially the determination by the IRS.