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Everything You Need to Know About Global Tax Cheats

A look at the ongoing crackdown to catch global tax cheats and why you should pay attention.
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Rich people have been dodging taxes around the world for centuries. But it's getting harder to get away with it.

The latest example comes from a rare look into the secret bank accounts of the world's richest people, based on a trove of documents leaked to a consortium of news outlets.

Here's a look at who's getting caught, how much money is at stake and the ongoing crackdown to catch global tax cheats:

How do these tax scams work?

It's pretty simple: You open an account with a bank or brokerage firm in a country that doesn't require your banker to report it to your home country's tax authority. While you're opening the account, you enjoy a little skiing or, if you prefer a tax haven in a warmer climate, relaxing on the beach. Then, when you go home, you don't report the account on your tax return. It's called cheating.

None of us likes to pay taxes, and there are reams of regulations known to armies of accountants ready to help you pay the least amount the law allows. Taking full advantage of the tax code is called tax "avoidance," and it's perfectly legal.

If you try to cut your tax bill by not reporting all your income or holdings—or lying about deductions or tax credits—that's tax "evasion." And it's illegal.

So how much cash is hiding out there in secret accounts?

Despite this week's trove of leaked HSBC accounts, it's hard to say. The documents refer to holdings before 2007, so much of the money may have moved on.

At the time, though, Switzerland was the favorite tax haven, and the list of account holders included drug traffickers, arms dealers and celebrities, according to a report by the International Consortium of Investigative Journalists and several news organizations. The leaked documents cover more than $100 billion held by more than 100,000 people and legal entities from 200 countries.

Not all of the accounts were illegal, the group noted, and having an account wasn't necessarily an indication of wrongdoing. Rock star David Bowie told The Guardian that he has been a legal resident of Switzerland since 1976. Tina Turner has lived in Switzerland for nearly two decades and gave up her U.S. citizenship in 2013, according to the ICIJ.

But the group noted that the records included bankers' advising clients on how to avoid paying taxes in their home countries and customers' telling bankers that their accounts are not declared to their governments.

Who else isn't paying?

U.S. corporations, for one. By parking cash and other assets in countries outside the U.S.—all legally—many big companies have avoided paying taxes on trillions of dollars in profits.

And there are plenty of places happy to help. The British Virgin Islands, for example, with a population of about 33,000, has more than 400,000 registered corporations, thanks to laws that require no identification of shareholders or directors, and require no financial records, according to a report last month by the Congressional Research Service.

In his 2016 budget, President Barack Obama has proposed giving U.S. corporations a one-time tax break (they would pay half the current rate) to bring the money home and raise hundreds of billions of dollars to bail out the nearly broke Highway Trust Fund that pays to fix crumbling roads and bridges.

Other countries are also looking to capture corporate profits parked offshore. A group of British MPs recently reported that hundreds of companies have cut their corporate tax bills by setting up bases in Luxembourg.

It's not something I need to worry about, right?

On the contrary; the billions in taxes not paid by evaders gets made up by the rest of us. A group called the Tax Justice Network figures that, worldwide, the revenue lost from individuals dodging taxes comes to $255 billion. The cost for the U.S. could approach $100 billion, according to the Congressional Research Service.

Why haven't governments cracked down?

In the U.S., they have. A three-year investigation by the Justice Department brought some high profile settlements on a variety of charges, including tax evasion and money laundering, for foreign banks. Last year, Credit Suisse pleaded guilty to helping American taxpayers file false returns and paid $2.6 billion in fines.

Last week, The Wall Street Journal reported that federal prosecutors have launched a new investigation into whether Swiss bank UBS AG helped Americans evade taxes through investments banned in the United States. UBS paid $780 million in 2009 to settle a separate Justice Department tax-evasion probe.

Stashing cash in a foreign tax haven also got a lot harder after Congress passed the Foreign Account Tax Compliance Act (FATCA) in 2010, which now requires thousands of foreign financial institutions to report Americans' holdings or face stiff penalties. The EU is also tightening up reporting requirements, and last year more than 80 countries agreed on a "common reporting standard." The crackdown may also be prompting more account holders to do the right thing. Since 2009, some 38,000 individuals holding foreign accounts have voluntarily disclosed their holdings, "taking advantage of special opportunities to comply with the U.S. tax system and resolve their tax obligations," according to the IRS. To date, the Offshore Voluntary Disclosure Program has netted some $5.5 billion in taxes.

So if you've got one of these accounts and would like to come clean, the IRS would like to hear from you.