Gotcha!

by Bob Williams on Fri 20 Nov 2009 08:00 AM EST  |

IRS Commissioner Doug Shulman reports that nearly 15,000 taxpayers turned themselves in under the service’s amnesty program for people who had failed to report overseas bank accounts on their federal income tax returns. A major inducement was the government’s settlement with Swiss bank UBS, under which the bank promised to hand over information on about 4,500 American account owners. More than 80 percent of the amnesty filings came after the IRS announced that settlement.

So why did more than 12,000 people fess up after they learned that UBS would report fewer than 5,000 of them? The key was that the IRS didn’t reveal the criteria UBS would use to pick accounts. Not knowing whether they were on the UBS list likely induced a lot of people to take advantage of the limited-time deal the IRS offered.

In a November 17 briefing, Shulman spelled out the UBS criteria, which surely exempted lots of accounts. UBS limited its list of accounts to those with balances of at least 250,000 Swiss francs (about $248,000) or annual revenue of at least 100,000 francs (about $99,000). But even for those accounts, owners had to have engaged in “fraud and the like” before the bank ratted them out—and UBS appears to have defined that phrase rather tightly. Hiding ownership through off-shore shell companies or using debit or credit cards to disguise withdrawals got you on the list. Simply owning an account did not. (Read more detail on the UBS criteria in David Hilzenrath’s story in the Washington Post.)

Last month Shulman said that people applying for amnesty reported account balances ranging “from just over $10,000 to over $100 million.” UBS apparently won’t report taxpayers—or should I say non-taxpayers—with accounts toward the lower end of that range. Some, perhaps many, of those who turned themselves in could have continued to hide their overseas assets without fear of being revealed, if only they’d known the UBS rules.

It’s likely that many people took the amnesty option to help them stop doing something they knew was wrong, even if they didn’t think their banks would report them. And others may have felt that UBS was only the first of many foreign banks that the U.S. will force to reveal account owners and decided to get in under the amnesty.

But because neither UBS nor the IRS explained the criteria during the amnesty period, a lot of people must have reported themselves for fear they’d show up on the UBS list.

Good move, IRS.

Clock Is Ticking For Secret Offshore Account Holders Forbes.com by: Ashlea Ebeling

Taxpayers with foreign bank and investment accounts they haven’t reported to the U.S. government have a decision to make this week: whether to fess up to their accounts as part of a voluntary disclosure program that ends Sept. 23.
Those who report by the deadline should, in most cases, be able to avoid criminal prosecution and minimize the civil penalties they must pay. But the penalties will still be stiff and some taxpayers are gambling they won’t be found out.
Robert McKenzie, a tax lawyer with Arnstein; Lehr in Chicago, reports he had four clients engage him on Tuesday morning, four more scheduled for office consultations Tuesday afternoon, and telephone calls with prospective clients in between. “It is really hectic,” he says.
Seth J. Entin, a tax attorney with Greenberg Traurig in Miami, is similarly busy. “We’re seeing a lot of people who were sitting on the fence a couple of months ago now deciding to come forward,” he says. “It’s basically the 11th hour,”
The Internal Revenue Service has given no indication that it intends to extend the deadline for the program, which was first announced on March 23. Entin is telling clients: “It would be wise to clean up things right now. It’s unlikely the deal is going to get any better than this.”
Failure to file an annual form with the U.S. Treasury–a form called an FBAR–reporting an interest in a foreign account worth $10,000 or more is a criminal offense. It’s also punishable by a civil penalty of up to 50% of the account’s value, for each year the form goes unfiled. But under the voluntary deal, taxpayers will pay a maximum of 20% of the account’s highest value over the last six years as an FBAR civil penalty. They must also pay six years of back taxes owed on any unreported income from the accounts and six years of accuracy or delinquency penalties related to that unpaid tax.
A taxpayer with an unreported account that at its height in 2003 was worth $1 million could pay $386,000 to come clean under the program, versus $2.3 million if the taxpayer doesn’t come forward and the IRS discovers the account, according to a 52-question Q;A page about the program on the IRS Web site. (The IRS could come after your domestic assets to collect the full penalties, warns Entin.)
The penalties for failure to file an FBAR are based on an account’s balance each year. So even if the account hasn’t been generating income, or even if there are losses in it, someone with an undisclosed account can save on penalties by disclosing it the IRS.
In addition, failing to admit to a foreign account worth more than $10,000 on a 1040 individual tax return is also a felony. But under a longstanding IRS policy, taxpayers who enter into a voluntary disclosure before the IRS begins to audit or investigate them are usually not prosecuted.
There’s been an intense spotlight on secret foreign bank accounts since December 2007, when billionaire California real estate developer and Forbes 400 member Igor M. Olenicoff pleaded guilty to a felony and agreed to pay $57 million in back taxes, interest and civil fraud penalties for failing to disclose his offshore accounts.
Later, Bradley Birkenfeld, a former private banker with Switzerland’s UBS ( UBS – news – people ), pleaded guilty to helping Olenicoff hide more than $200 million offshore. Then, this past February, UBS agreed to pay $780 million in penalties, fines and restitution to the U.S. government to avoid criminal prosecution.
Most significantly for account holders, last month, in an unprecedented breach in Swiss bank secrecy, the Swiss government agreed to turn over to the U.S. the names of 4,450 Americans with secret UBS accounts.
The trail doesn’t end at UBS, however. Accounts at other banks in Switzerland and elsewhere are also at risk of disclosure in coming months and years.
“We are gaining access to more and more information on institutions and individuals involved in offshore tax Taxpayers with foreign bank and investment accounts they haven’t reported to the U.S. government have a decision to make this week: whether to fess up to their accounts as part of a voluntary disclosure program that ends Sept. 23.
Those who report by the deadline should, in most cases, be able to avoid criminal prosecution and minimize the civil penalties they must pay. But the penalties will still be stiff and some taxpayers are gambling they won’t be found out.
Robert McKenzie, a tax lawyer with Arnstein; Lehr in Chicago, reports he had four clients engage him on Tuesday morning, four more scheduled for office consultations Tuesday afternoon, and telephone calls with prospective clients in between. “It is really hectic,” he says.
Seth J. Entin, a tax attorney with Greenberg Traurig in Miami, is similarly busy. “We’re seeing a lot of people who were sitting on the fence a couple of months ago now deciding to come forward,” he says. “It’s basically the 11th hour,”
The Internal Revenue Service has given no indication that it intends to extend the deadline for the program, which was first announced on March 23. Entin is telling clients: “It would be wise to clean up things right now. It’s unlikely the deal is going to get any better than this.”
Failure to file an annual form with the U.S. Treasury–a form called an FBAR–reporting an interest in a foreign account worth $10,000 or more is a criminal offense. It’s also punishable by a civil penalty of up to 50% of the account’s value, for each year the form goes unfiled. But under the voluntary deal, taxpayers will pay a maximum of 20% of the account’s highest value over the last six years as an FBAR civil penalty. They must also pay six years of back taxes owed on any unreported income from the accounts and six years of accuracy or delinquency penalties related to that unpaid tax.
A taxpayer with an unreported account that at its height in 2003 was worth $1 million could pay $386,000 to come clean under the program, versus $2.3 million if the taxpayer doesn’t come forward and the IRS discovers the account, according to a 52-question Q&;A page about the program on the IRS Web site. (The IRS could come after your domestic assets to collect the full penalties, warns Entin.)
The penalties for failure to file an FBAR are based on an account’s balance each year. So even if the account hasn’t been generating income, or even if there are losses in it, someone with an undisclosed account can save on penalties by disclosing it the IRS.
In addition, failing to admit to a foreign account worth more than $10,000 on a 1040 individual tax return is also a felony. But under a longstanding IRS policy, taxpayers who enter into a voluntary disclosure before the IRS begins to audit or investigate them are usually not prosecuted.
There’s been an intense spotlight on secret foreign bank accounts since December 2007, when billionaire California real estate developer and Forbes 400 member Igor M. Olenicoff pleaded guilty to a felony and agreed to pay $57 million in back taxes, interest and civil fraud penalties for failing to disclose his offshore accounts.
Later, Bradley Birkenfeld, a former private banker with Switzerland’s UBS ( UBS – news – people ), pleaded guilty to helping Olenicoff hide more than $200 million offshore. Then, this past February, UBS agreed to pay $780 million in penalties, fines and restitution to the U.S. government to avoid criminal prosecution.
Most significantly for account holders, last month, in an unprecedented breach in Swiss bank secrecy, the Swiss government agreed to turn over to the U.S. the names of 4,450 Americans with secret UBS accounts.
The trail doesn’t end at UBS, however. Accounts at other banks in Switzerland and elsewhere are also at risk of disclosure in coming months and years.
“We are gaining access to more and more information on institutions and individuals involved in offshore tax evasion, and you can expect us to use all of our enforcement tools to stop this abuse,” IRS Commissioner Doug Shulman said last month, when he announced the indictment of a Swiss banker at the Neue Zuercher Bank and a Swiss lawyer who worked with him.
So who’s been confessing and who’s holding back?
Clients who have unreported income from other sources–not just the interest or investment earnings on the undisclosed foreign account–have been the most reluctant to enter into a voluntary disclosure with the IRS, McKenzie says. The reason is that to qualify for the program, they must come clean on everything, meaning they have to pay back taxes, interest and penalties on six years of unreported income as well.
One client who had a change of heart and asked McKenzie to file a report for him had two years of bonuses totaling $280,000 paid by a European employer into a Swiss account.
At the other extreme, McKenzie is filing the paperwork for a woman whose 92-year-old dad recently told her, on his deathbed, that he had set up an offshore account for her. Under the IRS guidelines for the program, she could be assessed a lighter penalty–5% instead of the 20% of highest balance–because she didn’t open the account herself and she hasn’t touched it.
Folks with inherited accounts might be able to get the 5% deal too. But McKenzie says it’s rare they qualify, since heirs will usually take a trip to Europe and raid the account, thus opening themselves up to the stiffer 20% of account balance penalty.
To qualify for the program, taxpayers must apply by Sept. 23; have income from entirely legal sources (no drug dealers or bookies); must cooperate fully with the IRS, including identifying any lawyers or bankers who assisted them; and must make good-faith arrangements to pay the back taxes and penalties. It’s OK if you don’t have all your records (if you haven’t been on a trip to Switzerland lately); you just have to get your foot in the door by the deadline.
All disclosure cases start at the IRS’ criminal division, which then forwards the cases to the civil division. A taxpayer already under audit–even if it’s for something like inflated business expense deductions unrelated to the offshore accounts–can’t participate in the disclosure program.
There are still some taxpayers who are choosing not to go forward with disclosure, notes McKenzie. In most cases, these are taxpayers with other unreported income. “They are rolling the dice that their names won’t come out,” he says. That’s a high stakes gamble.
Says Entin: “The bottom line of the voluntary disclosure is so you can sleep at night.”
evasion, and you can expect us to use all of our enforcement tools to stop this abuse,” IRS Commissioner Doug Shulman said last month, when he announced the indictment of a Swiss banker at the Neue Zuercher Bank and a Swiss lawyer who worked with him.
So who’s been confessing and who’s holding back?
Clients who have unreported income from other sources–not just the interest or investment earnings on the undisclosed foreign account–have been the most reluctant to enter into a voluntary disclosure with the IRS, McKenzie says. The reason is that to qualify for the program, they must come clean on everything, meaning they have to pay back taxes, interest and penalties on six years of unreported income as well.
One client who had a change of heart and asked McKenzie to file a report for him had two years of bonuses totaling $280,000 paid by a European employer into a Swiss account.
At the other extreme, McKenzie is filing the paperwork for a woman whose 92-year-old dad recently told her, on his deathbed, that he had set up an offshore account for her. Under the IRS guidelines for the program, she could be assessed a lighter penalty–5% instead of the 20% of highest balance–because she didn’t open the account herself and she hasn’t touched it.
Folks with inherited accounts might be able to get the 5% deal too. But McKenzie says it’s rare they qualify, since heirs will usually take a trip to Europe and raid the account, thus opening themselves up to the stiffer 20% of account balance penalty.
To qualify for the program, taxpayers must apply by Sept. 23; have income from entirely legal sources (no drug dealers or bookies); must cooperate fully with the IRS, including identifying any lawyers or bankers who assisted them; and must make good-faith arrangements to pay the back taxes and penalties. It’s OK if you don’t have all your records (if you haven’t been on a trip to Switzerland lately); you just have to get your foot in the door by the deadline.
All disclosure cases start at the IRS’ criminal division, which then forwards the cases to the civil division. A taxpayer already under audit–even if it’s for something like inflated business expense deductions unrelated to the offshore accounts–can’t participate in the disclosure program.
There are still some taxpayers who are choosing not to go forward with disclosure, notes McKenzie. In most cases, these are taxpayers with other unreported income. “They are rolling the dice that their names won’t come out,” he says. That’s a high stakes gamble.
Says Entin: “The bottom line of the voluntary disclosure is so you can sleep at night.”

Sleepless Nights for Tax Evaders

by Bob Williams on Thu 20 Aug 2009 10:38 AM EDT |
Many people who have failed to pay taxes on funds stashed in overseas bank accounts will likely toss and turn during coming nights, worried that the tax man will soon come knocking at the door. Will they be among the nearly 4,500 account holders whose names Swiss bank UBS has agreed to give to the IRS? And even if their names aren’t on the list, will the IRS learn about them from others seeking amnesty? Should they apply for amnesty themselves, paying large tax bills but at least staying out of jail? Or lie low for fear the IRS will find other problems if they draw attention to their returns?

First, a little history. A few years ago, a disgruntled or guilt-stricken (depending on who’s telling the story) American who had worked at UBS went to the IRS with a story about secret bank accounts. The bank, he claimed, had sold to investors techniques that let them hide foreign accounts from government view. Many rich Americans bought into the plan and failed to report account income on their tax returns. That was no simple oversight; anyone reporting interest or dividends on Schedule B has to check a box saying whether she had a foreign bank account.

The IRS initiated a three-pronged attack. It began investigating taxpayers whose names had been revealed, sued UBS, and demanded that the bank identify all American account owners. At the same time, it set up an amnesty program that required taxpayers with unreported foreign income to pay back taxes, penalties, and interest but allowed them to avoid stiffer penalties and potential jail time.

Those strategies yielded a bountiful harvest. The IRS has successfully prosecuted some evaders, in one case collecting $52 million in back taxes. As part of a $780-million settlement with UBS last February, the bank promised to hand over the names of 250 account owners. Under a separate agreement announced yesterday, the IRS will get another 4,450 names.

Those moves really juiced the amnesty program. Facing a September 23 deadline, tax evaders have lined up to confess their sins. Last month, the IRS reported, more than 400 showed up in one week, “four times as many as in all of last year.” You can’t request amnesty once the IRS has started investigating you, and even with amnesty, you’ll still owe Uncle Sam a lot. But amnesty can make a big difference. The IRS offers this example: for six years, a taxpayer fails to report $50,000 of annual earnings on a $1-million account. Request amnesty and you’ll owe the IRS $386,000 in back taxes and penalties, plus interest. Wait for the IRS to come knocking and the tab could jump to $2.3 million plus interest and probably jail time. Not a hard choice if you think the IRS is on your tail.

The New York Times reports that UBS will let the 4,450 account holders know before September 23 that the IRS will get their names. That’s time enough to claim amnesty. But what if you don’t hear from UBS? What are the odds you’re not on the list?

And then there’s the section in the IRS’s suggested “voluntary disclosure form” that asks about communications with banks and financial advisors concerning overseas accounts. Someone else’s disclosure might finger your advisor and the IRS finds your name in his records. If you dealt with one of the major brokers, amnesty sounds like a pretty good deal.

But turning yourself in has its own downside. You’ve bumped the probability that the IRS will look at your returns to 100 percent and who knows what else they might find. Amnesty may protect you against huge penalties on those UBS accounts but you’re still on the hook for anything else the auditors find. So maybe you want to report other accounts you have with other banks. Who knows where that leads? Maybe you’re better off lying low and taking your chances.

The UBS case is one more skirmish in the continuing battle between tax evaders and the IRS, with this round going to the tax man. But it’s just one round. Remember the flap a few years ago over people using credit cards to access money stashed in foreign banks? The IRS got tens of thousands of account holders’ names but couldn’t cope with the numbers and the big bust seemed to fizzle. Nonetheless, shining more light on secret accounts can only make life tougher for tax cheats.

Meanwhile, a lot of people will battle insomnia over the next five weeks as they decide what to do. Of course, they’d sleep a lot better if they’d just paid their taxes in the first place.