Tax Havens’ Days Are Numbered

Robert Olsen, 05.03.10

The era of banking secrecy may be coming to an end.

HONG KONG — As Democrats and Republicans haggle over the details of financial reform in the Senate, a new tax law is quietly approaching that will force all overseas banks to reveal the overseas holdings of American account holders.

“I don’t think a lot of people have paid attention to this,” said Scott D. Michel, president of Caplin & Drysdale law firm.

“The whole purpose of this is to put American account holders around the world in a position where they can have no safe haven in any bank that wants to offer U.S. investments to any of its clientele,” he added.

American citizens are required to report all of their worldwide income every year when filing their tax returns. As a part of that process, they are also required to disclose any offshore bank accounts they may have or hold signature authority over.

If an individual falsifies his or her tax claim by concealing their income in offshore accounts, banking secrecy laws in countries like Switzerland have in the past helped to keep that income hidden by making it a crime for the banks and their employees to disclose information about clients.

U.S. lawmakers designed the Foreign Account Tax Compliance Act (FACTA) to “force foreign financial institutions, foreign trusts, and foreign corporations to provide information” on undisclosed assets held by Americans after Dec. 31, 2012. If they fail to do so, the Internal Revenue Service (IRS) can hit the banks with 30% withholding on all income originating from the U.S.

The full details of FACTA have yet to be ironed out between the U.S. Treasury and the IRS, but one of its requirements will include a document for new account holders to sign that waives whatever rights they may have under local banking secrecy laws.

The U.S. estimates that it will raise an additional $8.5 billion in tax revenue over the next 10 years by forcing Americans to disclose income they are hiding from tax collectors.

Spurred by rising fiscal deficits, the United States and other members of the Organization for Economic Cooperation and Development (OECD), particularly Germany and France, have been using a variety of methods to clamp down on tax cheats, tax havens and overseas financial centers.

The most high profile of these were the UBS ( UBS – news – people ) AG case and the OECD’s attempt to name and shame those countries that fail to comply with internationally agreed standards.

Tax havens are usually characterized by extremely low tax rates, strong banking secrecy laws and flexible regulations in terms of licensing, incorporation and supervision. So-called shell companies, trusts and other legal entities are often used to shield assets from overseas authorities.

The OECD had initially singled out 47 jurisdictions that included the likes of Hong Kong, Macau, the Philippines and Malaysia, but hasty commitments to improve transparency along with some backroom deal-making led to all four being removed from the blacklist.

The U.S. tax authorities, however, have recently introduced another far more effective means of collecting information on tax evaders: They pay informers for it.

The IRS Whistleblower Office can pay anywhere between 15% and 30% of the taxes, penalties and interest collected for cases valued at $2 million or more. (See: “Tax Informants Are On The Loose”)

The IRS has yet to make any payments under the new scheme, but that hasn’t dissuaded people like Bradley C. Birkenfeld from trying. Formerly an employee of Switzerland’s largest bank UBS, Birkenfeld was sentenced to 40 months in jail for helping billionaire California real estate developer Igor M. Olenicoff hide $200 million offshore. (See: “April 15 Plea: Pardon Tax Whistleblower”) Motivated in part by the possibility of a reward, Birkenfeld provided evidence to U.S. tax authorities detailing how the secretive Swiss bank helped wealthy Americans hide money offshore.

As a result, UBS was forced to admit wrongdoing, pay a fine of $780 million and to turn over data on as many as 4,450 UBS accounts to the Swiss government, which will pass the information to the U.S.

A number of banks from some of Europe’s best-known tax havens are facing similar investigations. Germany launched over 1,000 tax evasion probes against clients of Credit Suisse ( CS – news – people ) last month. In December the French authorities said that it had the details of 24,000 Swiss bank accounts provided by a former HSBC ( HBC – news – people ) employee.

Fearing the possibility of heavy fines and prosecution, many tax evaders from the U.S., Germany and France have come forward to report their assets.

Michel believes the disclosure of banking secrets will continue to grow. “When you combine the whistleblower regime with the template that the [U.S.] government used in the UBS case, with the information they’re getting with all these voluntary disclosure cases and now FACTA, I think the era of bank secrecy is fairly rapidly eroding in front of our eyes,” he said

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Foreign Investment’s New Landscape

IRS Probing Approximately 20 Swiss Banks

New York

(March 12, 2010)

By WebCPA Staff

The Internal Revenue Service is collecting information on approximately 20 Swiss banks, according a letter from UBS, one of the main banks it has been investigating.

UBS wrote a letter to members of the Swiss Parliament urging them to approve a deal between the Swiss and U.S. governments. The Swiss and U.S. governments agreed last year for the Swiss to divulge the identities of 4,450 U.S.-based account holders who were suspected of large-scale tax evasion or fraud. However, recent court decisions in Switzerland enforcing the country’s banking secrecy laws have threatened to upend the agreement (see Swiss Court Nixes UBS Tax Deals).

“The risks are very considerable for the Swiss financial center and the economy as a whole if parliament were to withhold its approval,” said UBS in the letter, according to the Associated Press. “Apart from UBS, many other Swiss banks were involved in cross-border business with American clients,” the bank added.

“The IRS has obtained information on about 20 Swiss banks from the voluntary disclosure program,” said the bank, referring to a program that the IRS offered to encourage holders of foreign bank accounts to come forward on their own. “It is quite possible that the IRS wants to obtain information on other customers of these banks,” said UBS. “Refusal by Switzerland to meet its obligations under international law could send a signal that would escalate these cases.”

The bank also warned that Switzerland could be added to a blacklist of tax haven countries, or become subject to extra taxes within the U.S. if the agreement were not enforced.

“This could mean that transactions not only for Swiss financial companies, but Swiss companies in general, could be made subject to a special withholding tax,” said UBS, according to Reuters.

Other areas of interest

Swiss Court Halts Release of Some UBS Account Holder Data

From The Journal of Accountancy.  A Swiss court has held that the Swiss bank UBS does not have to hand over to the IRS confidential data on 26 accounts under a settlement agreement between the United States and Switzerland negotiated in August 2009. Under the agreement, UBS is supposed to turn over for investigation information concerning approximately 4,450 accounts. Failure to provide a Form W-9 to the IRS for at least three years is one of the IRS’ selection criteria for account holders who have engaged in “continued and serious tax offense.” UBS must identify such account holders under the agreement. However, in a suit brought by 26 unnamed account holders (U.S. Taxpayers v. Swiss Federal Tax Administration), Switzerland’s Bundesverwaltungsgericht (federal administrative tribunal) held on Jan. 22 that the mere failure to file a Form W-9 does not by itself amount to tax fraud. Therefore, the court ruled that the account holders’ data cannot be handed over to the IRS. While this case only concerned 26 account holders, it is unclear what effect it will have on the other approximately 4,400 accounts potentially subject to the agreement. According to the tribunal’s press release, the decision cannot be appealed in Swiss federal court. The August settlement agreement represented a compromise between the two governments over a contested “John Doe” summons in U.S. v. UBS AG, a case filed in the U.S. District Court for the Southern District of Florida.

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.

Swiss Release Criteria for Handing Over UBS Accounts to IRS

 By Dylan Griffiths and Klaus Wille Nov. 17 (Bloomberg) —

Switzerland said it will turn over details of UBS AG accounts held by U.S. residents who had more than 1 million Swiss francs ($985,000) in undeclared assets to the Internal Revenue Service, as the government released a list of criteria used to screen bank clients for tax fraud. Other benchmarks include U.S. citizens who were beneficiaries of “offshore company accounts,” according to a statement distributed by the Swiss Justice Ministry in Bern today. In both cases, the review period is between 2001 and 2008 and there has to be a suspicion of “tax fraud and the like.” Switzerland agreed in August to hand over data on about 4,450 UBS accounts to the U.S. to settle a lawsuit related to suspected tax evasion. Swiss authorities withheld details of how the accounts were selected for 90 days so the information didn’t interfere with the IRS’s voluntary disclosure program. The criteria will be used as a template by the U.S. to pursue banks and tax evaders in other financial centers, lawyers say. “This is a mega-trend, and the IRS is going global,” William Sharp, a lawyer at Sharp Kemm, PA in Tampa, Florida, said before the criteria were released. “The days of bank secrecy are over.” The IRS plans to hire 800 people in the next year and increase staff in eight overseas offices, including Hong Kong, Commissioner Douglas Shulman said Oct. 14. The agency will also open offices in Beijing, Sydney and Panama City. ‘Tax Fraud’ U.S. prosecutors are already trying to determine what role financial professionals in Hong Kong play in tax evasion, people familiar with the matter said last week. UBS will give account information to a Swiss government task force, which will decide what it can relay to the IRS without violating Swiss law. The entire process is expected to take about a year. UBS used a list of criteria released today to determine whether account holders committed “tax fraud and the like.” Those criteria included the submission of documents to conceal assets and income that wasn’t fully declared, according to the Swiss government. In cases where tax fraud or the like is proven, details of accounts with at least 250,000 francs can be disclosed to the U.S. authorities. The IRS may hope the publication of the Swiss criteria will persuade more people to disclose their accounts as the U.S. is joined in its search for undeclared money by authorities in the U.K., France and Italy, said Stephanie Jarrett, a partner at Baker & McKenzie in Geneva. ‘Harder and Harder’ “There are still a lot of people out there who want to sort things out,” Jarrett said before the criteria were released. “It’s going to get harder and harder for people who are undeclared.” Under the IRS’s voluntary disclosure program, taxpayers must pay any tax owed, plus interest and a 20 percent penalty on the highest balance during the preceding six years. In return, they avoid possible criminal prosecution that could result in as much as 10 years in prison and $500,000 in penalties. About 7,500 Americans with undeclared assets overseas disclosed those holdings to the IRS by the Oct. 15 deadline, according to the U.S. Justice Department. The U.S. sued UBS on Feb. 19 to force disclosure of additional client details. That came a day after the bank agreed to provide the names of 250 account holders and pay $780 million to avoid prosecution for helping wealthy Americans evade taxes. Since the February settlement, prosecutors have won guilty pleas from six UBS clients who described a web of bankers, lawyers and advisers who helped conceal income and assets. All six hid money in shell companies outside Switzerland. The revenue services of the U.K., Australia and other countries have also asked for information on UBS’s cross-border wealth management businesses, the bank said in its third-quarter earnings report on Nov. 3. Zurich-based UBS said it’s cooperating with these requests “within the limits of financial privacy obligations under Swiss law.” To contact the reporter on this story: Dylan Griffiths in Geneva at dgriffiths1@bloomberg.net; Klaus Wille in Zurich at kwille@bloomberg

U.S. should scale back tax imperialism

U.S. should scale back tax imperialism
Obama is expanding an already tough policy of taxing worldwide income, but he could be laying the groundwork for a global backlash.
By Jeffrey Goldfarb, breakingviews.com
October 7, 2009: 12:28 PM ET

(breakingviews.com) — President Barack Obama wants the world to forget about his predecessor’s unilateral approach in international affairs. But imperialistic U.S. tendencies haven’t slowed in at least one important area: taxation.

The U.S. is already unusual in taxing its citizens on their worldwide income, even if they live or work elsewhere. Tax treaties and complex rules help reduce the cash burden — the same income is not supposed to be taxed in two countries — but compliance is often a nightmare.

Now the government is trying to increase tax revenue from its globe-trotting citizenry. Recent proposals would tax more instruments, including equity swaps. The U.S. government is also trying hard to get more from U.S.-based global companies — while Japan and the U.K. are going in the opposite direction.

The U.S. is asking foreigners to help chase tax dodgers. It is expanding the reach of the “qualified intermediary” system, which enlists foreign financial institutions to make sure Americans report all their income to the Internal Revenue Service.

In the face of all this pressure, some Americans abroad might want to shake off the taxman by surrendering their U.S. citizenship. But a relatively new exit tax can be costly for high earners, and doesn’t even provide a full escape. Some assets and subsequent gifts can still be taxed. Not even dying far from home is enough to outrun the long arm of the IRS. Overseas inheritors of U.S. securities can be hit with inheritance tax.

The U.S. claims the moral high ground on taxes. But to some foreigners, the combination of a crusade against foreign tax havens and the insistence that overseas companies help with American tax collection shows “breathtaking moral duplicity”. Those were the words used by Wegelin & Co., a Swiss private bank, as it bid adieu to its U.S. customers.

Not everyone would go that far. But Julius Baer, another Swiss bank, said it can live without U.S. clients and the UK’s Lloyds has started ditching some of its American customers. Brazil has included the U.S. states of Delaware and Wyoming as tax havens, because of their low costs and even lower disclosure requirements. Luxembourg’s prime minister has joined in, calling for the two to be put on the OECD tax blacklist.

As yet, these are isolated complaints. But if Obama keeps on his tax crusade — without attacking domestic abuses — he could face a damaging global backlash.

IRS extends amnesty for international tax dodgers

The Associated Press

Published: September 20, 2009

WASHINGTON – The IRS is extending the Wednesday deadline for international tax dodgers to apply for an amnesty program in order to give a rush of applicants more time to prepare their paperwork.

More than 3,000 Americans hiding assets overseas have applied for the program, which promises no jail time and reduced penalties for tax cheats who come forward, said a government official who spoke on condition of anonymity.

The Internal Revenue Service plans to announce Monday that the program will be extended until Oct. 15, said the official, who was not authorized to speak on the record ahead of the public announcement.

The IRS long has had a policy that certain tax evaders who come forward before they are contacted by the agency usually can avoid jail time as long as they agree to pay back taxes, interest and hefty penalties. Drug dealers and money launderers need not apply. But if the money was earned legally, tax evaders can usually avoid criminal prosecution.

Fewer than 100 people apply for the program in a typical year, in part because the penalties can far exceed the value of the hidden account, depending on how long the account holder has evaded U.S. taxes.

But in March, the IRS began a six-month amnesty program that sweetened the offer with reduced penalties for people with undeclared assets.

As the initial deadline approached, the IRS was contacted by tax advisers from across the country requesting more time to prepare applications from a rush of tax cheats looking to come clean, the government official said.

The amnesty program is part of a larger effort by federal authorities to crack down on international tax evaders. In August, the U.S. and Switzerland resolved a court case in which Swiss banking giant UBS AG agreed to turn over details on 4,450 accounts suspected of holding undeclared assets from American customers.

The process of turning over that information is expected to take several months. But once the IRS obtains information about international tax dodgers, they will be ineligible for the amnesty program.

Publicity from the UBS case, even before the agreement was announced, had many wealthy Americans with offshore accounts nervously running to their tax advisers.

Lawyers and advisers from several firms have said they were swamped with calls from people hiding assets overseas. Their advice: Call the IRS before the IRS calls you.

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.

IRS to Receive Unprecedented Amount of Information in UBS Agreement

IR-2009-75, Aug. 19, 2009

WASHINGTON — The Internal Revenue Service and the Department of Justice today announced the successful negotiation of an agreement that will result in the IRS receiving an unprecedented amount of information on United States holders of accounts at the Swiss bank UBS.

As a result of this agreement, the IRS will receive substantially all of the accounts that it was interested in when it initiated the John Doe summons against UBS.

Under the agreement, the IRS will submit a treaty request to the Swiss government describing the accounts for which it is requesting information. The Swiss government will then direct UBS to initiate procedures to turn over information on thousands of accounts to the IRS. The IRS will receive information on accounts of various amounts and types, including bank-only accounts, custody accounts in which securities or other investment assets were held and offshore company nominee accounts through which an individual indirectly held beneficial ownership in the accounts.

Also, the agreement retains the U.S. Government’s right, if the results are significantly lower than expected and other measures fail, to seek appropriate judicial remedies, including resuming actions to enforce the John Doe summons.

The agreement involves a number of simultaneous legal actions:

· The judicial enforcement of the John Doe summons will be dismissed. While this enforcement motion will be withdrawn, the underlying summons remains in effect.

· Upon receiving the treaty request, the Swiss government will direct UBS to notify account holders that their information is included in the IRS treaty request. It is expected that these notices will be sent on a rolling basis with some being sent over the coming weeks and others over the coming months. Receipt of this notice will not by itself preclude the account holder from coming into the IRS under the Voluntary Disclosure Program.

In addition, the Swiss Government has agreed to review and process additional requests for information for other banks regarding their account holders to the extent that such a request is based on a pattern of facts and circumstances equivalent to those of the UBS case.

Information provided to the IRS through this process will be thoroughly examined for all potential civil and criminal tax violations. The IRS will assess any additional tax, interest and a number of applicable penalties. This includes the penalty for the willful failure to file an FBAR. This penalty can be up to 50 percent of the value of the account for each year an FBAR was not filed.

The IRS will also recommend criminal prosecution in those cases where the facts warrant such an action. To date, the IRS and the Department of Justice have successfully prosecuted four United States customers of UBS whose information was provided to the IRS by UBS as part of the Deferred Prosecution Agreement.
Individuals whose information is obtained by the IRS through this process will, by longstanding policy, not be eligible for the voluntary disclosure program.

Related Items:

U.S.-Swiss Government Agreement
Declarations
Bank Agreement
Offshore Tax Avoidance and IRS Compliance Efforts