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IRS Aggressively Pursuing Off Shore Accounts

©2008

By Robert E. McKenzie, Tax Attorney

Arnstein & Lehr, LLP

On July 1, a federal judge in Miami issued an order authorizing the Internal Revenue Service (IRS) to request information from Zurich, Switzerland-based UBS AG about U.S. taxpayers who may be using Swiss bank accounts to evade federal income taxes.[1] The order, authorizes the IRS to serve what is known as a “John Doe” summons on the bank. The IRS uses a John Doe summons to obtain information about possible tax fraud by people whose identities are unknown. The John Doe summons approved by the court directs UBS to produce records identifying U.S. taxpayers with accounts at UBS in Switzerland who elected to have their accounts remain hidden from the IRS. It is highly likely that the IRS will be successful in its efforts to secure the account information from UBS.

Based on a statement submitted to the court by former UBS banker Bradley Birkenfeld, UBS employees assisted wealthy U.S. clients in concealing their ownership of assets held offshore by creating sham entities and then filing IRS forms falsely claiming that the entities were the owners of the accounts. According to Birkenfeld’s court statement, UBS had approximately $20 billion of assets under management in “undeclared” accounts for U.S. taxpayers.

Voluntary Disclosure

The court order could lead to the disclosure of thousands of U.S. residents who have failed to report UBS accounts. U. S. taxpayers who have banked with UBS should immediately seek the advice of a competent tax attorney. The IRS has a voluntary disclosure policy that may allow UBS clients to avoid harsh penalties and/or prosecution. The central concept of the voluntary disclosure policy is that the taxpayer must come forward and self identify before the IRS opens an investigation of that person.  Before approaching the IRS for a voluntary disclosure a competent tax attorney will review all appropriate facts and circumstances with a client to assure that the she qualifies for the program. After a review of the facts, in most matters the tax attorney will then approach the IRS to negotiate anonymously on behalf of the taxpayer and only upon agreement will the her identity be disclosed to the IRS.

The Law

The law requires a United States taxpayer to report all financial accounts in a foreign country if the total value of the accounts exceeds $10,000 at any time during the calendar year. A willful failure to report a foreign account can result in a penalty of up to 50 percent of the amount in the account at the time of the violation[2] or prosecution..

IRS Crackdown

Given its success in this case it is inevitable that the IRS will step up its efforts to find Americans utilizing tax haven banks. Since September 11 the U. S. Financial Crimes Enforcement Network has developed a coordinated program to find money laundering, foreign banking activity, and tax evasion. In most white collar crime cases the Justice Department offers plea bargains to individuals like Birkenfeld in return for cooperation in charging others involved in illegal activity. Therefore with increased resources being allocated to seeking out foreign bank activities by Americans we can anticipate  will the first of many bankers who cooperate to reduce their potential jail time. 

Background

On June 19 Birkenfeld pleaded guilty today to conspiring with an American billionaire real estate developer, Igor Olenicoff, Swiss bankers and his co-defendant, Mario Staggl, to help Olenicoff evade paying $7.2 million in taxes by assisting in concealing $200 million of assets in Switzerland and Liechtenstein.[3]

During the plea, Birkenfeld admitted that between 2001 and 2006, while he was employed as a director of UBS, he routinely traveled to and had contacts within the United States to help wealthy Americans conceal their ownership in assets held offshore and evade the payment of taxes on the income generated from those assets.

According to statements and documents filed with the court, Birkenfeld’s services to American clients violated a 2001 agreement that the UBS entered into with the United States. to identify and document any customers who received reportable U.S. source income or would withhold and anonymously pay a 28 percent withholding tax. This agreement was a major departure from historical Swiss bank secrecy laws under which Swiss banks concealed bank information from the IRS.

$20 Billion In Assets

In evidence provided by Birkenfeld to the court, managers and bankers at the firm, including Birkenfeld, assisted the U.S. clients in concealing their ownership of the assets held offshore by helping these wealthy customers create nominee and sham entities. This was done to prevent the risk of losing the approximately $20 billion of assets under management in the United States undeclared business.

The Scheme

Birkenfeld admitted that he and additional private bankers at UBS advised U.S. clients to place cash and valuables in Swiss safety deposit boxes, and purchase jewels, artwork and luxury items using the funds in their Swiss bank account while overseas. Additionally, they advised the clients to misrepresent the receipt of funds from UBS in the United States as loans from the bank; destroy all off-shore banking records existing in the U.S.; utilize Swiss bank credit cards that they claimed could not be discovered by U.S. authorities; and file false U.S. individual income tax returns that omitted income earned by the clients and fraudulently misrepresented that the clients did not have an interest in and signature authority over accounts held offshore.

Commissioner’ Comment

As an indicator of the importance of this case IRS Commissioner Douglas Shulman said on Julne 19, “I believe this case will send a strong signal to anyone hiding money in offshore bank accounts to avoid paying the taxes they should. The IRS will pursue people using offshore accounts in this manner as well as financial advisers and others who orchestrate these tax fraud schemes,”.[4]

Final Comment

In summary U. S. taxpayers who may have dealings with UBS should immediately seek the advice of competent tax counsel to determine their best options before the IRS successfully finds them by other means.