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IRS Offers Settlement Initiative for US Taxpayers: An Update on Undisclosed Offshore Account Investigations

Posted in Articles & Publications on July 30, 2009 | Share

Introduction

Swiss banking giant UBS AG (UBS) is facing ongoing pressure on all fronts—from the Department of Justice (DOJ), the Internal Revenue Service (IRS), U.S. Congress, and the international community—to disclose the names of offshore accountholders who use UBS accounts to avoid their taxes.  Federal authorities suspect that approximately 19,000 U.S. taxpayers have used 52,000 UBS accounts to hide $18 billion in assets—or $300 million in tax liabilities.  U.S. UBS accountholders who failed to disclose their offshore accounts to the IRS potentially face major repercussions and should carefully evaluate recent developments. 

Justice Department’s Ongoing Investigation

In June 2007, the Department of Justice and the IRS launched a highly-publicized civil and criminal investigation into undisclosed U.S. UBS offshore accountholders.  A major break in the investigation came in June 2008 when former UBS executive Bradley Birkenfeld pled guilty to conspiring to defraud the IRS by assisting U.S. UBS clients to avoid U.S. reporting requirements on income earned from offshore UBS bank accounts.  Notably, Mr. Birkenfeld admitted to helping real estate mogul Igor M. Olenicoff hide $200 million in offshore UBS bank accounts.  As part of Mr. Birkenfeld’s plea agreement, he disclosed to federal authorities that UBS held around $20 billion in “undeclared” assets belonging to as many as 20,000 U.S. customers.

Based primarily on these admissions and additional information provided by Mr. Birkenfeld, on July 1, 2008 a federal district court judge in Miami authorized the IRS to serve a “John Doe” summons on UBS. The Court’s “John Doe” summons order requires UBS to disclose to the IRS detailed account information on U.S. taxpayers who allegedly used UBS offshore accounts to conceal assets and failed to report income related to those assets for the purpose of evading U.S. taxation.  Under the court’s order, UBS must produce certain specified documentation and records to identify U.S. taxpayers who fall within the group or class of persons covered by the “John Doe” summons. 

Amid growing pressure from U.S. authorities investigating potential tax avoidance by U.S. taxpayers, in January 2009, UBS reported that it will close all secret offshore accounts held by U.S. accountholders.  UBS’s move to close all U.S. offshore accounts aids the federal probe of U.S. UBS accountholders because it helps create a paper trail for federal authorities to follow.  Once it closes the account, UBS will either transfer the funds to another bank of the accountholder’s choosing or to other accounts within UBS that are already registered with U.S. authorities.  Accountholders are required to report transfers in excess of $10,000 to the U.S. Department of the Treasury (“Treasury”).  Alternatively, UBS could mail a check for the full value of the account directly to the accountholders.  Accountholders can cash their checks and create a paper trail or not cash these checks and loose the value of their assets—effectively creating a catch-22 for the accountholder.  

While UBS’s closing of offshore accounts held by U.S. taxpayers makes the DOJ’s job easier, DOJ first and foremost wants names—identities of all U.S. taxpayers who held UBS offshore accounts.  Federal authorities may have gotten their wish, at least in part.  In February 2009 DOJ instituted criminal proceedings against UBS itself, alleging conspiracy to defraud the United States.  In a turn of events, on February 18, 2009 UBS and DOJ entered into a deferred prosecution agreement (“the Agreement”) whereby UBS agreed to cooperate with DOJ in its ongoing investigation and DOJ, in return, agreed not to prosecute UBS if certain conditions are met.  Under the Agreement, UBS is required to disclose the identities and account information of some 285 UBS US accountholders, as permitted by the Swiss regulatory agency the Financial Market Supervisory Authority (FINMA).  The names are set forth in a February 16, 2006 letter from DOJ to UBS, which is under seal by the Court.

DOJ has vowed to act swiftly and prosecute U.S. taxpayers disclosed in the Agreement.  On April 1, 2009 UBS accountholder Steven Rubinstein was indicted, becoming the first UBS accountholder indicted based on the disclosures in the Agreement.  Rubinstein, an accountant from Boca Raton, Florida, was charged with filing a false and fraudulent tax return.   In the complaint it’s alleged that Rubinstein hid over $6 million in a Swiss UBS account and failed to report these assets to the IRS.  On April 14, 2009,  Robert Moran, a yacht broker from Lighthouse Point, Florida, pled guilty in a Florida Federal District Court to one count filing false tax return for failing to disclose to the IRS $3.7 million held in an offshore UBS account.   More criminal indictments are sure to follow. 

UBS has said that it will contest the IRS’s efforts via “John Doe” summons to obtain accountholder names for all 52,000 U.S.-held UBS offshore accounts.  The Agreement also addresses the “John Doe” summons.  The Agreement provides that if UBS fails on appeal to prevent disclosure, UBS has to either surrender the names of U.S. accountholders or face criminal sanctions.  On February 20, 2009, in a filing in U.S. Federal District Court, UBS challenged disclosure of U.S.-held accounts covered by the John Does summons, asserting that disclosure violates both Swiss law and U.S.-Swiss tax treaties.   A trial is set for July 2009 to determine whether UBS will have to turn over the names of offshore accountholders to DOJ that will likely focus on the conflict between U.S. and Swiss law and U.S.-Swiss tax treaties.

Intersection of Swiss and U.S. Law

As previously stated, the Agreement is contingent on Swiss disclosure approval by FINMA the Swiss financial regulator.  On February 18, 2009, FINMA approved UBS’s transfer of account records on 285 U.S. accounts suspected of tax fraud and asked UBS to transfer the accountholder information.  On February 20, 2009, the Swiss Federal Administration Court temporarily granted an injunction filed by UBS accountholders against UBS and FINMA, halting disclosure.  However, it appears the injunction could not permanently prevent disclosure of information on U.S.-held UBS accounts, information that was turned over to FINMA and U.S. authorities.  This highlights the role of Swiss bank secrecy law and the potential obstacle it poses to the ongoing investigation.  

In Switzerland, bank secrecy is treated as a fundamental right, akin to the freedom of speech or religion in the United States.  Swiss banking law makes it a criminal offense to divulge any secret entrusted to a Bank, including an accountholder’s name.  However, pursuant to the U.S.-Swiss Double Taxation Convention (“Tax Convention”), Swiss banks may be required to disclose account information for suspected tax fraud under Swiss law but not for tax evasion, which is not recognized as a crime under Swiss law.  The Swiss distinguish tax fraud, which is a crime, from tax evasion, which is a civil infraction—a distinction codified in the Tax Convention.   While tax evasion is an act of omission—failing to report income or assets—tax fraud is an act of commission—actively lying to authorities.  Given that the majority of U.S. UBS account information concerns tax evasion—failure to disclose account assets on tax forms—and not tax fraud, Swiss law may provide a significant obstacle to disclosure. 

However, the Swiss Government may have signaled a major shift in Bank Secrecy policy—not without controversy.  Switzerland is facing growing international pressure to cooperate with tax evasion investigations.  World leaders who met at the April 2009 Group of Twenty (“G20”) Summit in London discussed ways to crackdown on tax havens—including withholding International Monetary Fund (IMF) and World Bank financing.   The Swiss, wishing to avoid tax haven status, preempted the G20 Summit.  On March 13, 2009, the Swiss Federal Counsel issued a statement, indicating that the Swiss intend to adopt international conventions on assistance in tax avoidance matters developed by the Organization for Economic Cooperation and Development (OECD), namely Article 26 of the OECD’s Model Tax Convention.  If adopted, the OECD Convention would require Swiss banks to disclose banking records for suspected tax evasion by foreign accountholders, which would include many more U.S. UBS accountholders.  

However, it is unlikely these changes will happen overnight.  The Swiss still need to negotiate a disclosure treaty with some 70 nations, including the U.S., and subject the treaties to a national referendum before Swiss bank secrecy laws are changed.  Given that over three-fourths of the Swiss public favor bank secrecy, passage will be difficult.  Furthermore, under an international agreement, U.S. authorities might still be required to identify the tax evaders along with evidence of tax evasion, which is difficult without names.  Negotiations between the U.S. and Swiss authorities will begin April 28, 2009 in Berne, Switzerland.   

What this Means for a U.S. UBS Accountholder

The DOJ and IRS have made it clear that they plan to pursue every U.S. taxpayer identified as having an undeclared account with UBS, as well as, U.S. taxpayers with undeclared accounts in Switzerland and other countries.  Those taxpayers whom the government decides to prosecute will potentially face prison time and severe monetary penalties upon conviction.  The most common charge the DOJ will likely bring against such taxpayers—willful failure to declare a foreign account—is a relatively easy criminal case for the DOJ to prove.  On taxpayers’ tax returns, they must answer whether they have any authority over, or interest in, a foreign account.  Any taxpayer who answers “yes” to the foreign account question and has $10,000 or more in foreign accounts must then file a Foreign Bank and Financial Account Report (FBAR) with Treasury.  To make its case, DOJ merely needs to establish that the taxpayer had authority over or interest in a UBS account and that he or she willfully failed to file an FBAR or report the income from the account’s assets to the IRS.  The willful failure to file an FBAR is punishable criminally by up to five years in prison and civilly by a penalty of $100,000 or 50% of the balance in unreported foreign accounts, whichever is greater. 

Additionally, U.S. taxpayers who transfer their assets from their closed UBS accounts to other bank accounts could face money laundering charges.  Even if the government does not prosecute a taxpayer, that taxpayer will still almost certainly be subject to a civil examination and subject to civil penalties of up to 75% of the amount in the unreported foreign account.

What Should an Undisclosed Offshore Account Holder Do?

To potentially avoid criminal prosecution, taxpayers should voluntarily come into compliance regarding any improperly reported or undeclared UBS offshore accounts (or other undeclared foreign accounts regardless of the bank) as soon as possible.  The best way for a taxpayer to come into compliance with the IRS is to make a voluntary disclosure of the accounts and acknowledge his or her failure to previously disclose them to the IRS.  If successful, the taxpayer can pay back taxes (and interest and penalties) now, with the assurance of the IRS that no criminal charges will be sought later.  The Wall Street Journal reported that many UBS accountholders have voluntarily disclosed their UBS accounts to federal authorities and have, thus far, avoided the most serious sanctions. Recent developments provide UBS accountholders with even greater incentive to disclose. 

On March 26, 2009, the IRS instituted a six month amnesty period, during which the agency will now waive some non-disclosure penalties if offshore accountholders voluntarily disclose their assets to the IRS.  Ordinarily, the penalty for deliberate non-disclosure of offshore accounts is $100,000 or 50% of an offshore account’s value each year the account is not disclosed to the IRS.  So, for a three year period, the accountholder could owe 150% of the accounts value.  Additionally, if the taxpayer is found guilty of fraud they could be subject to a 75% penalty on the unpaid taxes.  

Under the IRS’s amnesty policy, an accountholder would owe back taxes on the voluntarily disclosed account assets for the period from 2003-2008.   Additionally, the taxpayer would owe either 20% of the unpaid taxes per year for an “accuracy” penalty or 25% of the unpaid taxes per year for a “delinquency” penalty.  Finally, the accountholder would owe an additional 20% of the account’s total value.  However, the penalty may be reduced to 5% if the accountholder inherited the account or maintained an inactive account.  The amnesty policy is, of course, contingent on voluntary disclosurebefore the IRS investigates or audits the accountholder. 

Nevertheless, the IRS has indicated that this amnesty policy will be in effect for six months, after which the policy will be reevaluated.  After six months, there is no guarantee this policy will remain in effect.  Furthermore, the IRS emphasizes there is no guarantee that a taxpayer who makes a voluntary disclosure will not be prosecuted in the future.  Voluntary disclosures are extremely sensitive, complex and subject to strict rules and guidelines and, therefore, should not be undertaken without the advice of experienced counsel.  For example, a taxpayer’s eligibility to participate in the voluntary disclosure program is subject to strict qualification guidelines and accountholders already identified by the IRS are not eligible for voluntary disclosure.  Further, once a taxpayer is accepted into the voluntary disclosure program, the taxpayer must provide the IRS with full cooperation while their case is being reviewed. 

Alternatively, a taxpayer may choose to simply file amended returns and pay the tax due for the years at issue.  While this option allows a taxpayer to properly disclose the accounts and pay the income tax due to the IRS in a relatively stealth manner, it does not result in a closing agreement with the IRS that the IRS will not pursue further action against the taxpayer in the future.  All taxpayers must be aware of the risk that the amended returns will be “red-flagged” by the IRS for a criminal investigation that could potentially lead to tax evasion charges.  Given the high-profile nature of these cases, the risk is significant that amended returns identifying previously undeclared foreign bank accounts will be referred to the DOJ for further investigation.  It is important to note that the DOJ has a separatevoluntary disclosure policy from the IRS—a policy that can override the IRS if the DOJ decides to bring criminal sanctions against an accountholder. 

Conclusion

Recent actions by UBS and Federal authorities raise the stakes for U.S. taxpayers.  Specifically, by UBS closing U.S.-held UBS accounts and potentially disclosing names of accountholders to DOJ and IRS increases the likelihood that the IRS will identify undisclosed accounts and accountholders.  There do however remain barriers to the government’s investigation—namely Swiss bank secrecy laws—however recent developments suggest that there is no guarantee the Swiss law will prevent disclosure.  Once the IRS identifies the accountholder, it can begin an investigation of the accountholder and pursue felony charges against the taxpayer for failing to report the account and pay taxes on the account’s income.  Voluntary disclosure may be a viable option, given recent IRS action.  Any U.S. taxpayer who has an offshore UBS account and receives notice that their offshore account has been closed should contact the Thorn Law Group. 

For more information on this matter, see IRS Offers settlement initiative for us taxpayers:   An Update on undisclosed Offshore account Investigations at www.thorntaxlaw.com or contact Kevin E. Thorn at 202-349-4033 or ket@thornlawgroup.com.

IRS Offers settlement initiative for us taxpayers:   An Update on undisclosed Offshore account Investigations  is provided as an education service and is not intended to be and should not be construed as legal advice.  Readers with particular needs on specific issues should retain the services of competent counsel. 

Mr. Olenicoff pled guilty to the felonies of tax evasion and filing a false 2002 income tax return.  He paid $52 million in back taxes, interest and civil fraud penalties, agreed to bring all his money back to the U.S., and was sentenced to probation.  He is reportedly now cooperating with the UBS probe. United States v. Olenicoff, Case No. SA CR No. 07-227-CJC (C.D. Cal. 2007), Plea Agreement.  Similarly, in November 2008, Raoul Weil, the chief of UBS’s private bank, was indicted in federal court in Florida for his alleged role in helping hide from the IRS about $20 billion in assets belonging to about 20,000 UBS clients.  United States v. Weil, Case No. 08-60322-CR-COHN (S.D. Fla. 2008).

United States v. Birkenfeld, Case No. 08-60099-CR-ZLOCH (S.D. Fla. 2008), Statement of Facts.

In the Matter of the Tax Liabilities of John Does, Case No. 08-21864-McLenard/Garber, Order (S.D. Fla. 2008).

United States v. UBS AG, Case No. 09-60033-CR-COHN (S.D. Fla. 2009), Deferred Prosecution Agreement at ¶9

See Statement of Senator Carl Levin, Tax Haven Banks and US Tax Compliance: Obtaining the Names of US Clients with Swiss Accounts, U.S. Senate Committee on Homeland Security and Governmental Affairs, Permanent Subcommittee on Investigations (Mar. 4, 2009) [“Tax Haven Hearing”] at 4.

Lisa Jucca, Update 1: UBS Closing U.S. Clients’ Offshore Accounts, Reuters, Jan. 9, 2009,http://uk.reuters.com/article/marketsNewsUS/idUKL925159220090109 (last visited Jan. 26, 2009).

Ryan D. Donmoyer, UBS Offshore Customers Offered Eased Tax Penalties: Update 3, Bloomberg, Mar. 26, 2009.  


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