The next step in the IRS fight against offshore tax evasion may lead to the government’s use of stolen data.  Tax data thefts at HSBC in Switzerland and other offshore banks are leading more whistleblowers to come forward to U.S. tax authorities, Kevin Downing, a top Department of Justice prosecutor said on March 5, 2010.   The whistleblowers, including many former bank employees who worked in information technology, could help the U.S. government look for the next banks that may be helping clients evade taxes and further deter wealthy individuals from sending their money offshore.  “A lot of folks, and they seem to be IT (information technology) people, see what’s happening” in Germany and France and are coming to the U.S. with information”,  Downing said to a group of private and government lawyers at a conference in Washington.  “It’s a cottage industry right now,” he said, declining to name specific banks that could be implicated.

Igor S. Drabkin, J.D., Former IRS Attorney

UBS agreed last year to pay $780 million and hand over 4,450 client names to settle criminal and civil charges against the bank after it admitted it actively helped U.S. clients evade U.S. tax law.  Recently, we have seen that European governments are willing to use illegally obtained data to go after tax evaders. Germany has announced that it is prepared to pay for data offered by whistleblowers on clients of Swiss banks who may have been evading taxes, even if the information has been obtained illegally.  That announcement came after France announced it had obtained sensitive data belonging to potential tax evaders, some of which belonged to the Swiss private banking operations of HSBC

Tax enforcement authorities around the world are coordinating activities on a greater basis than ever and the U.S. may be the next country to use whatever information it can get to continue its efforts against offshore tax evasion.

If you have questions about compliance with the IRS requirements on foreign assets and financial accounts, please contact us at (310) 550-6200.  Former IRS Attorneys of Holtz, Slavett & Drabkin can assist you with resolving your tax problems.

Author: Igor S. Drabkin, J.D., Former IRS Attorney.

Copyright (c) 2010 Igor S. Drabkin.  All Rights Reserved.

Igor S. Drabkin, J.D., Former IRS Attorney

Swiss Suggest Fix for UBS Settlement to Go Forward

Switzerland will ask Parliament to turn a UBS deal with the U.S. (which provided for disclosure of 4,450 accounts and  got UBS off the hook in a John Doe Summons case) into binding law.  That would plug a legal hole that is stopping Berne from honoring the agreement. Our readers may recall that UBS and the Swiss government agreed in August of 2009 to disclose 4,450 secret accounts belonging to U.S. citizens.  The settlement, however, hit a stumbling block after a Swiss court ruled in January of this year that such a transfer of data would breach existing Swiss law. 

By asking its Parliament to approve the deal, Switzerland would eliminate a legal distinction between tax fraud and tax evasion in providing assistance to the U.S. and be allowed to deliver the data the IRS is seeking.  The January ruling  by the  Swiss administrative court created an embarrassment for the Swiss government as it risked prolonging a legal nightmare for UBS.  UBS said in a statement it intended to fulfill all commitments under both a criminal and civil settlement. This included providing relevant client account information to the Swiss tax authorities.

Igor S. Drabkin, J.D., Former IRS Attorney

On March 5, 2010, Igor Drabkin will be one of the speakers at a symposium called “Changing Face of Foreign Asset Protection” at Pepperdine University School of Law in Malibu, California.  The symposium is sponsored by the Journal of Business, Entrepreneurship, and the Law (“JBEL”).  Igor will be discussing IRS enforcement with respect to offshore financial activities, incluing the recent UBS case and the Offshore Voluntary Disclosure Program.

On February 4, 2010, Mary Gorman, IRS Assistant Division Counsel, announced that the IRS National Research Program study on employment taxes is scheduled to begin by the end of March of this year.  The IRS will randomly select 2,000 taxpayers for comprehensive, random employment tax examinations each year for the next three years.

Igor S. Drabkin, J.D., Former IRS Attorney

Although the IRS may look at any line on an employment tax return during the audits, the examinations will primarily focus on the following issues:

(1) worker classification (employee vs. independent contractor),

(2) fringe benefits,

(3) officer’s compensation, and

(4) review of 1099s with either no taxpayer identification number (TIN), or TIN/name mismatches.

The IRS is currently training its agents on the procedures to follow during the audits. The bulk of the exams will be conducted by the IRS Small Business/Self-Employed Division. The IRS is hoping that the study will help it improve its examination techniques and close the employment tax gap (i.e., the difference between what is paid in taxes and what should be paid).

After the case is received in Philadelphia, the IRS Revenue Agent will send a letter along with an Informaiton Document Request (IDR).  After the information requested in the IDR is provided, the IRS Revenue Agent will contact the representative to determine how the case will proceed.  The cases will utlimately conclude with a Closing Agreement. 

Former IRS Tax Attorneys at Holtz Slavett & Drabkin are available to assist you with your Offshore Voluntary Disclosure.

Author: Gary M. Slavett, J.D., LL.M., Former IRS Attorney.

Copyright (c) 2010 Gary M. Slavett. All Rights Reserved.

Igor S. Drabkin, J.D., Former IRS Attorney

On January 22, 2010, an anonymous client of UBS AG won an appeal to prevent her account data from being handed over to U.S. authorities as part of a deal which was supposed to give details on 4,450 UBS clients to the U.S.  The Swiss administrative court said that the existing tax agreement with the United States only allowed for data to be disclosed in cases of “fraud or the like.”  The five-judge panel ruled that under Swiss law, the failure to file a W-9 form is considered the civil offense of tax evasion, not the crime of tax fraud.

Back in November, The Swiss justice department said that most of the people whose accounts were to be handed over to the U.S. authorities were suspected of serious fraud rather than simple tax evasion. The department said it would hand over the names of wealthy American clients of UBS with accounts holding more than 1 million Swiss francs ($986,200) where there was a reasonable suspicion of tax fraud. Accounts of a lesser size, as low as 100,000 Swiss francs, could be included in certain circumstances when there was a “scheme of lies” identified. The country would also hand over the names of U.S. citizens holding offshore company accounts with UBS if they were suspected of tax fraud or similar, regardless of whether they were resident in the U.S. or elsewhere.

The January 22nd decision casts doubt on whether Switzerland could hand over the accounts of people who did not give proper documentation, but did not act fraudulently.  Nevertheless, U.S. tax authorities said they expect the Swiss to honor the terms of that deal. The Swiss cabinet is supposed to discuss this week how to ensure the implementation of the Swiss-U.S. tax agreement following the court’s decision, it said in a statement.  UBS said it had taken notice of the court’s decision but did not comment further.

IRS offshore voluntary disclosure program, which expired on October 15, 2009, has yielded 14,700 names to the IRS.

If you have questions about the voluntary disclosure practice or foreign bank accounts, please contact us at (310) 550-6200.  Former IRS Attorneys of Holtz, Slavett & Drabkin can assist you with resolving your tax problems.

Author: Igor S. Drabkin, J.D., Former IRS Attorney.

Copyright (c) 2010 Igor S. Drabkin.  All Rights Reserved.

Igor S. Drabkin, J.D., Former IRS Attorney

Over 14,700 voluntary disclosures were made under IRS’s special offshore voluntary compliance program that ended on October 15, 2009. The IRS Commissioner stated that it will be mining these disclosures for information to identify “financial institutions, advisors, and others who promoted or otherwise facilitated US persons hiding assets and income offshore and attempted to shirk their tax responsibilities at home.”

On December 2, 2009, the Department of Justice announced that it has filed papers seeking a federal court order authorizing the IRS to serve a “John Doe summons” on the Stanford Group Company (SGC) and related entities to provide documents identifying those U.S. taxpayers holding foreign accounts at or through SGC from 2002 through 2009. SGC, a Texas corporation, is a securities broker dealer that is part of the Stanford Financial Group, a privately held global network of independent, affiliated financial services companies that is run by Robert Allen Stanford. One service provided by SCG was the placement of funds in accounts at Stanford International Bank (SIB), an offshore private bank in Antigua.

The government asked the U.S. District Court for the Northern District of Texas in Dallas to let it serve the John Doe summons on Ralph Janvey, the court-appointed receiver for Stanford and related entities.  Based on a declaration of IRS Revenue Agent Daniel Reeves, filed with the court in support of the petition, the IRS has evidence volunteered from a U.S. taxpayer that account statements and Form 1099s from Stanford-controlled entities did not include interest or income generated from SIB accounts or certificates of deposits. The information sought in the John Doe summons will allow the government to review each taxpayer’s income to determine if there are any understatements or misstatements of income as well as to verify if Stanford’s U.S. clients properly filed Reports of Foreign Bank and Financial Accounts (FBARs).  The bank’s financial papers show total deposits of $8 billion in 2008.  The government wants information from Janvey on any U.S. clients who had accounts through Stanford units from 2002 through 2008.

This new “John Doe” summons case indicates that the government’s enforcement action against UBS was not a one-hit wonder, but rather a first step in the government’s effort to eradicate opportunities for U.S. taxpayers to hide assets offshore. The Stanford case is the next step in the offshore enforcement process.

As further evidence of government’s intent, the IRS announced that its newly set up unit to catch rich tax cheats hiding their wealth in complex business entities is rapidly taking shape with the hiring of hundreds of employees. The IRS declared that “hundreds” of people have already been hired to staff the new unit. The high-wealth unit is focusing on trusts, real estate investments, privately held companies and other business entities controlled by rich individuals. Tax authorities in Japan, Germany and the United Kingdom have also created similar units and they may cooperate with the IRS.   The IRS is also opening new criminal offices in Beijing, Panama City and Sydney to focus on funds flowing out of Europe and into Asia, in part because of a heightened focus on international enforcement in Europe. The IRS goal is to get those up and running before September 30, 2010.

Former IRS Attorneys of Holtz, Slavett & Drabkin can assist you with resolving your tax problems, including offshore financial accounts, and compliance with the IRS requirements. You can reach us at (310) 550-6200.

Author: Igor S. Drabkin, J.D., Former IRS Attorney.

Copyright (c) 2009 Igor S. Drabkin.  All Rights Reserved.

Igor S. Drabkin, J.D., Former IRS Attorney

IRS Calls Offshore Voluntary Disclosure Program a Success.  What if You Did Not Participate in the Program?

Last week, IRS Commissioner Douglas Shulman announced that about 14,700 taxpayers participated in the agency’s voluntary disclosure program revealing undisclosed accounts and assets in more than 70 countries. Under the IRS amnesty program initiated in March of 2009, taxpayers with hidden foreign financial accounts had until October 15, 2009 to come forward.  As the incentive for coming forward, the taxpayers avoided criminal prosecution and faced reduced penalties.

According to Shulman, participation in the IRS’s amnesty program was “unprecedented” and the final number was nearly double the agency’s estimate in October.  The Commissioner promised to closely monitor the voluntary disclosures in order to learn more about advisors and institutions that facilitated evasion.  Shulman also emphasized that the Service’s investigation into global tax evasion is not limited to UBS or Switzerland.  The Commissioner stated that the IRS will be looking at other foreign banks with a large number of U.S. clients.  The IRS is still in the early stages of a multiyear-effort to put a “serious dent in offshore tax evasion,” Shulman added.

Taxpayers who made a disclosure under the IRS offshore amnesty program, which expired on October 15^th, continue to work their way through the program, clearing the IRS Criminal Investigations unit, and moving towards the determination of their tax liabilities and penalties with the IRS civil examination function.  But what should be done by those who did not come forward before the October 15^th deadline?

In light of the IRS Commissioner’s statements, Service’s overall aggressive position on offshore accounts, and overall tax climate, it is likely that the IRS will continue its enforcement in this area.  Those taxpayers who missed the October 15^th deadline, but still want to protect themselves from potential criminal prosecution, still can use IRS Voluntary Disclosure Practice.  Internal Revenue Manual 9.5.11.9 states that a voluntary disclosure will be considered along with all other factors in the investigation in determining whether criminal prosecution will be recommended.  Although a voluntary disclosure will not automatically guarantee immunity from prosecution, however, as a matter of practice, a voluntary disclosure may result in prosecution not being recommended.

A taxpayer who wants to make a disclosure, must do so before the IRS initiates its own audit or investigation, or obtains information about the taxpayer’s non-compliance.  A voluntary disclosure occurs when it is truthful, timely, complete, and when the taxpayer cooperates with the IRS in determining his or her correct tax liability; and the taxpayer makes good faith arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable. We note that voluntary disclosure practice does not apply to taxpayers with illegal source income.  A disclosure is usually initiated by a taxpayer or taxpayer’s representative contacting the IRS Criminal Investigations unit.

Even if you missed the October 15^th deadline for the IRS offshore amnesty program, making a disclosure now may still achieve the same major goal – prevent criminal prosecution.  Although making a disclosure through the general voluntary disclosure practice outlined in IRM 9.5.11.9 does not provide the same guarantees on the civil penalties, it is still possible to negotiate the penalties with the IRS examiners based on the applicable facts and argue what penalties are applicable to a specific situation.

If you have questions about the voluntary disclosure practice or foreign bank accounts, please contact us at (310) 550-6200.  Former IRS Attorneys of Holtz, Slavett & Drabkin can assist you with resolving your tax problems.

Author: Igor S. Drabkin, J.D., Former IRS Attorney.

Copyright (c) 2009 Igor S. Drabkin.  All Rights Reserved.

The voluntary disclosure initiative that was launched in late March expires on October 15, 2009.  Under the amnesty offer, taxpayers who come forward to declare income from offshore or secret bank accounts get the certainty of reduced fines and general immunity from criminal prosecution.  Under the terms of the program. the taxpayers who come forward must pay back taxes and interest, plus a penalty of 20% of their highest account balance over several years.

Individuals who hid illegally sourced income do not qualify for the amnesty. Those who set up elaborate separate companies to hide their income also do not generally qualify.  Outside of the program, individuals who hide their money offshore face a potential fine of 50% of the highest account balance for each year.  Shulman  warned that those seeking a better deal should act before the deadline.

Based on the Commissioner’s comments and prior IRS announcements, we believe that the government will continue its efforts to crack down on those taxpayers who hide their income or assets offshore.  We remind everyone that the Offshore Voluntary Disclosure Program expires October 15th, and that the window of opportunity to avoid criminal prosecution and huge civil penalties may close.  Former IRS Attorneys of Holtz, Slavett & Drabkin are still available to talk about your foreign bank accounts and eligibility to participate in this voluntary disclosure program.  You can call us at (310) 550-6200.

Author: Igor S. Drabkin, J.D., Former IRS Attorney.

Copyright (c) 2009 Igor S. Drabkin.  All Rights Reserved.

Igor S. Drabkin, J.D., Former IRS Attorney

Another client of UBS AG, one of the Swiss banking giants, has pleaded guilty to filing a federal income tax return.  According to the U.S. Department of Justice, Roberto Cittadini of Bellevue, WA, accepted responsibility for concealing nearly $2 million in Swiss bank accounts. Cittadini failed to report income from bank accounts under his control at UBS in Switzerland on his individual income tax returns from 2001 through 2003.  He also failed to file a Report of Foreign Bank and Financial Accounts (FBAR) for each of those years. He faces a maximum sentence of three years incarceration and a maximum fine of $250,000, DOJ said, adding that Cittadini agreed to pay a civil FBAR penalty based on 50% of the highest account balance from 2001 to 2007. Cittadini’s guilty plea follows recent guilty pleas in UBS-related cases by individuals in California, Florida, New Jersey and New York.  “Individuals all over the country who are hiding income and assets in offshore accounts would be well-advised to promptly come in and come clean before the government learns about their accounts through other channels,” said John DiCicco, acting assistant attorney general of the Justice Department’s Tax Division. “IRS continues its pursuit of those hiding their income and assets in offshore accounts,” said Eileen Mayer, Chief of IRS’s Criminal Investigation. “We encourage people who have been hiding money offshore to come forward by Oct. 15 to take advantage of the special provisions in our voluntary disclosure effort.”

We remind everyone that the deadline for voluntary disclosing foreign financial accounts to the IRS expires on October 15, 2009.  On September 21, the IRS extended the deadline to October 15th, but specifically stated that this deadline will not be extended.

If you have questions about the Offshore Voluntary Disclosure program or FBARs, please contact Former IRS Attorneys of Holtz, Slavett & Drabkin at (310) 550-6200.

Author: Igor S. Drabkin, J.D., Former IRS Attorney.

Copyright (c) 2009 Igor S. Drabkin.  All Rights Reserved.