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    joann-m-weiner

    Joann M. Weiner

    Contributor

    IRS Gives Suspected UBS Tax Cheats More Time to Confess

    Posted:
    09/23/09
    Filed Under:Economy, Taxes, Woman Up
    17 Comments  + 
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    Today was supposed to have been the drop-dead date for Americans with hidden offshore bank accounts to come clean with the IRS. Just days before the Sept. 23 deadline, however, the IRS gave these account holders, some of whom have hidden their accounts for decades, until Oct. 15 to report them.
    There are many reasons to grant the extension. Apparently, there are so many tax cheats coming forward that the tax lawyers are overwhelmed and are unable to file the paperwork before the deadline.
    Yet, the extension comes with a certain distasteful feeling. U.S. account holders have been given plenty of time to report their holdings, and they have had plenty of time to learn the rules. On its Web site, the IRS provides all the information that offshore account holders need to know to comply with U.S. law. In particular, taxpayers must report the existence of any foreign account with an aggregate value of more than $10,000 at any time during the year. And, as everyone who earns income outside of the United States -- whether through employment abroad or through a mutual fund that owns foreign shares -- should know, the U.S. asserts its tax jurisdiction on all income, wherever earned.
    Perhaps a bit of leniency will go a long way. IRS Commissioner Doug Shulman is intent to track down not only tax evaders but the tax promoters who help them hide their wealth offshore. In his March 31 testimony before the House Ways and Means Subcommittee on Select Revenue Measures, Shulman said, "It is outrageous that wealthy individuals are hiding assets overseas and unlawfully avoiding U.S. tax."
    To encourage compliance, Shulman made it clear that those who come in voluntarily will be treated with greater leniency than those the IRS uncovers on its own. If a taxpayer comes to the IRS and admits to previous errors, he or she will pay back-taxes and interest for six years, plus either an accuracy or a delinquency penalty on all six years. The taxpayer also will pay a penalty of 20 percent of the amount in the foreign bank accounts in the year with the highest aggregate account or asset value. (Without the special voluntary compliance initiative, account holders could face a penalty of up to 50 percent of the highest annual balance in each account for each of the past three years.)
    The IRS reduces to 5 percent the penalty for account holders who may have inherited these offshore accounts but never made additional deposits and paid all taxes due on the account.
    The commissioner warned that those who "continue to hide their head in the sand" will face the full civil and criminal penalties available. These include the maximum penalty for the willful failure to file the Report of Foreign Bank and Financial Account (known as an FBAR), and the fraud penalty.
    There are clear benefits of voluntary compliance. As the IRS shows on its Web site, a taxpayer who voluntarily reports the existence of a previously hidden account with $1 million, and that earned $50,000 interest each year, will pay a total penalty and fine of $380,000. By contrast, if the IRS finds out about the account, the account holder faces $2,306,000 in various penalties and the possibility of criminal prosecution. The criminal penalties are not trivial. Failing to file an FBAR subjects a person to a prison term of up to 10 years and criminal penalties of up to $500,000.
    The IRS is to be commended for encouraging tax cheats to come forward. The program appears to be working, with more than 3,000 taxpayers coming forward so far this year, compared with fewer than 100 for all of 2008.
    Though the compliance initiative is aimed at all U.S. taxpayers, account holders with the Swiss banking giant UBS are the main focus. In June 2008, UBS's Bradley Birkenfeld pleaded guilty to helping a U.S. client evade his tax liability, and the case provided information on the bank's internal practices to American officials. In February of this year, UBS admitted that it had violated U.S. securities law and had helped its American clients hide their income from tax authorities. It agreed to pay $780 million in penalties and unpaid taxes in exchange for a deferred prosecution agreement with the Department of Justice. Simultaneously, the IRS and Justice pursued a related civil case (known as the John Doe summons) concerning the names of up to 52,000 account holders with the Swiss bank.
    In August, UBS reached a settlement agreement regarding that case and, as part of the deal, agreed to turn over the names of approximately 4,450 UBS account holders suspected of using their Swiss accounts to evade taxes. According to the IRS, these accounts held more than $18 billion at one point. UBS will give the names to Swiss tax officials, who will then determine whether to turn them over to U.S. tax authorities. The agreement, which contains details regarding how the Swiss government will make its determinations, remains sealed for now. The IRS has said that it will unseal the document by Nov. 17.
    The arrangement has left some 47,000 UBS account holders in a quandary.
    Investors with undeclared Swiss bank accounts face an unpleasant choice. They could play a form of Russian roulette and continue to hide their accounts on the gamble that the Swiss will not turn over their information to U.S. authorities. But the IRS has made it clear it will show no mercy to account holders who continue to violate U.S. law. As Commissioner Shulman emphasized, taxpayers lose the opportunity to participate in the Voluntary Compliance Initiative if the IRS already knows the accounts exist. Moreover, the IRS makes it clear that information about the account can come from many sources -- the Swiss government, Swiss banks, informants or even whistle-blowers. (Those who use Swiss account to hide assets from their ex-wives may be particularly worried about this point.)
    The second option is, of course, for the account holders to own up to their offshore holdings.
    On Sept. 10, UBS began notifying some U.S. account holders that their accounts appear to be "within the scope of the IRS treaty request" – a reference to the U.S.-Switzerland Double Taxation Treaty. UBS also said that it would give Swiss authorities all of the names on a rolling basis over the next nine months. According to Reuters, the bank transferred the first 500 files on Sept. 11.
    The next step is for the Swiss government to decide whether to disclose this information to the IRS. If the government agrees that the account holders look like tax evaders, those names will be provided. Account holders can appeal to Switzerland's Federal Administrative Court before the data is turned over to the U.S. The Swiss government will hire up to five additional administrative judges to accommodate the expected increase in filings.
    Filing an appeal, however, may not be a wise strategy. As UBS spelled out in its notification letter, anyone doing so must notify the U.S. Attorney General of this legal step. Thus, unless they choose to violate the notification law, filing an appeal in itself reveals to the U.S. government the existence of their account.
    Therefore, the decision facing certain UBS account holders appears obvious. For some 47,000 people, Swiss banking secrecy no longer provides the cover it once did. It's better to come forward now than wait for the IRS to come get you.

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    Joann M. Weiner

    Joann Martens Weiner is a lecturer at George Washington University, where she teaches public economics... more

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