November 16, 2013
Wall Street Journal
Why Homeowners Could Avoid a Tax Hit:
Troubled homeowners who get a break from their mortgage lenders could face a hefty tax bill next year if a key provision expires at the end of the year, though state laws could determine which borrowers will have to write a check to Uncle Sam.
Homeowners who live in states where mortgages are non-recourse—that is, where they aren’t personally liable for the unpaid balance—may avoid the potential tax hit even if Congress doesn’t act, according to a letter sent by the IRS released by Sen. Barbara Boxer (D., Calif.) on Friday.
The tax provision currently allows some homeowners—mostly those facing foreclosure—to avoid paying taxes on certain relief that they receive on their mortgages. The IRS considers debt forgiveness to be a form of taxable income. That means homeowners who sell their homes for less than the amount they owe in a short sale could face a tax bill.
In 2007, as the foreclosure crisis spread, Congress exempted some homeowners from counting certain kinds of forgiven mortgage debt as taxable income in order to encourage banks and borrowers to seek foreclosure alternatives. Congress retroactively extended the provision earlier this year, after it expired on Dec. 31, 2012. The provision is set to expire this coming Dec. 31 and there appears to be less urgency in Congress right now to pass an extension.
In the letter to Sen. Boxer, the IRS clarified that certain non-recourse debt forgiven by lenders wouldn’t typically be considered taxable income by the IRS. This means that for most California borrowers, the expiration of the tax provision may not have a meaningful effect.
Oct 31, 2013
IRS WARNS OF PHONE SCAM
The IRS has issued a warning regarding "a sophisticated phone scam targeting taxpayers, including recent immigrants," that has become increasingly pervasive throughout the country. (IR 2013-84) The targeted individuals receive a phone call and are told they owe money to IRS and immediate payment is required using a pre-loaded debit card or wire transfer. If prompt cooperation is not forthcoming, victims are threatened with arrest, deportation, or suspension of a business or driver's license. Additional characteristics of the scam include the following: scammers use false names and IRS badge numbers; scammers may be able to provide the last four digits of a victim's Social Security number; scammers may spoof the IRS toll-free phone number on caller ID; and after making various threats, scammers hang up and others call back stating they are from the local police department or department of motor vehicles. "If someone unexpectedly calls claiming to be from the IRS and threatens police arrest, deportation or license revocation if you don't pay immediately, that is a sign that it really isn't the IRS calling," said Daniel Werfel, acting IRS commissioner.
October 28, 2013
IRS Faulted for Problems Conducting Parallel Civil and Criminal Investigations of Tax Preparers
The Internal Revenue Service’s Criminal Investigation unit does not always coordinate with the IRS’s civil compliance functions when it becomes aware of an abusive tax preparer or promoter, according to a new report that suggested improved communication would allow the IRS to further explore all potential civil and criminal remedies in such cases.
The report, from the Treasury Inspector General for Tax Administration, noted that in 2005, the IRS established a policy that encourages civil enforcement actions in collaboration with criminal investigations when abusive tax promotions are ongoing and the possibility of harm to the federal government is significant. TIGTA noted that if communication and coordination are not thorough and consistent, the full range of criminal and civil remedies available may not always be explored, resulting in missed opportunities to seek injunctions to prevent further harm to the government and assess civil penalties for abusive tax preparer and promoter behavior.
In the report, TIGTA found that the processes for communication and coordination of parallel investigations between the applicable IRS civil compliance functions and the IRS’s Criminal Investigation unit could be improved. The civil compliance functions are generally following the procedures that require them to communicate with the Criminal Investigation unit their intent to conduct a civil investigation of an abusive tax preparer/promoter. However, the CI unit doesn’t always coordinate with the civil compliance functions when it learns about a shady tax preparer or promoter. Better communication between the civil and criminal functions would allow the IRS to further explore all potential civil and criminal remedies in these types of cases.
IRS procedures require that quarterly coordination meetings be held for ongoing parallel investigations. However, there is no consistent requirement to document these meetings, TIGTA noted. There is thus no assurance that the meetings took place and that all required attendees were present. When the required meetings are not held, the civil compliance functions may be unaware that IRS criminal investigators have concluded an investigation, possibly preventing the appropriate civil actions from being taken.
In addition, reconciliation of investigation case inventories among the various civil compliance functions and CI could be improved to provide IRS management with the ability to better monitor the progress of parallel investigations and ensure that the program is effective, TIGTA pointed out.
TIGTA recommended that the IRS revise the memorandum used for the civil compliance function notification process to clearly identify that the criminal investigation being initiated has abusive tax preparer/promoter characteristics. The report also suggested that the IRS revise its procedures to ensure that all quarterly coordination meetings are conducted and documented and ensure that all procedures are consistent. The IRS should also improve its employees’ awareness of the purpose of parallel investigations through the periodic dissemination of information and training; and it should conduct periodic reconciliations of the various investigation inventory systems used to track parallel investigations, according to the report.
In response to the report, IRS officials agreed with all four recommendations and plan to take corrective actions. The IRS said it plans to revise the memorandum used to notify the civil compliance functions, develop a standardized check sheet to document quarterly coordination meetings, and update procedures relevant to parallel investigations to ensure consistency across functions. IRS officials also plan to improve awareness by creating a training course on parallel investigations for use by civil examiners and special agents. Finally, the IRS plans to conduct a monthly reconciliation of the various inventory systems to help ensure that parallel investigations are properly tracked and monitored.
However, the IRS also pointed out some shortcomings in TIGTA’s findings. “Parallel investigations achieve maximum compliance by effectively balancing criminal and civil enforcement actions to stop the promotion of abusive tax avoidance schemes,” wrote Faris Fink, the commissioner in charge of the IRS’s Small Business/Self-Employed Division, in response to the report. “As your report states, due to the inherent risks involved and the rules and regulations governing both criminal and civil processes, additional procedures and increased oversight are necessary when considering the use of parallel proceedings. Our planned corrective actions based on your recommendations will help to strengthen our current procedures. We would note, however, that the findings in your report regarding parallel investigations and abusive tax return preparers and promoter cases cannot be projected to the respective case populations because the results were derived from judgment samples and are therefore not representative of the entire population.”
Sep 18, 2013
Beanie Babies Creator Ty Warner to Admit Tax Evasion
Ty Warner, the creator of Beanie Babies plush toys, was charged with tax evasion for failing to report $3.2 million in income on a secret Swiss bank account that held as much as $93.6 million in assets.
Warner, 69, will plead guilty in federal court in Chicago for hiding income at UBS AG (UBSN), the largest Swiss bank, U.S. Attorney Gary Shapiro said today in a statement. Warner falsely reported his 2002 income as $49.1 million, omitting money he made on his UBS account. He amended his 2002 return in 2007, yet understated his tax by $885,300, according to court papers.
Since 2009, the U.S. has prosecuted about 70 U.S. taxpayers and 30 bankers, lawyers and advisers in a crackdown on offshore tax evasion. Warner, the sole owner of TY Inc., held the highest account balance of the taxpayers prosecuted in the crackdown.
“This is an unfortunate situation that Mr. Warner has been trying to resolve for several years now,” Warner’s attorney, said in a statement. “Mr. Warner accepts full responsibility for his actions with this plea agreement.”
Warner, of Oak Brook, Illinois, also will pay a civil penalty of $53.6 million for failing to file a required Report of Foreign Bank and Financial Accounts, or FBAR, according to Scandaglia. He is scheduled to appear in court for his plea on Oct. 2, according to Shapiro’s spokesman Randall Samborn.
Through his Ty Warner Hotels & Resorts, he owns the Four Seasons Hotel New York, the San Ysidro Ranch in Santa Barbara, California, and Las Ventanas al Paraiso in Los Cabos, Mexico, according to the company’s website.
Warner opened a secret account at UBS in 1996. From there, he transferred $93.6 million in December 2002 to another secret Swiss account at Zurcher Kantonalbank, according to his criminal charging document known as an information.
He disguised his ownership of the ZKB account by holding it under an entity called the Molani Foundation, court papers show. In 2002, he failed to report his UBS income of $3.2 million to his outside accountants, and didn’t file an FBAR. The tax return he filed for 2002 also was false, according to the information.
In 2009, Warner tried to avoid prosecution through an amnesty program at the Internal Revenue Service known as the Offshore Voluntary Disclosure Program, according to Scandaglia. He was denied entry, the lawyer said.
Warner found Ty Inc. in 1985. It took off after he created the Beanie Baby, a children’s toy, in the 1990s. Ty Inc., based in Westmont, Illinois, is a $4.5 billion business, according to his biography. Since 1995, he has donated almost $140 million in cash and plush toys to charities and organizations.
More than 38,000 U.S. taxpayers have avoided prosecution through the amnesty program. They have repatriated more than $5.5 billion held offshore, while telling the IRS about the banks, bankers and other enablers who helped them hide their money.
UBS avoided prosecution by paying $780 million in 2009, admitting it aided U.S. tax evasion and handing over data on 4,500 accounts. Wegelin & Co., the oldest Swiss private bank, pleaded guilty in January and paid $74 million.
Fourteen firms, including Credit Suisse Group AG (CSGN), the second-largest Swiss bank; HSBC Holdings Plc (HSBA), the largest European bank; and Julius Baer Group Ltd. (BAER), Switzerland’s third-largest wealth manager, are under criminal investigation. On Aug. 29, the U.S. announced a program for other Swiss banks to avoid charges.
They must pay penalties, disclose their cross-border activities, give detailed account information for U.S. clients, describe other banks that got their secret accounts, and cooperate in requests for information under a U.S.-Swiss tax treaty. Banks that don’t come forward by the Dec. 31 deadline could face criminal charges.
Warner faces as long as five years in prison and a fine of $250,000. Most of the taxpayers sentenced in the offshore crackdown got probation.
Another UBS client in Chicago, Peter Troost, was sentenced on July 16 to a year and a day in prison for evading more than $1 million in taxes on more than $3.3 million in income. Troost owns Troost Memorials, which designs and sells cemetery monuments and gravestones. He pleaded guilty in March.
July 5, 2013
Germany strikes pact with U.S. to fight
BERLIN, (Reuters) - Germany approved new legislation on Friday that will assist the United States in cracking down on tax evasion by its citizens, joining a series of countries to strike such deals with Washington.
The new law enacts the Foreign Account Tax Compliance Act (FATCA), which went into force in the United States in 2010, and requires foreign financial institutions to tell the U.S. Internal Revenue Service about Americans' offshore accounts worth more than $50,000.
Germany's upper house of parliament rubber-stamped the bill after it was earlier approved by the lower house.
Britain, Denmark, Ireland and Mexico have struck such accords with the United States.
July 2, 2013
IRS Does Not Comply With the Law in 30% of Seizures of Taxpayers' Property
The Treasury Inspector General for Tax Administration yesterday released Fiscal Year 2013 Review of Compliance With Legal Guidelines When Conducting Seizures of Taxpayers’ Property (2013-30-061):
Taking a taxpayer’s property for unpaid tax is commonly referred to as a “seizure.” To ensure that taxpayers’ rights are protected in this process, the IRS Restructuring and Reform Act of 1998 amended the seizure provisions in I.R.C. §§ 6330 through 6344. ... TIGTA is required under § 7803(d)(1)(A)(iv) to annually evaluate the IRS’s compliance with the legal seizure provisions to ensure that taxpayers’ rights were not violated while seizures were being conducted...
TIGTA reviewed a random sample of 50 of the 738 seizures conducted from July 1, 2011, through June 30, 2012, to determine whether the IRS is complying with legal and internal guidelines when conducting each seizure. In the majority of seizures, the IRS followed all guidelines. However, in 15 seizures, TIGTA identified 17 instances in which the IRS did not comply with a particular I.R.C. requirement. Specifically, TIGTA found:
• The sale of the seized property was not properly advertised. (§ 6335(b))
• The amount of the liability for which the seizure was made was not correct on the notice of seizure provided to the taxpayer. (§ 6335(a))
• Proceeds resulting from the seizure of properties were not properly applied to the taxpayer’s account or seizure and sale expenses were not properly charged. (§§ 6341 and 6342(a))
• The balance-due letter sent to the taxpayer after sale proceeds were applied to the taxpayer’s account did not show the correct remaining balance. (§ 6340(c))
HSBC India Fears 'Significant' Penalty in NRI Tax Evasion Probe
The US tax department is investigating possible evasion of federal income taxes by the American residents of Indian origin through use of their accounts with HSBC India
LONDON: Global banking major HSBC has said it may face "significant" penalties from the US authorities with regard to an ongoing probe into suspected tax evasion by the US-based clients of its Indian unit, among other cases.
The US tax department is investigating possible evasion of federal income taxes by the American residents of Indian origin through use of their accounts with HSBC India.
HSBC said in a regulatory filing last night that it is cooperating with the US Department of Justice and the Internal Revenue System (IRS) in their probes into whether certain HSBC companies and employees acted appropriately in relation to certain customers with US tax reporting requirements.
The disclosure was made by UK-based HSBC as part of an update of the ongoing "regulatory and law enforcement investigations", along with the bank's first quarter results.
About the case involving its Indian unit, the banking giant said that HSBC Bank USA in April 2011 had received a 'John Doe' summons from the IRS, directing it to produce records with respect to US-based clients of an HSBC Group company in India.
"We have cooperated fully by providing responsive documents in our possession in the US to the IRS," it added.
In the US tax parlance, the 'John Doe' summons is one issued by the Internal Revenue Service to a third party to provide information on an unnamed, unknown taxpayer with potential tax liability. The unnamed person is addressed as 'Jon Doe' in such summons.
About another case, HSBC said it had also received in April 2011 a subpoena from the US markets regulator SEC, directing HSBC Bank USA to produce records related to HSBC Private Bank Suisse SA's cross-border policies and procedures and adherence to US broker-dealer and investment adviser rules and regulations when dealing with US resident clients.
"HSBC Bank USA continues to cooperate with SEC," it said. HSBC said that "based on the facts currently known in respect of each of these investigations, it is not practicable at this time for us to determine the terms on which these ongoing investigations will be resolved or the timing of such resolution or for us to estimate reliably the amounts, or range of possible amounts, of any fines and/or penalties.
"As matters progress, it is possible that any fines and/or penalties could be significant," HSBC added.
Way back in 2011, the US Justice Department had said that the IRS was demanding from HSBC Bank USA about the US residents who may be using accounts at HSBC India "to evade federal income taxes".
Through the John Doe summons, IRS had asked HSBC USA to produce records identifying US taxpayers with accounts at HSBC India, many of whom were believed by the government to have hidden their accounts from the IRS.
April 10, 2013
IRS claims it can read your e-mail without a warrant
The ACLU has obtained internal IRS documents that say Americans enjoy "generally no privacy" in their e-mail messages, Facebook chats, and other electronic communications.
Newly disclosed documents prepared by IRS lawyers say that Americans enjoy "generally no privacy" in their e-mail, Facebook chats, Twitter direct messages, and similar online communications -- meaning that they can be perused without obtaining a search warrant signed by a judge.
That places the IRS at odds with a growing sentiment among many judges and legislators who believe that Americans' e-mail messages should be protected from warrantless search and seizure. They say e-mail should be protected by the same Fourth Amendment privacy standards that require search warrants for hard drives in someone's home, or a physical letter in a filing cabinet.
An IRS 2009 Search Warrant Handbook obtained by the American Civil Liberties Union argues that "emails and other transmissions generally lose their reasonable expectation of privacy and thus their Fourth Amendment protection once they have been sent from an individual's computer." The handbook was prepared by the Office of Chief Counsel for the Criminal Tax Division and obtained through the Freedom of Information Act.
Nathan Wessler, a staff attorney at the ACLU's Speech, Privacy & Technology Project, said in a blog post that the IRS's view of privacy rights violates the Fourth Amendment:
Let's hope you never end up on the wrong end of an IRS criminal tax investigation. But if you do, you should be able to trust that the IRS will obey the Fourth Amendment when it seeks the contents of your private emails. Until now, that hasn't been the case. The IRS should let the American public know whether it obtains warrants across the board when accessing people's email. And even more important, the IRS should formally amend its policies to require its agents to obtain warrants when seeking the contents of emails, without regard to their age.
The IRS continued to take the same position, the documents indicate, even after a federal appeals court ruled in the 2010 case U.S. v. Warshak that Americans have a reasonable expectation of privacy in their e-mail. A few e-mail providers, including Google, Microsoft, Yahoo, and Facebook, but not all, have taken the position that Warshak mandates warrants for e-mail.
The IRS did not immediately respond to a request from CNET asking whether it is the agency's position that a search warrant is required for e-mail and similar communications.
Before the Warshak decision, the general rule since 1986 had been that police could obtain Americans' e-mail messages that were more than 180 days old with an administrative subpoena or what's known as a 2703(d) order, both of which lack a warrant's probable cause requirement.
The rule was adopted in the era of telephone modems, BBSs, and UUCP links, long before gigabytes of e-mail stored in the cloud was ever envisioned. Since then, the 6th Circuit Court of Appeals ruled in Warshak, technology had changed dramatically: "Since the advent of e-mail, the telephone call and the letter have waned in importance, and an explosion of Internet-based communication has taken place. People are now able to send sensitive and intimate information, instantaneously, to friends, family, and colleagues half a world away... By obtaining access to someone's e-mail, government agents gain the ability to peer deeply into his activities."
A March 2011 update to the IRS manual, published four months after the Warshak decision, says that nothing has changed and that "investigators can obtain everything in an account except for unopened e-mail or voice mail stored with a provider for 180 days or less" without a warrant. An October 2011 memorandum (PDF) from IRS senior counsel William Spatz took a similar position.
A phalanx of companies, including Amazon, Apple, AT&T, eBay, Google, Intel, Microsoft, and Twitter, as well as liberal, conservative, and libertarian advocacy groups, have asked Congress to update the 1986 Electronic Communications Privacy Act to make it clear that law enforcement needs warrants to access private communications and the locations of mobile devices.
In November, a Senate panel approved the e-mail warrant requirement, and last month Rep. Zoe Lofgren, a Democrat whose district includes the heart of Silicon Valley, introduced similar legislation in the House of Representatives. The Justice Department indicated last month it will drop its opposition to an e-mail warrant requirement.
Mar 24, 2013
U.S.Seeks Answers in Liechtenstein on Tax Cheats
The U.S. has asked Liechtenstein to hand over data on foundations that may have been used to hide untaxed American money from the Internal Revenue Service, a step that may threaten Swiss banks.
The U.S. wants to know the number of foundations set up by fiduciaries -- lawyers, accountants, financial advisers and asset managers -- for American taxpayers, according to a letter sent by the Department of Justice to authorities in the Alpine principality. A “formal request” to fiduciaries will follow, the DOJ said.
The headquarters of Liechtensteinische Landesbank AG, foreground, stand below Vaduz Castle in Vaduz. The bank known as LLB had 49.9 billion Swiss francs ($53 billion) of assets under management at the end of 2012 and is one of the firms being probed by the Justice Department. Photographer: Adrian Moser/Bloomberg
“Seeking documents from the Liechtenstein fiduciaries is an important investigative step,” which will shed light on “the roles of banks, of bankers outside of Liechtenstein,” the Justice Department wrote in the letter, adding that it looked forward to receiving the data by March 29.
The DOJ is investigating at least 11 financial firms, including Credit Suisse Group AG (CSGN) and Julius Baer Group Ltd. (BAER), for allegedly helping Americans hide money from the IRS. The Liechtenstein request will add to the information the IRS garnered as 38,000 Americans avoided prosecution through an amnesty program, which involved paying back taxes and penalties and disclosing their offshore accounts and bankers.
“It’s a further evolution of the Department of Justice using third-party fiduciaries to gather more information on these structures and the banks involved,” said Milan Patel, a former IRS trial attorney who is now a partner at Zurich-based law firm Anaford AG. “This could be bad news for Switzerland, as the information could be used against more Swiss banks.”
Katja Gey, director of Liechtenstein’s Office for International Financial Affairs, declined to comment. Justice Department spokesman Charles Miller declined to comment.
Banks in Switzerland are seeking a settlement with the U.S. as Liechtenstein’s larger neighbor, the world’s biggest center for offshore wealth, tries to shed its image as a haven for undeclared assets. That may involve negotiating separate deferred prosecution agreements with U.S. authorities.
UBS AG, the biggest Swiss bank, avoided prosecution in 2009 by paying $780 million, admitting it fostered tax evasion and giving the IRS data on more than 250 accounts. It later turned over data on another 4,450 accounts. Before the UBS deferred- prosecution deal, U.S. prosecutors said the bank managed $20 billion in undeclared assets for American clients.
Wegelin & Co., the oldest Swiss private bank, pleaded guilty in Manhattan federal court in January to conspiring to help hide more than $1.2 billion in assets from the IRS, while opening undeclared accounts for at least 70 U.S. taxpayers who were former UBS clients. The bank, which paid $74 million to resolve the investigation, closed its doors after 272 years.
Since 2008, U.S. prosecutors have charged at least 86 people in their crackdown on offshore tax evasion, including two dozen bankers, lawyers and advisers.
“The purpose of our request is to further our investigations of both U.S. taxpayers who, among other things, engaged in tax evasion through the use of Liechtenstein foundations and establishments, and the banks, bankers, and others who facilitated that tax evasion,” the Justice Department wrote in the letter to Liechtenstein authorities.
The DOJ’s focus is on foundations that existed since the end of 2007, according to the letter.
Beda Singenberger, a Swiss financial adviser, created sham foundations in Liechtenstein and phony corporations in Hong Kong and the British Virgin Islands to help clients hide their ownership of the accounts, federal prosecutors charged in a July 2011 indictment. Singenberger, who lives in Zurich, was charged with helping 60 people in the U.S. hide $184 million in secret offshore accounts. He has not responded to the charge in court.
Liechtenstein amended a tax law last year to allow the country of 36,000 people to comply with a U.S. request for account data on American clients of the principality’s oldest bank, Liechtensteinische Landesbank AG (LLB). The bank known as LLB had 49.9 billion Swiss francs ($53 billion) of assets under management at the end of 2012 and is one of the firms being probed by the DOJ.
Liechtenstein started to unwind secrecy after data stolen from LGT Group, the bank owned by the country’s princely family, was used by Germany to prosecute tax evaders in 2008. Former Deutsche Post AG (DPW) Chief Executive Officer Klaus Zumwinkel was convicted of tax evasion and received a two-year suspended prison sentence plus a penalty of 1 million euros ($1.3 million).
Under pressure from the U.S., Germany and France, Liechtenstein said in March 2009 that it would conform with tax standards set out by the Organization for Economic Cooperation and Development to avoid being blacklisted as a tax haven.
IRS Yanks Criminal Amnesty Deal From Taxpayers With Secret Bank Leumi Accounts
The Internal Revenue Service this week sent faxes to tax attorneys nationwide informing them that clients who were previously accepted into its criminal amnesty program for those who disclose once-secret offshore accounts, have “upon further review” been disqualified. The faxes, signed by John R. Tafur, director of of Global Financial Crimes at the IRS’ Criminal Investigation division, affect dozens of American taxpayers who had undisclosed accounts at Bank Leumi le-Israel Ltd., Israel’s largest bank.
On Monday Bank Leumi announced it will take a charge of 340 million shekels ($91 million) to cover the expense “of investigations that are being conducted by the U.S. authorities concerning customers who are U.S. taxpayers.” Presumably, that expense will ultimately include a fine for Bank Leumi, which is believed to be cooperating now with U.S. prosecutors. In 2009, Swiss Bank UBS AG paid $780 million for its role enabling U.S. tax cheats and just this week, Swiss bank Wegelin was sentenced to pay $58 million after pleading guilty to a tax evasion conspiracy.
Failing to disclose a foreign account on a 1040 is a criminal offense; billionaire Igor Olenicoff, who hid more than $200 million offshore, pleaded guilty in 2007 to the felony of filing a false return. Those with offshore accounts are also required to file a Report of Foreign Bank and Financial Accounts or “FBAR” annually with the Treasury, and can be fined up to half the value in a foreign account for each year they fail to file.
But criminal prosecutions and 50% penalties are comparatively rare and more than 35,000 taxpayers have participated in the IRS’ Offshore Voluntary Disclosure Program (OVDP) since it was launched in February 2009. In return for escaping criminal charges, taxpayers accepted into the current version of the OVDP must file eight years of amended tax returns, pay all back taxes, interest and penalties due (including a 20% accuracy penalty on offshore-related underpayments) and pay an FBAR penalty equal, in most cases, to 27.5% of the maximum held in the undisclosed offshore accounts during the eight year period. The IRS has collected more than $5 billion through the partial amnesty.
If the IRS already has a taxpayer under audit, is investigating a taxpayer, or has his name on a list of taxpayers with secret accounts (for example, one obtained as a result of a John Doe summons to a foreign bank or a tax preparer), he isn’t eligible for the OVDP. So in an elaborate dance, defense lawyers first provide the name and Social Security number of a client to the IRS, and are given a green or red light for the program. Taxpayers given a green light (a pre-clearance), then must send in a completed and signed questionnaire about their accounts and, assuming they answer the questions to the IRS’ satisfaction and pass a further check, get back a formal clearance letter. After that, they must file eight years of amended back returns and ante up the money as well as all their information and what they know about promoters.
Clearance green lights and the later letters are issued by the IRS’ Criminal Investigation division based on its checks of both criminal and civil proceedings. McKenzie said his client received his clearance letter for the OVDP last summer. He speculated there might have been an administrative foul-up within the IRS —meaning the government already had the taxpayers’ names, but the information wasn’t entered in the right computer system. “I’m upset that I gave advice, relying on the government letter, only to find I couldn’t rely on my government to do it properly,’’ McKenzie said.
The IRS might have simply decided that it wanted to have its pick of which Bank Leumi customers to prosecute.: “It appears IRS CI knows exactly what they are doing in rescinding the previously granted clearance. It appears to be part of a larger situation re the investigation of Leumi, its representatives, etc. Not dissimilar to the UBS process of rounding up the potential players involved and then figuring out which are the most culpable.” He noted that many of the taxpayers had not only gotten written clearance to participate in the OVDP, but had also “proceeded to submit a complete disclosure including amended returns, FBARs, account information, etc.”
“It would seem difficult for the government to actually pursue prosecutions of these individuals without a strong showing that such a prosecution is not based on tainted evidence. However, these individuals might not ultimately be afforded any civil benefits otherwise associated with participation in the IRS OVDP, etc. Time will tell.”
In a statement late Thursday, the IRS said federal law prohibits it from “commenting on specific cases,” but added that “there are a number of reasons why a taxpayer may be disqualified from participating in the IRS’s offshore disclosure program. For example, a taxpayer may be disqualified if he/she fails to make a timely, truthful and complete disclosure.”
Last month, in a plea deal with prosecutors, Zvi Sperling, an Israeli-born Los Angeles businessman, admitted to hiding $4 million in unreported corporate profits in an account at Israeli “Bank A”–an account he opened around 2001 and owned through a front Island of Nevis corporation. According to the statement of facts in his plea deal, he then tapped into that money through loans from Bank A’s Los Angeles office. In 2008, Bank A closed its LA office and Sperling moved the money to Israeli Bank B. A representative of Bank B allegedly bragged at a meeting in a Beverly Hills hotel that it “was better able than Bank A to keep the accounts secret.” According to Bloomberg, Bank A is Mizrahi Tefahot Bank Ltd., and Bank B, Bank Leumi. Robbins noted some account holders of Mizrahi also received letters last September rescinding their OVDP clearances.
January 11, 2013
Former UBS client pleaded guilty to using Swiss bank accounts to hide more than $43 million from the Internal Revenue Service in the largest individual offshore tax evasion case since a U.S. crackdown began in 2008.
Mary Estelle Curran, 79, admitted yesterday in federal court in West Palm Beach, Florida, to two counts of filing false tax returns. Curran failed to report her offshore accounts on returns from 2001 to 2007 and willfully failed to report income on them, prosecutors said in court papers.
U.S. prosecutors have charged more than 50 U.S. clients of offshore banks and more than two dozen bankers, lawyers and advisers in the crackdown. Before Curran, the previous largest individual case involved $42 million.
Curran, who lives in Palm Beach, faces 30 to 37 months in prison under her plea agreement. She also agreed to pay a civil penalty of $21.7 million for failing to file reports required for foreign accounts. Another one of her attorneys, Roy Black, declined to comment after the hearing.
Zurich-based UBS, the largest Swiss bank, was charged with conspiracy in February 2009 and avoided prosecution by admitting it aided tax evasion, paying $780 million and handing over account data on 250 clients. It later disclosed information on about 4,450 more accounts.
Curran, who had a high school education, inherited an undeclared UBS account in 2000 after the death of her husband of more than 40 years, Mortimer, a money manager, The account was in the name of a Liechtenstein foundation he created, prosecutors said yesterday in a statement of facts.
Since March 2009, 38,000 U.S. taxpayers with offshore accounts have avoided prosecution by entering a limited amnesty program, paying back taxes and identifying those who helped them hide their accounts from authorities.
Hundreds of taxpayers in the program gave prosecutors information that has helped build criminal cases against bankers and advisers.
Curran also became the beneficial owner of a UBS account opened in June 2007 in the name of Norega Investment, a Panamanian corporation, according to the Justice Department’s statement of facts filed yesterday.
The people managing her accounts transferred her assets in June 2008 to one in the name of Norega at a bank in Liechtenstein, according to the statement. The highest closing balance of her undeclared accounts was $43 million in 2007.
Curran admitted that from 2001 to 2008 she failed to file Reports of Foreign Bank and Financial Accounts, or FBARs. As a penalty, she must pay half of the highest annual balance. She also acknowledged that she filed false tax returns for 2006 and 2007 and that she failed to tell her accountant about her offshore accounts.
Curran, who was initially charged on Nov. 7, owes taxes of $667,716, as well as penalties and interest, according to court papers.
The case is U.S. v. Curran, 12-cr-80206, U.S. District Court, Southern District of Florida (West Palm Beach).
Jan 3, 2013
Swiss Bank Wegelin to Close After Guilty Plea
(Reuters News) -
Wegelin & Co, the oldest Swiss private bank, said Thursday it would shut its doors permanently after more than two and a half centuries following its guilty plea to charges of helping wealthy Americans evade taxes through secret accounts.
The plea, in U.S. District Court in Manhattan, marks the death knell for one of Switzerland's most storied banks. It is also a potentially major turning point in the battle by U.S. authorities against Swiss bank secrecy.
The bank admitted to charges of conspiracy in helping Americans evade taxes on at least $1.2 billion for nearly a decade. Wegelin agreed to pay $57.8 million to the United States, including $20 million in restitution to the Internal Revenue Service.
Otto Bruderer, a managing partner at the bank, said in court that "Wegelin was aware that this conduct was wrong."
Speaking in a thick Swiss-German accent, he said that "from about 2002 through about 2010, Wegelin agreed with certain U.S. taxpayers to evade the U.S. tax obligations of these U.S. taxpayer clients, who filed false tax returns with the IRS."
When indicted last February, the first indictment of a foreign bank by U.S. authorities in recent history, Wegelin vowed to resist the charges. The bank, founded in 1741, was declared a fugitive from justice when its Swiss-based executives failed to appear in U.S. court.
The surprise plea effectively ends the U.S. case against Wegelin, one of the most aggressive bank crackdowns in U.S. history.
"Once the matter is finally concluded, Wegelin will cease to operate as a bank," Wegelin said in a statement Thursday from its headquarters in the remote, small town of St. Gallen next to the Appenzell Alps near the German-Austrian border.
Wegelin, a partnership of Swiss private bankers, was already a shadow of its former self - it effectively broke itself up following the indictment last year by selling the non-U.S. portion of its business.
Dozens of Swiss bankers and their clients have been indicted in recent years, following a 2009 agreement by UBS AG, the largest Swiss bank, to enter into a deferred-prosecution agreement and pay a $780 million fine after admitting to criminal wrongdoing in selling tax-evasion services to wealthy Americans.
Banks under criminal investigation by U.S. authorities in the wider probe include Credit Suisse, which disclosed last July it had received a target letter saying it was under a U.S. grand jury investigation.
Some regional Swiss banks are also under scrutiny, sources familiar with the probes have previously told Reuters. So are UK-based HSBC Holdings and three Israeli banks, Hapoalim, Mizrahi-Tefahot Bank Ltd and Bank Leumi, sources have also said previously.
In a statement after the plea, Assistant U.S. Attorney General Kathryn Keneally said it was a top priority of the Justice Department "to find those who continue to shirk their tax obligations," as well as those who help them and profit from it.
"The best deal now for these folks is to come in and 'get right' with the IRS, before either the IRS or the Justice Department finds them," she said.
As part of the plea, Wegelin agreed to pay the $20 million in restitution to the IRS as well a civil forfeiture of $15.8 million, the U.S. Justice Department said.
Wegelin also agreed to pay an additional $22.05 million fine, the Justice Department said. U.S. District Judge Jed Rakoff, who must approve the monetary penalties, set a hearing in the case for March 4 for sentencing.
Last year, the U.S. government separately seized more than $16 million of Wegelin funds held in a UBS AG account in Stamford, Connecticut, via a separate civil forfeiture complaint.
November 18, 2012
Tax Preparers May be Stealing Taxpayer Direct Deposit Refunds
The Treasury Inspector General for Tax Administration has released Processes for the Direct Deposit of Tax Refunds Need Improvement to Increase Accuracy and Minimize Fraud (2012-40-118):
In 2011, more than 842,000 taxpayers took advantage of this “split refund” option, which the IRS first offered in 2007. They may split their tax refunds between two to three different checking or savings accounts using Form 8888, Allocation of Refund (Including Savings Bond Purchases).
However, TIGTA found that more than 65,300 bank accounts had multiple direct deposits, accounting for more than 949,000 refunds for approximately $1.6 billion. Auditors found that current IRS processes to ensure the accuracy of direct deposit information are not sufficient, which increases fraud potential.
Additionally, the option to split a refund between multiple accounts increases the risk of fraud. ... TIGTA identified more than 4,400 bank accounts listed on tax return preparers’ personal tax returns that had multiple direct deposits. More than 202,000 refunds for more than $309 million were sent to these bank accounts. This raises a concern as to whether tax return preparers are diverting clients’ refunds or portions of refunds to their own bank accounts to pay tax preparation fees or for other reasons.
October 18, 2012
IRS Unjustifiably Withholds $181 Million in Relief from Tax Penalties from 1.5 Million Taxpayers
The Treasury Inspector General for Tax Administration yesterday released Penalty Abatement Procedures Should Be Applied Consistently to All Taxpayers and Should Encourage Voluntary Compliance (2012-40-113):
The Internal Revenue Code imposes a Failure to File (FTF) penalty for failing to file a tax return and a Failure to Pay (FTP) penalty for failing to pay the tax shown on any tax return by the date prescribed. The IRS can abate both penalties under certain circumstances. If the IRS does not administer these and other penalties fairly and accurately, taxpayers’ confidence in the tax system will be jeopardized.
The IRS waives FTF and FTP penalties for some taxpayers who have demonstrated full compliance over the prior three years. The purpose for granting the waiver, called a First-Time Abate (FTA), is to reward past tax compliance and promote future tax compliance. However, most taxpayers with compliant tax histories are not offered and do not receive the FTA waiver. TIGTA estimated that for Tax Year 2010, approximately 250,000 taxpayers with FTF penalties and 1.2 million taxpayers with FTP penalties did not receive penalty relief even though they qualified under FTA waiver criteria. TIGTA estimated the unabated penalties totaled more than $181 million.
AUGUST 28, 2012
FEDERAL COURT PERMANENTLY BARS SAN DIEGO LAWYER
SCOTT WAAGE FROM TAX PREPARATION AND GIVING TAX ADVICE
San Diego Tax Lawyer Allegedly Worked With CPA
To Help Clients Evade Income Taxes and Circumvent Pension-Plan Rules
WASHINGTON – A federal court in San Diego has permanently barred tax lawyer Scott Waage and his law firm from providing tax advice and from preparing federal tax returns for others, the Justice Department announced today. The civil injunction order against Scott A. Waage, of San Diego, was signed by Judge William Q. Hayes of the U.S. District Court for the Southern District of California. Waage agreed to the injunction without admitting the allegations against him.
The government complaint in the case alleged that Waage, a self-proclaimed “visionary tax attorney,” promoted tax fraud schemes that helped customers evade income taxes through a concept he called “Strategic Integrated Planning.” According to the complaint, one of Waage’s schemes involved creating and using sham consulting corporations (purportedly headquartered in customers’ homes) that did not perform consulting services. Customers funneled funds to the sham companies to pay for and improperly deduct the customers’ personal expenses, the complaint alleged.
Waage also unlawfully used employee-benefit plans to pay customers’ personal expenses and used pension plans to illegally increase and accelerate deductions and avoid income taxes on plan payouts (illegally structured and funded by life insurance contracts), according to the allegations in the complaint. Robert O. Jensen, a certified public accountant, allegedly prepared the customers’ tax returns claiming the bogus deductions generated by Waage’s schemes. Last March the court enjoined Jensen from preparing tax returns that understate income.
The government complaint alleges that the harm to the Treasury as a result of Waage’s schemes exceeded $10.8 million.
The injunction order requires Waage to give the government a list of all clients who used his tax planning or tax preparation services since 2001. Waage also must send his former clients notice of the injunction order.
August 10, 2012
San Diego Tax Preparer Steven Martinez pleads guilty to several criminal charges; including filing false tax returns and attempted murder for hire...
A 51-year-old San Diego tax preparer and former Internal Revenue Service agent pleaded guilty Friday to trying to hire a hitman to kill four witnesses against him in a criminal case involving stealing more than $11 million from clients.
Steven Martinez of Ramona pleaded guilty in San Diego federal court to 12 felony counts involving various schemes to steal from clients, including mail fraud, filing false tax returns, Social Security fraud, identity theft and money laundering.
The four people that Martinez wanted killed were former clients, according to prosecutors. Martinez told the would-be hitman that he would pay him $100,000 "if he eliminated the lady in Rancho Santa Fe and the lady in La Jolla," according to court documents.
Martinez said two guns and a silencer should be used, according to prosecutors. The would-be killer reported the offer to police; the FBI recorded and videotaped his next meeting with Martinez.
Martinez used client money to buy real estate, including a beach home in Mexico, make $2 million in investments and make more than $2 million in payments on loans and credit cards.
Sentencing is set for Nov. 30. Among other charges to which he pleaded guilty, witness tampering can bring a sentence of 30 years in prison, murder-for-hire 10 years, solicitation of violence 15 years and mail fraud 20 years.
August 1, 2012
Senate looks at state sales taxes for online purchases
By Hadley Malcolm, USA TODAY
All online merchants could soon start charging state sales tax due to two bills gaining steam in Congress after at least a decade of debate.
The Senate Commerce Committee holds a hearing Wednesday on the Marketplace Fairness Act (MFA), which would allow states to collect sales tax on all remote purchases and make it easier for merchants to determine each state's tax rate.
If passed, it would reverse the effects of a 1992 Supreme Court decision exempting many online retailers from collecting state sales taxes unless they had a physical presence in the state, such as a warehouse.
But as e-commerce has boomed and states continue to suffer from recession-era budget cuts, proponents of collecting a tax say it's unfair that brick-and-mortar and online retailers are competing on an "uneven playing field." Now technology makes it easier for merchants to follow the thousands of local tax codes.
"With the growth of e-commerce, it's more important than ever for this issue to be addressed," says Daniel Head, press secretary for Sen. Michael Enzi, R-Wyo., who introduced the MFA.
NRF estimates local retailers are at a 6% to 10% price disadvantage because of collecting taxes that most online retailers don't.
The Senate bill has 240 supporters, including online giant Amazon as well as Best Buy, Target and Walmart. But eBay objects to the small-business exemption in the bill, which maxes out at $500,000 in gross annual sales. The House bill exempts sellers up to $1 million in gross annual sales.
"It's small businesses who would face the biggest new burden if you change this law the way that's being proposed," says Brian Bieron, senior director of federal government relations at eBay.
July 11, 2012
Credit Suisse clients, UBS employees targeted
By Katharina Bart and Arno Schuetze
ZURICH, Germany, July 11, (Reuters) - German tax authorities have launched raids into Credit Suisse clients and French officials searched the homes of UBS employees, part of crackdowns on foreigners suspected of evading taxes through the two largest Swiss banks.
Switzerland's strict banking secrecy rules, which have helped build a $2 trillion offshore financial sector, have infuriated cash-strapped governments elsewhere as they try to stop tax evasion by wealthy citizens.
Roughly 5,000 German clients of Credit Suisse are being probed on suspicion of tax evasion and some had their homes searched, a source at the bank said on Wednesday, as European tax officials broaden their investigation to clients from banks.
Meanwhile, the offices of UBS in Lyon, Bordeaux and Strasbourg were raided on Tuesday on suspicion of money-laundering and aiding tax evasion, according to a source at that bank.
The private homes of several high-ranking UBS employees in Strasbourg were also searched, the UBS source said.
UBS said it was cooperating with authorities. The French prosecutor's office declined to comment because the investigation was ongoing.
It was not immediately clear whether the raids in Germany and France were coordinated or in any way connected.
Credit Suisse said it was aware that German tax authorities were investigating its clients but gave no further comment.
The source at the bank said tax authorities in the German towns of Bochum and Duesseldorf were probing its clients over Bermuda-based life insurance products which may have been used to avoid tax. Tax officials in both towns declined to comment.
The Frankfurt prosecutor said one client was searched.
The German investigation comes against the backdrop of a deal reached with Switzerland to levy taxes on German assets stashed in Swiss bank accounts that is due to come into effect next year pending German parliament approval.
Duesseldorf and Bochum are in the German state of North-Rhine Westphalia, where the Social Democrat-led regional government has been one of the most vocal opponents of the deal that would also end prosecutions of Swiss banks and employees.
"Our tax inspectors must be able to do their work unimpeded, which is to root out criminal evaders. No tax agreement should prevent that," the region's finance minister, Norbert Walter-Borjans, said in a statement.
North-Rhine Westphalia bought names of Swiss bank clients from an informant in 2010. Two sources told Reuters the targets for the latest investigation were culled in part from that information.
Germany has long been trying to crack down on tax evasion. In 2008, data leaked from Liechtenstein's LGT bank revealed that wealthy citizens including former Deutsche Post chief Klaus Zumwinkel had stashed money in the tiny principality. Zumwinkel received a suspended jail sentence after admitting tax evasion.
Credit Suisse struck a deal with German tax authorities last September, agreeing to pay 150 million euros ($183.83 million) to end an investigation over allegations the bank and its employees helped Germans dodge taxes.
UBS was forced in 2009 to pay a fine and release the names of 4,500 clients to U.S. officials to end a damaging tax probe. U.S. authorities are still investigating Swiss banks including Credit Suisse and Julius Baer over tax offences.
Switzerland is trying to get the U.S. investigations dropped in exchange for the payment of fines and the transfer of names of thousands more U.S. bank clients.
June 8, 2012
The Next Wave of IRS Offshore Account Enforcement -- Israeli Banks Under Scrutiny
The criminal tax division of the U.S. Department of Justice (DOJ) have now focused attention on three of Israel's biggest banks: Bank Leumi Le-Israel, Bank Hapoalim and Mizrahi-Tefahot Bank, to see if they helped U.S. citizens to evade taxes.
The IRS is now scrutinizing banks outside of Switzerland, including Liechtenstein, India and other countries. In the case of Israeli banks, American authorities are concerned with the flow of money from Switzerland to Israel in recent years. As Swiss banking secrecy faded over the past few years, and the U.S. extracted once-"secret" Swiss account details, many taxpayers transferred assets from Switzerland to Israel to avoid detection by the I.R.S. Now, the IRS has caught up with them.
Whereas until recently, Swiss bank secrecy laws presented a formidable challenge to the IRS, pursuing undisclosed accounts in Israel will not require nearly as much effort. The tax treaty between the U.S. and Israel enables both countries to "exchange such information as is pertinent to . . . fraud or fiscal evasion in relation to the taxes which are the subject of this Convention." Cooperation between the U.S. and Israel is routine in many matters, tax and otherwise. In addition, the U.S. and Israel currently grant legal assistance to each other in criminal matters via a Mutual Legal Assistance Treaty (MLAT). The MLAT states that the U.S. and Israel "express their understanding that this treaty applies to . . . criminal tax offenses . .
IRS Announces More Flexible Offer-in-Compromise Terms
May 21, 2012
WASHINGTON — The Internal Revenue Service today announced another expansion of its "Fresh Start" initiative by offering more flexible terms to its Offer in Compromise (OIC) program that will enable more financially distressed taxpayers to clear up their tax problems.
Today’s announcement focuses on the financial analysis used to determine which taxpayers qualify for an OIC.
In certain circumstances, the changes announced today include:
- Revising the calculation for the taxpayer’s future income.
- Allowing taxpayers to repay their student loans.
- Allowing taxpayers to pay state and local delinquent taxes.
- Expanding the Allowable Living Expense allowance category and amount.
In general, an OIC is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. An OIC is generally not accepted if the IRS believes the liability can be paid in full as a lump sum or a through payment agreement. The IRS looks at the taxpayer’s income and assets to make a determination of the taxpayer’s reasonable collection potential.
When the IRS calculates a taxpayer’s reasonable collection potential, it will now look at only one year of future income for offers paid in five or fewer months, down from four years, and two years of future income for offers paid in six to 24 months, down from five years. All offers must be fully paid within 24 months of the date the offer is accepted.
Other changes to the program include narrowed parameters and clarification of when a dissipated asset will be included in the calculation of reasonable collection potential. In addition, equity in income producing assets generally will not be included in the calculation of reasonable collection potential for on-going businesses.
The Allowable Living Expense standards are used in cases requiring financial analysis to determine a taxpayer’s ability to pay. The standard allowances provide consistency and fairness in collection determinations by incorporating average expenditures for basic necessities for citizens in similar geographic areas. These standards are used when evaluating installment agreement and offer in compromise requests.
The National Standard miscellaneous allowance has been expanded to include additional items. Taxpayers can use the miscellaneous allowance for expenses such as credit card payments and bank fees and charges.
Guidance has also been clarified to allow payments for loans guaranteed by the federal government for the taxpayer's post-high school education. In addition, payments for delinquent state and local taxes may be allowed based on percentage basis of tax owed to the state and IRS.
May 3, 2012
Parallel IRS Criminal and Civil Tax Investigations Have Returned After a 35-Year Hiatus
By Michael Gillen and Stanley Todd
Danger is lurking in the world of Internal Revenue Service audits, namely, parallel investigations. Parallel investigations by the IRS are simultaneous civil and criminal investigations of an individual or business entity, which means that taxpayers can be under investigation for criminal tax matters at the same time a civil audit is being conducted.
A parallel investigation is not a joint, but rather two separate, yet simultaneous investigations being conducted by the criminal investigation and civil examination divisions of the IRS. Although the two divisions may coordinate, they do not direct each other's actions during the investigation.
Recent changes to IRS policies direct IRS personnel not to inform the taxpayer when a criminal investigation is taking place, nor is the civil investigation required to stop when a criminal investigation commences. Therefore, it is essential for taxpayers and their advisers to be aware of the dangers lurking in the shadows of civil examination activities and audits, and the possibility that those activities may be used to gather information for a criminal investigation.
Prior to 1977 there was a free flow of information between agents conducting both civil and criminal investigations since there were no procedures for conducting parallel investigations. In fact, agents conducting criminal investigations often solicited the help of agents conducting civil examinations to obtain documents and records that added value to the criminal case. That all changed with the U.S. Court of Appeals for the Fifth Circuit's decision in U.S. v. Tweel, 550 F. 2d. 297 (1977).
In Tweell, the IRS agent continued an investigation of a taxpayer after evidence was obtained through the IRS agent's deception of the taxpayer's representative as to the criminal nature of the investigation. The court suppressed the evidence even though the taxpayer's accountant had voluntarily turned over records to the IRS agent. The Tweel case compelled the IRS to implement procedures directing its agents who discovered firm indications of fraud during an audit to cease the civil examination and refer the case to the criminal investigation division. Thus, parallel investigations were no longer a concern for taxpayers subject to a civil audit, even if fraud was evident, after the Tweel case.
Current Procedures and Related Perils
Quietly, in August 2009 and 2010, the IRS changed its procedures with respect to parallel investigations, and, pursuant to Internal Revenue Manual (IRM) Section 188.8.131.52, parallel investigations are now permissible. The IRM contains policies, procedures, guidelines and instructions directing the operation and administration of the service. The change is based in large part on the ability of other federal agencies, such as the Securities and Exchange Commission and the Justice Department, to operate similarly in the conduct of parallel investigations.
The SEC and DOJ have both had great success utilizing parallel investigations in the financial fraud arena. The change to IRM Section 184.108.40.206 came soon after several cases were settled in the favor of the government allowing parallel investigations for the SEC and the DOJ. In one of the cases, U.S. v. Stringer, 521 F.3d 1189 (9th Cir. 2008), the decision stated that the government may not affirmatively mislead defendants to hide the existence of a criminal investigation.
The government is under no obligation to inform targets about a criminal investigation as long as the defendants are generally aware that prosecution can take place. Finally, where a civil investigation was initiated prior to a criminal investigation, the criminal investigation agencies may use and help guide the civil investigation to assist in developing evidence in the criminal case.
Although Tweel is still good case law, the IRS is now relying on a Supreme Court case, U.S. v. Kordel , 397 U.S. 1 (1970), that permits parallel investigations so long as the government does not proceed in bad faith. The Kordel case is the case that is being used by other federal agencies in their parallel investigations. In Kordel, the federal Food and Drug Administration requested information as part of a civil investigation, which was used later for criminal prosecution. The Supreme Court ruled that there was no violation of due process in using this information for criminal purposes. The key to avoiding the limitations of Tweel and properly employing parallel investigations is that the IRS must act in good faith.
Despite the IRS's reliance on Kordel , several district court opinions have been critical of the government's conduct in parallel investigations, including U.S. v. Scrushy , 366 F. Supp. 2d 1134 (DC Ala. 2005). In Scrushy, the court held that the DOJ was involved in a behind-the-scenes orchestration of the SEC's deposition of the defendant. This led the court to suppress the deposition testimony and dismiss the perjury charges against the defendant. The court concluded in Scrushy that the government had "depart[ed] from the proper administration of justice" by its actions in directing the SEC deposition.
Under theScrushy decision, if it can be shown the criminal investigators directed the civil investigators to gather information for the criminal case, there is a possibility that the courts will suppress evidence presented in the criminal case. The avoidance of taxpayer deception is the apparent process by which the courts will allow evidence gathered during parallel investigations to stand.
The Internal Revenue Code (IRC) contains both civil and criminal provisions addressing fraud. When fraud is suspected during a civil audit, it is now possible that a parallel investigation will commence, as the civil agent may share evidence of fraud with the criminal investigations division. Criminal investigation special agents, although not permitted to influence the investigations of other divisions, may now conduct criminal investigations before, during and after civil investigations of the same taxpayer or entity.
One of the dangers to taxpayers with respect to parallel investigations is that disclosure to a taxpayer by the IRS is not required during a civil examination when evidence presents itself that fraud may have occurred and that, as a result, a criminal investigation is commencing or ongoing at the same time. An agent, during an ongoing parallel investigation, is now permitted, but not required, by recent policy to disclose to a taxpayer or representative that a criminal investigation is taking place, and the agent may share with the criminal investigation division any information obtained during the civil examination. When the IRS decides to conduct a parallel investigation, the criminal investigation special agent is required to meet and discuss the case with the noncriminal agent on a regular basis. IRM Section 220.127.116.11.11.1 states:
"Civil and criminal special agents, and IRS attorneys should regularly coordinate their efforts through regular status meetings held at least quarterly until the collection activities are complete. These coordination meetings will facilitate sharing important case developments."
Therefore, an unsuspecting taxpayer subject to a civil examination may unknowingly provide the IRS ammunition for or during a parallel criminal investigation. While the IRM clearly provides that the special agents "will not direct the actions" in the civil case, they can greatly influence the civil examination. The IRS also requires the civil agent to inform the criminal investigation special agent of all meetings with the taxpayer in advance of any meeting. Unstated in these rules is that the special agent can suggest that the civil agent gather documents that the civil agent would not collect as part of the normal civil examination.
Impact to You and Your Clients
The change in IRS policy that we have now started to see creates a progressively more challenging IRS audit process. While conducting a civil audit an agent can now, and likely will, gather information to assist in the criminal investigation. It is common for agents in a civil investigation to request information that may or may not be helpful in resolving the examination. Frequently, agents decide, without taxpayer or representative involvement or knowledge, on the nature and extent of information document requests based on a multitude of factors.
In representing a client in a civil examination, it is important to ascertain if a criminal investigation is also taking place. How should you reach this determination? Ask the revenue agent? "No," is the general answer.
Asking if your client is under a criminal investigation or if the revenue agent is contemplating a referral to the criminal investigation division may suggest to the revenue agent that criminal behavior has or may have occurred. A better approach may be to ask what records they are seeking. While the civil agent is now permitted to disclose the existence of a parallel investigation, the agent's response should be documented. The agent's statement, especially if the agent denies the existence of a parallel criminal investigation, may be used for the purpose of suppressing evidence in the criminal trial.
A tax practitioner whose client is undergoing a civil examination or collection action should seek to resolve the civil matter while preserving the taxpayer's rights by making every effort to determine if, in fact, a criminal investigation may be lurking in the shadows. Civil agents may engage in certain activities that can be indicative of a simultaneous criminal, or parallel, investigation, including, but not limited to:
- A more extensive review of aggressive transactions than might otherwise be conducted during a civil investigation.
- Making repeated requests to interview the taxpayer.
- An unusual focus by the agent on taxpayer intent, as opposed to transaction structure.
- An intent to provide documents to the criminal investigation division, by requesting copies rather than a review of originals.
If there is any chance that the IRS may be building a criminal case, the taxpayer may not wish to provide copies of select records and source documents to the agent. These documents would still be available for the agent to review in the taxpayer's or representative's office, but copies would not be provided for the civil agent to share with the criminal agents. Taxpayers should be cautioned not to provide any information to the IRS without the involvement of tax counsel.
A New Era
In this new era of IRS expanded and enhanced parallel investigations, it is essential for taxpayers to immediately contact their tax attorney in the event of an IRS tax audit.
April 30, 2012
Big Taxpayer Win: Supreme Court Limits IRS To 3 Years Audit Period In Basis Overstatement Cases
Even the IRS has limits. If you’ve ever been audited by the IRS, you may think going back three years is bad enough. The tax code generally allows the IRS to audit three years back, and six in some cases.
The U.S. Supreme Court in U.S. v. Home Concrete & Supply, LLC today has dramatically cut back on IRS reaches into six year territory. It’s a big win for taxpayers.
The main rule is that the IRS time to audit runs three years after filing or due date. However, the IRS gets double time for a “substantial understatement of income”—where you omit 25% or more.
The issue in this case was whether a basis overstatement triggers a 6 year audit period or whether the normal 3 year audit period applies. Today, the U.S. Supreme Court ruled that the IRS was limited to only 3 years.
In recent Court of Appeal cases, there had been split results.
IRS previously won --- so the six-year statute of limitations applied:
IRS previously lost --- so was audit period was limited to three years:
TaxMasters slapped with $195 million dollar fraud judgment
CNNMoney March 30, 2012:
NEW YORK (CNNMoney) -- TaxMasters, the Houston-based tax consultation firm whose ads had been a TV fixture in recent years, has been ordered, along with its founder Patrick Cox, to pay $195 million on charges that it defrauded customers nationwide.
A jury in Texas' Travis County handed down the verdict in the civil trial Friday, finding that TaxMasters, its predecessor companies, and founder Patrick Cox had committed over 110,000 violations of the state's Deceptive Trade Practices Act.
"Today's decision marks a significant victory for the Texans and TaxMasters customers nationwide who sought help from TaxMasters with their income tax debts and were taken advantage of in the midst of a national economic downturn," Texas Attorney General Greg Abbott said in a statement.
The state said TaxMasters misled customers about contract terms, failed to disclose its no-refunds policy, and falsely claimed that its employees would immediately begin work on a case, sometimes causing customers to miss IRS deadlines.
TaxMasters also failed to consult with the IRS on its clients' behalf and prevent liens on their property.
The firm and its predecessors were ordered to pay $149 million, including penalties and restitution, while Cox was ordered to pay $46 million. Of the $195 million in total, $113 million has been earmarked for defrauded consumers.
TaxMasters filed for bankruptcy earlier this month, a move the Texas attorney general's office called "an apparent effort to avoid the state's enforcement action." It's therefore not clear how much of the judgment can be collected.
The bankruptcy filing said TaxMasters (TAXS) owes creditors between $1 million and $10 million, and that its assets total just $50,000 or less. The firm did not list its creditors, but said it owes money to between 1,000 and 5,000 people and businesses.
The Texas Attorney General's office said it would "actively participate in the bankruptcy case to seek to recover restitution for customers."
TaxMasters' most recent financial reports show it spent nearly $16 million on advertising in 2010, eating up about 37% of its revenue. Among the networks on which TaxMasters has advertised is CNN.
The company recently restated results to show a $4.7 million loss in 2010 and essentially break-even results for the first quarter of 2011, the most recent quarter for which it has reported.
March 19, 2012
ABC News--TaxMasters Files for Bankruptcy
The controversial tax resolution firm Tax Masters Inc., filed for bankruptcy this morning, just as a Court trial was to begin with charges of deceptive practices leveled by the Texas attorney general.
The Houston-based company, best known for a national advertising campaign that made company's bearded, red-haired founder Patrick Cox a recognizable figure, was the subject of an ABC News investigation in April, in which customers had alleged that the company persuaded them to pay large upfront fees, but never delivered on promises of helping them resolve their tax problems. The commercials boast that the company's staff of former IRS agents and tax professionals "have helped many good people just like you."
But Texas Attorney General Greg Abbott said the ads have been misleading. He filed a multi-count civil case against TaxMasters, accusing it of deceiving its customers and violating the state's debt collection laws.
"In the midst of a national economic downturn, TaxMasters used a nationwide marketing campaign to offer services for distressed taxpayers who needed help dealing with the IRS," Abbott said. "A state investigation and nearly 1,000 customer complaints indicate that the defendants routinely misled customers about the nature of their tax resolution service agreements – and worse, attempted to enforce those improper agreements through unlawful debt collection tactics."
ABC News made repeated attempts to contact the company and its founder last week, as word began circulating that it was in financial distress. TaxMasters' customers had reported to KTRK, the owned-and-operated ABC News station in Houston, that they were not able to get responses when calling about their tax filings, and one described visiting the company's office, only to find the doors locked. A telephone sales agent told an ABC News reporter that the company "was not taking any new sales," but would not discuss the company's dire finances any further.
Within the past month, the landlord that owns the building where the company is headquartered sued alleging that Taxmasters failed to pay its January rent. A contracting firm handling construction work at the office also sued the company alleging it had not been paying its bills. Videos on the company's website displaying the well known TaxMasters advertisements featuring Cox were no longer working. Recent filings with the Securities and Exchange Commission carry a warning that the company's earlier financial statements are being amended and should no longer be relied upon.
A spokesman for the Texas Attorney General told ABC News the state was preparing to head to court this morning in its civil case, but had not heard anything specific about TaxMasters' financial status. Court papers filed Monday morning indicate that TaxMasters has filed for bankruptcy with between $1 million and $10 million in liabilities.
March 18, 2012
Bankrupt TaxMasters Lists Less Than $50,000 In Assets, Up To 5,000 Creditors
In a bare-bones three-page bankruptcy filing Sunday, TaxMasters Inc. reported it owes 1,000 to 5,000 creditors up to $10 million, but has less than $50,000 in assets. The filing, which became available on the web site of the U.S. Bankruptcy Court for the Southern District of Texas this morning, calls into question whether the Houston-based tax resolution firm will be able to continue to operate. The lengthy creditors list no doubt include thousands of individuals who have paid TaxMasters for help resolving their Internal Revenue Service debts and now could be left in the lurch.
A call to TaxMasters’ toll free number this morning was eventually answered by a woman who said the firm continues to operate. Johnie J. Patterson, the Houston attorney listed on bankruptcy court filings by three separate entities associated with TaxMasters, did not immediately return a phone call and email asking for comment.
As Forbes reported yesterday, the publicly traded TaxMasters notified the SEC on Friday that it would be filing for bankruptcy. According to a report on Houston’s KHOU this morning, the bankruptcy filing “comes as the Texas Attorney General’s Office is set to begin a trial against the tax resolution firm for misleading consumers under Texas’ Deceptive Trade Practices Act.”
Texas sued TaxMasters in May 2010 (PDF of original complaint here) alleging that TaxMasters misled consumers by offering an installment payment plan for its fees to prospective customers, without disclosing it wouldn’t start working on a case until it got all its money—even if that meant key Internal Revenue Service deadlines were missed. Last month, KHOU’s I-Team reported that consumer complaints about TaxMasters were continuing to pour into the state.
This is the third recent bankruptcy of a “tax resolution” service that advertised heavily on cable TV and made allegedly dubious claims. JK Harris & Co., a South Carolina-based firm which once operated hundreds of locations in dozens of states, filed for bankruptcy last October. It ceased operations and went into liquidation in December, leaving 5,400 active clients in the lurch. Last May, “Tax Lady” Roni Deutch filed for bankruptcy and surrendered her law license; the California Attorney General filed suit against her in 2010.
March 18, 2012
TaxMasters Files for Bankruptcy
Owe The IRS? TaxMasters Bankruptcy Shows Why Not To Get Help From TV Pitchmen,
by Janet Novack:
If you've got problems paying the IRS, don’t look for help from the ads on late night cable television. That's one of the lessons from an SEC filing Friday by TaxMasters Inc. disclosing the publicly traded company will file for voluntary bankruptcy. As ABC reported last April, even after Houston-based TaxMasters had been accused of deceptive business practices by the attorney generals of Texas and Minnesota, it continued to buy millions of advertising on CNN, FoxNews and other cable channels. (The ads featured Patrick Cox, the red-bearded TaxMasters CEO, assuring potential clients that his staff of tax pros, including former IRS agents, had helped “many good people just like you.”)
Moreover, this is just the latest bankruptcy by a “tax resolution” service that advertised heavily—and made allegedly exaggerated claims–on cable TV. JK Harris & Co., a South Carolina-based firm which once operated hundreds of locations in dozens of states, filed for bankruptcy last October after being sued by both states and unhappy customers. ...In 2010, California Attorney General (now Governor) Jerry Brown sued “Tax Lady” Roni Deutch, who also had a big presence on TV, claiming she “engaged in a scheme to swindle taxpayers” by overstating the ability of her firm to gain concessions from the IRS. Deutch called the charges politically motivated. But last year, she filed for bankruptcy and surrendered her law license.
IRS warns taxpayers voluntarily coming into offshore compliance to be truthful
[ABA Tax Section meeting San Diego 2/18/2012]:
The IRS is aggressively using intelligence gathered from the agency's Offshore Voluntary Compliance Program to study the movement of undisclosed funds abroad and to deter tax avoidance, an IRS official recently said at the American Bar Association Section of Taxation meeting in San Diego. "When [taxpayers] come in and tell us about their offshore account in one bank in one country, they may tell us about another account in another bank in another country and about the bankers they used," said Rebecca Sparkman, Acting Executive Director Investigations and Enforcement Operations Division of the IRS. "As you can imagine we start looking at all that intelligence and it points the way for the next criminal investigation."
Although her comments had undertones of the recent indictment of Wegelin & Co., Switzerland's oldest private bank, she declined to speak directly on any specific matter. The bank has been charged with aiding tax offenders move their undisclosed accounts from UBS. "We want to assure you that we are reviewing all the information that comes in from your clients to match up [and provide direction on] where we should look next," she said.
She cautioned practitioners to be fully truthful when bringing their clients into compliance. "Please be fully, fully truthful," she told the audience. "Because there may be those folks that are tempted to only disclose that account in that one bank that they think we know about in that one country because they think we don't know about [an account] somewhere else. But guess what? They come in, they come through the whole program, we get their name on a list for some other bank, some other country, all bets are off! Now they are facing criminal investigation because they were not fully truthful."
Sparkman stressed that the time to come forward with all offshore account information is at the time a voluntary disclosure is made, not subsequently. "When you walk in the door, that is the time to be fully truthful," she said. "Don't be hiding anything else."
February 15, 2012
President Obama wants to boost IRS budget by $950 million
Obama's fiscal year 2013budget proposal for IRS totals $12.8 billion, approximately $950 million above the level enacted for the current year.
According to budget documents, the proposal would ensure “robust IRS tax enforcement and compliance initiatives that can return $5 for each dollar spent.” The proposal includes $403 million for new enforcement activities. Approximately $200 million would be used to bolster examination and collection programs. IRS identified specific areas where proposed funding would strengthen enforcement efforts, including: improving international compliance by individual and business taxpayers; expanding efforts to spot fraud and prevent the issuance of questionable refund.
February 6, 2012
JK Harris Suspends All Operations and Prepares to Liquidate
Tax-resolution firm swamped by consumer complaints, lawsuits
Tax representation firm JK Harris & Co. has suspended operations, sent its employees home and is reported to be preparing to liquidate its assets.
The firm, the subject of hundreds of complaints to ConsumerAffairs.com over the years, has been in Chapter 11 bankruptcy proceedings since October but has reportedly been unable to raise enough funding to continue operations.
"This is truly the most devastating event I have been forced to deal with in my 58 years on this earth," CEO John K. Harris said in an email to employees as he apparently prepared to file for a Chapter 7 liquidation.
The firm won't be missed by many of the consumers who they failed to help.
One call does it all? "My husband began working with JK Harris over 3 years ago and we have paid them at least $3,000.00 or more. They never return your calls, they are constantly telling you they are 'still working on it', they demand more money, they always have a new rep, etc.," said Christine of Anoka, MN, in a complaint to ConsumerAffairs.com a few days ago.
"Their ad says 'one call does it all.' That's a lie. I was told by my rep that I met with that no one could take money out of my disability checks. Well, they did. I am disabled and live on my disability," said Suzan of Blytheville, AR. "Every time I called J.K Harris' office, I was directed to a new rep. I sent in paperwork every 3 months and every time, it went to a new rep. I was told to ignore notices from IRS. This went on for over 4 years."
The company has been the target of complaints for years -- and it was those complaints and the resulting lawsuits that finally pushed it over the edge.
Harris filed for bankruptcy protection last October after Texas Attorney General Greg Abbott charged the firm with misrepresenting its ability to help Texans resolve their unpaid tax obligations. Harris agreed to pay $1.2 million in penalties to settle the case.
The state charged that the firm failed to provide promised services, misrepresented its employees professional skills and experience, overstated its ability to reduce debts that customers owe to the Internal Revenue Service, and accepted large, prepaid fees from customers whose tax liabilities the firm knew or should have known it could not reduce.
Abbott's charges echoed many of the complaints voiced by consumers.
"While Harris' advertisements claimed that former IRS agents, Certified Public Accountants, lawyers, and other professionals were available to meet with consumers in 325 locations in 43 states, investigators discovered that JK Harris regional offices are staffed by sales personnel who are not trained tax experts," Abbott said.
Last July, Harris agreed to provide full refunds to West Virginia consumers who hired the firm but received no tax relief.
In 2008, the company agreed to pay $1.5 million to settle a suit filed by 18 states.
"This company took advantage of people who paid for tax assistance and, in some instances, profited by taking their money and not giving them any help at all," said Massachusetts Attorney General Martha Coakley in announcing the settlement.
Also in 2008, then-Missouri Attorney General Jay Nixon sued Harris on behalf of customers who received neither the services for which they paid as much as $4,500 each nor the refunds they requested.
"JK Harris promises it can help consumers who are having tax problems, but the Missourians who complained to my office told a different story -- one of unreturned phone calls, lost paperwork, and a worse financial situation than when they started," Nixon said.
In 2007, a class action lawsuit sought $6 million for consumers who complained that, far from solving their tax problems, JK Harris actually made their worse.
The South Carolina-based company owes its primary lender, RAI Credit, nearly $11.9 million but has assets worth only about $3.8 million.
The firm's collapse not only leaves its employees and current clients in the lurch but also raises questions about the millions of dollars in owes in court settlements. Unsecured creditors are typically at the back of the line in bankruptcy proceedings, leaving the possibility that many who are owed money will get little or nothing.
The company has a Jan. 10 court date at which the court is expected to appoint a trustee.
February 03, 2012
Swiss Bank Wegelin Criminally Charged With Helping U.S. Clients Evade Taxes
By David Voreacos
Feb. 3 (Bloomberg) -- Wegelin & Co., the 270-year-old private bank, became the first Swiss lender to face criminal charges in a broadening U.S. crackdown on offshore firms suspected of helping Americans evade taxes.
Wegelin helped Americans hide more than $1.2 billion in assets and evade U.S. taxes, according to an indictment filed yesterday in federal court in New York. The new charges expand on earlier ones filed Jan. 3 against three bankers at Wegelin’s Zurich branch accused of conspiring to help U.S. clients cheat on their taxes.
Prosecutors said that from 2002 to 2011, more than 100 U.S. taxpayers conspired with Wegelin, the three Zurich bankers -- Michael Berlinka, Urs Frei and Roger Keller -- and others. The bank held more than $1.2 billion in assets not declared to the Internal Revenue Service, according to the indictment.
“Wegelin Bank aided and abetted U.S. taxpayers who were in flagrant violation of the tax code,” Manhattan U.S. Attorney Preet Bharara said in a statement.
The U.S. and Switzerland are in talks to resolve a U.S. probe of offshore tax evasion. Wegelin was one of at least 11 banks under criminal investigation by the Justice Department’s tax division.
Wegelin announced on Jan. 27 that it agreed to a sale to Switzerland’s Raiffeisen Group.
“The indictment shows that the U.S. government will indict a Swiss bank if they don’t get cooperation,” said Skarlatos of Kostelanetz & Fink LLP. “It’s symbolic in that the United States is saying that if a Swiss bank doesn’t cooperate, it will be indicted. It puts pressure on other Swiss banks to cooperate.”
Federal authorities yesterday also seized $16 million in Wegelin’s correspondent bank account in the U.S. at UBS AG.
Richard Strassberg, a lawyer who represents the bank in the U.S., declined to comment.
Prosecutors said that Wegelin and the three bankers wooed U.S. clients fleeing UBS, the largest Swiss bank. UBS avoided U.S. prosecution in 2009 by admitting it aided tax evasion, paying $780 million and handing over data on 250 accounts. It later disclosed information on about 4,450 more accounts.
By attracting clients leaving UBS, Wegelin “opened new undeclared accounts for at least 70 U.S. taxpayers,” according to the indictment. The effort to woo UBS clients was backed by Wegelin’s senior management, according to the indictment. Wegelin bankers emphasized that because it had no offices in the U.S., it wasn’t subject to law enforcement pressure there, prosecutors said.
Phil West, a former international tax counsel at the Treasury Department, said it was “unfortunate” that the Justice Department and Wegelin couldn’t reach an agreement short of indictment.
“The Justice Department alleged that Switzerland’s oldest bank had tried to capitalize on the misfortunes of UBS and attract the clients UBS was rejecting, and assisting them in doing just what UBS was accused of doing,” West said in an e- mail. “If true, this would have made any resolution short of indictment very difficult.”
In its Jan. 27 announcement, Wegelin, based in St. Gallen, Switzerland, said its U.S. business, and the risks and responsibilities that go with it, will remain with the current partners. Wegelin, which describes itself as the oldest Swiss bank, didn’t disclose the sale price.
Credit Suisse AG, the second-largest Swiss bank, said July 15 that it was a target of a criminal probe by the Department of Justice over former cross-border private-banking services to U.S. customers. On July 21, seven Credit Suisse bankers were indicted on a charge of conspiring to help U.S. clients evade taxes through secret accounts.
The IRS has said 30,000 U.S. taxpayers with offshore accounts have avoided prosecution since 2009 by entering a limited amnesty program, paying back taxes and saying who helped them hide their accounts from authorities.
Hundreds of taxpayers in the program have given information to prosecutors that has helped them build criminal cases against bankers and advisers.
The U.S. crackdown against offshore tax evasion has led to criminal charges against at least 21 foreign bankers, advisers and attorneys and at least 40 U.S. taxpayers.
The case is U.S. v. Berlinka, 12-cr-00002, U.S. District Court, Southern District of New York (Manhattan).
Jan 25, 2012
Senate investigating HSBC bank for money laundering
(Reuters)- HSBC Holdings PLC is under investigation by a U.S. Senate panel in a money-laundering inquiry, the latest step in a long-running U.S. effort to halt shadowy money flows through global banks, according to people familiar with the situation and a company securities filing.
The inquiry being conducted by the Senate Permanent Subcommittee on Investigations could yield a report and congressional hearing later this spring, these people said. The subcommittee has a history of conducting high-profile hearings that have proved embarrassing for the world's biggest banks.
The intensifying scrutiny of HSBC is the latest in a series of investigations by U.S. officials into how global banks have processed -- and in some cases, intentionally hidden -- financial transactions on behalf of countries which allegedly support terrorism, corrupt foreign officials, drug gangs and criminals.
Since 2008, European and U.S. banks have signed deferred prosecution agreements and paid more than $1.2 billion in penalties for alleged violations of anti-money laundering regulations.
The specific focus of the Senate probe of HSBC isn't known. A Reuters review of legal documents and prior regulatory probes, though, points to a number of alleged breakdowns in HSBC's anti-money laundering systems.
HSBC spokesman Robert Sherman said in a statement, "We have ongoing discussions with officials" including the Senate panel "on a number of regulatory and compliance matters. The nature of these discussions is confidential; in all cases, we are cooperating."
A spokesperson for the Senate subcommittee declined comment.
Earlier this month, HSBC named former top U.S. Treasury Department official Stuart Levey as chief legal officer in a sign of how the bank is hiring outside experts in money laundering. Levey, who specialized in combating terrorism financing and left the Treasury Department last year, is based in London. An HSBC spokesman said Levey wasn't available for comment.
Stuart Gulliver, HSBC chief executive, said in a statement this month that Levey's experience "dealing with international financial and legal issues is highly relevant to a global bank such as HSBC."
EARLY WARNING SIGNS
For HSBC, which has operations in more than 80 countries and territories, the Senate probe is another sign that U.S. law enforcement officials are widening their inquiries into the London bank - one that for the past decade has repeatedly drawn scrutiny from U.S. financial regulators for weak money-laundering controls and allegedly enabling healthcare fraud and tax evasion.
In 2003 and 2010, two U.S. bank regulators raised serious concerns about the bank's anti-money laundering systems and staff and ordered the bank to improve anti-money laundering systems and personnel, according to enforcement actions by the Federal Reserve Bank of New York and the Comptroller of the Currency, a Treasury Department unit.
In securities filings, the bank has disclosed increasing inquiries. In 2010, the bank disclosed that it had received grand jury subpoenas and was being investigated by the Justice Department in money-laundering inquiries. It subsequently said the district attorney's office in Manhattan was investigating.
Then in November, HSBC said additional inquiries were being pursued by the Senate panel and the U.S. Securities and Exchange Commission, according to an SEC filing by HSBC USA Inc. The bank said the investigations focused on money laundering and the proper filing of U.S. taxes by customers. The unit is HSBC's main U.S. business, offering retail and corporate banking to some 4 million customers. HSBC's North American operations, which include HSBC Bank USA and a consumer-finance unit, account for about 5 percent of HSBC profits.
WEST VIRGINIA LINK
Investigations into how the bank allegedly was used to launder money extend to Vienna, W. Va. There, a pain-management doctor named Barton J. Adams was indicted in 2008 by the Justice Department on 169 counts of alleged healthcare fraud, tax evasion, money laundering and witness tampering. Adams allegedly moved hundreds of thousands of dollars in Medicare fraud proceeds between an HSBC Bank USA internet account and other HSBC accounts in Canada, Hong Kong and the Philippines, according to U.S. District Court filings in West Virginia. Dr. Adams has pleaded not guilty.
Stephen Herndon, an attorney for Adams, declined to comment citing the ongoing litigation. A spokesman for the U.S. attorney's office in West Virginia declined comment.
To be sure, HSBC isn't the only major bank to face scrutiny from regulators over alleged money laundering. In 2009 and 2010, Barclays PLC, Lloyds Banking Group and Credit Suisse Group agreed to forfeitures totaling $1.2 billion with U.S. regulators that found the banks evaded U.S. law in aiding sanctioned countries. In 2010, Royal Bank of Scotland Group PLC agreed to forfeit $500 million to the U.S. to cover ABN Amro Holding NV's illegal U.S. dollar transactions tied to Iran, Libya, the Sudan and Cuba. RBS and a bank consortium acquired ABN, a Dutch bank, in 2007.
Law-enforcement scrutiny is increasingly focused on narcotics proceeds moving between the U.S. and Mexico. In 2010, for example, Wachovia Bank, acquired by Wells Fargo & Co. in 2008, agreed to a $160 million settlement with the Justice Department, which alleged that failure in controls at the bank allowed drug traffickers to launder drug money tied to Mexico.
A 2011 study by the Government Accountability Office said that money from illegal drug sales in the U.S. that flows back to Mexico -- often in the form of large currency shipments called "bulk cash smuggling" -- totals between $18 billion and $39 billion a year. John Cassara, an expert on money laundering and former Treasury agent, said U.S. authorities struggle to stop the money flowing from the U.S. into Mexico.
HSBC UNDER MICROSCOPE
HSBC has faced several orders to improve its anti-money laundering policies. In 2003, HSBC Bank USA, under an agreement with the Federal Reserve Bank of New York and New York bank regulators, said a "common goal" with regulators was that the bank would "ensure that the bank fully addresses deficiencies in the bank's anti-money laundering policies and procedures."
At the time, the bank agreed to design a program to upgrade internal controls to ensure compliance with Bank Secrecy Act provisions to better monitor "suspicious or unusual activities."
In early 2010, HSBC again came under scrutiny. The Senate panel alleged in a report, titled "Keeping Foreign Corruption out of the United States," that HSBC, along with other banks, had allowed high-risk individuals, known as politically exposed persons, or PEPs, to route money through the U.S. financial system. Such persons are typically powerful foreign leaders, relatives and close associates from regimes prone to corruption.
The 2010 Senate report analyzed HSBC's ties to Angola, the oil-producing African country prone to graft and mismanaging oil revenues. The Senate report alleged that HSBC provided U.S. banking services to politically connected officials of Angola's national oil company through Banco Africano de Investimentos, or BAI, an Angolan private bank, without designating the transactions as potentially high risk. HSBC allowed those money movements "despite the presence of PEPs" in BAI's management and clientele.
At a Senate hearing, Wiecher Mandemaker, then a director of general compliance for HSBC Bank USA, said the bank believed that institutions such as BAI were important to helping move Africans "into the modern banking system." The HSBC official said the bank had thoroughly investigated BAI and that it was HSBC's policy to discourage banking relationships with PEPs unless the bank had a long-standing relationship with the client and the bank believed the client had a "legitimate source of funds."
Mandemaker has since left the bank and could not be reached for comment.
In late 2010, the bank was hit with another order from a U.S. bank regulator to clean up its anti-money laundering system after the Office of the Comptroller of the Currency, or OCC, investigated several businesses that routed cash for clients and other banks. The probe and subsequent consent order "identified deficiencies" in the HSBC's anti-money laundering practices and among other requirements, ordered the bank to hire a permanent regional compliance officer and submit full compliance plans in policing improper money flows.
HSBC subsequently exited or curtailed those businesses. It separately has announced plans to exit numerous U.S. businesses, agreeing to sell both bank branches and a credit card business amid a shift to faster-growing economies.
The OCC found the bank's "compliance program and its implementation are ineffective" and that the bank faced the "significant potential for unreported money laundering or terrorist financing."
The OCC consent order said that between 2006 and 2009, HSBC had not properly monitored bulk cash transactions. The OCC order also said the bank did not "appropriately" designate customers as "high risk" even if the customer affiliation with a politically exposed person could hurt the bank's reputation.
The report also criticized the bank for a backlog of unprocessed suspicious activity reports, known as SARs, that can tip off regulators to questionable money flows.
As part of the consent order, the bank said it had "committed to taking all necessary and appropriate steps to remedy the deficiencies."
Sherman, the HSBC spokesman, said, "We acknowledged we fell short of our own expectations and are working with our regulators to address and resolve the issues raised."
Sherman said the bank had taken steps such as investing in staff, a new anti-money laundering system, a new compliance helpline, and new training for all U.S. employees.
January 9, 2012
IRS Reopens Offshore Voluntary Disclosure Program.
The Internal Revenue Service today reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes and announced the collection of more than $4.4 billion so far from the two previous international programs.
The IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs.
This third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.
“Our focus on offshore tax evasion continues to produce strong, substantial results for the nation’s taxpayers,” said IRS Commissioner Doug Shulman.
“We have billions of dollars in hand from our previous efforts, and we have more people wanting to come in and get right with the government. This new program makes good sense for taxpayers still hiding assets overseas and for the nation’s tax system.”
The program is similar to the 2011 program in many ways, but with a few key differences. Unlike last year, there is no set deadline for people to apply. However, the terms of the program could change at any time going forward. For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers – or decide to end the program entirely at any point.
“As we’ve said all along, people need to come in and get right with us before we find you,” Shulman said. “We are following more leads and the risk for people who do not come in continues to increase.”
The third offshore effort comes as Shulman also announced today the IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program, reflecting closures of about 95 percent of the cases from the 2009 program. On top of that, the IRS has collected an additional $1 billion from up front payments required under the 2011 program. That number will grow as the IRS processes the 2011 cases.
In all, the IRS has seen 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. Since the 2011 program closed last September, hundreds of taxpayers have come forward to make voluntary disclosures. Those who have come in since the 2011 program closed last year will be able to be treated under the provisions of the new OVDP program.
The overall penalty structure for the new program is the same for 2011, except for taxpayers in the highest penalty category.
For the new program, the penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011.
Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.
Participants face a 27.5 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty. Smaller offshore accounts will face a 12.5 percent penalty. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the new OVDP will qualify for this lower rate. As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.
The IRS recognizes that its success in offshore enforcement and in the disclosure programs has raised awareness related to tax filing obligations. This includes awareness by dual citizens and others who may be delinquent in filing, but owe no U.S. tax. The IRS is currently developing procedures by which these taxpayers may come into compliance with U.S. tax law. The IRS is also committed to educating all taxpayers so that they understand their U.S. tax responsibilities.
January 5, 2012
IRS Audited Record Number of Millionaires in 2011
The U.S. Internal Revenue Service said it audited 12.48 percent of individual tax returns with income exceeding $1 million during fiscal 2011. It marks the third consecutive year that the IRS increased its audit rate on returns showing income of more than $1 million. According to IRS data, the previous record was the 8.36 percent of returns in that category audited during fiscal 2010.
For taxpayers reporting over $200,000 of income, the audit rate 3.9%. That was an increase of 34% from 2010.
The overall IRS audit rate for all individuals in all income brackets remained constant at 1.11 percent in 2011 while the rate for small corporations -- those with assets less than $10 million -- rose to 1.02 percent from 0.94 percent in 2010.
January 4, 2012
Wegelin Bankers Indicted by U.S. in Tax Crackdown, Bank Says
Switzerland’s Wegelin & Co. said three bankers were charged with conspiring to help U.S. clients hide more than $1.2 billion from American tax authorities.
Michael Berlinka, Urs Frei and Roger Keller helped Americans open dozens of accounts and hide them from the Internal Revenue Service after a U.S. crackdown on offshore tax evasion led clients to flee bigger Swiss banks in 2008 and 2009, according to an indictment filed yesterday in federal court in Manhattan.
All three employees remain at the bank, spokeswoman Albena Bjorck said in an e-mailed statement today. Wegelin, the oldest Swiss private bank, no longer has U.S. clients, and it is negotiating with U.S. authorities, Bjorck said. The indictment doesn’t name Wegelin, referring to “Swiss Bank A” and saying all three worked at its Zurich branch.
The indictment signals a broadening crackdown by U.S. prosecutors, who filed tax charges against more than three dozen U.S. clients of UBS AG and Credit Suisse Group AG, Switzerland’s two biggest banks, and London-based HSBC Holdings Plc, Europe’s biggest bank. They also have charged at least 24 bankers, advisers and attorneys, including seven Credit Suisse bankers.
“This is a further example of what the government has been saying all along -- that they are not stopping with UBS or Credit Suisse,” said Bryan Skarlatos, a tax attorney. “The criminal grand jury investigations are continuing with respect to banks in Switzerland and other countries.”
The indictment comes amid U.S.-Swiss talks to resolve a U.S. probe of offshore tax evasion. Officials are trying to conclude negotiations on a civil settlement with Swiss banks, as well as criminal probes of 11 of them, including Wegelin, which is based in St. Gallen.
U.S. prosecutors charged UBS in February 2009 with helping Americans hide assets from the Internal Revenue Service. UBS avoided prosecution by admitting it fostered tax evasion, paying $780 million and handing over data on 250 secret accounts. It later disclosed another 4,450 accounts, causing U.S. customers to seek new banks.
As those clients fled UBS and another large Swiss bank, Berlinka, Frei and Keller and “Managing Partner A” wooed them, according to the indictment. The bank, which is principally owned by eight managing partners, also solicited accounts through a third-party website, “SwissPrivateBank.com,” prosecutors said.
The men told clients their undeclared accounts would stay hidden from the IRS because the bank “had a long tradition of bank secrecy, and, unlike UBS, did not have offices outside Switzerland,” making it “less vulnerable to United States law enforcement pressure,” according to the indictment.
“In or about 2008, the managing partners affirmatively decided to take advantage of the flight of U.S. taxpayers with undeclared accounts by opening new undeclared accounts for many of them at Swiss Bank A,” according to the indictment. “Swiss Bank A opened new undeclared accounts for at least 70 U.S. taxpayers.”
Berlinka, 41, began working at Swiss Bank A in 2008; Frei, 51, started in 2006; and Keller, 47, began in 2007, according to a statement by U.S. Attorney Preet Bharara. The men, who all live in Switzerland, face as long as five years in prison if convicted.
“Wegelin & Co. has in the meantime ceased all dealings with U.S. clients and the employees concerned have taken on other tasks within the bank,” Bjorck said. The bank “has authorized its lawyers in the U.S. to negotiate with the U.S. justice authorities to the extent possible under Swiss law,” she said. Wegelin declined to comment further by phone.
At least 17 others accused in the tax crackdown live outside the U.S. and haven’t responded in U.S. court to the charges.
Since 2009, about 30,000 Americans have avoided prosecution by disclosing their offshore accounts to the IRS. Prosecutors have debriefed hundreds of those clients to learn which banks and advisers helped them cheat the IRS. The Justice Department has used those interviews to build several criminal cases.
The indictment details how Berlinka, Frei and Keller helped 23 U.S. clients open undeclared accounts at their bank. Kenneth Heller, a disbarred New York maritime attorney who pleaded guilty on June 27 to hiding more than $26.4 million in accounts at UBS and Wegelin, also is referred to in the indictment. He is scheduled to be sentenced Jan. 20.
The three bankers conspired with two other Swiss financial advisers already under indictment, Gian Gisler and Beda Singenberger, according to the charges filed yesterday.
“Some bankers are cooperating with the Justice Department and turning over the names of their customers, and it’s possible that these bankers may do the same,” Skarlatos said.
The case is U.S. v. Berlinka, 12-cr-00002, U.S. District Court, Southern District of New York (Manhattan).
December 28, 2011
U.S. Deploys New Tactic in War Against Swiss Bank Tax Cheats
Reuters, New US Tactic for Suspected Swiss Bank Tax Cheats, by Lynnley Brownin
U.S. authorities hunting in Swiss banks for suspected tax cheats have a new weapon in their arsenal: an arcane but aggressive legal maneuver more commonly used against drug smugglers, money launderers and Imelda Marcos, widow of the Philippine dictator.
Backed by court judges, federal prosecutors are issuing subpoenas -- official papers which compel the recipients to provide potentially damning evidence -- to United States taxpayers suspected of holding hidden accounts at Swiss and other offshore banks, according to criminal defense lawyers whose clients have received the papers.
The grand jury subpoenas are unusual in that they ask bank clients -- not the banks themselves -- to turn over to the authorities their bank account details since 2003, including statements with the highest annual balances. Taxpayers who refuse to comply potentially face a stark choice: be found in contempt of court and thus subject to civil or criminal fines and jail time, or disclose potentially incriminating evidence against themselves.
December 6, 2011
U.S. Indicts Client of UBS in Tax Case
U.S. authorities have indicted another U.S. client of Swiss banking giant UBS AG in a case that sheds new light on the role of a major Swiss cantonal bank in enabling tax evasion by U.S. persons. Amir Zavieh, a naturalized U.S. citizen born in Iran, was charged on December 6 with fraud and conspiracy by federal prosecutors in Fort Lauderdale, Florida. The charges against Zavieh, a San Francisco resident who also goes by the first name Allen, refer to his accounts at UBS and at "a cantonal bank wholly owned by Basel City Canton." That bank is Basler Kantonalbank, according to public records and to persons briefed on the matter.
The Zavieh indictment underscores cooperation provided to U.S. authorities by Renzo Gadola, a former senior UBS private banker. For a number of years, he handled Zavieh's account. Gadola, who worked at UBS from 1995 to 2008, last month received five months' probation from a Florida federal judge after being charged with conspiracy. Gadola has cooperated extensively with U.S. authorities conducting a wide-ranging criminal investigation of scores of Swiss banks. His role is significant because he disclosed to federal prosecutors for the first time the role of Swiss cantonal banks, including Basler Kantonalbank, in helping Americans to evade U.S. taxes on at least hundreds of millions of dollars in assets.
Ex-UBS Banker Sentenced for Aiding U.S. Tax Evasion
Reuters New Service
A former senior UBS banker who helped the U.S. government expand its crackdown on offshore tax evasion was sentenced to five years probation for advising wealthy Americans on ways to hide their money from U.S. tax authorities. Renzo Gadola, who worked at Swiss bank UBS AG from 1995 to 2008, pleaded guilty in December to charges of conspiracy to defraud the United States. Almost immediately after his arrest on Nov. 8, 2010, Gadola started cooperating with U.S. officials, providing key insight into other bankers and Swiss financial institutions offering offshore banking services, according to prosecutors. He is currently out on bail.
U.S. authorities, who suspect tens of thousands of Americans are using Swiss banks to avoid paying billions of dollars in taxes, are conducting a widening criminal investigation into scores of Swiss banks and international banks with Swiss operations. Banks under investigation include Credit Suisse, HSBC Holdings Plc and Basler Kantonalbank, a large Swiss cantonal, or regional, bank, according to U.S. judicial sources. Cantonal banks are largely government-owned in Switzerland.
Gadola turned over the names of bankers and participated in recorded conversations with clients, according to an unsealed government document filed last week requesting leniency in his sentencing. His actions helped reveal for the first time the role that Swiss cantonal banks play holding undeclared offshore accounts. Gadola's pivotal role in the crackdown continues. He has "indicated he wishes to continue to cooperate with the government after he is sentenced, and will assist in other grand jury investigations and testify at the trials of his former customers and colleagues, if necessary," the government document said. The 45-year-old Gadola could have been sentenced to a maximum of 16 months in prison. He appeared in court for his sentencing dressed in a dark gray suit and blue striped ties.
The case against Gadola, an investment adviser based in Switzerland, highlighted how some bankers continued to help wealthy Americans conceal money from the Internal Revenue Service (IRS) even amid a U.S. probe into UBS that mushroomed into a major international judicial and diplomatic affair.
In 2009, UBS paid $780 million to settle criminal charges from the U.S. Department of Justice that it helped thousands of wealthy Americans evade taxes. UBS ultimately agreed to disclose 4,450 client names and ended its U.S. cross-border banking business. The bank was accused by federal prosecutors of helping some 17,000 American clients with $20 billion in assets hide their accounts from the IRS.
Gadola's case involved a Mississippi client who kept $445,000 in a safe deposit box before transferring it first to UBS and then to a Basler Kantonalbank account. The unidentified client said he wanted to declare the money under a voluntary disclosure program launched by the IRS, but Gadola advised against it, arguing the money would go undetected by officials.
Gadola's cooperation also led to criminal charges against two other bankers with UBS ties. In January, U.S. officials arrested Christos Bagios, a senior private banker at Credit Suisse, and accused him of helping as many as 150 U.S. clients hide as much as $500 million from the IRS when he worked at UBS.
Martin Lack, a former senior UBS banker, was indicted in August for selling offshore tax evasion services. Lack, a Swiss national, is a fugitive. Lack was Gadola's business partner after Gadola left UBS, and the two worked to help American clients hide money in Swiss cantonal banks following the crackdown on UBS, according to people briefed on the matter.
Swiss Banks Said Ready to Pay Billions, Disclose Customers
October 24, 2011
- By David Voreacos, Klaus Wille and Giles Broom
(Bloomberg) -- Swiss banks will probably settle a sweeping U.S. probe of offshore tax evasion by paying billions of dollars and handing over names of thousands of Americans who have secret accounts, according to two people familiar with the matter.
U.S. and Swiss officials are concluding negotiations on a civil settlement amid U.S. criminal probes of 11 financial institutions, including Credit Suisse Group AG, suspected of helping American clients hide money from the Internal Revenue Service, according to five people with knowledge of the talks who declined to speak publicly because they are confidential.
Switzerland, the biggest haven for offshore wealth, wants an end to new U.S. probes while preserving its decades-old tradition of bank secrecy, the people said. The U.S. seeks data on Americans who have dodged U.S. taxes and a pledge by Swiss banks to stop helping such clients, according to the people. The Swiss reached accords this year with Germany and the U.K. on untaxed assets.
“The Swiss would like to get out of this by paying money, and they’ve done that with other countries,” said tax attorney H. David Rosenbloom of Caplin & Drysdale Chartered in Washington, who isn’t involved in the talks. “For the U.S., it’s not primarily a money question. It’s a matter of making sure the laws apply fairly among taxpayers.”
The Swiss government seeks to outline a final accord for the Foreign Affairs Committee of its Parliament’s upper house on Nov. 10, according to a person familiar with the matter. The number of banks that will pay to resolve the U.S. negotiations may extend beyond the 11 under criminal investigation, the people said.
“We are aiming for an all-encompassing solution that will apply to all the banks,” Finance Minister Eveline Widmer- Schlumpf said in an Oct. 4 interview in the Swiss capital Bern. “We don’t want to be confronted with the same issues time and again.”
Under accords this year with Germany and the U.K. on untaxed assets, the identity of clients remained secret. The U.S. insists that the Swiss disclose client account data, and the banks may end up handing over data on 5,000 to 10,000 accounts, the people said. A final determination hasn’t been made, they said.
The U.S. Justice Department also may bring criminal charges or civil enforcement actions against any of the 11 financial institutions. They could avoid prosecution by separately paying fines, admitting wrongdoing and disclosing data, the people said. On Aug. 30, the Justice Department requested statistical data from the 11 about their U.S. accounts, which the U.S. has received and is analyzing, the people said.
Credit Suisse, the second-biggest Swiss bank, said July 15 that it was a target of U.S. prosecutors. On July 21, seven Credit Suisse bankers were indicted on a charge of conspiring to help U.S. clients evade taxes through secret accounts.
The group of 11 also includes HSBC Holdings Plc, the biggest European bank, Basler Kantonalbank, Wegelin & Co., Zuercher Kantonalbank, and Julius Baer Group Ltd., the people said. Three Israeli banks -- Bank Leumi Le-Israel BM, Bank Hapoalim BM, and Mizrahi-Tefahot Bank Ltd. -- are on the list, as well as Liechtensteinische Landesbank AG and an asset manager, NZB AG, according to the people.
The U.S. crackdown against offshore tax evasion has led to charges against UBS AG, the largest Swiss bank; at least 21 foreign bankers, advisers and attorneys; and at least 36 U.S. taxpayers.
UBS, which isn’t one of the 11 banks now under scrutiny, avoided prosecution in 2009 by paying $780 million, admitting it fostered tax evasion and handing over details on 250 secret accounts. It later disclosed another 4,450 accounts.
UBS made 10.75 billion francs ($12.1 billion) in revenue in the U.S. in 2010, or 34 percent of the group’s total. Credit Suisse made 12.84 billion francs in revenue in the Americas in 2010, or 41 percent of the total. HSBC’s Swiss private bank and Julius Baer declined to disclose information on revenue from U.S. clients. A spokesman for HSBC in Geneva declined to comment on the settlement talks.
Credit Suisse rose 3.3 percent to 24.64 Swiss francs in Zurich. Baer rose 1.3 percent to 35.14 francs. Basler Kantonalbank was unchanged and Liechtensteinische Landesbank fell 3.2 percent.
Urs Rohner, chairman of Credit Suisse, last month told newspaper NZZ am Sonntag that the bank has transferred statistical data sought by the U.S. Marc Dosch, a spokesman for the Zurich-based bank, declined to comment further.
Basler Kantonalbank spokesman Michael Buess said it also gave such data to the U.S.
Wegelin & Co. spokeswoman Albena Bjoerck said it will show “Swiss and U.S. authorities that the bank has not breached either Swiss or U.S. law.” The bank is cooperating with authorities “within the scope of Swiss law.”
After a U.S. indictment of two Julius Baer bankers this month, the bank said it “is one of a number of Swiss financial institutions supporting the ongoing tax negotiations between the U.S. and Switzerland” and is cooperating with the U.S. probe. Spokesman Martin Somogyi declined to comment further.
Youval Dichovski, Zurich-based head of internal audit at Bank Leumi Switzerland Ltd., said the bank is cooperating.
Bank Hapoalim Switzerland is complying with its legal and regulatory duties in cooperating with Swiss authorities, said Chief Executive Officer Michael Warszawski. He said the bank “has only a limited number of American clients whose holdings with the bank are very small.” The bank, he said, “is not aware of any violations of U.S. law by the bank or its employees.”
Cyrill Sele, a Vaduz, Liechtenstein-based spokesman for Liechtensteinische Landesbank AG, said it sent statistical data to the U.S. A man who answered the phone Oct. 20 at NZB said it is closing and has only a few employees.
Zuercher Kantonalbank spokesman Urs Ackermann said the bank was informed in September of the U.S. investigation. A spokesman for Mizrahi Bank had no immediate comment.
The UBS turnover of 4,450 names, in the face of Swiss laws barring most disclosures of client data, set a precedent for the current talks. The U.S. agreed to submit a request for specific accounts under a 1996 tax treaty and a follow-up agreement in 2003. Under that accord, Swiss bank secrecy doesn’t protect accounts if the owner engaged in “tax fraud or the like,” which is a narrower definition of tax evasion than U.S. law provides.
The Swiss directed UBS to turn over accounts to the Swiss Federal Tax Administration for review before handing them to the IRS. Negotiators are determining how to apply the 1996 tax treaty and one adopted in 2009 that still needs ratification by the U.S. Senate, the people said.
“Switzerland is continuing talks with the U.S. authorities on administrative assistance in cases of tax fraud and tax evasion,” said Norbert Baerlocher, spokesman for the Swiss embassy in Washington, in a statement.
“Any exchange of client data can occur only within the scope of the current legal system, in accordance with the procedures provided for in the existing or the new double-taxation agreement with the USA.”
The Swiss agreed in March 2009 to meet international standards to avoid being blacklisted as a tax haven by the Organization for Economic Cooperation and Development. The London-based Tax Justice Network this month ranked Switzerland at the top of its financial secrecy index.
“This is a big issue for these banks,” said C. Evan Stewart, an attorney at Zuckerman Spaeder LLP in New York, who isn’t involved in the settlement talks.
“These are no longer small institutions catering to wealthy people in a small part of central Europe,” he said. “These are multinational institutions now that have a reach that’s all over the world. This has a huge impact on the banking system in Switzerland. Another issue is the sovereignty in Switzerland and whether that will be given deference by other governments.”
The IRS has said 30,000 U.S. taxpayers with offshore accounts avoided prosecution since 2009 by entering a limited amnesty program, paying back taxes and saying who helped them hide their accounts from authorities.
Hundreds of taxpayers in the program have given information to prosecutors that have helped them build criminal cases against bankers and advisers.
“The DOJ and IRS are casting a wide net as they try to identify Americans guilty of offshore tax evasion,” said Aaron D. Schumacher, a Geneva-based wealth planning attorney, with Withers LLP.
“They obtained a lot of information about various Swiss banks from the participants in the voluntary disclosure programs and that has likely enabled the recent indictments we’ve seen,” he said. “More people than we saw previously have come to us looking to renounce their citizenship.”
Attorney Robert Katzberg, who represents clients in criminal tax cases, said U.S. taxpayers with Swiss accounts don’t understand that the IRS and Justice Department will get a trove of new data on secret accounts.
“There are thousands of Americans, who are the functional equivalent of residents of New Orleans on the eve of Hurricane Katrina, who have no idea that Katrina is about to happen,” said Katzberg, of Kaplan & Katzberg in New York.
To contact the reporters on this story: David Voreacos in Newark, New Jersey, at email@example.com; Klaus Wille in Zurich at firstname.lastname@example.org; Giles Broom in Geneva at email@example.com
The New Gift Tax Audits: IRS Identifies Non-Filers Using State Property Records.
A new IRS gift tax compliance initiative responds to suspicions of widespread failure to file gift tax returns. According to Josephine Bonaffini, the Federal/State Coordinator for the IRS Estate and Gift Tax Program, between sixty percent and ninety percent of taxpayers fail to file a gift tax return despite having engaged in a transaction requiring a return. Although gift tax audits are historically rare, the IRS has examined hundreds of taxpayers in the last two years whom the IRS suspects made large gifts, yet failed to file the appropriate returns. Borrowing from techniques long employed to identify noncompliant taxpayers in the income tax context, the IRS is using records obtained from third parties—namely, land records maintained in state and county offices—to root out intra-family land transfers for little or no consideration.
Land records maintained at local state offices are publicly available. However, the suspect transfers make up a small percentage of these voluminous and decentralized records. Thus, the IRS has asked state and county agencies that compile the relevant records to provide the IRS with those records. For instance, the California constitution contains cap on property tax increases following certain intra-family transfers, which inadvertently results in the California Board of Equalization (“BOE”) segregating the records of interest to the IRS—those on intra-family transfers—from the mass of irrelevant property records.
State or county agencies in fifteen states, including New York and Texas, have voluntarily agreed to provide records similar to those maintained by the California BOE. There is no reason to believe that the IRS has not made similar requests to agencies within many more, if not all, states, and more voluntary compliance from individual states may be forthcoming.
The recent flurry of gift tax compliance activity took many in the tax community by surprise. The compliance initiative received no appreciable public attention until the recent dispute in California federal court (discussed in more detail below), and the IRS has declined to comment on the initiative beyond the information provided in documents filed in that case. This mysterious quality gives the IRS’s recent activity the aura of a “stealth” program.
As with any federal tax law violation, the government may impose severe consequences for violating the gift tax provisions. But one curious aspect of the new gift tax compliance initiative is that the majority of examinations likely result in zero assessed tax or penalties.
According to Bonaffini, in the past two years, 323 taxpayers have been audited for failure to file gift tax returns relating to gifts of real property, 217 cases were still under examination, and another 250 cases were being researched to determine whether to conduct gift tax audits. At the time, the IRS had determined that ninety-seven taxpayers had violated gift tax reporting requirements by failing to file, and just twelve cases resulted in assessment of tax and penalties.
The same statutory regime that governs sanctions for the failure to file income tax and most other returns also governs sanctions for failure to file gift tax returns. Because the Code bases the civil penalty amount on the amount of tax due, failure to file a gift tax return generally results in no penalty if the taxpayer’s gifts during the year triggered no tax. However, where a taxpayer does make gifts large enough to trigger gift tax and fails to file a gift tax return, such taxpayer cannot “wait it out,” hoping that the IRS will fail to assess the tax and penalties while the tax is still enforceable.
Code Section 6501(c)(3) specifies that, “[i]n the case of failure to file a return, the tax may be assessed . . . at any time.” In addition to the assessment of tax and civil penalties, the government can potentially pursue taxpayers criminally for failure to file a gift tax return. Code Section 7203 criminalizes the willful failure to file a return, and this section has been applied to gift tax returns, albeit infrequently.
Although several states apparently complied voluntarily with the IRS’s requests for records, California did not. Rather, when the IRS requested the California BOE produce the neatly segregated records of intra-family transfers discussed above, the BOE refused, citing a state statute which forbids disclosure of personal information absent a court order.
The Department of Justice, on behalf of the IRS, filed suit in District Court for the Eastern District of California, naming as defendants “John Does, United States taxpayers who, during any part of the period January 1, 2005, through December 21, 2010, transferred real property in the State of California for little or no consideration . . . [and for] which information is in the possession of the [BOE]. . . .” The initiation of the federal lawsuit allowed the government to petition the court for a summons to serve upon the BOE. The IRS hoped that the court would issue the summons, thereby overcoming the state law which generally prohibits the disclosure of personal information.
The Code expressly allows the IRS to petition for a summons “which does not identify the person with respect to whose liability the summons is issued.” However, the Code creates three additional hurdles where the government asks for a John Doe summons: the IRS must establish that (i) the summons relates to an investigation of an ascertainable group of people; (ii) there exists a reasonable basis for believing that the group of people may have failed to comply with the Code; and (iii) the records sought are not readily available from other sources. In its petition, the government averred that the summons requested satisfied these three requirements.
On May 23, 2011, the court issued an order whereby it disagreed with the government and refused to issue the summons. With respect to the third requirement—that the records are not otherwise readily available—the government asserted only that the BOE maintains the relevant records separate from all other property records, that the BOE stated that it could not provide the information without a summons, and that the IRS’s only other option was to search through records of all property transactions of all kinds in each of California’s fifty-eight counties. But the court noted that taxpayers first file the appropriate forms with their county assessor’s office in order to benefit from the tax increase cap following an intra-family transfer, and only later are these forms forwarded to the BOE for centralized recordkeeping. Thus, according to the court, it was unclear why the government could not obtain the requested information directly from the individual counties without having to search through all property records.
The court denied the government’s petition without prejudice, leaving the government the option to re-file its petition. However, the court offered the following cautionary note:
[T]his court has serious concerns about the fact that the United States seeks to utilize the power of a federal court to sanction the issuance of a John Doe Summons upon a state. Indeed, the Court’s own review of the case law has revealed no other circumstances on par with the United States’ current request.
Additionally, the court flagged four issues that the government should address in the event that it resubmits its petition: (i) whether a state is a “person” under the Code sections allowing the IRS to summon “persons” to produce records; (ii) whether a state’s sovereign immunity precludes issuance of the John Doe summons; (iii) whether the government must exhaust all administrative remedies before proceeding in federal court; and (iv) whether the government should be required to pursue state court remedies before proceeding in federal court.
The IRS may heed the court’s suggestion and simply attempt to seek the relevant records directly from the counties. Alternatively, the government may resubmit its petition in federal court, in which case the tax community will await another court order. In any event, the court’s denial of the government’s petition may embolden additional states to refuse the IRS’s request for records.
October 18, 2011
Former Ohio State Bar President Charged With Tax Fraud
Leslie Jacobs, the senior partner in Thompson Hine's competition, antitrust, and white-collar crime practice group and a former president of the Ohio State Bar Association, was charged with tax fraud Thursday in federal court in Ohio.
The 66-year-old Jacobs allegedly underreported his income from the firm by more than $250,000 between 2004 and 2007, according to charges filed by the U.S. Attorney's Office for the Northern District of Ohio. ... Jacobs, a Harvard Law School graduate, told The Plain Dealer that he is cooperating with federal investigators and that the matter is "a terrible embarrassment and regrettable."
According to court filings, Jacobs filed four federal income tax returns between 2004 and 2007 that inflated his business expenses by as little as $25,000 and as much as $94,000 in an effort to lower the taxable income he collected from his Thompson Hine partnership. Prosecutors said Jacobs's income in each of those years should have ranged from $633,303 to $759,973.
October 13, 2011
Google Faces IRS Audit Over Shifting Profits to Offshore Subs
Bloomberg, Google Tax Probe to Focus on Offshore Units, by Jesse Drucker:
The IRS is auditing how Google avoided federal income taxes by shifting profit into offshore subsidiaries, according to a person with knowledge of the matter.
The agency is bringing more than typical scrutiny to how the company valued software rights and other intellectual property it licensed abroad, said the person, who requested anonymity because the audit isn’t public. The IRS has requested information from Google about its offshore deals after three acquisitions, including its $1.65 billion purchase of YouTube, the person said. The transfer overseas of these kinds of rights has enabled Google to attribute earnings to foreign units that pay lower taxes, Bloomberg News reported a year ago. ...
Google, owner of the world’s most popular search engine, has cut its worldwide tax bill by about $1 billion a year using a pair of strategies called the Double Irish and Dutch Sandwich, which move profits through units in Ireland, the Netherlands and Bermuda. Google reported an effective tax rate of 18.8% in the second quarter, less than half the average combined U.S. and state statutory rate of 39.2%.
New IRS Program allows companies to re-classify improper independent contractors to employee status at reduced back payroll tax amounts.
September 22, 2011
WASHINGTON - The Internal Revenue Service is giving companies that have been misclassifying employees as independent contractors a chance to pay a fraction of back taxes to avoid interest, penalties, and audits for previous years.
Under the program disclosed yesterday by IRS Commissioner Douglas Shulman, US companies would have to agree to treat the workers as employees going forward and pay 10 percent of the previous year’s payroll taxes. The program is open to employers of all sizes, though Shulman said he is trying to encourage smaller businesses to participate.
“A lot of our job is to make sure that we provide clarity for the vast majority of people that are trying to get it right,’’ Shulman said on a conference call with reporters yesterday.
Worker misclassification is a complex area of the tax code without clear rules to guide businesses, Shulman said. Since 1978, Congress has prohibited the IRS from issuing general clarifying regulations.
Employers are responsible for paying part of the payroll tax and paying federal unemployment taxes for their workers. Independent contractors pay the employee and employer shares of the payroll tax.
Brian Turmail, a spokesman for the Associated General Contractors of America, a trade group, said in a phone interview yesterday that the IRS program is an acknowledgment of how complex it is to comply with employment classification requirements.
Within the construction industry, home building is particularly challenging because it can involve multiple trades and small jobs, Turmail said.
President Obama in his most recent budget plan proposed allowing the IRS to issue guidance and to require companies to reclassify some contractors as employees. That proposal was projected by the Treasury Department to raise $8.7 billion over the next decade.
Shulman said he didn’t have estimates of how many employers would join the voluntary compliance program or how much money it would generate. The program has no deadline.
IRS Reaps Billions From Amnesty Program for Offshore Accounts
Sept. 15, 2011
The IRS continues to make strong progress in combating international tax evasion, with new details announced today showing the recently completed offshore program pushed the total number of voluntary disclosures up to 30,000 since 2009. In all, 12,000 new applications came in from the 2011 offshore program that closed last week.
The IRS also announced today it has collected $2.2 billion so far from people who participated in the 2009 program, reflecting closures of about 80% of the cases from the initial offshore program. On top of that, the IRS has collected an additional $500 million in taxes and interest as down payments for the 2011 program — a figure that will increase because it doesn’t yet include penalties.
The combination of efforts helped support the 2011 Offshore Voluntary Disclosure Initiative (OVDI), which ended on Sept. 9. The 2011 effort followed the strong response to the 2009 Offshore Voluntary Disclosure Program (OVDP) that ended on Oct. 15, 2009. The programs gave U.S.taxpayers with undisclosed assets or income offshore a second chance to get compliant with the U.S. tax system, pay their fair share and avoid potential criminal charges.
The 2009 program led to about 15,000 voluntary disclosures and another 3,000 applicants who came in after the deadline, but were allowed to participate in the 2011 initiative. Beyond that, the 2011 program has generated an additional 12,000 voluntary disclosures, with some additional applications still being counted. All together from these efforts, taxpayers came forward and made 30,000 voluntary disclosures.
In new figures announced today from the 2009 offshore program, the IRS has $2.2 billion in hand from taxes, interest and penalties representing about 80% of the 2009 cases that have closed. These cases come from every corner of the world, with bank accounts covering 140 countries.
The IRS is starting to work through the 2011 applications. The $500 million in payments so far from the 2011 program brings the total collected through the offshore programs to $2.7 billion.
August 26, 2011
Due to the potential impact of Hurricane Irene, the IRS has extended the due date for offshore voluntary disclosure initiative requests until Sept. 9, 2011. The prior deadline was August 31, 2011.
Ex-UBS Client Ordered to Give Tax Records to Federal Grand Jury in San Diego
By Bloomberg News
August 22, 2011
U.S. prosecutors won a victory in their crackdown on offshore tax evasion when a federal appeals court said a former UBS AG client cannot assert his constitutional right against self-incrimination to avoid turning over his bank records to a U.S. grand jury.
The client, identified only as M.H., must produce records sought by a federal grand jury in San Diego, according to the U.S. Ninth Circuit Court of Appeals. A three-judge panel rejected M.H.'s argument that the Constitution protects him from being a witness against himself, saying the Fifth Amendment privilege doesn’t cover records on foreign bank accounts.
Prosecutors seek information that M.H. must keep under the Bank Secrecy Act, asking for the name and number of each account, the name and address of each bank, and the maximum values of accounts, according to the Aug. 19 opinion. Such record-keeping requirements mean M.H. must comply, the appellate panel ruled.
“Because the records sought through the subpoena fall under the Required Records Doctrine, the Fifth Amendment privilege against self-incrimination is inapplicable, and M.H. may not invoke it to resist compliance with the subpoena’s command,” according to the panel.
The grand jury issued a subpoena in June 2010 to M.H., who is the target of an investigation into whether he used secret Swiss bank accounts to evade taxes, according to the ruling. He transferred securities from his UBS account in 2002 to a different Swiss bank, UEB Geneva, according to the ruling.
M.H. asserts the information being sought might conflict with what he previously told the IRS, according to the ruling.
“Production might reveal, for instance, that he has accounts he has not reported or that the information he has reported is inaccurate,” the panel ruled. “On the other hand, if M.H. denies having the records, he risks incriminating himself because failing to keep the information when required to do so is a felony.”
M.H. attorney Pamela Naughton ofSheppard, Mullin, Richter&HamptonLLP in San Diego didn’t return calls seeking comment.
UBS, the largest Swiss bank, was charged in 2009 with aiding tax evasion by U.S. clients. UBS avoided prosecution by paying $780 million, admitting it fostered tax evasion, and giving the IRS data on more than 250 accounts, including M.H.’s, according to the opinion. UBS later turned over data on another 4,450 accounts.
Since 2008, the United States has filed criminal tax charges against at least 34 former U.S. clients of Zurich-based UBS; Zurich- based Credit Suisse Group AG; and London-based HSBC Holdings Plc, Europe’s biggest bank. Most of those clients have pleaded guilty.
The United States also has charged at least 18 bankers, financial advisers and lawyers who aided clients at various Swiss banks.
The appellate panel upheld the ruling of a district court in the Southern District of California. Robbins said that he is fighting two similar cases in Fort Lauderdale, Fla., where he lost a ruling.
The case is In re: Grand Jury Investigation M.H. v. United States of America, 11-55712, U.S. Court of Appeals for the Ninth Circuit (San Francisco).
August 3, 2011
ANOTHER UBS CLIENT PLEADS GUILTY TO FILING FALSE TAX RETURN
Agrees to Pay $6.8 Million to the U.S. Treasury
Robert E. Greeley, a resident of San Francisco, pleaded guilty today to charges of filing a false federal income tax return, the Justice Department and Internal Revenue Service (IRS) announced. Greeley appeared before U.S. District Court Judge Charles R. Breyer in San Francisco and accepted responsibility for concealing more than $13 million in two bank accounts he had with UBS in Switzerland. On June 14, 2011, Greeley was charged with one count of filing a false federal individual income tax return for the 2008 tax year. Judge Breyer scheduled sentencing for Nov. 9, 2011.
According to the plea agreement, Greeley admitted that in 2002 and 2004, with the assistance of UBS banker Renzo Gadola, he opened two bank accounts at UBS in Switzerland in the names of Meyrin Investors and Exchange Preferred Limited, both Cayman Islands nominee entities. Greeley admitted that he was the beneficial owner of Meyrin Investors and Exchange Preferred Limited, and that he directed the financial transactions concerning these bank accounts.
According to the plea agreement, Greeley admitted that between 2002 and 2008, the Meyrin Investors bank account’s highest total net asset balance was $2,855,894 and the Exchange Preferred Limited bank account’s highest total net asset balance was $12,616,881. Greeley further admitted that between 2003 and 2008, he earned more than $734,000 in interest income in the two UBS Switzerland bank accounts and that none of the interest income was reported on any tax return that he filed with the IRS.
According to the plea agreement, U.S. citizens who have a financial interest in, or signature or other authority over, a financial account or accounts in a foreign country with assets in excess of $10,000 at any time during a particular calendar year are required to file with the U.S. Department of Treasury a Report of Foreign Bank and Financial Accounts on Form TD F 90-22.1 (FBAR). Greeley admitted that between 2002 and 2008, he failed to file FBARs with the Department of Treasury and did not otherwise disclose to the IRS his interest in and control over the UBS accounts.
Greeley further admitted that between 2002 and 2008 he willfully failed to disclose on his tax returns that he had an interest in, or signature or other authority over, a financial account in a foreign country.
According to the plea agreement, Greeley also admitted that on or about April 15, 2009, he filed a false U.S. Individual Income Tax Return, Form 1040, for the 2008 tax year, which he signed under the penalties of perjury. Greeley admitted that he willfully failed to report both his financial interest in and signature authority over the two bank accounts at UBS Switzerland and interest income of more than $146,000 that he earned from these two UBS Switzerland bank accounts on his 2008 tax return.
In addition to pleading guilty, as set forth in the plea agreement, Greeley agreed to pay a civil FBAR penalty of more than $6.8 million for his failure to file FBARs as required by law.
August 2, 2011
FORMER UBS BANKER CHARGED WITH HELPING U.S. TAXPAYERS USE SECRET SWISS BANK ACCOUNTS TO EVADE U.S. TAXES
Investment Advisor Encouraged U.S. Taxpayers Not to Disclose Accounts to Internal Revenue Service
WASHINGTON - Martin Lack, a former UBS AG banker who is currently an independent asset manager, has been charged with conspiracy to defraud the United States, the Justice Department and the Internal Revenue Service (IRS) announced today.
According to the indictment, Lack, a citizen and resident of Switzerland, founded his own investment management firm, Lack & Partner Asset Management AG in Zurich in 2002. According to the indictment, Lack assisted U.S. customers to open and maintain secret bank accounts at a Swiss cantonal bank headquartered in Basel, Switzerland, with the assistance of a private banker at the bank. The indictment alleges that Lack traveled to the U.S. to conduct banking for U.S. customers with undeclared accounts and conducted currency transactions in the U.S. in violation of federal banking and currency reporting laws.
According to the indictment, Lack encouraged his customers not to participate in the IRS voluntary disclosure program and he offered to provide his customers with falsified bank documents to conceal the source of the funds in their undeclared bank accounts. The indictment further alleges that Lack gave a U.S. customer with an undeclared bank account a cell phone and instructed the customer to only contact him using the cell phone and not to use a U.S. land line.
The indictment further alleges that Lack feared that he would be arrested by U.S. law enforcement following the investigation of UBS AG, so, in November 2010, he sent his associate, Renzo Gadola, to meet with a client at a Miami hotel to persuade that client not to disclose to the U.S. that the client owned and controlled a bank account at a regional bank headquartered in Basel. The undeclared bank account allegedly was funded when the client provided Lack with approximately $445,000 in cash during two meetings in New Orleans in 2007. According to the indictment, at the Nov. 6, 2010, meeting in Miami, Gadola encouraged the customer not to disclose the undeclared cantonal bank account to U.S. authorities, telling the customer that there was a “99.9 percent chance the client had nothing to worry about because the “likelihood . . .that they will somehow. . . find out about the account is practically zero percent.” Lack also allegedly encouraged this client not to disclose the undeclared bank account at the cantonal bank to the U.S. authorities and offered to provide the client with falsified bank documents to make the funds in the account appear as though they were the proceeds of a loan. On Dec. 22, 2010, Gadola pleaded guilty to conspiring to defraud the United States. He is scheduled to be sentenced before District Judge James King of the Southern District of Florida on Nov. 18, 2011.
Credit Suisse “worse off” than UBS in the US
July 25, 2011
by Marie-ChristineBonzominWashington for Swissinfo.ch
Once again a Swiss bank in the United States is implicated in tax fraud. Three years ago it was UBS in the hot seat; now Credit Suisse faces a criminal inquiry.
The political and legal climate has changed considerably since 2008 and lawyers and clients of Credit Suisse see the position of Switzerland’s second largest bank as more serious than that of its competitor UBS.
Before indicting four former bank employees, the US Department of Justice sent a letter to Credit Suisse earlier this month warning that it was the target of an inquiry.
The four new indictments bring to eight the number of Credit Suisse employees accused of having helped Americans to commit tax fraud.
The spokeswoman for Credit Suisse in the US declined an interview request from swissinfo.ch. But in a communiqué Victoria Harmon emphasised the commitment of the Zurich bank “to a fully compliant cross-border business”.
"Subject to our Swiss legal obligations and throughout this process we will continue to cooperate with the US authorities in an effort to resolve these matters," she wrote.
As lawyers for UBS and Credit Suisse clients, Scott Michel and Lawrence Horn are very close to the issue. They see the situation of Credit Suisse as worse than that of UBS.
“The very serious allegations against Credit Suisse relate to a wider range of conduct extending beyond a tax conspiracy into a broader range of criminal activity,” Michel told swissinfo.ch.
“These are not just allegations that a Swiss bank opened accounts that they knew would not be reported to the IRS [Internal Revenue Service], there are also allegations that employees of the bank lied to the Federal Reserve, engaged in destruction of records, helped people try and evade DOJ [Department of Justice] investigation and provided unlicensed banking services to customers.”
Michel interprets the measures taken in the past week by the US authorities as pointing to the imminent indictment of the bank itself.
“Credit Suisse is on the verge of being indicted, unless the bank negotiates with DOJ and gives names of its American depositors,” Michel said.
The letter sent to Credit Suisse is known in legal jargon as a target letter, and its meaning is clear. “It means that the Department of Justice has enough evidence to indict you”.
The DOJ refuses to comment on the case but the analysis of the lawyers involved is backed up by news agency reports citing “high level government sources” who indicate that the US is planning to charge Credit Suisse.
Is the DOJ bluffing? “No. The DOJ does not issue target letters lightly, they’re definitely not bluffing,” said Horn, a former federal prosecutor. Michel agrees.
Furthermore, developments in the legal and political environment since the UBS scandal complicate the situation for Credit Suisse.
At the beginning of July, the Swiss Federal Court ruled that the transfer of confidential UBS bank details to United States tax investigators in 2009 was legal.
In Washington the political climate is marked by the federal debt crisis; not a good backdrop for Credit Suisse to be in trouble. “There’s no sympathy anywhere in the government for people who are not paying their fair share in the context of big budget problems.”
Added to this, the US government seems to want to act swiftly against Credit Suisse as it moves to tackle the problem of tax evasion not just connected to Switzerland but with inquiries looking elsewhere in Europe and in Asia.
The fact that the prosecutor submitted the new indictments to the federal court of Alexandria in Virginia reflects the government’s haste because the court is known for its rapid handling of cases.
According to Michel, “the court in Alexandria is an exceptionally good group of judges and they believe in moving cases along quickly, it’s a hallmark of that court which is often chosen as a venue when the government wants to act fast”.
Investigators also benefit from information provided by Credit Suisse clients who are cooperating in exchange for reduced penalties. “Some of them are clients of mine, it’s fairly widespread and it’s going to continue,” Michel said.
Reported by a Swiss newspaper, the Sonntagszeitung, and Reuters, rumours of a breakdown in negotiations between Bern and Washington over a framework accord on fiscal matters have been denied by the Swiss embassy in Washington.
“Switzerland is conducting talks with US authorities regarding current bilateral financial issues. Switzerland is striving for a solution within the framework of the Swiss judicial system and has no comment about the course of these talks,” Salome Ramseier of the Swiss embassy in Washington told swissinfo.ch.
“If reports that negotiations have stopped are true, it would have an impact on the US probe of Credit Suisse and other Swiss banks in the sense that DOJ prosecutors would feel like going full speed,” Michel said.
Faced with this unfavourable climate and at risk of losing its US licence if indicted, it is in the bank’s interest to cooperate and make amends honourably, the lawyers say.
As Horn predicts: “Credit Suisse will go the way of UBS, it will enter into a deferred prosecution agreement, it will pay millions of dollars in fines and it will turn over a number of its American depositors.”
“There’s no escape for Credit Suisse because it wants to continue to do business in the United States,” he added.
Marie-Christine Bonzom in Washington, swissinfo.ch
HSBC alerts U.S. clients to offshore tax evasion probe
July 18, 2011
A major bank at the center of an expanded federal crackdown on wealthy Americans suspected of offshore tax evasion has told Indian-American clients to "be aware" of the IRS' offer of lower penalties for those who voluntarily disclose secret overseas assets they hold.
HSBC's former head of services for Indians living outside their homeland recently wrote to the clients confirming that the London-based banking giant had received an IRS summons seeking the names of Americans who hold accounts at the bank.
In the letter, a copy of which was obtained by USA TODAY, Sanjay Nair did not address whether HSBC plans to turn over the information. But he urged Indian-American clients to consult with a U.S. tax adviser "if you have any concerns about your U.S. tax reporting relating to your HSBC India account(s)."
"You may wish to be aware of an IRS voluntary disclosure program, which encourages U.S. taxpayers to bring themselves voluntarily into compliance with the U.S. tax laws," Nair added, referring to an offer set to expire Aug. 31.
Martin Press, a Fort Lauderdale tax law expert who said he and his firm had been consulted by several HSBC Indian-American clients, predicted the letter signals "HSBC intends to fully cooperate with the U.S. government."
"It basically seems to put people on notice to either take advantage of the IRS program — or face possible legal consequences," Press said.
HSBC spokeswoman Juanita Gutierrez declined to comment on the letter or the reason it was sent. She also would not discuss negotiations "we may or may not be having with authorities" regarding the tax evasion investigation.
However, Gutierrez said HSBC "fully supports U.S. efforts to promote appropriate payment of taxes by U.S. taxpayers" and "cooperates appropriately with requests from proper authorities" while seeking to comply with national and local laws in countries where it operates.
The IRS and U.S. Justice Department have focused on Americans with offshore accounts in at least two banks — HSBC and Credit Suisse— since winning a similar legal effort against Swiss banking giant UBS. In the earlier case, UBS agreed to a $780 million settlement to defer prosecution on charges it secretly sent bankers into the U.S. to help American clients duck taxes by hiding assets offshore.
UBS last year also agreed to turn over information for 4,450 American clients as part of a separate agreement that has led to criminal tax charges against at least 30 of the bank's former account holders. Many have pleaded guilty to tax charges.
Employing legal tactics also used in the UBS case, federal officials in April won San Francisco federal court approval to serve HSBC with the IRS summons seeking account details on American clients.
An IRS declaration filed in the investigation shows HSBC told U.S. authorities roughly 9,000 Americans held "premier" accounts as of September 2010 under a special program for wealthy, non-resident Indians.
The accounts collectively held nearly $400 million, the legal declaration shows.
Yet the American owners had disclosed fewer than 2,000 of those accounts to the IRS as of 2009, the declaration shows.
Since the investigation began, at least two American-Indian clients of HSBC have pleaded guilty to tax-related charges. A third was indicted last month by a federal grand jury in Milwaukee.
Separately, Credit Suisse announced Friday that federal authorities have designated the Swiss bank itself as a target of the continuing investigation. "Subject to our Swiss legal obligations, we will continue to cooperate with the U.S. authorities in an effort to resolve these matters," Credit Suisse said.
Credit Suisse targeted in US tax evasion probe
The Associated Press
GENEVA — The U.S. Justice Department is investigating Credit Suisse Group's offshore business with wealthy American clients as part of a larger probe into suspected U.S. tax evaders, the Swiss bank said Friday.
Credit Suisse said it was informed of the investigation by letter Thursday and will cooperate with U.S. authorities within the limits set by Swiss banking secrecy laws.
"The investigation concerns historical private banking services provided on a cross-border basis to U.S. persons," the bank said in a statement. It stopped providing those services in 2008.
Credit Suisse is the most high-profile Swiss bank to be targeted by U.S. investigators since rival UBS became embroiled in a tax evasion probe three years ago. Zurich-based UBS admitted to helping U.S. clients hide money on offshore accounts. It ended up paying a fine and giving U.S. authorities details on thousands of American account holders. The case prompted Switzerland to soften its strict banking secrecy rules in response to international pressure.
Switzerland's top court on Friday upheld the Swiss government's right to order the handover of UBS customer data, a move that was challenged by some of the affected clients. The Federal Tribunal in Lausanne said the government had the right to use emergency powers to prevent "serious and virtually uncontrollable economic repercussions for Switzerland" had it failed to order the release of the files.
Observers had expected a formal investigation against Credit Suisse after three former and one current employee of the bank were indicted by U.S. authorities in February on charges of conspiring to help American tax cheats.
Analysts at Zuercher Kantonalbank noted that a new treaty currently being discussed by Bern and Washington — which would automatically tax the accounts of American bank clients in Switzerland — might ease the pressure on Credit Suisse and other Swiss banks.
A spokesman at the Swiss Finance Department, Mario Tuor, told The Associated Press last month that the aim of the talks was to reach a "comprehensive solution" that would cover all past tax infringements by U.S. clients and Swiss banks.
Tax experts say Switzerland has few trumps left to play while U.S. authorities are accumulating piles of evidence against Swiss banks from voluntary disclosures by U.S. clients seeking reduced punishment for tax evasion.
"What the Swiss are trying to do is just get this whole thing resolved," said Milan K. Patel, a Zurich-based tax lawyer. If they fail to reach an agreement, Swiss banks could lose their license to operate in the United States and senior employees could face prosecution, he said.
Revenue Officers Now Given Only 15 Days to Contact Employers Included in Federal Fax Deposit Alert Cases
The IRS Small Business/Self-Employed (SB/SE) Division has issued an internal memorandum that instructs its revenue officers to contact employers in Federal Tax Deposit (FTD) Alert cases within 15 calendar days. The FTD Alert program (the Alert program) is a proactive process that provides for early intervention by the IRS when semiweekly depositor employers do not deposit and pay taxes withheld from employees. The Alert program identifies taxpayers that appear to be behind in making deposits of withholding taxes before their quarterly employment tax returns are due to be filed. FTD Alerts are computer-generated, and taxpayers' accounts will have a specific code indicating there is an Alert. If the Alert meets a certain probability level that there will be an underpayment of FTDs, the Alert is assigned to the IRS collection field inventory. Revenue officers in the collection field work Alert cases and contact the identified taxpayers in person to discuss the deposit requirements and obtain payments. The Alert program can protect the federal government's interest by its early identification of a potential delinquent tax payment. It also serves the employer's interest by allowing IRS involvement before enforced collection action, such as a levy of a bank account, seizure of assets, or bankruptcy, becomes the sole remaining alternative for collecting the taxes owed.
In 2007, the Treasury Inspector General for Tax Administration (TIGTA) issued a report which said that revenue officers do not always promptly contact employers about federal tax deposit issues, and, therefore, more employers incur FTD penalties.
The new internal memorandum requires revenue officers to contact employers within 15 calendar days after a revenue officer receives a FTD Alert. A telephone call by the revenue officer that does not result in employer contact will not meet IRS requirements for timely contact. Leaving a message within this period is also not considered a timely contact. In these instances, revenue officers should make a field visit to the employer.
Trust Fund Recovery Penalties May be Assessed Against Third Parties Too
July 1, 2011
IRS Memorandum SBSE-05-0711-044, Issuing Interim Guidance for Trust Fund Recovery Penalty Investigations for Third-Party Payer Cases
The IRS Small Business/Self-Employed (SB/SE) Division has issued an internal memorandum which says that the “trust fund recovery penalty” (TFRP) may be imposed against third-party payroll service providers, as well as the employer.
Trust fund recovery penalty. Code Sec. 6672 imposes the trust fund recovery penalty on any person who: (1) is responsible for collecting, accounting for, and paying over payroll taxes; and (2) willfully fails to perform this responsibility. The amount of the penalty is equal to the amount of the tax that was not collected and paid. The penalty is imposed on a “responsible person.” A “responsible person” may be anyone in a business entity who has the duty to collect, account for, or pay over the tax.
Common law employers. The new IRS memorandum applies to “common law employers.” A “common law employer” is any person who has the status of employer under the usual common law rules applicable in determining the employer-employee relationship. Generally an employer-employee relationship exists when the person for whom the services are performed has the right to direct and control the worker who performs the services, not only as to the result to be accomplished by the work, but also as to the details and means by which that result is accomplished.
Third-party arrangements. Common law employers may designate a third party who is not the common law employer or a statutory employer under Code Sec. 3401(d)(1) to take over some or all of the employer's federal employment tax withholding, reporting, and payment responsibilities and obligations. A third party that could be subject to a TFRP includes: (1) a payroll service provider (PSP), or (2) a professional employer organization (PEO) or employee leasing company that is not the common law or statutory employer. The trust fund recovery penalty may be assessed against the payroll service provider, PEO, or responsible parties within the PSP or PEO.
A third-party payer is considered a responsible person under (1) above in Code Sec. 6672 if the person had significant control over the payment of its client's employment taxes. A third-party payer is considered to have willfully failed to perform the payroll tax responsibility (i.e., item (2) above) if failure to perform the responsibility was intentional, deliberate, voluntary, reckless, or knowing, as opposed to accidental. No evil intent or bad motive is required.
A common law employer that uses a third party to prepare its employment taxes can still be subject to the trust find recovery penalty if it meets conditions (1) and (2) above. Employees of the common law employer may also still be subject to the penalty.
California UBS Clients Plead Guilty to Hiding Assets in Secret Swiss Bank Account
June 20, 2011
WASHINGTON - Sean Roberts and Nadia Roberts of Tehachapi, Calif., pleaded guilty before U.S. District Judge Anthony W. Ishii of the Eastern District of California to a criminal information charging them with filing a false tax return related to an undisclosed Swiss bank account that they maintained at UBS, as well as other offshore bank accounts, the Justice Department and the Internal Revenue Service (IRS) announced today.
According to court documents and statements made in court, the Robertses pleaded guilty to filing a false 2008 individual U.S. income tax return in which they failed to report that they had an interest in or a signature authority over a secret Swiss financial account at UBS, as well as several other foreign accounts, failed to report income earned on the foreign accounts, and falsely deducted transfers from their domestic business to the foreign accounts on their corporate tax returns. The false deductions allowed the Robertses to under-report their income on their individual income tax returns. The Robertses own and operate the National Test Pilot School and Flight Research Incorporated in Mojave, Calif. National Test Pilot School is a non-profit educational institute that trains test pilots from domestic and foreign aerospace industries and governments. Flight Research Inc. owns and maintains most of the aircraft used by the school.
In or about 1991, the Robertses opened a bank account at an Isle of Man branch of a United Kingdom bank, in the name of nominee entity Interline Trade Associates Limited. From at least 2002 through 2004, the Robertses transferred funds from their company, Flight Research Incorporated of Mississippi (FRI Mississippi), to the Interline account, and caused the transfers to be falsely deducted as interest payments on corporate income tax returns as a sham aircraft loan.
In or about 1995, the Robertses, with the assistance of a UBS banker, established an account in their own names at UBS in Switzerland. In 2004, the Robertses, with the assistance of an account manager at a Zurich-based financial services company, acquired a nominee Hong Kong entity called Excalibur Investments Limited and opened a new UBS account in Excalibur’s name. In July 2004, the Robertses closed the UBS account in their own names and transferred the assets to the nominee Excalibur UBS account. In February 2005, the Robertses also closed their Interline account and, with the assistance of the Zurich account manager, transferred the assets to the Excalibur UBS account. From 2004 through 2008, the Robertses transferred more than $1.2 million from FRI Mississippi to the Excalibur UBS account, and caused the transfers to be falsely deducted as interest payments on corporate income tax returns as a sham aircraft loan.
In or about May 2008, the Robertses closed their Excalibur UBS account and, with the assistance of the Zurich account manager, transferred more than $4.8 million to an account in Excalibur’s name at a Swiss branch of a Liechtenstein bank. This was done after the account manager informed the Robertses that UBS was under investigation by U.S. authorities and that they should leave UBS to ensure the continued secrecy of their account. In 2008, the Robertses transferred more than $1.4 million from FRI Mississippi to the Excalibur account at the Liechtenstein bank, and again caused the transfers to be falsely deducted on a corporate income tax return. Also in May 2008, the Robertses, again with the assistance of the Zurich account manager, opened a bank account in the name of Modest Winner, a nominee Hong Kong entity, at the Liechtenstein bank. In 2008 and 2009, the Robertses transferred funds from another of their entities, Tisours LLC, to the Modest Winner account. In 2009, with the assistance of the Zurich account manager, the Robertses transferred that account to a bank in Hong Kong. The Robertses also maintained numerous undeclared foreign bank accounts in New Zealand and South Africa held in their own names.
The Robertses admitted to filing false tax returns for tax years 2004 through 2008 that concealed their interest in these various offshore accounts, failing to report income earned from these accounts, and falsely deducting transfers from their business to these accounts. The Robertses also admitted that they never filed reports of Foreign Bank and Financial Accounts (FBARs) disclosing their interest in any offshore financial accounts. As part of their plea agreements, the Robertses agreed to pay restitution to the IRS in the amount of $709,675, and to pay a 50 percent penalty for the one year with the highest balance in their offshore accounts in order to resolve their civil liability for failing to file FBARs, Forms TD F 90-22.1.
In February 2009, UBS entered into a deferred prosecution agreement under which the bank admitted to helping U.S. taxpayers hide accounts from the IRS. As part of their agreement, UBS provided the United States government with the identities of, and account information for, certain U.S. customers of UBS's cross-border business, including the Robertses.
Sentencing has been set for Sept. 6, 2011, and the Robertses remain free on bail pending sentencing, where each faces a maximum sentence of three years in prison.
Two-Time U.S. Open Champ Goosen Understated Income, U.S. Tax Court Says
Jun 9, 2011
Professional golfer Retief Goosen, the winner of the U.S. Open in 2001 and 2004, understated the share of his endorsement income generated in the U.S., the U.S. Tax Court ruled.
"On the evidence presented, we cannot accept petitioner's contention that less than 7 percent of his royalty income is U.S. source income," Judge Diane Kroupa wrote in a ruling released today in Washington.
The decision involved Goosen's endorsement deals with companies including Electronic Arts Inc. (ERTS) and Rolex Group. The Internal Revenue Service had determined that Goosen, 42, owed
$20,224 for 2002 and $144,474 for 2003. The golfer challenged the IRS findings in tax court.
On some issues, particularly on the question of how much of the earnings were related to his image as opposed to his performance, the court sided with Goosen. It was unclear from the ruling how much he would have to pay the government if the ruling stands.
"We're in the process of reviewing it," said one of his tax attorneys, Matthew Kadish of Kadish, Hinkel & Weibel in Cleveland. A voicemail message seeking comment from Guy Kinnings, Goosen's agent at IMG Worldwide Inc. in London, wasn 't immediately returned.
The IRS case against the South African native centered on Goosen's endorsement deals with six companies: Electronic Arts; Rolex; Upper Deck Co.; Izod, which is owned by Phillips-Van Heusen Corp. (PVH) ; Acushnet Co., the maker of Titleist golf equipment sold by Fortune Brands Inc. (FO); and TaylorMade, which is owned by Adidas AG. (ADS). The TaylorMade deal had an annual base payment of $400,000, and the Acushnet deal included a base payment in 2003 of $375,000, according to the ruling.
The case turned on whether Goosen's endorsement earnings were royalty income based on his image or personal services income based on his performance on the golf course. The IRS argued the latter position.
The judge took a middle position, Kadish said. She found that the golfer's off-course image and his on-course performance were both important.
Kroupa noted that TaylorMade valued Goosen less than it did Spanish golfer Sergio Garcia, who was paid "substantially more than petitioner despite his lesser record." Garcia has a case pending before the tax court on similar issues regarding endorsement income.
"TaylorMade valued Mr. Garcia's flash, looks and maverick personality more than petitioner's cool, 'Iceman' demeanor," Kroupa wrote. "We find that TaylorMade, Izod and Acushnet valued petitioner's image, and they paid substantial money for the right to use his name and likeness."
The ruling notes that Goosen, a permanent resident of the U.K., was advised by his agents to set up a bank account in Liechtenstein to receive his non-U.K. earnings.
Goosen won his last professional championships in 2009, according to his website. He tied for third at the Abu Dhabi HSBC Golf Championship in January, and his best finish on the U.S. PGA Tour this season is a tie for 12th at the Northern Trust Open in February.
Goosen is playing this week at the St. Jude Classic in Memphis, Tennessee, and scored a first-round 2-under-par 68. He is scheduled to play next week in this year's U.S. Open, which is being held at Congressional Country Club in Bethesda, Maryland, just outside Washington.
The case is Retief Goosen v. Commissioner of Internal Revenue, 023323-09.
Supreme Court to decide if Japanese couple can be deported over tax crime.
May. 23, 2011
WASHINGTON -- The U.S. Supreme Court will decide if a Japanese couple can be deported because of criminal tax convictions resulting from their filing of a false income tax return.
The justices will hear an appeal from Akio and Fusako Kawashima, who became permanent lawful residents in 1984. But he pleaded guilty to subscribing to a false statement on a federal tax return, and she pleaded guilty to aiding and assisting in preparing a false tax return statement.
Immigration officials want to deport them because of the financial amount of the crime. Anything over $10,000 is considered an aggravated felony, and Kawashima said in his plea the government's tax loss was $245,126.
The 9th U.S. Circuit Court of Appeals upheld their deportation, but the high court will review it.
The case is Akio and Fusako Kawashima v. United States,10-577.
Former TaxMasters Manager Says Company 'Cheats' Customers
By AVNI PATEL, ANGELA M. HILL, MARK SCHONE and BRIAN ROSS (@brianross)
April 14, 2011
A former manager at Tax Masters, a tax resolution firm now being sued by two different state Attorney Generals for alleged deceptive business practices, claims the company cared more about making money than solving its clients' tax problems, and told sales representatives it was okay to lie to potential clients to get their business.
"You make money as fast as you can and it doesn't matter how you do it," said Lloyd Lee, who was head of tax preparation at Tax Masters until he was fired in 2010. "If you have to lie to a client to get money, you do it. That's the way they operated. It was a money machine."
Houston-based Tax Masters has been sued by the state attorney generals of Texas and Minnesota for what they allege are deceptive business practices. In commercials that run regularly on Fox, CNN and other cable networks, red-bearded company founder Patrick Cox claims that TaxMasters will "stand between" its clients and the IRS, but state officials in Minnesota and Texas say that taxpayers who turn to TaxMasters – and pay thousands of dollars in upfront fees for their help -- may wind up even deeper in debt.
Lee told ABC News that when he went to work for TaxMasters in November 2008 as a tax preparation supervisor, he discovered that despite some good people at the company who wanted to "do right and do a very good job," the company's business practices made it hard to help taxpayers.
"The standard operating procedures of the company prevents that from happening," said Lee. "The main motive behind it was just to make money ... and greed."
The emphasis was on sales, not tax assistance, said Lee. Sales representatives outnumbered actual tax preparers by as much as four to one, he added, and almost none of the sales reps had any tax expertise. "Most of them had zero experience," said Lee. "In fact, I did tax returns for several salespeople and a couple of sales managers. If their title is 'Tax Specialist,' they should be able to do a simple 1040 easy. But that wasn't the case."
As a result, he claims, TaxMasters was a year-and-a-half behind in its tax preparations when he arrived, with the IRS adding interest, and often penalties, as taxpayers waited. "They were 18 months behind in the process because you had all of this work coming in and not enough people to do it," said Lee. "If you sign a contract in January of 2008 and your file doesn't get looked at until November or December of that same year, you've lost a lot of money."
According to Lee, TaxMasters would further delay payment by not forwarding claims to the IRS until clients had paid their TaxMasters bills. The company commonly charges customers up tp $8,000 to resolve tax debts. Lee also claims that some sales representatives did not disclose hidden costs to customers and would charge customer credit cards before any contract was signed. Asked if he thought that meant customers had been "cheated," Lee said, "Of course, yes."
He said at first he had a good working relationship with Patrick Cox, the company's founder, CEO and highly visible on-air spokesman. Cox, a car enthusiast who used to drive a Bentley to work, even took Lee to see the racetrack he was building in Texas.
But Lee said that people working at TaxMasters told him that Cox was unconcerned with questions about the company's business practices. He said they told him, "Pat really doesn't care about what happens, you know. If he gets all of his money, millions of dollars upfront and something happens, he's got his." And Lee said he has no doubt Cox knew how his business was run, with sales representatives making promises that, in most cases, couldn't be kept.
ABC news obtained tapes of actual TaxMasters sales calls show the deceptive practices alleged by the Texas and Minnesota state AG lawsuits, including one in which a salesman promises the IRS stops collection efforts once a customer hires TaxMasters.
"That's what the IRS, consultation does," says the salesman. "It pulls your name, it pulls your number out of the collection process."
Minnesota Attorney General Lori Swanson, whose office obtained the taped calls from TaxMasters, told ABC News that TaxMasters can't automatically stop collections from happening.
In another call, the TaxMasters sales representative claims the company can easily get back taxes reduced to pennies on a dollar. "You're owing $19,000," says the salesman. "I mean, we can get you down to basically, next to nothing, and our job, and our goal is to get you to zero. We're 97 percent successful. Attorney General Swanson calls that "another falsehood" and that the person making the claim is "a salesperson, who is trying to get you to pay thousands of dollars to the company, not somebody with tax expertise."
"Tax lady" Roni Deutch closes down her tax resolution business and agrees to give up her law license
May 12, 2011
North Highlands, CA
"Tax lady" Roni Deutch said she is shutting down her tax resolution business immediately and that she will surrender her license to practice law in California. Deutch faces a lawsuit by the California State Attorney General's office accusing her of bilking clients out of $34 million.
Roni Deutch said her tax resolution firm is now $10 million in debt. As a result of the attorney general's lawsuit my business decreased by over 90 percent, Deutch said. A Sacramento superior court froze her assets last month for violating a Court order. Her tax resolution firm is now in receivership. California Attorney General Kamala Harris has called Deutch a "predator for profit" with the lawsuit claiming less than 10 percent of her clients have their federal tax debts settled successfully. Harris also accused Deutch of shredding millions of pages of documents, failing to pay over $400,000 in refunds to her customers that she cheated and for violating the court's order "almost before it came off the printer." Roni Deutch is also facing a hearing on contempt of court allegations that is set for July 22. Deutch could face heavy fines and time in jail for violating the court's orders.
IRS to Ramp Up Worker Classification Audits
April 21, 2011
Shifting from full-time employees to independent contractors is a recessionary cost-cutting measure some businesses implemented. But for those who have misclassified their workforce, the glare of the IRS spotlight may soon be upon them. Over the next three years, the IRS is auditing 6,000 randomly selected businesses to determine whether they have workers who've been classified as contractors when they should be treated as employees. When appropriately done, classifying a worker as a contractor allows a business to escape unemployment, Social Security and Medicare taxes and overtime pay. However, additional taxes, penalties and interest result from worker misclassification.
California AG Asks Judge to Jail the 'Tax Lady' Roni Lynn Deutch
April 21, 2011
Attorney General Kamala D. Harris today asked a Sacramento County Superior Court to hold "Tax Lady" Roni Deutch in contempt of court, imprison her for five days on each violation and fine her thousands of dollars for shredding millions of pages of documents and failing to pay refunds to her clients in violation of a court order.
"Deutch showed herself to be a predator for profit, preying on innocent, hard-working people who were simply hoping to settle their accounts with the IRS," Attorney General Harris said. "By defrauding these victims, and then pleading poverty, she created a real danger that her clients will never receive their advance fees back."
In August, the Attorney General filed a $34 million lawsuit against Deutch for swindling thousands of people facing serious and expensive tax collection problems with the IRS. On August 31, the court issued an order that prohibited Deutch from destroying evidence.
"Despite this order," the Attorney General said in today's action, "Deutch has been routinely shredding documents on an almost a weekly basis." The Attorney General estimates that to date Deutch has shredded some 1,643,000 to 2,708,600 pages of documents. Deutch's shredding campaign has permanently deprived the Attorney General of evidence needed to fully prosecute the action against her.
Deutch's law firm, based in Sacramento County, had revenues of at least $25 million a year. She spent $3 million a year on advertising, much of it on late-night cable TV, and frequently offered tax advice on popular TV shows. In her pitches, she promised to significantly reduce the IRS tax debts of people who signed up with her firm. Instead, she took thousands of dollars in up-front fees from clients but offered little or no help in lowering their tax bills. Hundreds of clients complained to the Attorney General and other government agencies.
IRS Targets 9,000 Taxpayers With Offshore Accounts Linked To India
April 7, 2011
Dramatically expanding its efforts to unearth unreported offshore income, federal authorities Thursday asked a court for permission to force HSBC India to cough up the names of 9,000 U.S. taxpayers of Indian descent.
The U.S. Department of Justice, which represents the Internal Revenue Service, filled a lawsuit in San Francisco federal court to allow the serving of a so-called “John Doe” summons on HSBC India.
HSBC India is a unit of London-based HSBC Holdings, an international banking giant on the Forbes 2000. HSBC operates 470 branches in the U.S. through HSBC Bank USA. Until last year, HSBC India operated “representative offices” in Fremont, Calif., a San Francisco suburb, and New York City catering to what was called the “non-resident Indian” market, or Indians living outside India.
In a 47-page statement and attachments appended to the lawsuit, IRS agent Daniel Reeves said there were 9,000 U.S. residents who had $100,000-minimum-balance accounts at HSBC India but that fewer than 1,400 taxpayers had disclosed existence of their accounts. U.S. law require disclosure in a special annual filing of any foreign account containing $10,000 or more. “This indicates that thousands of United States taxpayers of Indian origin who maintain more than $100,000 in accounts with HSBC, may have failed to disclose,” Reeves wrote.
The IRS seeks names of account holders from 2002 to 2010.
A statement issued by the New York headquarters of HSBC Bank USA said, “HSBC does not condone tax evasion and fully supports the U.S. efforts to promote appropriate payment of taxes by U.S. taxpayers. While complying with the law in all the jurisdictions in which it operates, HSBC cooperates with requests from U.S. authorities. We have been engaged in a constructive dialogue with U.S. authorities and hope any ‘IRS summons’ issues can be resolved expeditiously. No further comment.”
The parent HSBC organization may have problems arguing the HSBC Indian operation in the U.S. was some rogue outfit. Reeves’ statement cites postings on Internet Web sites like LinkedIn in which bankers staffing those two U.S. offices said they were “employees” of HSBC USA.
A tip-off of things to come materialized on January 26 when a grand jury in Newark, N.J. indicted Vaibhav Dahake of Somerset, N.J., on charges he evaded taxes by holding undeclared accounts in the British Virgin Islands and at HSBC India. In his statement today, agent Reeves said the IRS is investigating taxpayers “who directly or indirectly hold or held interests in, or have or had signature or other authority over, financial accounts at HSBC USA’s affiliate foreign bank, HSBC India, and who are not or may not be complying with U.S. internal revenue laws requiring the reporting of foreign financial accounts, and income earned on those accounts.”
In its multi-year campaign against undeclared offshore accounts held by U.S. taxpayers, the IRS has focused primarily on accounts held by banks in Switzerland, including UBS AG. And the agency has struck pay dirt: UBS admitted two years ago it had plotted to defraud the U.S. government of huge amounts of taxes by helping well-heeled Americans hide their assets. UBS paid $780 million to avoid the crippling stain of a criminal prosecution and turned over upwards of 4,000 names. Presumably, the IRS is eagerly going through the list.
In February, four bankers who used to work for Credit Suisse Group were indicted in the U.S. on charges they plotted to help well-heeled Americans avoid taxes through offshore accounts.
Word of this latest IRS initiative might considerably increase interest in the agency’s newest amnesty for offshore cheats. They have until August 31 to fess up and avoid criminal prosecution.
Tax convictions comparatively low in San Diego
March 28, 2011
Taxpayers convicted in San Diego federal court on criminal tax charges are less likely to be sent to prison than other taxpayers nationally, and those that are receive sentences less than half the national average, according to an analysis by California Watch.
The nonprofit news organization analyzed three years worth of Internal Revenue Service criminal enforcement data covering convictions where white-collar crimes of tax fraud and tax evasion were the leading charge.
But the data does not tell the whole story, according to federal prosecutors in San Diego. They said tax-related charges are often included in larger federal investigations into border-related drug trafficking and other crimes.
The data showed that nationally, about 70 percent of people convicted of tax crimes go to prison, with an average sentence of about 35 months. That is not the case in the southern district of California, which covers San Diego and Imperial counties.
The analysis showed that in federal court here, about 63 percent of people convicted of tax crimes go to prison. And the average sentence they receive is 15 months.
That is the shortest average sentence of any federal court in California and among the lowest in the nation. Only federal courts in New Mexico and central Tennessee averaged shorter prison stays, 3.3 months and 8.7 months, respectively.
The data also showed fewer of those tax convictions in San Diego than in any of the three other federal judicial districts in California.
In the past three years, a total of 27 cases here ended in conviction. That compared to 84 for courts in San Francisco, 91 for the eastern district in Sacramento and 144 cases in the largest district, covering Los Angeles.
The tax cases data was obtained by the Transactional Records Access Clearinghouse, a nonpartisan research organization based at Syracuse University.
Prosecutors with the U.S. attorney’s office in San Diego said that they believe the data analysis underestimates their number of tax cases. For example, cases involving mail and wire fraud may also allege a tax fraud charge, but that is not the central focus of the case.
Moreover, the office focuses the bulk of its resources combating crimes along the border, including drug trafficking and drug smuggling. Agents with the Internal Revenue Service play key investigative roles in those cases, said John B. Owens, the chief of the criminal division in the office.
“The bottom line is we have certain special characteristics in this district of being a border district that other districts in California don’t have,” Owens said. “I think our track record shows that this district is not a haven for tax evaders or cheaters.”
Prosecutors might elect to file other charges, such as money laundering, in cases that begin as investigations into tax fraud, he said. Money laundering typically carries a longer sentence, and it opens the door for the government to seize assets.
IRS Boost Auditing of Taxpayers, Almost Doubling Rate of Last Year
March 14, 2011
IRS audit rates increased in 2010 for all income groups according to data released today in Washington for the fiscal year that ended Sept. 30.
Highest earners had the sharpest increases in audit rates. The IRS audited 11.6 percent of taxpayers reporting adjusted gross income between $5 million and $10 million, up from 7.5 percent the year before. Taxpayers making between $75,000 and $100,000 faced the least chance of an audit, with a 0.64 percent rate.
Through its voluntary offshore disclosure programs and court cases involving Swiss banks, the IRS has gotten a better understanding of how wealthy people in non-corporate businesses manage their assets. They learn things and then they roll those things out across the board.
The overall audit rate for income tax returns was 1.11 percent, up from 1 percent the year before. The IRS had previously reported some of this data without the breakdowns at the top of the income scale.
The increase in audits of people making more than $10 million is part of a concerted IRS effort to focus on the business dealings of the wealthiest individuals.
“Our goal is to better understand the entire economic picture of the enterprise controlled by the wealthy individual and to assess the tax compliance of that overall enterprise,” IRS commissioner Douglas Shulman said in October 2009 upon discussing the formation of a group within the agency focused on “global high wealth” individuals.
“We cannot do this by continuing to approach each tax return in the enterprise as a single and separate entity,” he said. “We must understand and analyze the entire picture.”
Higher audit rates are designed in part to build public confidence in the tax system. The government has an obligation and a duty to make people believe that everybody is paying their fair share. And particularly with respect to the wealthy, there’s a view that they’re able to get out of their obligations.
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