2013 Year in Review: Top 10 Offshore Tax Evasion Developments

Offshore tax evasion continued to be a major focus for the IRS and Department of Justice in 2013. From Switzerland’s old bank pleading guilty to a guilty plea from the creator of Beanie Babies, here is our summary of the 10 most significant offshore tax evasion developments in 2013.

Swiss Bank Wegelin Pleaded Guilty to U.S. Tax Law Violation

  • Summary: Wegelin & Co., Switzerland’s oldest bank, agreed to pay $74 million to the United States to settle charges that it aided U.S. taxpayers in evading taxes. In 2012, Wegelin announced that it would cease operations due to “the extraordinarily difficult situation and threat to the bank brought about by the legal dispute with the US”. In June 2013, Switzerland’s Federal Tax Authorities ordered Wegelin to comply with U.S. government’s request for information on former American clients suspected of using offshore accounts to evade taxes.
  • Significance: This is the first time a foreign bank has pleaded guilty to U.S. tax law violations.

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GAO Offshore Report: IRS Has Collected Billions of Dollars, but May be Missing Continued Evasion

  • Summary: “Among other things, GAO recommends that IRS (1) use offshore data to identify and educate taxpayers who might not be aware of their reporting requirements; (2) explore options for employing a methodology to more effectively detect and pursue quiet disclosures and implement the best option; and (3) analyze first-time offshore account reporting trends to identify possible attempts to circumvent monies owed and take action to help ensure compliance. IRS agreed with all of GAO’s recommendations.”
  • Significance: Deterring offshore tax evasion remains a high priority for the IRS and it is likely we will see more investigations of foreign banks and taxpayers with offshore accounts.

Read the GAO report here: http://www.gao.gov/products/GAO-13-318

John Doe Summons Authorized to CIBC – FirstCaribbean

  • Summary: A federal court in San Francisco entered an order authorizing the Internal Revenue Service (IRS) to serve a John Doe summons seeking information about U.S. taxpayers who may hold offshore accounts at Canadian Imperial Bank of Commerce FirstCaribbean International Bank (FCIB). FCIB does not have offices in the United States but maintains a correspondent account in the United States at Wells Fargo Bank N.A.
  • Significance: IRS is aggressively using all means available to identify U.S. taxpayers who are evading taxes through offshore accounts.

Read the IRS press release: http://www.justice.gov/opa/pr/2013/April/13-tax-488.html

HSBC India Received John Doe Summons; Cooperates with IRS

  • Summary: The IRS is investigating suspected tax evasion by HSBC’s US-based clients using the bank’s Indian branch. In 2011, the IRS issued a John Doe summons to produce records related to US-based clients. In 2013, HSBC said it might face significant penalties from the US related to the investigation.
  • Significance: The U.S. government is expanding its investigations of offshore tax evasion beyond the Swiss banks.

OVDP Participants Kicked Out of IRS Program and Under Investigation by the Department of Justice

  • Summary: In March 2013, the IRS notified a group of participants who had already been accepted into the Offshore Voluntary Disclosure Program (OVDP) that they had been disqualified. Many of the participants were Bank Leumi accountholders. In a miscommunication between the IRS and the Department of Justice (DOJ), the IRS accepted the participants into the program and later expelled them because the DOJ received their names in a separate investigation. Assistant Attorney General for the Tax Division Kathryn Keneally publicly assured the disqualified taxpayers that the DOJ would “consider the facts and circumstances under which any substantive disclosures were made, and the fairness of proceeding” criminally.
  • Significance: In participating in the OVDP, taxpayers come into compliance and pay back taxes while avoiding heavy fines and criminal prosecution.  The expulsion of these individuals creates uncertainty in the program potentially discouraging taxpayers from electing to participate in the OVDP program in the future.

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Liechtenstein Bank Pays $23.8 Million to Resolve Criminal Tax Investigation

  • Summary: Liechtensteinische Landesbank AG, a bank based in Vaduz, Liechtenstein, agreed to pay $23.8 million to resolve U.S. criminal tax investigations related to assisting U.S. taxpayers with maintaining offshore accounts and evading U.S. taxes.
  • Significance: New Liechtenstein legislation has been enacted that requires all Licechtenstein banks to comply with Department of Justice requests for account information on U.S. taxpayers.

Read the Department of Justice press release: http://www.justice.gov/opa/pr/2013/July/13-tax-861.html

Defendant Receives Probation in FBAR Sentencing

  • Summary: In October 2013, retired Julius Baer Bank employee Pius Kampfen was sentenced for not including a Swiss bank account in an FBAR he filed. Kampfen, a Swiss expat now a U.S. citizen, received 2 years probation, 6 months location monitoring and a $20,000, less than the government requested.  The government spent fours years investigating Kampfen’s involvement in establishing foreign accounts for U.S. citizens but was not able to establish any connection.
  • Significance:  Although the Government has continued to pursue criminal prosecutions of U.S. taxpayers with undisclosed foreign accounts, courts have generally been reluctant to impose stiff sentences.

Beanie Babies Creator Pleaded Guilty to Tax Evasion; Pays $53.6 Million Fine

  • Summary: In September 2013, H. Ty Warner, the creator of Beanie Babies, pleaded guilty to tax evasion and agreed to pay $53.6 million in fines and $27 million in back taxes. Warner opened a secret account at UBS AG in 1999. According to prosecutors, Warner failed to include income from his Swiss account on his 2002 tax return. He also failed to file a Report of Foreign Bank and Financial Accounts (FBAR). Warner tried to enter the Offshore Voluntary Disclosure program in 2009 but was denied entry by the IRS.
  • In January 2014, Warner avoided jail time and was sentenced to 2 years probation and community service.
  • Significance: To date, Warner has held the highest account balance of any taxpayers prosecuted by the government.

New Internal Revenue Manual (IRM) Appeals Procedures re FBAR Penalties

  • Summary: Effective October 28, 2013, the IRS updated the IRM appeals procedures for FBAR Penalties, including:
  • Revised IRM to discuss new forms available for electronic filing, clarifies when Alternative Dispute Resolution rights are not available for FBAR cases, made reference to mitigation threshold conditions for FBAR penalties, joint and severable liability, accrual of interest, unagreed closings, bankruptcy relief, electronic filing requirements for FBARs, and the venue for FBAR cases. Changed the time for completing post-assessed FBAR cases from 60 days to 120 days.
  • Revised IRM clarifies premature referrals, updated information on how to contact the FBAR Coordinator, added that protested years should match the case summary card, and added that IRS Counsel memo is needed for willful penalties over $10,000.
  • IRM Clarified that an Appeals Officer has the authority to execute a Title 31 FBAR extension.
  • Moved Account and Processing Support (APS) procedures for establishing FBAR cases on ACDS to IRM
  • IRM Clarified the information to be verified and contained on the case summary card for FBAR cases. Changed the time for completing post-assessed FBAR cases from 60 days to 120 days.
  • IRM Clarified instructions for processing a payment received for an FBAR penalty.
  • IRM makes reference to APS closing procedures for all types of FBAR cases now contained in IRM, Foreign Bank and Financial Accounts (FBAR) Penalty Case Closing Procedures.
  • IRM Clarified closing procedures for pre-assessed FBAR cases.
  • IRM Clarified closing procedures for post-assessed FBAR cases.
  • Significance:  The OVDP continues to evolve as evidenced by the IRS implements procedures to address those individuals who “opt out” of the program.

Read the IRM updates here: http://www.irs.gov/irm/part8/irm_08-011-006.html

FinCEN to Allow Third Parties (and Married Couples) to File FBARs Electronically

  • Summary: In July 2013, the U.S. Department of Treasury Financial Crimes Enforcement Network (FinCEN) announced FinCen Form 114(a), Record of Authorization to Electronically File FBARs. The form is for spouses filing jointly and third-party preparers. A copy of the form is maintained by the filer and account owner but not submitted to FinCEN or the IRS unless otherwise asked to do so.
  • Significance: The form, along with other technical changes being made to the FBAR filing system should make it easier for taxpayers to correctly file FBARs.

Read the FinCEN announcement here: http://www.fincen.gov/whatsnew/html/20130729.html

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