In the 1990s, foreign tax havens greatly increased offshore tax evasions for U.S. taxpayers by use of undisclosed bank accounts, offshore credit/debit cards and money laundering.
According to Senator Carl Levin” “Offshore tax evasion produces an estimated $100 billion in unpaid taxes each year. It’s long past time to collect these taxes and stop the tax dodgers from offloading their tax burden onto the backs of honest Americans.”
In 1996, a cable piracy investigation by the FBI uncovered money laundering resulting in a tax evasion investigation into the Cayman Islands banking system.
In 1999, John Matthewson pleaded guilty to money laundering which led to an IRS investigation into offshore tax evasion involving credit cards issued by offshore banks to U.S. taxpayers. During 2000-2002, the IRS obtained “John Doe” summons against major credit card companies (i.e. American Express, Visa and MasterCard), and over 100 businesses in an effort to identify U.S. taxpayers evading taxes.
According to IRS (I.R.M. Sec. 126.96.36.199), a “John Doe Summons” is any summons where the name of the taxpayer under investigation is unknown and not specifically identified.
In January 2003, the IRS announced its Offshore Voluntary Compliance Initiative; for U.S. taxpayers who had committed tax evasion, this allowed them to pay back taxes, interest and penalties but avoid civil fraud and information return penalties and criminal penalties. In July 2003, the IRS reported the initiative netted $75m in taxes.
For many years, Switzerland was a tax haven for U.S. taxpayers who kept their income undisclosed to the IRS. Swiss banks provided financial secrecy for their U.S. clients by not disclosing account ownership information to the IRS and/or creating “fictitious foreign entities” as the account owners.
In 2001, Swiss Bank, UBS signed an agreement to be part of the U.S. Qualified Intermediary Program which allows a foreign financial institution to enter into an IRS agreement to “assume documentation and withholding responsibilities in exchange for simplified information reporting for foreign account holders and the ability not to disclose proprietary account holders’ information to a withholding agent that may be a competitor.” When the IRS became aware that UBS was not reporting account information, the IRS and Department of Justice began a criminal investigation of UBS in 2004.
In the spring of 2007, Swiss banker Bradley Birkenfeld informed the U.S. government of a conspiracy between UBS and its bank clients to keep financial account information secret from the IRS. He provided the IRS with detailed information including cell phone numbers, email addresses and names of U.S. hotels used by UBS salesmen. Birkenfeld’s evidence that UBS hid $20B in assets of U.S. taxpayers in undeclared accounts and that UBS had assisted them in concealing their identities by investing in sham entities and filing false IRS forms became the basis for a federal judge in Miami on July 1, 2008, authorizing the IRS to issue a “John Doe” summons on UBS to obtain the names of the U.S. taxpayers with hidden accounts at UBS.
In 2009, UBS entered into a deferred prosecution agreement with the US/DOJ, in which it admitted that it participated in a scheme to assist U.S. taxpayers in hiding accounts from the IRS and agreed to disclose the identities of 4,735 U.S. taxpayers (out of 52,000 U.S. accounts), their account information and pay a $780M fine.
On 8/21/09, Birkenfeld pled guilty to a single count of assisting a U.S. billionaire real estate developer evade paying $7.2M in taxes and was sentenced to 40 months in prison. At Birkenfeld’s sentencing, the U.S. prosecutor admitted: “Without Mr. Birkenfeld…I doubt …that this massive fraud scheme would have been discovered by the U.S. government.