FBAR Filing and Hedge Funds
After the landmark agreement between the U.S. and Swiss government over secret (UBS) Swiss bank accounts, held by U.S. Citizens, the IRS is now focusing on hedge funds in the Cayman Islands. (Please see 8/24/09 Wall Street Journal article, IRS Could Target Off-Shore Hedge-Fund Investors Next.)
Recently, IRS officials advised that certain U.S. investors in off-shore hedge funds must file a FBAR.
On June 12, 2009, an IRS official stated that the term “financial interest” (which requires a FBAR filing) includes hedge funds that “function as mutual funds”.
It appears the IRS and Justice Department will identify U.S. Taxpayers who evade U.S. taxes, by investing with off-shore hedge funds. The IRS and Justice Department are pressing foreign financial institutions to provide them with information about Americans with “foreign, secret bank accounts”.
FBAR: Amended Tax Returns, and the Risks of Voluntary Disclosure
U.S. Taxpayers who fail to report offshore accounts by filing FBAR (TD F 90.22-1) face criminal and civil penalties:
1. Failure to Report Income
(3 Felonies and 1 Misdemeanor) up to 14 years in jail, plus 75% Civil Tax Fraud Penalty, 25% Failure to Pay Tax Penalty.
2. Failure to File FBAR’s
(a maximum annual penalty of 50% of the account balance, up to 10 years in jail a $500,000 fine).
3. Perjury
Taxpayers Form 1040/Schedule B must declare whether Taxpayers have any authority over, or interest in foreign accounts with a total of more than $10,000.
In the IRS 6/24/09 FAQ update, the IRS stated:
What is the distinction between filing amended returns to correct errors and filing a voluntary disclosure?
An amended return is the proper vehicle to correct an error on a filed return, whether a taxpayer receives a refund or owes additional tax. A voluntary disclosure is a truthful, timely and complete communication to the IRS in which a taxpayer shows a willingness to cooperate (and does in fact cooperate) with the IRS in determining the taxpayer’s correct tax liability and makes arrangements in good faith to fully pay that liability. Filing correct amended returns is normally a part of the process of making a voluntary disclosure under IRM 9.5.11.9.
Taxpayers and practitioners trying to decide whether to simply file an amended return with a Service Center or to make a formal voluntary disclosure under the process described in IRM 9.5.11.9 and the March 23, 2009 memoranda should consider the nature of the error they are trying to correct. Taxpayers with undisclosed foreign accounts or entities should consider making a voluntary disclosure because it enables them to become compliant, avoid substantial civil penalties and generally eliminate the risk of criminal prosecution. Making a voluntary disclosure also provides the opportunity to calculate, with a reasonable degree of certainty, the total cost of resolving all offshore tax issues. It is anticipated that the voluntary disclosure process is appropriate for most taxpayers who have underreported their income with respect to offshore accounts and assets. However, there will be some cases, such as where a taxpayer has reported all income but failed to file the FBAR (FAQ 9), or only failed to file information returns (FAQ 42), where it remains appropriate for the taxpayer to simply file amended returns with the applicable Service Center (with copies to the Philadelphia office listed in FAQ 9).
The IRS stated position is that a Taxpayer’s voluntary disclosure entitles the Taxpayer to become compliant, avoid substantial civil penalties and generally eliminate the risk of criminal prosecution.
In reality, a taxpayer who makes a voluntary disclosure may:
1. Spotlight their “tax crimes”
2. If the voluntary disclosure is not accepted, jeopardize them and subject them to criminal prosecution
The IRS SBSE 3/23/09 memorandum, Subject: Routing of Voluntary Disclosure Cases, which addresses a change in the processing of voluntary disclosure requests containing offshore issues.
1. Such requests will continue to be initially screened by Criminal Investigation to determine eligibility for voluntary disclosure, and, if involving only domestic issues will be forwarded to Area Planning and Special Programs for Civil Processing;
2. Voluntary disclosure eligibility for offshore issues will be initially screened by Criminal Investigation and forwarded to the Philadelphia Offshore Identification Unit (POIU) for processing.
Voluntary Disclosure risks include:
1. Heightened risk of criminal prosecution (since initial screening is by the IRS Criminal Investigation Division);
2. A voluntary disclosure may be used as an evidentiary admission of Taxpayer’s unreported income;
3. A voluntary disclosure may waive Taxpayer’s 5th Amendment right against self-incrimination;
4. While a voluntary disclosure is pending the IRS may request more information, commence an audit or initiate criminal prosecution.
As an alternative strategy to a voluntary disclosure, the “quiet filing” (for the Tax Years at issue) of an amended tax return (or original tax return) may instead:
1. Pre-empt criminal charges for the failure to file FBAR returns, Form 1040 tax returns and failure to pay tax;
2. Pre-empt a 75% civil tax fraud penalty, for failure to file or pay tax and a 25% failure to pay tax penalty;
3. If the income is properly reported (i.e., no substantial understatments which are subject to a 6 year statute of limitations), the tax filing will commence the 3 year statute of limitations (for each year) for IRS audit.
IRS Corporate Audit Division Will Examine UBS Tax Evasion Cases
By Ryan J. Donmoyer, Bloomberg.com
The U.S. Internal Revenue Service is shifting audits of wealthy Americans suspected of offshore tax evasion to an elite division that usually examines businesses as it prepares to receive data on 4,450 UBS AG Swiss bank accounts.
The tax agency posted internal job listings yesterday seeking auditors to work for a newly created office within its Large and Mid-Size Business division that will be tasked with monitoring what it called the “global high-wealth industry.”
The move centralizes responsibility for auditing wealthy individuals suspected of offshore tax evasion in a unit with the most experience navigating international tax treaties and untangling complex cross-border business structures.
“That’s where the most sophistication is at IRS,” said Michael Murphy, a former deputy IRS commissioner who is now a consultant for the law firm Sutherland Asbill & Brennan LLP in Washington.
Responsibility for auditing wealthy individuals is currently split among IRS divisions devoted to small businesses and self-employed wage earners and investors, which don’t have as much experience in cross-border transactions, Murphy said.
The IRS says it anticipates handling up to 10,000 new cases related to UBS, including thousands of people who come forward voluntarily in exchange for reduced penalties before Sept. 23.
Click link above for complete article.
UBS whistle-blower gets 40-month sentence
By Martha Brannigan, MiamiHerald.com
In a surprisingly heavy judgment, Bradley Birkenfeld, the former UBS private banker who blew the whistle on a wide-ranging scheme in which the Swiss bank helped wealthy Americans dodge income taxes through secret accounts, was sentenced to 40 months in prison Friday morning.
The sentence was 10 months longer than the prosecution had asked for. The defense had sought probation, pointing to the major impact of Birkenfeld’s unprecedented cooperation. The prosecutors said Birkenfeld is still helping the government and will remain free until Jan. 8, 2010.
In federal court in Fort Lauderdale, U.S. District Judge William J. Zloch ordered Birkenfeld to pay a $30,000 fine. After prison, he has three years of probation.
Birkenfeld, a tall and athletic man of 44, laid the foundation for the federal government’s most devastating assault ever on Swiss banking secrecy and offshore tax cheats. He wore a gray pinstripe suit, blue shirt, red tie and the beginnings of a goatee.
Drawing heavily on details Birkenfeld provided about UBS’ illegal practices in helping U.S. tax cheats, the Internal Revenue Service filed a civil suit seeking to force the bank to turn over information on thousands of unidentified UBS account-holders with secret offshore accounts.
As a result, the U.S. and Swiss government on Wednesday unveiled details of an agreement under which the IRS will end up getting details on 4,450 secret accounts through diplomatic channels in exchange for abandoning its aggressive court tactics.
Assistant U.S. attorney Jeffrey A. Neiman recommended that Birkenfeld get 30 months in prison for his conviction on one count of conspiracy to defraud the government — down from the 60-month maximum sentence he is exposed to — because of his extensive cooperation.
Zloch had delayed Birkenfeld’s sentencing four times at the request of prosecutors who are continuing to debrief him, but last week turned down a fifth request.
Birkenfeld was one of about 50 UBS private bankers catering to U.S. clients. His special services to rich Americans who wanted to hide money in secret offshore accounts once included slipping through U.S. Customs carrying diamonds stuffed inside a toothpaste tube.
Click link above for complete article.
Swiss Banking Executive and Swiss Lawyer Charged With Conspiring to Defraud the United States
Defendants Aided Wealthy Americans Conceal Assets in Secret Swiss Bank Accounts
From PRNewswire.com
Hansruedi Schumacher and Matthias Rickenbach, both of Switzerland, were indicted today for conspiring to defraud the United States, the Justice Department and Internal Revenue Service (IRS) announced. According to the indictment, Schumacher worked as an executive manager at Neue Zuercher Bank (NZB), a Swiss private bank located in Zurich, Switzerland. Rickenbach worked as a Swiss attorney who provided legal advice and services to U.S. clients. Both are alleged to have aided wealthy Americans conceal assets and income in Switzerland from United States authorities.
According to the indictment, Schumacher and Rickenbach helped wealthy American clients conceal their assets by establishing sham and nominee offshore entities to hide their U.S. clients’ assets and income while allowing these clients to still control the assets and make investment decisions.
The indictment further alleges that Schumacher and Rickenbach regularly traveled to the United States to conduct banking and investment activities with their U.S. clients and that when they traveled they concealed their business activities in the United States by falsely representing to American authorities that they were traveling to the U.S. for personal reasons. While in the United States, the defendants would sometimes bring cash for their clients..
According to court documents, Schumacher and Rickenbach aided their wealthy American clients repatriate money back to the United States using several deceptive means. Schumacher and Rickenbach helped their clients obtain offshore credit cards and created sham loan documents. Additionally, Schumacher and Rickenbach falsified bank documents to generate the appearance that assets of their U.S. clients belonged to Swiss citizens, and they falsified documents to disguise their United States clients’ repatriation of offshore funds as inheritances from foreign citizens.
According to court documents, Schumacher and Rickenbach discouraged their U.S. clients from voluntarily coming into compliance in the United States. Instead, the defendants encouraged their clients to transfer their assets from UBS, a large Swiss bank, to NZB, a smaller bank in Switzerland. The defendants told their clients that their assets and identification would be safer at NZB because they had no presence in the United States and was therefore less likely to be pressured by the American authorities to disclose the identities of their United States clients.
“The Justice Department will continue to investigate leads provided by U.S. taxpayers who have come forward to disclose foreign bank accounts and will prosecute those foreign bankers and banks who illegally helped U.S. clients evade taxes,” said John A. DiCicco, Acting Assistant Attorney General of the Justice Department’s Tax Division. “We encourage foreign banks to come forward and disclose their conduct immediately, before we learn about their criminal conduct from U.S. taxpayers.”
Click link above for complete article.
UBS to Give 4,450 Names to U.S.
The Wall Street Journal is reporting (8/20/09)…
The U.S. could within months begin criminally prosecuting hundreds of wealthy Americans — from the obscure to the “rich and famous” — for using foreign bank accounts to evade income taxes.
In a settlement with the Swiss government detailed Wednesday, the Internal Revenue Service said Swiss bank UBS AG will ultimately turn over the identities behind 4,450 secret accounts.
At least $10 billion had been stashed to avoid payment of U.S. taxes or the disclosure of foreign accounts, according to a person familiar with the matter. The U.S. government investigation and settlement ultimately could produce some 10,000 account identities.
Click link above for complete article.
UBS Tax Crackdown Widens to Hong Kong
By Carrick Mollenkamp, The Wall Street Journal
The U.S. crackdown on clients of UBS AG is widening into a global hunt, with the government detailing in court documents how the Swiss bank and outside advisers helped Americans hide money using enterprises set up in Hong Kong.
For the first time in the government’s long-running bid to ferret out the names of U.S. tax-evaders from the Swiss bank’s client list, plea agreements entered in the case are providing a clearer picture of UBS’s sophisticated efforts to help Americans hide income or the existence of foreign bank accounts.
On Friday, John McCarthy, a UBS client in California, agreed to plead guilty to one count of failing to file an annual report to the Treasury Department. A document filed with the plea shows the tax scheme relied in part on channeling funds to a Swiss UBS account held in the name of a Hong Kong entity, the second time accounts in the Asian financial hub have figured in these cases.
Click link above for complete article.
UBS to name 5,000 accounts under U.S. deal
By Jonathan Lynn, Reuters.com
The deal initialed last week between the United States and Switzerland over UBS will involve the disclosure of around 5,000 holders of secret Swiss accounts, weekly newspaper NZZ am Sonntag said on Sunday.
Click link above for complete article.
Malibu man to plead guilty to using Swiss bank to avoid U.S. taxes
John McCarthy is the first Californian to be prosecuted after Swiss bank UBS agreed to reveal identities of its customers. The IRS is seeking more names from the bank.
By Nathan Olivarez-Giles, LATimes.com
A nationwide crackdown on federal income tax evasion using secret Swiss bank accounts yielded an agreement from a Malibu businessman to plead guilty to hiding at least $1 million abroad.
John McCarthy is the first tax dodger in California — and the fourth nationwide — to be prosecuted after Switzerland’s largest bank, UBS, agreed to reveal the identities of U.S. customers.
The Internal Revenue Service is seeking the names of more than 52,000 U.S. residents who deposited money into secret accounts through agreements with both UBS and the Swiss government. The charge against McCarthy was based on information provided by UBS in February, officials said.
McCarthy funneled the money to a UBS account with the help of a Swiss lawyer and bank officials between 2003 and 2008, court documents said.
Click link above for complete article.
U.S. Builds Crime Cases on Clients of UBS
By Lynnley Browning, New York Times (8/13/09)
Federal prosecutors are building criminal cases against 150 wealthy American clients of the Swiss banking giant UBS as part of a continuing investigation into tax evasion, a person briefed on the matter said Thursday.
Many of the inquiries, which are being handled by dozens of prosecutors around the country, will result in criminal complaints, said this person, who was not authorized to speak publicly. While it is not clear where the government got the 150 names, federal investigators received 285 names from UBS in February as part of a settlement, as well as names from other sources. In February, UBS agreed to pay $780 million to settle charges that it had helped American clients evade taxes on nearly $20 billion hidden in offshore accounts.
Click link above for complete article.
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