UBS, Switzerland’s largest bank, became “the first crack in the Swiss Banking System” when, on 2/18/09, they entered into a deferred prosecution agreement with the U.S. Department of Justice (DOJ).
Under the agreement, UBS agreed to pay a $780 million fine and turn over the names and account information of 285 U.S. account holders who were not reporting their foreign financial accounts, the assets held in these accounts, nor the income from the assets (held in these accounts).
On 2/19/09, the U.S. Dept of Justice filed a civil suit seeking to force UBS disclosure of up 52,000 accounts held by U.S. taxpayers.
On 8/19/09, UBS and the U.S. DOJ entered into a settlement agreement in which an additional 4,450 accounts of non-compliant U.S. taxpayers were disclosed.
A parallel agreement was signed on 8/19/09 between the U.S. and Swiss government, based on the existing U.S.-Switzerland Double Taxation Treaty, which was approved by the Swiss Parliament on June 17, 2010.
On 10/22/10, the U.S. DOJ agreed to dismiss its criminal prosecution against UBS because UBS complied with its obligations.
In total, UBS paid $780million in fines, and turned over 4,735 U.S. taxpayers, suspected of tax evasion to the U.S. government. These U.S. taxpayers with Swiss bank accounts at UBS who failed to disclose the accounts, the account assets and the income (from the account assets) violated multiple U.S. tax compliance filing requirements as follows:
1) Form 1040 Individual Tax Returns: Annual reporting of world-wide income
2) Report of Foreign Bank and Financial Account, “FBAR” (Form TDF 90-22.1)
Annual disclosure of foreign bank and financial accounts in which the U.S. taxpayer has a financial interest in, or signatory authority over any financial accounts in a foreign country, if the total value of such accounts exceeds $10,000 at any time during the calendar year.
Signature Authority is defined as the authority (either alone or in tandem with another individual) to control the disposition of assets, funds or money held in a financial institution account, by delivery of written or oral instructions, directly to the financial institution which holds the account.
The U.S. taxpayer must file the FBAR, disclose the foreign account on Form 1040/Schedule B (Part III: Foreign Accounts and Trusts) and report all income earned on the foreign account on Form 1040.
3) Form 8938: “Specified Foreign Financial Assets” to disclose foreign financial assets in excess of $50,000 (Form 8938 is attached to Form 1040).
The filing of Form 8938 (with Form 1040) does not relieve U.S. taxpayers of the requirement to file the FBAR (Form TDF 90-22.1) if the FBAR filing is otherwise due.
For those U.S. taxpayers who established UBS accounts, with the assistance of tax advisors, under 18 USC 371, both the taxpayer and the tax advisors may be held liable for conspiracy to defraud the U.S.
A conspiracy to defraud the U.S. for taxes due is known as a Klein Conspiracy. The U.S. government must prove that there was an agreement by 2 or more persons to impede the IRS, and each participant knowingly, willfully and intentionally participated in the conspiracy.
A U.S. taxpayer’s failure to report their worldwide income, disclose foreign financial accounts over $10,000, disclose foreign financial assets over $50,000, which appears to be the case for the 4,735 U.S. taxpayers with UBS accounts, subjects these U.S. taxpayers to significant civil and criminal penalties as discussed herein.
Civil and Criminal Penalties
U.S. taxpayers who:
1) Fail to report worldwide income on their tax returns (Form 1040);
2) Fail to report foreign financial accounts, in which they have a financial interest or have signatory authority, account value over $10,000 (Form TDF 90-22.1); and/or
3) Fail to report foreign financial assets, in which they have an ownership interest, assets over $50,000 (Form 8938).
Face civil and criminal tax penalties.
U.S. Taxpayers include:
1) U.S. citizens;
2) U.S. “Green Card” holders;
3) U.S. resident aliens in the U.S. for 183 days in one year, or 122 days per year over 3 consecutive years.
U.S. taxpayers must file annual U.S. income tax compliance:
1) Form 1040: report worldwide income;
2) Form TDF 90-22.1 (FBAR): report foreign financial accounts (value over $10,000.);
3) Form 8938: report foreign financial Assets with value over $50,000, in which they have an ownership interest.
U.S. taxpayer foreign assets must be reported under the “FBAR” filing (foreign financial accounts over $10,000) and the FACTA filing (foreign assets over $50,000). These foreign assets must also be reported under Form 1040 (Schedule B).
Form 8938 (reporting specified foreign financial assets) must be attached to tax return/Form 1040. Filing Form 8938 does not relieve U.S. income tax residents of obligation to file FBAR (Form TDF 90-22.1) if FBAR filing is otherwise due.
Unreported income, undisclosed foreign financial accounts and undisclosed foreign financial assets subject U.S. taxpayers to criminal penalties.
1) IRC Sec. 7201: Tax Evasion (Willful Evasion of Tax): up to 5 years in prison; Fine: $100,000 (individual); Fine: $500,000 (corporation).
2) IRC Sec. 7212: Obstruct (Impede Tax Collection): up to 3 years in prison. Fine: $5,000
3) 18 U.S.C. Sec. 371: (Conspiracy to Impede Tax Collection): Separate charge of Impeding: up to 5 years in prison.
4) IRC Sec. 7203: (Failure to file tax return.) Up to 1 year in prison. Fine: $25,000 (for individual); $100,000 (for corporation).
5) IRC Sec. 7206(1): (Filing a false tax return.) Up to 3 years in prison. Fine: $250,000.
31 U.S.C. Sec. 5322(b) and 31 C.F.R. Sec. 103.59(c): willful violation up to 10 years in jail and a $500,000 fine.
FACTA (Form 8938)
Taxpayers who fail to file Form 8938, report an asset or have an underpayment of tax may be subject to criminal penalties.
FBAR (Willful Failure to File)
Civil penalty is the greater of $100,000 or an annual penalty of 50% of the greatest amount in the account. The 50% penalty is imposed for each year there is no FBAR filed for the foreign financial account, so if the FBAR is not filed for 4 years, the penalty is 200% of the highest account balance (e.g., if the highest account balance is $1m, the penalty for 4 years of non-FBAR filing, is $2m).
FACTA (Form 8938)
Taxpayers who fail to file Form 8938, fail to report an asset, or have an underpayment of tax may be subject to civil penalties.
1) A 40% accuracy-related penalty for underpayment of tax distributable to an undisclosed foreign financial asset understatement, or
2) A 75% fraud penalty for underpayment of tax due to fraud.
Unreported Income – Civil Tax Fraud
1) IRC Sec. 6651(f): Fraudulent Failure to File Tax Return: Maximum penalty of 75% of the amount of the unpaid tax.
2) IRC Sec. 6663(d): Fraudulent Tax Return (Unreported Income): Maximum penalty of 75% of the amount of the unpaid tax.
3) IRC Sec. 6662(b)(1)-(5): Accuracy – Related Penalty, Penalty of 20% of the unpaid tax.
4) IRC Sec. 6663(c): Spousal Liability
On a joint tax return, both spouses are subject to joint and several liability for the entire tax liability. The civil fraud penalty applies only to the spouse responsible for the tax underpayment attributable to fraud.
5) IRC Sec. 6651(a)(2): Failure to pay tax shown as due on a tax return penalty of up to a maximum of 25% of unpaid tax.
6) IRC Sec. 6651(a)(3): Unpaid tax not shown as due on a return (i.e., unreported income) penalty of up to a maximum of 25% of unpaid tax.
7) Offsetting Penalties: Under IRC Sec. 6651(c)(1), the amount of the penalty for failure to file is reduced by the amount of the penalty for failure to pay (the amount shown on a return for any month for which both penalties apply.)
Under IRC Sec. 6651(a)(3), there is no offset for the penalty for failure to pay tax not shown as due on a return (i.e., unreported income).
No credit is allowed against the civil fraud penalty for any criminal fines paid for income tax evasion and conspiracy to defraud the United States.