U.S. Continues to Uncover the Methods Used by Wealthy Tax-Evaders

In our last post, we addressed that the IRS was receiving an overwhelming number of disclosures from wealthy taxpayers, regarding income earned, but not reported, on offshore accounts. The U.S. continues to aggressively pursue the people who use these schemes to avoid paying income tax and the financial institutions that have willingly assisted and advised on how to set up these accounts.

The identities of many of these account holders have been revealed through the government’s civil and criminal cases against the Swiss bank, UBS. The bank turned over the names of 250 account holder as part of a criminal settlement. The number of names is about to grow significantly due to a separate settlement in a civil case against UBS, where it is expected that the bank will turn over thousands of names of U.S. account holders. This revelation makes for a large number of nervous tax-evaders. The bank unsuccessfully argued that it could not provide the account information due to Swiss privacy laws.

The IRS has been pursuing charges against the account holders revealed to it by the bank in the criminal settlement. There have been at least four guilty pleas to date. These cases have revealed in detail the elaborate schemes set up by wealthy U.S. residents with the assistance of UBS and Swiss lawyers. A recent Wall Street Journal (WSJ) article, UBS Tax Crackdown Widens to Hong Kong, identifies a California resident who opened a Swiss bank account with UBS in the name of a Hong Kong entity. The Californian moved more than $1 million from a Los Angeles business to the offshore account. The details of these schemes will continue to be revealed as the U.S. investigation spreads.

IRS Offering Clemency for Taxpayers Secreting Offshore Accounts

U.S. Taxpayers are required to declare on an annual basis income earned from foreign financial accounts by the filing of IRS Form TD F 90-22.1. For years, offshore accounts in certain countries have made it possible for these taxpayers to park money outside of the U.S., concealing that income from the IRS. It is estimated that billions of dollars in income tax revenues is lost every year to undisclosed offshore accounts.

While the IRS has urged compliance by implementing “amnesty” programs in the past, none has had the response of the current disclosure program commenced in March of this year. The disclosure program, which is currently scheduled to end on September 23, 2009, asks the taxpayer to volunteer information by following the procedure set out in IRS IRM 9.5.11.9 in exchange for avoiding substantial civil penalties and criminal prosecution.

According to a recent Wall Street Journal (WSJ) article, Tax Evaders Flock to IRS to Confess Their Sins, the volume of wealthy taxpayers filing for relief as a result of the Offshore Voluntary Disclosure Initiative has overwhelmed the IRS. An example provided in the WSJ article, helps explain the dramatic response. Under the disclosure program, a taxpayer with offshore accounts in the amount of $1 million that earns $50,000 in annual income for a six year period might end up paying $386,000 plus interest. A non-disclosing taxpayer might incur a $2.3 million penalty in addition to criminal prosecution.

It is not just the reduced penalties that are causing the influx of confessors. Recent federal court decisions have authorized the IRS to request information from foreign-based financial institutions.

If you are interested in learning more about the Offshore Voluntary Disclosure Initiative, there is a IRS Frequently Asked Questions (FAQ) release, recently modified on July 31, 2009.