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October 1, 2010
NACDL's 6th Annual Defending the White Collar Case Seminar – “Evasion, Avoidance, or What? Ethically Navigating the Modern Tax Fraud Case Post-UBS,” Friday, October 1, 2010
Peter Hardy of Post & Schell and Kathryn Keneally of Fullbright & Jaworski presented on government enforcement initiatives and the voluntary disclosure program regarding Americans with off-shore bank accounts. The DOJ and IRS initiative began in 2007 at when Igor Linikov pled guilty to tax evasion in connection with a $350 million undisclosed bank account at UBS in Switzerland. He paid $52 million to the IRS, received probation and cooperated with the government. Later, the person who serviced Linikov at UBS pled guilty, cooperated and received nearly four years in jail.
UBS entered into a deferred prosecution agreement with the government, paid $700 million in penalties and disclosed the names of 250 account holders of foreign accounts to the government. Since then, the U.S. and Swiss governments have entered into an agreement whereby Swiss financial institutions have agreed to turn over information to the U.S. regarding Americans who hold accounts in Swiss institutions. As a result, the government is now prosecuting UBS account holders, although the cases have so far been few (only ten indicted), and the sentences have been relatively short.
Most practitioners may be unaware of the FBAR form that must be filed by a person who holds a foreign bank account containing greater than $10,000. Under Title 31 of the U.S. Code, a willful failure to file the form is a felony carrying a maximum sentence of five years. The civil penalty for failing to file is also severe. That penalty is 50% on the total assets in the account per year. Besides the FBAR, IRS Form 1040 requires a taxpayer to disclose foreign bank accounts. Failure to disclose the account on the Form 1040 is interpreted by the IRS as a false return, a felony.
To encourage voluntary compliance, and in recognition that people fall out of the system for various reasons, the IRS instituted the “Off-shore Voluntary Disclosure Initiative.” Under this Program, the IRS guarantees a one-time penalty of 20% of the highest balance in the foreign account for the prior six years. Those in the Program would, of course, have to file the FBAR and amend their tax returns to pick up the unreported income. Under this Program, 14,700 people came forward, which overwhelmed the system. After an extension, the Program ended on October 15, 2009. Thus, the IRS guarantee of the 20% penalty ended.
Although the Off-shore Program ended, the general IRS Voluntary Compliance Program regarding tax offenses still remains in effect. There are, however, some changes to this program implemented in connection with off-shore accounts. One such change is that the IRS developed an institutional position against so-called “quiet disclosure,” i.e., disclosing the omission by simply filing an amended return.
Today, there is a great deal of uncertainty regarding the treatment of undisclosed off-shore accounts by DOJ and the IRS for people who missed the “Off-shore Voluntary Disclosure Program” deadline. Moreover, UBS is not the only foreign bank disclosing the names of account holders to the IRS. News reports have revealed that HSBC and many others are doing the same. Now, white collar practitioners have to present clients with a choice of loss of their freedom versus the loss of the assets in their foreign accounts. Such decisions will become more frequent as DOJ and the IRS ramp-up prosecutions.
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