Articles Posted in Offshore Bank Account Problems

To help prevent tax evasion through the use of offshore accounts, the U.S. Treasury Department, enacted regulations under the Foreign Account Tax Compliance Act (FATCA), that go into effect July 1, 2014. At the end of March, the Bank of Israel released draft guidance for Israeli banks to prepare for the implementation of FATCA, whether or not an Intergovernmental Agreement (IGA) is signed before July 1, 2014. The Israeli supervisor of banks, David Zaken, announced that he is ordering Israeli banks to prepare for the implementation of FACTA even though the agreement between Israel and the U.S. has not yet been signed.

Under FATCA, every foreign financial institution (FFI) must notify the IRS about its U.S. customers. This means that banks around the world, including Israel banks, must report to the IRS the existence of “foreign” bank accounts belonging to U.S. citizens, as well as accounts belonging to Israelis on which U.S persons have signatory authority. The IGA when signed will supersede the U.S. government’s demand that the Israeli banks report directly to the U.S. authorities. Instead, the banks will send the information about U.S. customers to the Israel Tax Authority, which in turn will send it to the IRS. Israeli banks were given instructions on:

1) Corporate governance processes (appointing a person responsible for the issue, appointing a work team, establishing policies and procedures, reports to the management and to the board of directors).

According to two U.S. Senators, Switzerland has not sought extradition of a single Swiss national charged with criminal conduct that was related to aiding and abetting U.S. tax evasion for more than five years. In a recent letter authored by Senator Carl Levin and Senator John McCain, they urged that the IRS and Department of Justice (DOJ) act more aggressively to prosecute Swiss nationals aiding and abetting tax evasion and other crimes. Of course, if more Swiss bankers were prosecuted it would likely result in more names of U.S. taxpayers being disclosed so that the Swiss bankers could avoid stiff prison sentences.

The DOJ confirmed that it has charged 35 Swiss bankers and 25 financial advisors with helping U.S. taxpayers hide their undisclosed offshore bank accounts. However, of those charged, only six have been convicted or pled guilty while the majority live openly in Switzerland without standing trial. The Justice Department official said extradition proceedings would be a poor use of resources because aiding and abetting tax evasion is not considered a crime in Switzerland, which means the country is unlikely to pursue and prosecute such cases or to extradite its citizens. According to the Senators, however, the treaty between the U.S. and Switzerland does not preclude the cooperation of the Swiss government in extradition requests for tax fraud cases. Even if the extradition request is denied, the Senators’ letter states “it will inform both Switzerland and its current citizens that the United States is ready to make full use of available legal tools to stop facilitation of U.S. tax evasion and hold alleged wrongdoers accountable.” The Senators also stated in the letter that it was time to “test the Swiss government’s professed willingness to cooperate with intentional tax enforcement efforts and put an end to its nationals participating in criminal tax offenses.

Despite the DOJ’s resistance to fully investigate Swiss banks and to extradite Swiss nationals pursuant to the U.S. and Switzerland treaty, there are signs that the Justice Department is putting pressure on Swiss banks to comply with the treaty. Last week, for example, former Credit Suisse banker Andreas Bachmann returned to the U.S. to face a 2011 tax evasion indictment. Mr. Bachmann admitted to helping Americans hide their assets in exchange for leniency and being allowed to return to Switzerland before sentencing. This suggests that the IRS and DOJ may continue to take more aggressive measures to use the treaty to extradite Swiss nationals for aiding and abetting tax fraud by U.S. citizens.

The tax evasion conviction of Dr. Edward Picardi was upheld by the Eighth Circuit last month. Also upheld was his conviction for failure to file Foreign Bank Account Reports (FBARs), Form TDF 90-22.1. Picardi was sentenced to five years in jail. According to the Department of Justice press release and various press reports, Picardi was advised by attorney and CPA Anthony Kritt on setting up an “employee leasing program.” Picardi entered into a contract with an offshore corporation to lease his services as a physician. That company in turn contracted with Professional Leasing Services, Inc. a Nevada corporation that was operated by Kritt to provide Picardi’s services to Professional Leasing Services (PLS). In turn, PLS contracted with Picardi’s medical group to lease Picardi’s services to it.

A large portion of the “leasing fee” was transferred into offshore bank accounts set up by Picardi. Picardi didn’t report this fee as income on his tax returns on the theory that he should have been unable to access it until he retired or turned 70 years old. It appears that Picardi’s defense at trial was that he believed the transaction was legitimate based upon the advice he received from Kritt. Apparently the jury didn’t buy it because he was convicted.

The interesting part is the IRS also brought criminal tax charges against another physician, Dr. Randy Brodnik, and Kritt arising out of a series of similar transactions involving employee leasing and the use of offshore bank accounts. Kritt and Brodnik were, however, acquitted of all charges. Without having been at the trial it is hard to say why Brodnik and Kritt were acquitted and Picardi was not. However, our tax litigation attorneys found an interesting footnote.

A Mizrahi Bank customer pled guilty to filing a false tax return in connection with an undisclosed criminal tax investigation of undisclosed foreign accounts. According to a tax lawyers have seen in the past.

The problem with this scheme is that when uncovered, it provides clear evidence of criminal tax evasion. To add insult to injury, when he filed his tax returns not only did he not report the interest income generated on the Mizrahi Bank account in Israel, he deducted the interest he paid to the Mizrahi Bank branch in Israel as a business deduction. The unreported interest income amounted to approximately $282,000.

Then in March 2013, Hakimijoo was scheduled to be interviewed by Justice Department criminal tax attorneys and IRS special agents from the Criminal Investigation Division. In preparation for the interview Hakimijoo’s counsel provided copies of amended income tax returns to the special agents and the Department of Justice attorneys. At the interview Hakimijoo was asked if he filed the amended tax returns, and he responded that he had. Unfortunately for Hakimijoo when the IRS subsequently checked its files it turned out that the returns had not been filed. When the IRS asked for proof that the payments shown on the amended tax returns were actually made, no proof was provided. It’s hard to believe that even at the point where it was clear that he was in the IRS’ crosshairs he thought that the best tactic was to lie about a fact that was easily verifiable by the IRS. It really makes you wonder!

The Swiss Federal Administrative Court has blocked Swiss Bank Julius Baer from turning over one of its client’s Bloomberg News.

On April 17, 2013 the IRS had submitted a request for administrative assistance to the Swiss Federal Tax Authority (SFTA) requesting that it order Julius Baer to turn over information on accounts “owned through a domiciliary company” and held at any time between the beginning of 2002 and the end of 2012. The SFTA granted the request, and ordered Julius Baer to turn over the Swiss bank account data. At least two clients appealed the SFTA order. The news was not good for one of the account holders, because the court ruled that his appeal had been filed late and, therefore, the original SFTA order was valid. Presumably that individual’s information will be on its way to the IRS in due course with a Foreign Bank Account Report (FBAR) has been filed?

It does not mean that their previous blog post, many Swiss Banks will be turning over information about their account holders in order to avoid being indicted in the U.S.

Based upon anecdotal evidence, foreign bank account owners are opting to enter the Offshore Voluntary Disclosure Program (OVDP) more frequently in the last few months. In November, I blogged about why quiet voluntary disclosures are becoming more risky. As a follow-up, here are a two more reasons why quiet voluntary disclosures may be riskier now than six months ago.

Electronic Filing of Foreign Bank Account Reports (FBARs) is Now Required

As of July 1, 2013 the Financial Crimes Enforcement Network (FINCEN) began requiring that all Foreign Bank Account Reports (FBARs) be filed electronically. This includes all late filed FBARs for prior years. Therefore, as part of a quiet voluntary disclosure the back FBARs will be filed electronically which makes it very, very easy for the IRS to track them; since the Government Accountability Office (GAO) has previously criticized the IRS for failing to follow up on quiet disclosures it would not be surprising to see more quiet disclosures being targeted for tax audits.