Articles Posted in Tax Fraud

I have been and will be speaking to several CPA firms as well as various California CPA Society groups regarding the tax problems that have been generated by the failure to file Foreign Bank Account Reports (FBARs), TD 90-22.1, and a possible solution through the Internal Revenue Service’s voluntary disclosure program. I have prepared an outline that I have distributed, entitled “FBARs and Voluntary Disclosure”, which is now available on my website. In addition to some of the topics that I have discussed in my blog, the outline references the issues that CPAs, and other non-tax attorneys face when their clients disclose the existence of offshore bank accounts because the information their clients provide is not privileged, and the non-tax lawyer can be forced to disclose these client confidences to the IRS.

If your clients have undisclosed offshore accounts, and you wish to discuss their tax problems call the tax controversy attorneys at Brager Tax Law Group, A P.C.

Reuters has reported that the IRS is set to serve summonses on foreign banks to obtain the names of U.S. citizens who may have committed tax fraud and buried the proceeds in Swiss or other offshore bank accounts. As I have previously blogged, the IRS is already involved in tax litigation with UBS seeking the names of 52,000 holders of Swiss bank accounts.

The Reuters revelation is not good news for those with offshore bank accounts who were hoping to keep them secret from the IRS. Even taxpayers who have reported all of the income that was used to fund the offshore accounts are at risk for a 50% FBAR penalty.

We are now reviewing with some of our clients the advisability of taking advantage of the IRS tax amnesty that is available until September 22nd.

According to a report in the New York Times by Lynnley Browning, the Internal Revenue Service (IRS) has announced in a press release that is has applied for permission to serve a John Doe Summons on First Data Corporation. First Data is a leading processor of credit card payments. The information sought by the IRS is expected to be used to identify businesses that have opened offshore bank accounts, and directed the card processor to deposit the proceeds in these offshore accounts. Even if the merchant didn’t use the account to commit tax fraud, the merchant would still be required to file an FBAR form with the IRS.

Clients often ask me something like, “How will the IRS know that I have put my funds in a Swiss bank account?” I usually respond, “I don’t know for sure, but what I do know is if they find out you are not going to be happy with what happens next.” Even assuming that the IRS doesn’t get the information directly from the foreign bank this summons is just one example of the IRS obtaining data in ways which might not be immediately apparent to the casual observer.

I have previously blogged about the tax amnesty for holders of offshore accounts. This new lawsuit is yet another reason why those with offshore accounts need to consult with a tax attorney to determine whether or not a voluntary disclosure makes sense.

On April Fool’s Day, with no apparent sense of irony, the Internal Revenue Service (IRS) filed a criminal tax complaint against Steven Michael Rubinstein, an accountant, but apparently not a Certified Public Accountant (CPA), charging him with one count of filing a false tax return pursuant to Internal Revenue Code Section 7206(1). According to the criminal complaint, Rubinstein failed to disclose that he had an interest in, or signatory authority over UBS Swiss bank accounts. Apparently this is the first criminal tax fraud case the IRS has filed involving a UBS Swiss bank account holder.

As readers of this blog know, holders of offshore bank accounts with a balance of over $10,000 are required to disclose the existence of the account on Form 1040, Schedule B. In addition, owners of such accounts must file a Form 90.22-1 (aka an FBAR) separate from the tax return. Failure to file an FBAR is a separate crime. Rubinstein’s name was turned over to the IRS by UBS pursuant to the deferred prosecution agreement that it entered into with the IRS. Although only the 2007 tax year was charged, according to the criminal complaint, Rubinstein had a Swiss bank account at least since 2001. The complaint does not indicate whether or not Rubinstein failed to declare income, other than the income generated by the Swiss Bank account itself. However, at some point there was at least $3 million in the offshore bank accounts, and perhaps more.

The filing of the tax fraud charges illustrates the potential dangers of waiting too long to file a voluntary disclosure with the IRS. According to an article in the New York Times by LYNNLEY BROWNING there are 100 open tax fraud investigations in the UBS matter.

The other day I blogged about the new Internal Revenue Service (IRS) tax amnesty for holders of Swiss and other offshore bank accounts who make a voluntary disclosure. I called it a “break.” Upon further reflection I think that the tax amnesty is a blunt instrument rather than the scalpel that was needed. Consider these two examples:

Mr. E.Z. Going sold his business six years ago, paid tax on the sale, and put the proceeds of $1,000,000 in a Swiss bank account because he was concerned about potential lawsuits against him, and he had been told that putting your assets in an offshore bank account will help protect assets from frivolous lawsuits. Each year he has trading losses, and over the next six years he loses about $300,000. In addition, over that period he withdrew another $100,000 to pay for his daughter’s college education, leaving $600,000. He didn’t give too much thought to mentioning the existence of the account to his Certified Public Accountant (CPA) since he was losing money, not making money. If he makes a voluntary disclosure, E.Z. Going will be subject to a penalty of $200,000-20% of the high balance in the account.

In contrast take a look at Mr. Tax Fraud. Mr. Tax Fraud owns a restaurant, and every year for the past six years he has skimmed a little over $150,000 per year in cash, and not reported it on his tax return. Instead he travels several times each year with the cash in a suitcase to Switzerland. Mr. Tax Fraud has been advised by his friendly UBS banker to set up a trust in Lichtenstein to further disguise the ownership of the offshore bank account. Each year the Swiss bank account earns some interest, and as a result by 2008 he has $1,000,000 in the account. If he makes a voluntary disclosure Mr. Tax Fraud will pay the same $200,000 penalty.

The Internal Revenue Service (IRS) has issued guidelines for resolving the civil tax penalties related to offshore bank accounts for individuals who make voluntary disclosures. Generally it will require:

• Payment of all taxes and interest for the previous six years.

• Assessment of an accuracy penalty under Internal Revenue Code Section 6662 or a delinquency penalty for all years • An FBAR penalty of 20% of the highest account balance during the six year period.