Tax Problem Attorney Blog

A father and son have been convicted of federal tax evasion charges after authorities say they sold a hotel and used offshore bank accounts to hide $33 million from the Internal Revenue Service.

Los Angeles tax lawyers and others had been closely watching this case, which was the first trial since the U.S. Department of Justice announced the crackdown on offshore tax evasion in March 2009.

In this case, the 77-year-old father and the 46-year-old son were found guilty of conspiring to defraud the Internal Revenue Service and filing false tax returns, according to Bloomberg News. The men owned hotels under the “Flatotel” brand. Both face up to 11 years in prison.

The IRS touted the conviction as a message to Americans who hide assets offshore. The push by the government in the last several years to crackdown on off-shore bank accounts has included a period of amnesty and other tactics aimed at getting citizens to voluntarily admit to hiding assets. Subsequently, the government has promised to increase the pressure on those found in violation of the law and to push for significant penalties for those facing criminal charges involving offshore bank accounts.

Prosecutors accused the pair of using offshore companies, family members and friends to pose as owners and of forging documents to cheat the IRS. The government contends the father and son owed taxes on undeclared income resulting from the use of mansions and luxury cars that the two claimed were owned by various corporations.
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Felix M. Mathis, a tax lawyer in the Swiss law firm of Froriep Renggli LLP, was indicted last month for conspiring to commit tax fraud with Andrew B. Silva, and others. The tax fraud scheme described how Mathis helped Silva set up a Lichenstein Trust, and advised him on evading the FBAR (Foreign Bank Account Report, Form TDF 90-22.1) filing requirements, by among other things making all withdrawals from his Swiss bank account in cash. The indictment sets forth spy novel like details of the conspiracy including instructions from Mathis to his clients that if they wanted to discuss their Swiss bank accounts they should send him a letter saying they “wished to meet for coffee.”

Based upon press reports, and the indictment it appears that Mathis provided similar advice to many clients. An article by Emily Babay in the Washington Examiner states that a warrant has been issued for Mathis’ arrest. It will be interesting to see if he is extradited, and if so whether he will cooperate with U.S. authorities by providing the names of his clients to the IRS in return for leniency. If that happens we can expect more prosecutions of U.S. citizens and residents for tax fraud and FBAR violations. And by the way the attorney client privilege wouldn’t apply because of the so-called crime-fraud exception which provides that there is no attorney client privilege if the services of the lawyer were sought or obtained to enable or aid anyone to commit, or plan to commit, a crime or a fraud.

This indictment is just one more reason that anyone with an offshore bank account needs to consider whether or not to make a voluntary disclosure to the IRS in the hopes of avoiding a criminal tax prosecution.

Credit Suisse’s offices in Germany were raided by German tax officials looking for evidence of tax fraud. According to an article by Judy Dempsey in the New York Times all 13 German branches of Swiss bank Credit Suisse were searched, and it would take weeks for German tax officials to review the seized documents. One can expect that the IRS is watching this development very closely hoping to find evidence of tax evasion, and failure to file Foreign Bank Account Reports, TDF 90-22.1 (FBARs), by U.S. citizens and residents.

It wouldn’t surprise me if the IRS were preparing to file a lawsuit against Credit Suisse similar to the one filed against UBS in the hopes of getting the names of U.S. citizens suspected of tax evasion and failure to file FBARs. If the German tax prosecutors have evidence of tax fraud committed by Credit Suisse bankers, this would add fodder to any lawsuit by the IRS.

As I keep explaining to clients with offshore bank accounts, the FBAR problem is not going away, and it’s a mistake to think that the IRS investigation of offshore financial is limited to UBS, or even Switzerland.

Failure to file a Foreign Bank Account Report (FBAR) on TDF 90-22.1 is crime under the Bank Secrecy Act punishable by up to 5 years in jail. Failure to file an FBAR usually goes hand in hand with tax fraud, and other tax problems. There is a common belief that if a person is a senior citizen he is safe from criminal prosecution. While that may have been true in the past, current FBAR and tax evasion prosecutions are breaking that pattern. Seventy six year old Leonid Zaltsberg pled guilty to charges of tax evasion and failing to file an FBAR on July 1, 2010. According to news reports he failed to report $60,000 in income over a six year period on an account with a maximum balance of $2.6 million.

Just in case you read that too quickly let me repeat. Over a six year period Zaltsberg, age 76, failed to report $60,000; that’s $10,000 per year! Granted it’s not pocket change, but we’re hardly talking about a big-time tax evader. According to his daughter as reported by David Voreacos, in Bloomberg News Zaltsberg has bladder and prostate cancer.

This case is a stark reminder to tax lawyers, and CPAs that they can not assume that because the amount of unreported tax is relative small their clients do not have criminal tax exposure. Clients need to be informed of the risks, and the way those risks can be minimized through a voluntary disclosure.

Foreign Bank Account Reports (FBAR) on Form TDF 90-22.1 are due in Detroit, Michigan on June 30th. Some CPAs and tax attorneys seem to be relying on an exception contained in IRS Notice 2010-23 which provides that persons who have signature authority, but no financial interest in a foreign bank account do not need to file an FBAR until June 30, 2011. The expectation is that the IRS may publish rules which would permanently exempt such persons from filing an FBAR. That’s fine, but some CPAs and even some tax lawyers believe that persons who are holding money for a foreign resident are allowed to use this exception to avoid filing an FBAR.

So for example, John opens an account in Israel for his father, Sam, who lives in Iraq. John is a U.S. citizen. Sam has never even been to the U.S. for a visit. The funds in the offshore account belong to Sam, but because the Israeli bank wouldn’t open up an account in Sam’s name unless he comes to Israel, John opens it in his own name, and puts Sam’s funds in the offshore bank account.

The assumption that John falls under IRS Notice 2010-23 is incorrect. John has a financial interest in the account. The definition of financial interest is set forth in the instructions to the FBAR, Form TDF 90-22.1 which states:

The Swiss Parliament has decided to allow UBS to turn over the names of its Swiss bank account customers to the IRS. This means that the names of 4,450 UBS customers who are suspected of committing tax fraud, and FBAR (Foreign Bank Account Reports, TDF 90-22.1) violations will be turned over to the IRS by the August deadline. For a recap of the UBS John Doe summons litigation, and the subsequent twists and turns through the Swiss court system look here and here.

For owners of UBS Swiss bank accounts this may be the last chance to make a voluntary disclosure to the IRS, thereby greatly reducing the chances of criminal tax evasion, tax fraud, and willful non-filing of FBARs charges being filed. Making a voluntary disclosure at this point after the tax amnesty deadline has passed will not by itself eliminate harsh civil tax penalties, but is one step in the right direction.

Once the IRS has received an individual’s name from UBS it will be too late to make a voluntary disclosure, and a criminal tax investigation is almost a sure thing.