ataxingmatter

Swiss Bank Weigelin Indicted

On Feb. 2, 2012, a grand jury in the Southern District of New York indicted Weigelin & Co, a Swiss bank founded in 1741 that provided various asset management and private banking services to U.S. residents without having any branch offices in the US, for helping US taxpayers hide more than a billion in secret offshore accounts.  See United States v. Wegelin, SDNY No.81-12 Cr.02(JSR) (2/2/12) (Download Wegelin indictment).  The Department of Justice has also seized more than $16 million from Wegelin's U.S. accounts under civil forfeiture laws.

 The indictment claims that more than 100 US taxpayers availed themselves of Weigelin's services to hide their assets, starting around 2002 and continuing through 2011.  In particular, it charges that the bank and its officers opened "dozens" of new undeclared accounts in 2008-09 after the investigation of UBS had brought attention to the issue.  The company's executive committee "affirmatively decided" to go after UBS's US clients, telling U.S. taxpayers that the bank's lack of U.S. branch offices would help prevent discovery.  In announcing this new policy of capturing UBS's illegal business, a bank executive noted that Weigelin was smaller and that it would be able to charge high fees for this business since taxpayers were now frightened about the prospect of criminal prosecution in the US if their accounts were discovered.

The bank used a variety of techniques to assist in the tax evasion objectives of its US taxpayer clients.  It helped them repatriate funds by drawing checks on a Stanford account held by the bank, and even extended this to assist clients of other offshore banks in repatriating their funds.   This was often done by conmingling the US taxpayers' funds with other funds, so that the IRS would have more trouble connecting the dots.   It set up their Swiss accounts in names of sham foundations and corporations--using Lichtenstein, Hong Kong and other jurisdictions' facilitative entities for this purpose. It used code names for taxpayers and numbered accounts rather than names whenever possible.  The bankers never mailed information to their clients' US addresses, but they did email and telephone them about their accounts (sometimes using personal email accounts rather than office accounts to further deter discovery).  After the bank started taking on clients that were fleeing UBS, it also changed its contact policies to require travel to the Swiss bank rather than email or phone contacts with US taxpayer clients.  The indictment notes that "various" of the bank's clients filed false 1040s and failed to file the required FBARs related to the accounts.  (We can probably expect to see more of these taxpayers facing criminal tax evasion charges as the months roll by.)

According to the indictment, the bank also solicited new US taxpayers for its asset management business, through Fed Ex and email and through a website (run by another firm, but paid for by the bank) advertising Swiss bank accounts that would not disclose information on tax evasion.  At least 70 US taxpayers moved their accounts from UBS to Weigelin in response to these solicitations.  As it became clear that voluntary disclosures by some US taxpayers was revealing information about other Swiss banks, Weigelin took measures to protect identities of advisers assisting US tax evasion, for example by removing client advisor names from records and listing merely "team international" on those records.

The indictment includes stories of US taxpayers who used the Weigelin bank to hide their assets.  One, a woman who inherited a UBS account in 1987, made a trip  with her husband to Switzerland when the UBS investigation became public and was advised to move her account to Weigelin, which she did.   When the couple wanted funds out of the account, they would call and notify the bank that they were going to Aruba. In Aruba, they would fax information to the bank.  The bank would arrange for checks (in amounts less than $10,000 each) on its Stamford account.  The couple became alarmed, however, when it learned that its account at UBS might be one of the 4500 or so disclosed under the agreement with the IRS.  Weigelin advised them not to worry, and not to voluntarily disclose the account, which held almost $2.5 million. 

Another accountholder mentioned had a larger account of about $30 million.

Of course, it would have been to the taxpayers' benefit to disclose, and the bank was acting to protect itself in persuading them not to disclose.  Surely accountholders should be able to recognize that there would be a conflict?  None of the taxpayers specifically mentioned disclosed voluntarily and, one assumes, all are likely to be under criminal indictment (ought to be at any rate).

 

Offshored Assets still in IRS cross-hairs but new disclosure program available

As most who follow the issues are aware, the IRS has been focusing for some time on the foreign bank accounts of US taxpayers.  The big break came when the IRS was able to get some data from UBS, including information about particular bankers and mechanisms that US taxpayers were using to sequester significant amounts abroad to avoid paying US taxes on the income.   This has allowed the IRS to pursue leads and draw connections from bankers to accounts to taxpayers, and to pursue criminal prosecutions for international tax evasion in some cases.

There have been two "voluntary programs" for declaring offshore accounts and avoiding potential criminal prosecution with the payment of a set penalty--the first in 2009 and the second in 2011.  The penalty in the second program was stiffer than the penalty in the first program, so that those who delayed had to pony up more to get clear.   The programs have been enormously successful, bringing in more than $4.4 billion dollars, according to an IRS release announcing a reopening of the offshore voluntary disclosure program.  See IR-2012-5.  Under the new program, some taxpayers may be eligible for the 5 or 12.5% penalties but the stiffest penalty will be higher than under earlier versions: 27.5% of the highest aggregate balance in foreign bank accounts during the 8 years prior to disclosure, up from 25% in  the 2011 program.  In addition, of course, participants have to file returns and pay back taxes and interest for the preceding 8 years, and pay any accuracy-related penalties due.

 

Swiss Bankers Fighting Back on behalf of offshore banking secrecy

The US has threatened to sue more Swiss banks unless they hand over information on tax-dodging US taxpayers.  See Thomasson, U.S. Threatens to Sue Swiss Banks, Huffington Post (Sept. 4, 2011).  The article reports a letter from  U.S. deputy attorney general Cole demanding that Credit Suisse hand over information by today and that nine other banks follow suit.  One reason for the smaller banks--many of the US taxpayers that failed to disclose their accounts after the tax evasion charade at UBS became public simply moved their accounts from UBS to smaller Swiss banks.

Switzerland had already offered to turn over certain information that would  be made available under the new treaty negotiated around the time of the UBS brouhaha, even though the treaty is still pending before the U.S. Senate.

This isn't making Swiss bankers happy.  The Swiss Bankers Association is mounting a campaign to persuade the Swiss Government not to enter into further agreements with the US requiring banks to reveal more US taxpayers' hidden Swiss bank accounts.   John Helprin, Swiss Bankers Oppose Another US Tax Treaty, Associated Press (Sept. 6, 2011). 

The banks are under pressure from more than just the US, as the UK, Germany and France also close in on their own tax evasion problems by pressuring banks for new tax conventions.  See, e.g., Kaffish, Swiss Agreement: the international ramifications, AccountancyAge.com (Sept. 1, 2011) (regarding the Swiss-UK agreement to apply withholding at just below the top rates--meaning 48% for capital gains realized in Switzerland and other types of income such as dividends and interest!). 

But the UBS case in the US  was the apparent first breach in the dam, leading to a special bilateral agreement that forced the Swiss government to permit disclosure of accountholders at UBS.  and now Credit Suisse and others may be in line for similar treatment.  The bankers want to stop it.  Now.  Not surprising, but one has to hope they do not succeed.

 

Hurricane Irene Postpones Deadline for Offshore Tax Evaders to File Voluntary Disclosure

The IRS has delayed the end date for the voluntary disclosure program for offshore accounts.  Citing the potential interruptions caused (or likely to be caused) by Hurricane Irene as she trundles up the east coast, the IRS provided a reprieve for filing the required information or seeking a 90-day extension, from August 31 to September 9, for those making a 'good faith' effort to comply.  The updated voluntary disclosure initiative information is available on the IRS website, here.  The posting provides details about the program and the documents necessary to comply.

This second program requires participants to pay 25% of the highest amount in the account from 2003-2010, along with the back taxes, interest, and other penalties.  Without the voluntary disclosure program, the penalty can easily be more than is in the account.

Which is worse--theft of pizza or hiding almost $5 million from the IRS?

In California, I seem to recall, some unlucky (and probably bullying) soul went to jail under the three strikes law for stealing a slice of pizza.

Now, a member of the elite class can file a false tax return to defraud the government (and all honest taxpayers) by hiding $4.9 million in assets in a Swiss bank and not filing tax returns and information reports as required and what does he get ? Possible maximum sentence under the sentencing guidelines was 20 years.  He got: 24 months probation.  the taxes due.  a $940 thousand civil penalty.  (The penalty charge is only 50% of the assets he had hidden in one year--2004, even though it ostensibly could be charged for more years.) And a $10,000 fine.

This guy was clearly engaging in intentional tax evasion.  When the UBS case came to light, he moved a million of his stash to Lichtenstein, hoping to stay ahead of the law.  (Lichtenstein was even better at banking secrecy than the Swiss.) Then he made regular trips back to his Swiss bank to take out bunches of travelers' checks, trying to empty out his account. 

The case is United States v. Vogliano, S.D.N.Y., No. 10 Cr. 327 (sentencing 4/21/11).  You can read the plea agreement here  Download Vogliano SDNY No. 10-cr-327. 122210 plea agreement.

Will the lack of jail time make all those scofflaws who had gotten worried about their tax information coming to light in the UBS case decide it isn't worth worrying about?  Probation, after all, is just checking in with someone to show you're still around.  They're probably living in their multimillion dollar townhouse, so what's not to like.  These days, the "greed is good" crowd doesn't seem to have much shame.  He'll end up paying about a fifth of the assets he had socked away, though.  That's something.

IRS Expands, Makes Permanent Large Corporate Taxpayer "Compliance Assurance Process"

The IRS announced in IR-2011-32 that it was making the complaince assurance process (CAP) for large corporate taxpayers permanent and expanding it to other corporations.  The process is designed to allow the IRS and corporate taxpayers with assets of $10 million or more to work out potential problems prior to the time of the filing of the return, helping to avoid problems on audit.  The program started in 2005 with 17 taxpayers, and has expanded to 140 corporate taxpayers at this time.

With the CAP program growing in popularity, it is being expanded to include two additional components. A new pre-CAP program will provide interested taxpayers with a clear roadmap of the steps required for gaining entry into CAP. A new CAP maintenance program is intended for taxpayers who have been in CAP, have fewer complex issues, and have established a track record of working cooperatively and transparently with the IRS.

“CAP is a program where the tax system is at its best -- when the taxpayer and the IRS are transparent and issues are resolved before a return is filed,” Shulman said.

I admit that I am skeptical about this program, as I am skeptical about the contractual process "advanced pricing agreements" whereby the IRS signs off on taxpayer proposals for transfer pricing.  A the recent discussion of corporate offshoring and other activities demonstrates, corporate taxpayers are able to afford sophisticated tax advice, and they use that advice to avoid taxes wherever possible.  They know their own situation intimately, and may well be in a position to cast transactions that are primarily tax avoidance arrangements as though they were germane to the business.  The IRS may be understaffed and short on time, and may not give these processes the time they demand.  The worry, at least, is that the IRS will satisfy itself that the company is a good tax citizen and then not focus on that taxpayer much at all once the CAP program is in place.  If the corporate taxpayer has fooled the IRS in the process, that makes for a tidy tax package for the corporation, but not such good news for the fisc. 

Does this happen much of the time?  I don't know.  And it is very hard for an outsider to assess the program without reviewing confidential tax information.  So that is another worry--that these types of relationships with taxpayers are behind the scenes and it is hard to hold the IRS accountable.

Audit rates for the rich increasing--about time

Note to readers:  sorry for the long absence again--personal circumstances prevented my blogging for the last several weeks.  I hope that I can again resume regular blogging now, but do apologize for the absence.

The IRS recently released its 2010 Data Book, which describes the agency's activities for the 2010 FY ending September 30, 2010. 

One important part of the data revealed is a much-needed focus on the compliance of wealthy taxpayers.  IRS Commission Doug Shulman admitted in late 2009 that the agency needed to shift its focus to pay more attention to high-net-worth individuals--at least in part to reassure ordinary Americans that the rich weren't able to avoid compliance (i.e., the idea that they might be able to avoid paying taxes simply because they had lots of money and could seek out tax shelters unavailable to the rest of us).  The IRS created a group within the agency focused on "global high wealth" individuals--those with $10 million or more.  Plans for the group required increased audits as a way to call attention to the problems and for the agency to teach itself more about the ways that these high-wealth individuals maintain their wealth and receive their income.  The Data Book shows that the IRS audited 18.4% of those high-income taxpayers in FY 2010, up considerably from the rate of 10.6% the prior fiscal year.

The release describing the databooks highlights the following information--including the fact that tax revenues are down compared to prior years.

During fiscal year 2010, the IRS collected $2.3 trillion in revenue, and processed 230 million returns. More than 116 million returns, including almost 70 percent of individual income tax returns, were filed electronically. More than 119 million individual income tax return filers received a tax refund, totaling $358 billion. In fiscal year 2010, IRS spent an average of 53 cents to collect each $100 of tax revenue.

The IRS examined more than 1.5 million individual income tax returns and nearly 30,000 returns filed by corporations, excluding S corporations. The IRS provided taxpayer assistance through 305 million visits to IRS.gov and assisted more than 78 million taxpayers through its telephone helpline or at walk-in sites.

More on Tax Information Reporting by Third Parties

On Wednesday, the Senate waived a budget point of order against, and thus effectively passed on an 81-17 vote, an amendment (S. Amdt. 9) to the Federal Aviation Administration reauthorization act (S. 223) that would repeal the 1099 reporting requirements added by the health care reform law (P.L. 111-148) that mandates reporting of payments totaling $600 or more in a year to a single vendor.

This provision was put in the bill as a revenue raiser, because third-party reporting prevents "under the table" payments and non-inclusion of income on tax returns.  So the Republicans and Democrats in the Senate (this version of the amendment was introduced by Michigan's own Debbie Stabenow) have proven yet again that they are not serious about getting rid of the deficit in ways that can be done without causing real economic havoc to ordinary people who are just scraping by.  Instead, they kowtow to the National Association of Manufacturers and all of the other lobbying groups representing businesses that are willing to let tax cheats continue to hide away their income and leave the greater share of the tax burden to those who comply with their obligations.

Carl Levin at least recognizes that repeal of this reporting provision will mean less of the taxes due coming into the Treasury.  He proposed an amendment (S. Amdt. 28) that would have paid for the repeal with other revenue raisers--including the repeal of the ridiculous "domestic manufacturing" deduction under section 199 for oil and gas production and changes to the foreign tax credit applicable to dual capacity taxpayers.  You'd think the Senate would have been eager to pass a revenue-neutral version of the bill, wouldn't you, after all the hollering about how the government "must" reduce Social Security and other "entitlements" because there simply isn't enough money?  But the Senate voted against the paid-for repeal, 44-54. 

I'm more and more convinced that it is not the deficit that the Republicans hollering for "entitlement reform" care about--it is that they just simply want to destroy all of the things that the New Deal did to provide a safety net for ordinary people, while making sure that they reinstate brute-force capitalism like existed in the 1920s, back when Teddy Roosevelt made his famous statement about the corporate titans and malefactors of great wealth.

At least the Senate voted down Mitch McConnell's attempt to repeal the health care overhaul, which he also offered as an amendment to the FAA reauthorization bill.  The defeat came on a vote of 47-51 on a point of order, since repeal would cost us more than $1 trillion in the decade after 2019.

Tax information reporting by third parties

As the extraordinarily conservative Republicans in the House (and in the Senate) press to turn back progressive initiatives, the White House and responsible Democrats (assuming there are a few) need to be cautious that they don't concede before they even try to fight and end up dumping out important provisions to appease the right like they did with the "public option" in health care reform.

For example, Obama made a point in his State of the Union address of going along with the demand by small businesses for alteration of the 1099 reporting provision enacted as part of the Health Care Reform bill.  See, e.g., Lavante, What President Obama Really Said in the State of the Union Address about 1099 Reporting (Jan. 2011).  Businesses complain about any new reporting requirement.  First, because they don't want to do any reporting at all if they can get out of it.  Second, because they know that information reporting has a huge impact on the ability of small businesses generally to evade taxes by simply failing to report income.  Compliant businesses ought of course to support reporting requirements, since they end up paying their taxes in full, while the noncompliant businesses that earn income "under the table" are the ones that benefit when there is no reporting requirement. 

Think about this a minute.  Businesses inevitably track their invoices and their customers.  They know who pays and who doesn't.  They know what they've bought and who they've bought it from.  It doesn't require much to file that information (already maintained by most modern businesses on computerized accounting programs) in the appropriate forms so that the IRS has the information to match against what various business vendores report as their income.  This should therefore be a nonissue:  for a small additional cost in the time to do the paperwork, the government will be able to hold businesses accountable in the same way that it holds ordinary wageearners accountable--through the information reports filed by third parties.  

Raising the threshold on the amount for reporting or excluding all "small" businesses from reporting would be a bad idea.  Small businesses are the place where failure to report income likely adds up because of the ease with which such things can be obscured without third party reporting, whereas large companies have various audit and public reporting requirements that would hinder such failures to report: one has to think that it is a number of those family-owned businesses running sole proprietorships and S Corporations that are evading their responsibility to report their income and causing all of us to have to bear a disproportionate amount of the burden.

Of course, this is a broad issue that relates to reporting by third parties in many different situations.  With third-party reporting, the tax gap--somewhere in the range of $200 to $300 billion annually made up of taxes evaded by cheaters--would be significantly reduced, and compliant taxpayers would be restored to equity.  Noncompliant taxpayers would no longer garner a tax advantage from simply failing to report their income on the assumption that the IRS would have considerable difficulty figuring out the additional payments they've received.  It is a no-brainer, given the way that third party reporting assists in overcoming the problems of assymetry of information faced by the government.  See, e.g., United States Government Accountability Office Report to the Committee on Finance, U.S. Senate, "Tax Administration: Costs and Uses of Third-Party Information Returns," GAO-08-266, Nov. 2007 (noted in Citizens for Tax Justice report cited below).   But neither the Republicans nor the Democrats seem to be able to see past the hullabaloo raised by people (presumably including a good many of those who profit from the lack of third-party reporting) about "burdensome" reporting.

There are similar complaints about the IRS's proposed regulations requiring banks to report interest paid to foreign accountholders in the same way that they have been reporting such interest for domestic accountholders for some time, in order to be able to comply with our information reporting requirements under treaties.  Citizens for Tax Justice notes that the so-called "center for freedom and prosperity" (hereinafter CFP) (often represented by Dan Mitchell of the Cato Institute) has as usual distorted and misrepresented the issue here.  See The Tax Cheaters' Lobby is Wrong about IRS Proposed Regulations, CTJ, Jan. 31, 2011.  Not only do we have a responsibility to provide information to other governments under our agreements on tax information exchange, but such reporting will likely aid in the ongoing battle to catch flagrant tax cheats who hide as foreigners to avoid paying income tax on earned interest, as CTJ notes.   

(Again, one suspects that these are some of the same people who hide money in offshore secret banking jurisdictions and conveniently forget to report the income on it on their tax return.  At the recent ABA tax section meeting in Florida, I spoke with a lawyer whose practice includes representation of many of these tax shirks.  He estimates that there are more than 250,000 such shirks with "substantial" amounts socked away in offshore tax havens.  The right-wing CFP, of course, gathers money from these rich folks and spends it vilifying the efforts to squelch tax havens and tax competition, which it considers a wonderful thing because it permits the extraordinarily wealthy to hang onto "their" property (i.e., avoid contributing taxes to pay for the government that made that property possible).  Don't believe anything you read on the "prosperity" center's site--it will almost certainly be distorted by misleading innuendo and misinformation.  The CTJ report is an excellent takedown of the many exaggerated and misleading claims made in the "prosperity" center's materials.  You can also find a number of my own website where I have reviewed some of their videos and found them to rest on a very shaky foundation of speculation and conclusory assertions.)

The Dodd-Frank financial reform bill included a similar new reporting requirement for broker-dealers.  Some experts have concluded that about 25% of those who report capital gains from sales (in most cases, the most affluent amongst us who are making trades in financial assets such as stocks and bonds) have cheated by overreporting basis and thus underreporting gains.  That adds up to a huge part of the tax gap.  Dodd-Frank raised some revenues by requiring brokers to report basis, providing a third party check against an individual's claimed basis amount.  The banks have this information automatically when they conduct trades on stocks or bonds they've sold to the investor and they are gearing up for the initiation of this reporting this year.  See Larry Barrett, Broker-Dealers Brace for Cost Basis Reporting, Security Monitor, Feb. 2, 2011. 

Of course, in enacting the provision, Congress provided much too much flexibility to investors selling financial assets, by allowing them to specifically identify which of completely fungible items they sell (thus cherry picking the basis that gives them the lowest tax liability).  If average basis isn't used (and this is an area of considerable complexity regarding the appropriate rule), then there should be a first in-first out rule that requires investors to be treated as selling their oldest acquired items first.  It is hard to see any justification for allowing cherrypicking that has nothing but a tax-minimization goal as its object--these are fungible financial assets that are exactly the same for every purpose other than tax, so recognizing the tax differences as a basis for a tax beneficial election makes no policy sense at all.  The identification provision that has been in the Code for a long time should be deleted, and owners of financial assets should not be able to specfically identify consideration received for such items in any context, whether reorganizations (where the Bush Treasury instituted a rule permitting such identification in 2006, claiming wrongly that it was a necessary corollary to their decision to treat a share of stock as the base unit of property in reorgs) or otherwise.

Meanwhile, other provisions in the Dodd-Frank reforms, limited though they were, now face a struggle against a headwind of Republican cost-cutting and business-friendly attitudes.  The SEC seems to be suggesting that it thinks it will have to rely on the banks' own self-regulatory apparatus--i.e., it appears to be willing to let the fox watch the henhouse when it comes to the Dodd-Frank fiduciary standard.  And the CFTC sees itself needing considerably more resources in order to institute the swaps exchange which is essential to the re-regulation of the swaps market that lay at  the heart of the financial speculation carried on by TBTF banks.  See Dodd-Frank Tax Battle Coming, Securities Monitor, Feb. 2, 2011.  Too many in the new Congress seem to think that the tea party crazies represent the majority of American voters, and are planning a range of truly stupid actions, from failing to approve a new debt ceiling (this, of course, after fighting singlemindedly for hundreds of billions of tax cuts for the extraordinarily wealthy) to failing to fund the regulatory apparatus necessary to give us any hope that 21st century global capitalism can be responsive to democratic, people-centered objectives for society.

UBS and other ? offshore bank accounts

The government's dismissal of a criminal information against UBS filed in Florida-- United States v. UBS AG, No. 09-600333-CR-COHN, Dismissal of Information, Oct 22, 2010-- leaves the tax cognoscienti wondering what the next step in its fight against secret offshore bank accounts will be.  Bryan Skarlatos of Kostelanetz & Fink says that "the UBS case was the beginning of the end of Swiss bank secrecy.  We don't know whether it's the beginning of the end of IRS activity, or only the beginning." BNA Daily Tax RealTime, (Oct. 25, 2010).

It is questionable whether the UBS case and Swiss changes to information releases are sufficient to call it the "beginning of the end of Swiss bank secrecy."    But it is likely that the government isn't finished with the topic, and that the information received through the reporting process will be tapped to target other banks and jurisdictions on the issue.  As Skarlatos noted, "the real question is whether another shoe is going to drop" or whether there will be "different strategies" going forward.  BNA Daily Tax RealTime, Oct. 25, 2010. 

 Switzerland and the UK have agreed to negotiated a new tax agreement requiring withholding on behalf of the UK on assets of UK nationals in Swiss banks and supposedly also a better provision for cooperation in tax evasion cases.   It will be interesting to see where this is five years from now--will wealthy Americans still be able to hide their assets in Swiss banks because the IRS can't get the information unless it already has enough information?  My colleage Mike McIntyre has written about the inadequacies of information exchange provisions when the government doesn't already know considerable particular information about tax evasion in progress.  See McIntyre, How to End the Charade of Information Exchange, Tax Notes (Nov. 9, 2009) (noting that banking secrecy is "not over yet").