In Volume 3, Number 4, “Come in From the Cold” (March 29, 2009), I discussed the IRS Voluntary Disclosure Program specifically as it relates to offshore bank accounts. On my website STEINBERGTAXLAW.COM is an updated version of the article including coverage of the Frequently Asked Questions published and later updated by IRS.
The phrase “Come in from the Cold” refers to John Le Care’s novel turned into a 1965 movie, “The Spy Who Came in From the Cold.” Richard Burton is Alec Leamas who is drawn in from the cold by his love interest, Clair Bloom. The phrase comes from the screenplay: Control says to Leamus: “We have to live without sympathy, don’t we? We can’t do that forever. One can’t stay out of doors all the time. One needs to come in from the cold.” Leamus goes back behind the Iron Curtain for one last mission only to find he has been duped by his own handlers. In the end, he chooses freedom of the soul over an emotionless life.
Roughly 14,700 taxpayers came in under the IRS public Voluntary Disclosure program by its extended due date, October 15, 2009. Those who made voluntary disclosure submissions are now going through the process of (1) receiving clearance from the IRS criminal division that they are tentatively accepted into the program; (2) If accepted, responding to document requests from agents assigned by the IRS audit division in Philadelphia, including the filing of amended Form 1040s and delinquent FBARs; and, (3) entering into a formal closing agreement (contract) with IRS regarding the tax, penalty and interest due and other obligations and agreements regarding the foreign accounts and income there from.
WHY WAS THE GOVERNMENT SO UPSET WITH UBS?
UBS is Switzerland’s largest bank. For one thing, in pursuing its cross border banking business with about 20,000 U.S. clients (IRS estimates that about 17,000 did not report the existence of the accounts or income earned) from 2000 to 2007, UBS was engaging in regulated banking and investment advisory services in the U.S. without appropriate legal authority to conduct such businesses. In over-vigorously pursuing cross border business, a small part of its total banking operations but amounting to about $200 million a year in revenue, UBS covertly encouraged and aided U.S. taxpayers in evading provisions of the Internal Revenue Code and Bank Secrecy Act and in committing serious felony crimes under U.S. law. UBS also intentionally circumvented a Qualified Intermediary Agreement entered into with IRS after its acquisition of Paine Webber. Under the QI agreement UBS was to, among other things, obtain and submit to IRS Forms W-9, with the name, address and Social Security numbers of U.S. investors. Instead UBS instructed U.S. clients in the use of offshore nominee entities to avoid disclosing their identity.
In a conspiracy charge, the accused must do more than merely agree to commit a crime; they must have committed at least one overt act in furtherance of the plan. The brazen overt acts alleged in the Information are astounding in light of the prominence of UBS, in the banking world. One of these acts alleged was UBS management instructing its private bankers to tell U.S. clients, thinking of switching to another offshore bank, that its size, job footprint in the U.S. and superior lobbying would thwart any pressure on UBS from the U.S. to disclose client identities. This sounds a lot like the script of a boiler room telephone scam, the sort of sleazy operation occasionally busted by the FTC. As events turned out, the statement was no more truthful than the boiler room fast, loose and false promise. UBS, in part, also:
1. Trained its bankers who travelled to the U.S. to avoid detection by changing hotels frequently and using encrypted laptop computers.
2. In 2004 alone, had 32 bankers traveling to the U.S. about 3,800 times to meet with U.S. clients.
3. In 2004 organized a meeting in Switzerland with outside lawyers and accountants to discuss creating new structures and vehicles for U.S. clients to conceal UBS offshore accounts and evade the taxes on income from those accounts.
4. Instructed U.S. clients to destroy all documents relating to their account.
STATUS OF UBS AND OTHER CASES
UBS having avoided defending the conspiracy charges in court by entering into a Deferred Prosecution Agreement with the Department of Justice (under which it accepts responsibility for violations of U.S. law, consents to the filing of a one count Information, agrees to disclosed some names, and, agrees to exit the cross border banking business in the U.S.), settled the John Doe Summons enforcement action seeking another 52,000 names, by agreeing to disclose another 4,500 or so. The settlements are jeopardized, however, by a Suisse court ruling that the agreement to turn over names is illegal under Suisse law. The Suisse are scrambling to remedy the legal roadblock and avoid UBS being tried or the John Doe Summons proceeding being decided by a U.S. District Court Judge. Two former senior officers of UBS have been indicted, one having already plead guilty. Already, IRS has indicted and obtained guilty pleas from a number of UBS U.S. clients who did not enter the voluntary disclosure program with foreign investments hidden ranging from the millions to billions of dollars.
Elsewhere in Switzerland, the French government had obtained surreptitiously and returned, after pressure from the Suisse government, information on 130,000 HSBC clients.
Additionally, IRS has created a new department of focus on overseas tax havens used by wealthy U.S. persons with Hong Kong specifically noted for initial focus.
The information gleaned by IRS from the 14,700 who have come forward will lead to information about promoters and other investors in geometric fashion. Thus, especially within Switzerland, identity disclosure is highly probable. Presently, there are 150 Grand Jury investigations in progress.
WHAT TO DO IF ONE DID NOT COME FORWARD BEFORE OCTOBER 15, 2009
All is not lost but there is no one roadmap to a safe arrival. The most important thing one can and should do is obtain good counsel. For, it is ultimately the judgment of counsel that will determine the best course of action. The broad alternatives are the same; that is, making a noisy or quiet disclosure or foolishly doing nothing, as many undoubtedly have done. Some considerations are:
1. Noisy Disclosure after October 15: After a preliminary clearance to make sure one is not already under examination, a voluntary disclosure is submitted through IRS Criminal division as before. Submissions after October 15, if compliant, still have advantages over a quiet disclosure or doing nothing, namely:
a. Finality of having a closing agreement.
b. pretty much guarantees non-prosecution for criminal violations
c. Most advisable for:
i. Those who have Suisse financial accounts (especially UBS or other banks already on the hot seat) since there is a very high probability of disclosure.
ii. Those with high dollar balances in accounts or high income from accounts.
iii. Those who have used nominee entities.
iv. Those who have actively managed accounts and have many deposits and withdrawals.
d. Advantages of a noisy disclosure lost after October 15 are:
i. Certainty as to the civil penalties which now will be determined on a case by case basis (statutory penalty can be 50% of account value for each year). IRS has only said the penalty will not be below 20% of highest balance offered before October 15). Note the civil penalty structure:
1. Non-willful violations - $10,000.
2. Willful violations - $100,000 or 50% of value of account.
3. Reasonable cause – no penalty
4. Willful defined: the same as for criminal cases, “intentional violation of a known legal duty,” but must be proven by clear and convincing evidence, not the more stringent criminal standard, beyond a reasonable doublt.
ii. Certainty as to the number of years IRS will go back (six years before Oct. 15), now on a case by case basis.
e. Quiet Disclosure: One files amended returns (3-6 years) with IRS Service Center and files current FBARs with the Treasury Department, pays the income tax due and waits out the statute of limitations. The advantages:
i. Although IRS now says this is not a true voluntary disclosure, there have been no reported prosecutions of one who has made an appropriate quiet submission by filing truthful returns and paying the tax. (Present IRS statements about quiet disclosures contradict the Internal Revenue Manual which sanction such submissions). The bottom line: if done properly in the appropriate case, the Department of Justice would not likely approve indictment of a case not winnable.
ii. May be appropriate where:
1. Income from foreign accounts is small compared to total reported income.
2. Account is with smaller non-Suisse bank.
3. There are no nominee owners of the account.
4. Inherited accounts where present owner never accessed account.
5. Other situations where client is not a tax criminal or can show reasonable cause for the failure to file the FBARs.
“GO NOT TO THE ELVES FOR COUNSEL FOR THEY WILL SAY BOTH YES AND NO” (J.R.R. TOLKIEN).
The bottom line after October 15 is the same as before – The same shoe does not fit every foot. Seek out wise counsel for it is on his or her judgment that your comfort will be determined – either a cold, isolated travail through investigation, indictment and perhaps incarceration; or, the warm knowledge of having wisely resolved a most difficult problem.