IRS eyes offshore tax cheats beyond Switzerland

WASHINGTON — Internal Revenue Service Commissioner Doug Shulman closed out 2010 by dining out one last time on the success of the agency’s recently-concluded enforcement effort against Switzerland’s premier financial institution, UBS AG.

The case targeted the bank and thousands of UBS clients, caught red-handed in a long-running fraud hiding as much as $20 billion in secret undeclared accounts and earning UBS up to $200 million a year in ill-begotten profits.

“Taxpayers understand that the risk of being caught hiding assets offshore has increased significantly,” Shulman told an assembly of lawyers, corporate tax executives and accountants at the 23rd Annual Institution on Current Issues in International Taxation in Washington in December.

Shulman said the agency is now carrying the fight against offshore tax abuse well beyond Switzerland and UBS by replicating tactics honed in the UBS investigation: “Cleaning up abuses of the past and then mining and leveraging the data we receive to mount a greater attack on the abuse.”

Shulman also said the IRS is “seriously considering” launching a new “special” amnesty program to induce even more U.S. tax-avoiders with offshore accounts to come in from the cold (the IRS estimates there are some 2 million Americans with foreign accounts, many of which are undeclared, costing the U.S. Treasury an estimated $100 billion in lost tax revenues because of offshore tax abuses).

As GlobalPost reported in an August special report titled “Telling Swiss Secrets,” the U.S. government inquest into UBS began when former Geneva-based UBS banker Bradley Birkenfeld, an American, provided damning insider information to several U.S. agencies in June 2007. That whistleblowing testimony set off cascading civil and criminal investigations against the bank.

Birkenfeld’s testimony and corroborating internal UBS documents showed that the bank intentionally subverted U.S. tax laws and defrauded the U.S. government. According to the testimony and court documents, it did so by sending dozens of unregistered bankers like Birkenfeld to the United States on thousands of illegal trips to facilitate tax evasion schemes for wealthy U.S.-based clients.

Ironically, the Justice Department prosecuted Birkenfeld for his relatively minor role in the fraud, and he is now serving a 40-month sentence in federal prison.

To avoid criminal indictment and the loss of it’s licenses to do business in the United States, UBS agreed to pay a $780 million fine and, most controversially in Switzerland, a country practically synonymous with bank secrecy, the bank turned over to the IRS names of some 4,000 American account holders.

The Swiss government bowed under the weight of the evidence accumulated against UBS. In high-level settlement discussions with the U.S. State Department, the Swiss government conceded to new treaty terms to prevent Switzerland’s leading bank from losing its licenses to do business in the United States.

The IRS officially ended its UBS inquest in November , following the Justice Department’s decision to dismiss its criminal case against UBS in October. Both agencies cited the bank’s full compliance with agreements it made with the U.S. government to avoid prosecution.

Meanwhile, the investigation spurred some 15,000 U.S. taxpayers, at least half of them UBS clients, to close illegal accounts and pay huge penalties to avoid prosecution as part of an IRS voluntary disclosure program.

Participants were required to divulge the names of accountants, attorneys and bankers who helped them create the illegal accounts in the first place. That data has been mined by the IRS and Justice Department to expand investigations, reportedly to HSBC and Credit Suisse and spanning from Europe to Asia and the Middle East.

Shulman hinted that the new amnesty program being considered by the IRS would be a carrot counterpart to the looming stick of the agency’s purported investigations into other banks.

But the IRS commissioner’s tough talk about putting the hurt on other tax offenders à la UBS has been met with skepticism among some with inside knowledge of current investigations.

“They’ve made a lot of noise and they’ve certainly gotten a lot of press – you keep hearing that this is not going to be limited to UBS and not going to be limited to Switzerland, “ said Robert Fink of Kostelanetz & Fink, LLP, in New York in an interview with GlobalPost.

But, Fink added, “We’ve been hearing those drums beat for eight months now and there’s no follow-through. I’ve seen grand jury subpoenas with Credit Suisse and HSBC on them, but there’s a vast difference between investigation and results.”

Fink doubts the IRS can replicate the conditions that brought UBS and its clients to their knees when it comes to the other banks, particularly in terms of a new voluntary disclosure program, which will impose harsher penalties than the first, according to Shulman, as a gesture of fairness to the 15,000 who came in during the first round (in addition to back-taxes and interest, they paid penalties of 20 percent of the past due tax plus 20 percent of the foreign account at its highest value in the last six years, figures which, in some cases, eclipsed the current values of the accounts).

Kostelanetz & Fink represented several hundred former UBS clients implicated in the UBS scandal, with accounts ranging from $10,000 to $1 billion, the average account in the range of “a couple of million,” Fink said.

His counsel to clients was nearly universal no matter the size of the account: Participate in the voluntary disclosure program, despite the “draconian” penalties.

“I’ve been doing voluntary disclosures for at least 40 years, and there was never a flood like this,” Fink said. “But it’s naive to think that because of all the drum-beating there’s going to be a new stampede of American taxpayers coming in. That stampede is over. They’ll come in if they feel their banks are in the crosshairs like UBS was. But absent that, what in the world makes you think if they didn’t come in at 20 percent, they’ll come in at 30?”

Fink and other tax professionals interviewed by GlobalPost believe it’s more likely people will simply hide their money further and further out of sight in harder-to-reach banking jurisdictions such as Singapore and Hong Kong.

"Bank stories never end if you keep watching,” said Laurie Holtz, a forensic accountant who has investigated corporate malfeasance throughout his 50-year career. “For the past 25 years there has been a breakdown in moral, legal and ethical values that has resulted in so much fraud and so much financial harm to the country. UBS is just the tip of the iceberg.”

Fink tends to agree, and wondered aloud whether even UBS has been fully chastened.

“I know for a fact that UBS counseled people on how to hide their money [in the middle of the investigation ] — either by disguising the fact that they were identifiable as Americans, or suggesting that the money be moved to different banks where it would be safer, or perhaps even to a UBS bank in a different country,” Fink said. “I know it from customers of UBS.”

So where’s the next hot spot if you’re an incorrigible tax -avoider?

“Dubai,” Fink said. “People are confident the government of Dubai will never cooperate with the IRS like the Swiss did.”