Justice Department Criticized for Not Sufficiently Pursuing Offshore Tax Evaders, and IRS-Criminal Investigation Reports Its FY2013 Accomplishments

The Senate Permanent Subcommittee on Investigations released a report earlier this week entitled “OFFSHORE TAX EVASION: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts.”  The report is generally critical of the Justice Department’s efforts in pursuing individuals who hold offshore accounts that have not yet been disclosed to the IRS.  Although we have not yet fully digested the lengthy report, here are some findings that are noteworthy:

  • “Switzerland has continued to severely restrict the ability of Swiss banks to disclose the names of U.S. customers with undeclared Swiss accounts.  As a result, the United States has obtained few U.S. names and little account information.”
  • The Justice Department has sought documents from Credit Suisse and the other 14 Swiss banks currently under criminal investigation only through treaty requests.  The request for Credit Suisse was derailed by a Swiss Supreme Court ruling that found that part of the treaty request was unenforceable.  As a result, “the United States has obtained the names of only about 230 U.S. clients with hidden accounts at Credit Suisse,” which is “less than 1 percent of the over 22,000 U.S. accountholders with Swiss accounts at Credit Suisse.”  For the other 14 Swiss banks, the Justice Department has made treaty requests for at least two of the banks and that yielded “few U.S. client names and little account information.”
  • “By relying on the restrictive treaty process and refraining from using U.S. remedies enforceable in U.S. courts to obtain information directly from the 14 Swiss banks, DOJ essentially ceded control of the document process to Swiss regulators and Swiss courts that value bank secrecy and are willing to prohibit disclosure of bank information essential to effective U.S. investigations and prosecutions of U.S. tax evasion involving Switzerland.”
  • While a total of 34 Swiss bankers and professionals have been indicted “for aiding and abetting U.S. tax evasion, the vast majority of those defendants have yet to stand trial. Most continue to reside in Switzerland, without facing any public U.S. extradition request to require them to face U.S. criminal charges.” None of the seven indicted Credit Suisse bankers have been prosecuted. 
  • The Justice Department’s “decision to refrain from taking enforcement action against Credit Suisse over the past five years is part of a larger failure by the United States to obtain from the Swiss the names of the tens of thousands of U.S. persons who opened undeclared accounts in Switzerland and have not yet paid taxes on their hidden assets.”
  • “Despite constructing a 2013 program to enable hundreds of Swiss banks to apply for non-prosecution agreements or non-target letters, DOJ did not obtain any agreement in return from the Swiss Government to permit any of those Swiss banks to furnish U.S. client names to the United States.”
  •  While the implementation of FATCA will cause information on current accountholders to be disclosed to the U.S., there are a number of loopholes that reduce its effectiveness.  For instance, “the FATCA regulatory loopholes will require disclosure of only the largest dollar accounts; they will permit banks to ignore, in most cases, bank account information that is kept on paper rather than electronically; they will allow banks to treat accounts opened by offshore shell entities as non-U.S. accounts even when the entity is owned by a U.S. taxpayer; and the remaining disclosure requirements can be easily circumvented by U.S. persons opening accounts below the reporting thresholds at more than one bank.”

Yesterday, Deputy Attorney General James M. Cole and Assistant Attorney General, Tax Division, Kathryn Keneally appeared before that Subcommittee to respond to the criticism.  Cole noted that currently approximately 400 and 500 people per month are being entered into the IRS’s voluntary disclosure program, which has already caused over 43,000 taxpayers to pay over $6 billion in back taxes and penalties since 2009.  In addition, the Subcommittee should “expect additional developments in the coming months” on other ongoing cases.  See Tom Schoenberg and David Voreacos, Senate Hearing Likely to Flush Out More U.S. Tax Evaders (Bloomberg, Feb. 26, 2014).  Also, according to their prepared joint statement, the Justice Department is not only focused on activities in Switzerland but has now expanded its investigation to banking activities in India, Israel, Liechtenstein, Luxembourg, Barbados, and other Caribbean countries.

Finally, also this week, the IRS released its Criminal Investigation Annual Business Report for fiscal year 2013.  In general, CI reported more investigations, more recommended prosecutions, more indictments and informations filed, more convictions, and more custodial sentences.  The conviction rate was reported at 93.1%, of which 80.1% received a sentence that included incarceration.  Other noteworthy statistics for 2013 include:

  • Those convicted of tax fraud by way of the use of identity theft are sentenced to an average of 38 months in prison.
  • There were 207 convictions of tax return preparers, who were sentenced to an average of 27 months in prison.
  • Over 2,500 money laundering and Bank Secrecy Act investigations were initiated.
  • Nearly $1 billion in assets were seized or forfeited.
  • A Cyber Crime Unit was established “that will allow CI to proactively identify and pursue tax, money laundering, identity theft and other financial crimes in the virtual world.”

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