Three More Swiss Banks Have Secured Non-Prosecution Agreements with the DOJ

Since our last update, three more Swiss banks have reached resolutions with the Justice Department under its Swiss Bank Program –Valiant Bank AG, Schroder & Co. Bank AG, and Hypothekarbank Lenzburg AG. To resolve their respective tax-related criminal offenses, Valiant Bank agreed to pay a penalty of $3.3 million, Schroder Bank agreed to pay a penalty of $10.3 million, and HBL agreed to pay a penalty of $560,000.

In press releases, the DOJ described the relevant conduct of each of the banks in relation to their U.S. accountholders as follows:

Valiant Bank (announced yesterday)

Valiant traces its origins to 1824 and is headquartered in Bern, the capital of Switzerland.  Today, Valiant is the successor of 40 banks.

Valiant offered hold mail services and numbered accounts to its U.S. clients, including some U.S. clients who had not provided Valiant with an Internal Revenue Service (IRS) Form W-9.  Valiant also accepted funds from 19 UBS accountholders who exited UBS.  Eleven of these 19 U.S. persons provided a signed Form W-9.  The remaining eight U.S. persons who did not were later forced to close their Valiant accounts.

For 26 accountholders who refused to sign a Form W-9, Valiant cashed out or converted into gold hundreds of thousands (and even millions) of dollars in account balances.  In late November 2011, one accountholder withdrew more than one million Swiss francs in various currencies and 114,000 Swiss francs in gold coins, gold bars and precious metal.  Another accountholder withdrew $2 million in cash and wired 400,000 Swiss francs to a U.S. bank.  In both instances, the accountholders refused to sign a Form W-9.  Other accountholders withdrew only amounts under $10,000 either by U.S. dollar cash withdrawals or by check or wire transfer to the United States, or transferred large sums to non-U.S. institutions.  For example, one accountholder transferred over 435,000 euros to France and $350,000 to Luxembourg.  Two other accountholders each transferred 75,000 Swiss francs to Dubai and closed their accounts with cash withdrawals of over 300,000 Swiss francs.

In 2009, an accountholder refused to sign a Form W-9 and requested that Valiant ignore the accountholder’s U.S. status.  The accountholder’s non-U.S. spouse later opened a separate account at Valiant, and the accountholder transferred more than $1 million into that account.  According to an “Agreement of Donation” between the accountholder and the accountholder’s non-U.S. spouse, the purpose of the transfer was “to make a donation” and “without any consideration.”  The agreement provided that the donation was “irrevocable.”  The non-U.S. spouse then transferred the funds to UBS and instructed Valiant to close the account.

Some U.S.-related accounts at Valiant were held in the name of non-U.S. entities with one or more U.S. beneficial owners.  In one case, a British Virgin Islands entity opened an account at Valiant through a third-party Swiss entity assigned to manage the account.  The entity holding the account designated four U.S. persons as beneficial owners, but signed a Valiant form declaring that the account was for the benefit of non-U.S. persons.

Since Aug. 1, 2008, Valiant had 330 U.S.-related accounts, out of a total of 600,000 accounts.  The maximum aggregate dollar value of the U.S.-related accounts was $147.4 million.  Valiant will pay a penalty of $3.304 million.

Schroder Bank (announced 9/3/2015)

Schroder Bank was founded in 1967 and received its Swiss banking license in 1970.  Since 1984, Schroder Bank has had a branch in Geneva.  The bank has two wholly owned subsidiaries, Schroder Trust AG (domiciled in Geneva) and Schroder Cayman Bank & Trust Company Ltd. (domiciled in George Town, Grand Cayman).  Schroder Cayman Bank & Trust Company Ltd. provides services to clients such as the creation and support of trusts, foundations and other corporate bodies.  Both subsidiaries also acted in some cases as an account signatory for entities holding an account with the bank.  Schroder Bank is in the process of closing the operations of Schroder Trust AG and Schroder Cayman Bank & Trust Company Ltd.

Schroder Bank opened accounts for trusts and companies owned by trusts, foundations and other corporate bodies established and incorporated under the laws of the British Virgin Islands, the Cayman Islands, Panama, Liechtenstein and other non-U.S. jurisdictions, where the beneficiary or beneficial owner named on the Form A was a U.S. citizen or resident.  In addition, a small number of accounts were opened for U.S. limited liability companies (LLCs) with U.S. citizens or residents as members, as well as for U.S. LLCs with non-U.S. persons as members.  Schroder Bank communicated directly with the beneficial owners of some accounts of trusts, foundations or corporate bodies, and it arranged for the issuance of credit cards to the beneficial owners of some such accounts that appear in some cases to have been used for personal expenses.

Schroder Bank also processed cash withdrawals in amounts exceeding $100,000 or the Swiss franc equivalent.  For at least three U.S.-related accounts, a series of withdrawals that in aggregate exceeded $1 million were made.  In addition, at least 26 U.S.-related accountholders received cash or checks in amounts exceeding $100,000 on closure of their accounts, including in at least three cases cash or checks in excess of $1 million.

Between 2004 and 2008, four Schroder Bank employees traveled to the U.S. in connection with the bank’s business with respect to U.S.-related accounts.  In 2008, Swiss bank UBS AG publicly announced that it was the target of a criminal investigation by the Internal Revenue Service (IRS) and the department, and that it would be exiting and no longer accepting certain U.S. clients.  In a later deferred prosecution agreement, UBS admitted that its cross-border banking business used Swiss privacy law to aid and assist U.S. clients in opening accounts and maintaining undeclared assets and income from the IRS.  Between Aug. 1, 2008, and June 30, 2009, Schroder Bank opened eight U.S.-related accounts with funds received from UBS, which was then under investigation by the U.S. government.

Since Aug. 1, 2008, Schroder Bank had 243 U.S.-related accounts with approximately $506 million in assets under management.  Schroder Bank will pay a $10.354 million penalty.

Hypothekarbank Lenzburg AG (announced 8/27/2015)

HBL offered a variety of traditional Swiss banking services that it knew could assist, and that did assist, U.S. clients in the concealment of assets and income from the Internal Revenue Service (IRS).  For example, HBL, upon client request, did not send mail associated with some U.S.-related accounts to the United States.  In addition, HBL offered numbered accounts to its clients, a service by which access to information about an account, including the identity of the accountholder, was limited to only certain employees of HBL.  In a handful of instances, the accountholders of U.S.-related accounts who refused to provide a Form W-9 or who admitted that they were not tax compliant withdrew significant amounts of cash or physical assets when HBL forced these accounts to be closed.

In or about 2008, Swiss bank UBS AG publicly announced that it was the target of a criminal investigation by the IRS and the department, and that it would be exiting and no longer accepting certain U.S. clients.  In a later deferred prosecution agreement, UBS admitted that its cross-border banking business used Swiss privacy law to aid and assist U.S. clients in opening accounts and maintaining undeclared assets and income from the IRS.  HBL opened one account for a U.S. person who exited UBS.  For another long-standing holder of a U.S.-related account, HBL received a transfer of funds from an account held at UBS into a pre-existing account at HBL.

Another accountholder who resided in the United States for many years had two accounts, one of which was a numbered account.  In 2012, the accountholder’s relationship manager requested a Form W-9 for the numbered account and the accountholder refused to provide one.  As a result, the relationship manager directed the accountholder to close the numbered account.  Thereafter, the accountholder came to Lenzburg to close the numbered account.  The accountholder withdrew 240,000 Swiss francs and 12,000 euros and purchased precious metals in the amount of 318,000 Swiss francs.

Since Aug. 1, 2008, HBL had 96 U.S.-related accounts with an aggregate value of $69.8 million.  HBL’s average annual revenue attributable to U.S.-related accounts in the form of fees, commissions and earnings on client funds that were loaned out by HBL was $198,000, or a total of $1.2 million since Aug. 1, 2008.  HBL will pay a penalty of $560,000.

Under the Swiss Bank Program, eligible Swiss banks that had notified the DOJ by December 31, 2013 of an intent to participate in the Program were eligible to resolve any potential criminal liabilities in the U.S. by completing the following:

  • Make a complete disclosure of their cross-border activities;
  • Provide detailed information on an account-by-account basis for accounts in which U.S. taxpayers have a direct or indirect interest;
  • Cooperate in treaty requests for account information;
  • Provide detailed information as to other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed;
  • Agree to close accounts of accountholders who fail to come into compliance with U.S. reporting obligations; and
  • Pay appropriate penalties

Swiss banks meeting all of the above requirements are eligible for a non-prosecution agreement.

According to the terms of these non-prosecution agreements, each bank agrees to cooperate in any related criminal or civil proceedings, demonstrate its implementation of controls to stop misconduct involving undeclared U.S. accounts and pay penalties in return for the DOJ’s agreement not to prosecute these banks for tax-related criminal offenses.

The Justice Department released the following documents with each of these announcements:

  • The Valiant Bank non-prosecution agreement and statement of facts (available here).
  • The Schroder Bank non-prosecution agreement and statement of facts (available here).
  • The HBL non-prosecution agreement and statement of facts (available here).

‘Required Records’ Decision Erodes Taxpayers’ Fifth Amendment Rights

by Matthew D. Lee and Jed Silversmith

The Legal Intelligencer

Few rights are more sacrosanct than the constitutional privilege against self-incrimination. This right extends beyond making statements to police or testifying in court, but also to the act of producing records. This means that if an individual is subpoenaed to produce records, he does not need to do so if he can establish that the act of production would be an implicit representation that would incriminate himself. In short, it is not simply an individual’s words that can be used to incriminate himself, but also the mere possession of documents.

In the last four years, the federal courts of appeal have begun to peel back this inviolable privilege in the realm of foreign bank account reporting. The U.S. Court of Appeals for the Third Circuit has now joined six other circuit courts to hold that an individual may not assert Fifth Amendment “act of production” immunity in response to a request for his or her foreign bank account records. In United States v. Chabot, No. 14-4465 (3d Cir. Jul. 15, 2015), the Third Circuit joined the unanimous chorus of circuit courts to hold that the production of foreign bank account records is not protected by the Fifth Amendment because federal law requires that a taxpayer maintain such account records.

In Chabot, the taxpayers received a civil summons from the IRS demanding production of bank account records for an account at HSBC Bank. The Chabots refused to produce records, citing their Fifth Amendment rights. In response, the IRS filed a civil action in federal district court seeking to enforce the summons. Affirming the district court’s decision enforcing the summons, the Third Circuit concluded that records of a foreign bank account were “required records” and therefore the Fifth Amendment did not apply.

Foreign bank account reporting is a hot area of civil and criminal tax enforcement for the IRS and the Department of Justice since 2009, as a result of the landmark deferred prosecution agreement the United States reached with Switzerland’s largest bank, UBS AG, that year. Under the federal Bank Secrecy Act, which was enacted in 1970, every “resident or citizen of the United States or a person in, and doing business in, the United States” is required to keep records and file reports about transactions with foreign financial institutions. U.S. taxpayers are required to file these reports on a FinCEN Form 114, commonly referred to as an “FBAR,” annually.

Failure to file the FBAR form carries draconian civil penalties: 50 percent of the highest balance in the unreported bank account each year. The IRS, the agency charged with enforcement, is permitted a six-year look-back period, meaning that it may impose a penalty equal to three times the balance of the account (in other words, 50 percent of the account for each of six years). This is not an idle threat. Last year, a jury upheld a three-year, 150 percent penalty against a Florida man who had failed to disclose his Swiss bank account worth about $1.5 million.

Individuals who willfully fail to file an FBAR can be prosecuted criminally as well, carrying a statutory maximum of five years’ incarceration for each year that a taxpayer did not file. In addition to the failure-to-file penalty, the federal individual income tax return (Form 1040) asks taxpayers if they have an overseas bank account on Schedule B. The DOJ, as part of its offshore initiative, has prosecuted a number of taxpayers who failed to check “yes” in response to this question. This misstatement, which has no impact on a taxpayer’s tax liability, is still a felony.

Given that the disclosure of foreign bank account information carries both significant civil penalties and the very real threat of criminal prosecution, production of these records in response to subpoenas or summonses is not an abstract concern. Other than the Third Circuit’s decision in Chabot, every other “required records” decision involved enforcement of a grand jury subpoena.

The courts of appeals that have ordered the production of these documents have relied on the “required records doctrine.” The courts note the Bank Secrecy Act requires that a taxpayer maintain bank account records for a period of five years. Therefore, it is a “required” record, and the taxpayer cannot avoid producing it.

The required records doctrine first appeared in Shapiro v. United States, 335 U.S. 1, 32–33 (1948), which involved a merchant who was engaged in improper sales in violation of the Price Control Act during the early 1940s. The Supreme Court held that Shapiro had to produce records pertaining to the sales because such records were public papers as they were required to be kept by the Price Control Act. At that time, “private papers” were entitled to Fifth Amendment protection based on their private status but public papers were not.

The U.S. Supreme Court subsequently fleshed out Shapiro‘s holding in Grosso v. United States, 390 U.S. 62, 67–68 (1968), in 1968. In Grosso, the court set out three elements of the “required records” exception: (1) the reporting or recordkeeping scheme must have an essentially regulatory purpose; (2) a person must customarily keep the records that the scheme requires him to keep; and (3) the records must have “public aspects.”

In recent years, Shapiro has been applied sparingly. Baltimore City Department of Social Services v. Bouknight, 493 U.S. 549, 555–56 (1990), a 1990 decision, involved a mother who was suspected of child abuse but was given custody of her injured child with extensive conditions imposed by a protective order. The mother violated those conditions, and a court ordered her to produce the child in order to verify that the child was alive and well. When she refused, the court held her in contempt and rejected her contention that the Fifth Amendment protected her from having to produce him. The court, citing the required record doctrine, found that the mother did not have a legitimate Fifth Amendment concern. In California v. Byers, 402 U.S. 424 (1971), the court upheld California’s hit and run statute, reasoning that in certain instances “organized society imposes many burdens on its constituents.” The Byers court cited a host of decisions including Shapiro to reach its decision. Ordering a parent to produce her child in the face of previously documented allegations of child abuse or requiring that a motorist identify himself before he leaves the scene of an accident does not seem to implicate the same Fifth Amendment protections as the production of foreign bank records. The recent spate of appellate court decisions involving foreign bank accounts takes the required records doctrine much further. The Third Circuit, in applying this doctrine, justified its decision because these foreign tax records “serve legitimate noncriminal purposes, because government agencies use this data for tax collection, development of monetary policy, and conducting intelligence activities.”

The government has a significant interest in aggregating large amounts of data to fulfill a wide range of public policy applications. Therefore, the same could be said for almost any other record that a citizen may wish not to produce.

The Third Circuit’s decision is significant for two reasons. First, for individuals who have foreign bank accounts, if confronted with an IRS summons or a grand jury subpoena, they will be required to produce records—even if the production is incriminating or will yield a substantial civil penalty. Second, the decision is a clear erosion of constitutional protection. As Justice Felix Frankfurter pointed out in his dissent in Shapiro, “If Congress by the easy device of requiring a man to keep the private papers that he has customarily kept can render such papers ‘public’ and nonprivileged, there is little left to either the right of privacy or the constitutional privilege.” These court of appeals decisions are precisely what Frankfurter feared.

“‘Required Records’ Decision Erodes Taxpayers’ Fifth Amendment Rights,” by Matthew D. Lee and Jed Silversmith, was published in The Legal Intelligencer on August 18, 2015. To read the article online, please click here.

Reprinted with permission from the August 18, 2015, edition of The Legal Intelligencer © 2015 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, reprints@alm.com or visit www.almreprints.com.

A Welcome Change: Congress Finally Conforms FBAR and Tax Return Filing Deadlines

Last week Congress passed, and the President signed, a bill entitled “The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015.” While this legislation was primarily directed at extending federal funding for transportation projects, buried within the bill were several tax-related provisions that changed key filing deadlines. One of the most important passages in this new law changed the due date for an important information reporting form: the Report of Foreign Bank and Financial Accounts (commonly referred to as the “FBAR”).

Any U.S. taxpayer with a financial interest in, or signature or other authority over, a foreign bank account with a balance in excess of $10,000 is required to annually disclose the existence of such account(s) on the FBAR form. The deadline for filing the form is June 30, 2015, and no extension of that deadline was available under prior law. The FBAR is required to be filed electronically using the BSA e-filing system website.

Practitioners and taxpayers alike have complained for years that the deadlines for filing tax returns (April 15 for individuals) and the FBAR (June 30 for all taxpayers) were not aligned, and that no extension of the FBAR deadline was available. Congress finally heeded these calls for change, and last week’s legislation contains the following short, but critical, provision:

(11) The due date of FinCEN Report 114 (relating to Report of Foreign Bank and Financial Accounts) shall be April 15 with a maximum extension for a 6-month period ending on October 15 and with provision for an extension under rules similar to the rules in Treas. Reg. section 1.6081–5. For any taxpayer required to file such Form for the first time, any penalty for failure to timely request for, or file, an extension, may be waived by the Secretary.

This provision applies to returns for taxable years beginning after December 31, 2015.

As a result of this new legislation, the FBAR filing deadline will be April 15, starting with the 2016 tax year. Thus, for taxpayers required to file a 2015 FBAR, the deadline will remain June 30, 2016. For taxpayers required to file a FBAR for 2016 (and thereafter), the deadline will change to April 15, 2017. Importantly, taxpayers will also be able to request, for the first time, a six-month extension of the FBAR filing deadline, to October 15. (As noted above, previously taxpayers were unable to request any extension of the FBAR deadline, even if their income tax return was placed on extension.) We expect the Treasury Department to promulgate regulations setting forth the procedure for requesting an extension of the FBAR filing deadline. Note that the new April 15 FBAR filing deadline applies to all types of taxpayers, not just individuals. Thus, corporate taxpayers that file on March 15 will also have an April 15 deadline for filing their FBAR forms.

The legislation also provides the opportunity for penalty relief for first-time filers. This is significant because the FBAR statute provides for substantial penalties for taxpayers who fail to file, or file false, FBAR forms. Willful failure to file the FBAR is a felony that can subject the taxpayer to criminal prosecution and/or civil penalties in the amount of 50 percent of the highest balance of the unreported bank account(s). Negligence penalties can also apply, at a rate of up to $10,000 per unreported account per year.

Changing the FBAR filing deadline to April 15, to align with the Form 1040 income tax return deadline, is a positive and much-needed development. Taxpayers, and return preparers, will now be able to focus on income tax and FBAR reporting at the same time and, more importantly, will be able to seek a six-month extension of the FBAR deadline if necessary. Given the difficulties that taxpayers often experience in obtaining account records from offshore financial institutions, the ability to seek an extension is a welcome change.

IRS Issues Last-Minute FBAR Filing Reminder

With the June 30 deadline to file the FBAR form fast approaching, the IRS issued another reminder to taxpayers with bank accounts located outside of the United States. The IRS noted that during 2014, the total number of FBAR filers exceeded one million for the first time in history. Taxpayers with foreign bank accounts should take care to comply with their FBAR filing obligations, as hefty civil and criminal penalties can apply to non-compliant taxpayers.  The June 30 deadline cannot be extended, and the FBAR form must be filed electronically.

Here is the text of the latest FBAR press release issued by the IRS:

WASHINGTON—The Internal Revenue Service today reminded everyone who has one or more bank or financial accounts located outside the United States, or signature authority over such accounts that they may need to file an FBAR by next Tuesday, June 30.

FBAR refers to Form 114, Report of Foreign Bank and Financial Accounts, which must be filed with the Financial Crimes Enforcement Network (FinCEN), a bureau of the Treasury Department. It is not a tax form and cannot be filed with the IRS. The form must be filed electronically and is only available online through the BSA E-Filing System website.

In general, the filing requirement applies to anyone who had an interest in, or signature or other authority over foreign financial accounts whose aggregate value exceeded $10,000 at any time during 2014. Because of this threshold, the IRS encourages taxpayers with foreign assets, even relatively small ones, to check if this filing requirement applies to them.

FBAR filings have surged in recent years, topping the one-million mark for the first time during calendar-year 2014. The FBAR requirement is separate from the requirement to report specified foreign financial assets on a U.S. income tax return using Form 8938. A brief comparison of the two filing requirements is available on IRS.gov.

For more on filing requirements for the FBAR, see Current FBAR Guidance on IRS.gov. The IRS has also produced a free one-hour webinar explaining the FBAR requirement.

Blank Rome’s FBAR and FATCA Compliance Team regularly advises taxpayers as to foreign bank account reporting obligations, the IRS voluntary disclosure programs, and FATCA compliance.

Wegelin & Co. Account Holder Sentenced to Prison Term

Kordash received cash distributions from his undeclared account at Wegelin and used the account for his antiques business in New York.  Kordash opened the account decades ago, when he was a Russian citizen living in Russia.  He came to the U.S. in 1984, and later became a U.S. citizen.
Wegelin & Co. was the oldest private bank in Switzerland.  In January 2013, the bank pleaded guilty to felony tax charges, thus becoming the first foreign bank to do so.  The bank admitted to conspiring to defraud the United States by helping U.S. account holders hide assets from the IRS in undeclared accounts.  A federal district court also authorized the IRS to issue a “John Doe” summons that allowed the United States to determine the identity of U.S. taxpayers who held accounts at Wegelin and other banks based in Switzerland to evade federal income taxes.

IRS Clarifies Requirements for Streamlined Filing Procedures

On October 9, 2014, the Internal Revenue Service published additional guidance clarifying the requirements for participation in the Streamlined Filing Compliance Procedures.  (See prior coverage of the new procedures announced in June 2014 here.)  Here are links to the new guidance published on the IRS website:

  • Updated general description of Streamlined Filing Compliance Procedures here;
  • Updated instructions for taxpayers residing in the United States here;
  • Frequently asked questions for domestic taxpayers here;
  • Updated instructions for taxpayers residing outside the United States here;
  • Frequently asked questions for taxpayers residing outside the United States here.

The IRS also released frequently asked questions for the Delinquent International Information Return Submission Procedures (available here).  In a notable change, the IRS now states that these procedures are available to taxpayers even if they have unreported income:

The Delinquent International Information Return Submission Procedures clarify how taxpayers may file delinquent international information returns in cases where there was reasonable cause for the delinquency. Taxpayers who have unreported income or unpaid tax are not precluded from filing delinquent international information returns. Unlike the procedures described in OVDP FAQ 18, penalties may be imposed under the Delinquent International Information Return Submission Procedures if the Service does not accept the explanation of reasonable cause. The longstanding authorities regarding what constitutes reasonable cause continue to apply, and existing procedures concerning establishing reasonable cause, including requirements to provide a statement of facts made under the penalties of perjury, continue to apply. See, for example, Treas. Reg. § 1.6038-2(k)(3), Treas. Reg. § 1.6038A-4(b), and Treas. Reg. § 301.6679-1(a)(3).

We will analyze this guidance and provide further analysis in future posts.

FATCA Notebook: Former IRS Chief, Taxpayer Advocate Criticize FATCA; Switzerland Moves Toward Greater Transparency

This week brings a wealth of news in the FATCA arena, which we summarize in today’s post.

First, former acting IRS Commissioner Steven Miller speaks out against FATCA and suggests that the benefits of the new information reporting regime imposed by FATCA may not outweigh its costs. An article published by TaxAnalysts on October 7 quotes Miller as follows:

“I can’t even say with conviction that I’m sure, looking strictly on a cost-benefit basis, that FATCA’s . . . benefits are going to outweigh the cost,” Miller told a lunch crowd at the Securities Industry and Financial Markets Association FATCA Policy Symposium in Washington. “It’s not clear to me that when you look solely at the burden placed on financial institutions and others, versus the amount of revenue that may come into the treasury, that this is going to be a revenue-positive event for the United States.”

Miller, former deputy commissioner of services and enforcement and a 25-year veteran of the IRS, acknowledged both problems and progress in the implementation of FATCA and said that he believes “offshore evasion is an area in which noncompliance will never be completely eradicated.”

“While I have high hopes that the implementation of FATCA will be successful and of great assistance in this regard, I fear that it’s not going to be a panacea,” Miller said. “I also believe that we have yet to see the full breadth of creativity in terms of the types of assets that will be used into the future to store wealth overseas.”

Second, joining Miller in criticizing FATCA is National Taxpayer Advocate Nina Olson, who also spoke at the Securities Industry and Financial Markets Association FATCA Policy Symposium. According to an article published by TaxAnalysts on October 8, Olson made the following points in her remarks:

“This is a piece of legislation that is so big and so far-reaching, and [has] so many different moving pieces, and is rolling out in an incremental fashion . . . that you really won’t be able to know what its consequences are, intended or otherwise,’ Olson said. “I don’t think we’ll know that for years. And by that point we’ll actually be a little too late to go, “Oops, my bad, we shouldn’t have done this,’ and then try to unwind it.”

. . .

The raw numbers so far tell a confusing tale, Olson said. In 2011, 170,000 taxpayers filed Form 8938, “Statement of Specified Foreign Financial Assets”; 187,000 filed Form 8938 in 2012, she said. Forty-one percent of 2011 filers also filed a foreign bank account report, she added. However, in 2012 only 21 percent of Form 8938 filers had a foreign address, Olson noted.

“I really don’t know what people’s assumptions were when they enacted this requirement,” Olson said. “Did we expect to get 7 million? Did we expect to get 10 million? Did we expect to get 500,000? Is this a good result? Is this a bad result?” Just one-half of 1 percent of Form 8938 filers had a balance due account after getting notices, compared with 4 percent for the general taxpayer population, she noted.

Olson further noted in her remarks that a new cottage industry has sprouted as a result of FATCA: after foreign banks expressed reluctance to open accounts for some U.S. taxpayers overseas, some businesses began offering insurance to protect against incomplete FATCA disclosures. “So here we now have created a whole new industry for a risk we have manufactured ourselves,” Olson said.

Finally, Switzerland announced on October 8 that it would move toward automatic exchange of bank account information with other countries, including the EU and the United States. (See articles here and here.) If adopted, the earliest date for automatic exchange of data would be 2018 and the new reporting regime would require Switzerland to notify an account holder’s country of origin if a Swiss bank account is opened. Switzerland also announced that it would seek to negotiate a Model 1 Intergovernmental Agreement (IGA) with the United States to implement FATCA, to replace the Swiss-U.S. Model 2 IGA that was reached in February 2013.  In a press release, the Swiss Federal Council made the following statements regarding its decision to implement greater transparency in its tax dealings: 

The cornerstones of the mandates definitively adopted by the Federal Council today are as follows:

– The introduction of the automatic exchange of information is to be negotiated with the EU.

– Regarding implementation of the Foreign Account Tax Compliance Act (FATCA), a Model 1 FATCA agreement should be with negotiated with the United States. With the new agreement, data would be exchanged automatically between the competent authorities on a reciprocal basis.

– Negotiations on the automatic exchange of information will be initiated with further selected countries. In an initial phase, consideration will be given to countries with which there are close economic and political ties and which, if appropriate, provide their taxpayers with sufficient scope for regularisation.

– The introduction of the automatic exchange of information with foreign countries will be conducted by means of agreements with partner countries. Moreover, implementing legislation will be required in national law. This is currently being prepared by the Federal Department of Finance and will be submitted to parliament together with the negotiated agreements. The existing legislative framework excludes the automatic exchange of information.

Switzerland welcomes the new international standard, to which it contributed actively. It allows for a level playing field in the competition between financial centres, as these regulations apply to all, and is an important instrument in international efforts to combat tax evasion. Domestic bank client confidentiality will not be affected by the implementation of the new global standard.

It is important for the Federal Council that the requirements which it adopted in June 2013 are contained in the new standard. There is to be only one global standard, the exchanged information should be used solely for the agreed purpose (principle of speciality), the information should be reciprocal, i.e. should flow in both directions, data protection must be ensured and the beneficial owners of trusts and other financial constructs should also be identified. Moreover, the Federal Council has stated that the issues of regularisation of the past and market access are to be addressed and solutions sought in negotiations on the automatic exchange of information with the EU and EU member states.

 

DOJ Continues to Prosecute Those Who Fail to File FBARs to Disclose Offshore Accounts

Howard Bloomberg, a forensic account and certified fraud examiner of Atlanta, Georgia, pleaded guilty on Friday to failing to file a Foreign Bank Account Report (FBAR) for the year 2008. Mr. Bloomberg opened a bank account at UBS AG in July 1997. The value of Mr. Bloomberg’s account increased to approximately $930,000 in 2001, and he routinely wired funds from the UBS account to his U.S. accounts. He closed the UBS account in April 2008 and wired the balance of over $540,000 to the U.S.

For having admitted to not filing the 2008 FBAR, Mr. Bloomberg has agreed to pay a penalty of $278,397, representing 50% of highest balance in 2008, and file accurate FBARs from 1997 to 2008. At sentencing, currently scheduled for December, Mr. Bloomberg faces a maximum of five years’ imprisonment and 3 years’ supervised release. According to the U.S. Attorney for the Northern District of Georgia, Sally Quillian Yates:

The era of hiding money in secret Swiss bank accounts is over. Citizens should understand that failing to abide by their banking disclosure obligations to the U.S. Treasury Department could mean criminal prosecution.

(Press release here).

In addition, the trial of Raoul Weil is set to begin next Tuesday, October 14, in Florida. Mr. Weil is the former head of UBS’s global wealth-management business who was indicted in 2008 for allegedly supervising 60 private bankers who managed the secret assets of U.S. account holders. Mr. Weil appeared in court in 2013 and is currently living under house arrest in New Jersey.

For information on all prosecutions under the Department of Justice’s Offshore Compliance Initiative, which began in 2008 with its investigation of UBS, see its “scorecard” here.

FATCA Update: Brazil Signs IGA with U.S. and Treasury Releases More Guidance

Treasury logoOn September 24, 2014, the government of Brazil announced it had signed an intergovernmental agreement with the United States as part of its adoption of the requirements of the Foreign Account Tax Compliance Act (FATCA). The agreement was signed on September 23 by Finance Minister Guido Mantega and U.S. Ambassador Liliana Ayalde. The Brazil-U.S. IGA is reciprocal, meaning that information on U.S. taxpayers residing in Brazil will be sent by Brazilian financial institutions to Brazil’s federal tax department, which will then pass on the information to the U.S. Internal Revenue Service, and the IRS will provide Brazilian tax authorities with financial information on Brazilian taxpayers living in the U.S. This brings the total number of IGAs reached – either signed agreements or in substance – to over 100. (A list of all IGAs is available on Treasury’s website here.)

In related developments, the IRS updated its FATCA FAQs to address whether a nonreporting FFI under a Model 1 IGA is required to register and obtain a GIIN, and under what circumstances FFIs in IGA countries may use substitute Forms W-8. (The updated FAQs are available on the IRS website here.)

Finally, the IRS is updating Form 1099 to address FATCA reporting.  Newly issued Form 1099 instructions provide as follows:  “Beginning in 2014, an FFI with a chapter 4 requirement to report a U.S. account maintained by the FFI that is held by a specified U.S. person may satisfy this requirement by reporting on Form(s)1099 under the election described in Regulations section 1.1471-4(d)(5)(i) (A). Additionally, a U.S. payor may satisfy its chapter 4 requirement to report such a U.S. account by reporting on Form(s) 1099. See Regulations section 1.1471-4(d)(2)(iii)(A). Form 1099-MISC is among the Forms 1099 used for such purpose. A new check box was added to Form 1099-MISC to identify an FFI filing this form to satisfy its chapter 4 reporting requirement.”  (The new instructions can be found here, here, and here.)

FATCA became effective on July 1, 2014.

Recent Sentences for Federal Tax Crimes in 2014 – Part 1

As we reported in posts here and here, the Justice Department’s Tax Division and the IRS each issued press releases over the past two days touting their accomplishments over the past year in an effort to warn would-be tax cheats in advance of Tax Day. We take the opportunity here to review sentences imposed on defendants in 2014 for tax crimes. The cases mentioned here were not included in the two recent government press releases.

In this post, we review recent sentences relating to Foreign Bank Account, Tax Evasion, and Employment Tax crimes. We will cover sentences in cases involving False Tax Returns, Tax Return Preparers and Returns Submitted via Identity Theft in subsequent posts.

Foreign Bank Account

California attorney Christopher M. Rusch had pleaded guilty to conspiracy to defraud the government and failing to file a Report of Foreign Bank and Financial Accounts (FBAR) and testified against his two Arizona clients at their trial. Mr. Rusch had established nominee foreign entities and corresponding secret accounts at the Swiss banks of UBS AG and Pictet & Cie for his clients, which were used to conceal their ownership in the stock and income deposited into the accounts. Mr. Rusch also routed some of the money from the secret foreign accounts through his Interest on Lawyer’s Trust Account before disbursing it to his clients. This allowed his clients to evade reporting more than $6.6 million in income over the years 2007 and 2008. Mr. Rusch was sentenced to 10 months in prison (the same sentence each of his clients received) and three years of supervised release. [DOJ press release here].

Also in California, consultant Christopher B. Berg had pleaded guilty to failing to report a foreign bank account. From 2001 to 2005, Mr. Berg transferred over $600,000 in income to a secret bank account at UBS in Switzerland and did not report the account or the income to his accountants or to the IRS. Prior to sentencing, Mr. Berg paid $200,000 in restitution and an FBAR penalty of $287,896. Mr. Berg was sentenced to imprisonment for one year and one day and three years of supervised release. [DOJ press release here].

Tax Evasion

Jimmie Duane Ross had been convicted by a Utah jury for five counts of tax evasion for failing to pay taxes on an $840,000 arbitration award. To conceal the award proceeds, Mr. Ross had filed a false mortgage on his home, a false lien on his vehicle, dealt extensively in cash, and directed funds to an offshore account. In addition, Mr. Ross earned commission income in 2004-2007 and concealed that income by placing it in nominee entities. Mr. Ross was sentenced to 51 months in prison and three years of supervised release, and ordered to pay $532,389 in restitution. [DOJ press release here].

New Mexico farmer Bill Melot had been convicted by a jury for tax evasion, program fraud, and other crimes for failing to file tax returns since 1986, owing the IRS over $25 million in taxes. Mr. Melot also had provided false information – a false SSN and employer identification number – to the Department of Agriculture in order to obtain more than $225,000 in federal farm aid. He also had caused documents to be forged in order to conceal 250 acres that he owned in New Mexico and maintained an undisclosed Swiss bank account since 1992. Mr. Melot was sentenced to 14 years in prison and three years of supervised release and was ordered to pay over $18 million in restitution. [DOJ press release here].

Colorado contractor Michael Destry Williams, of Greenview Construction, Inc., had been convicted by a jury for tax evasion, structuring, bank fraud, and interfering with internal revenue laws. From 2005 through 2008, he failed to file income tax returns and pay income and employment tax. He utilized trusts to conceal income he earned in his construction business. He also structured a number of deposits totaling over $90,000 in 2008. When investigated, Mr. Williams sent frivolous correspondence to the IRS and made complaints about state court judges involved in other litigations. Mr. Williams was sentenced to 71 months in prison and five years of supervised release and ordered to pay over $60,000 in restitution. [DOJ press release here].

Former president of an Idaho highway construction company, Elaine Martin, of MarCon, Inc., was convicted by a jury of 22 criminal counts, including filing false tax returns, wire fraud, conspiracy, and obstruction. Ms. Martin concealed business income by diverting payments into a separate bank account, failing to reveal that account to corporate accountants, and destroying business records relating to those payments. She did not pay taxes on that income, referred to it as her “slush fund,” and lied to the IRS when questioned about MarCon’s business income. Ms. Martin also engaged in program fraud, by making false statements and taking actions to effectively lower her net worth in order to be eligible for federal- and state-sponsored construction programs. A co-owner of MarCon, Darrell Swigert, also was convicted of obstructing the IRS audit and subsequent criminal investigation into MarCon. Ms. Martin was sentenced to 84 months in prison and three years of supervised release. She was also ordered to pay restitution of over $98,000 and agreed to forfeit over $3 million. Mr. Swigert was sentenced to three months in prison and two years of supervised release and ordered to perform 100 hours of community service. [DOJ press releases here and here].

Employment Taxes

            An Indiana ear, nose and throat surgeon, Ronald Eugene Jamerson, had pleaded guilty to one count of failing to account for and pay employment taxes to the IRS from 2003 through 2008. Dr. Jamerson deducted amounts from his employees’ paychecks for federal income tax and unemployment tax but failed to pay that amount over to the IRS and also failed to file employment tax returns. Dr. Jamerson was sentenced to 12 months and one day in prison and ordered to pay $541,083 in restitution. [DOJ press release here].