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IRS Crackdown on Unreported Foreign Trusts Gets Big Boost


     By Fulcrum Inquiry Damages, Appraisal, Accounting & Economics Expert Witnesses

PhoneCall David Nolte at (213) 787-4100


Expert Witness: Fulcrum Inquiry
Wealthy Americans are tempted to avoid high U.S. income taxation by moving funds offshore. But this “foreign” income is still fully taxable by the U.S. … unless the IRS never knows about it. Recent investigations have (or soon will) uncover the names and details of thousands of wealthy Americans who have engaged in illegal tax evasion. If you never gave in to the obvious temptation to have such a “tax-free” account before, you should not start one now.
In July, The Senate’s Permanent Subcommittee on Investigations issued a report concerning “Tax Haven Banks and U.S. Tax Compliance”. The report contains numerous findings, the follow-up of which will alter the manner in which wealthy U.S. citizens have (illegally) used foreign trusts to avoid U.S. taxation. The report indicates the problem is much larger than previously anticipated.

The issue recently received attention in February 2008 when a former employee of a Liechtenstein trust company provided tax authorities with data on roughly 1,400 persons with accounts at LGT Bank in Liechtenstein. Around a dozen countries have already announced plans to investigate these account holders. Most of the account holders were in Europe, with about 100 Americans involved.

Much more important from a U.S. perspective, in May 2008, the U.S. arrested a banker formerly with UBS (one of the largest banks in the world). The banker plead guilty and is apparently cooperating with U.S. officials. The U.S. also detained a UBS banker from Switzerland, seizing his computer and other evidence.

With regard to UBS, the report concludes:

“UBS AG of Switzerland is one of the largest financial institutions in the world, and has one of the largest private banks catering to wealthy individuals. From at least 2000 to 2007, UBS made a concerted effort to open accounts in Switzerland for wealthy U.S. clients, employing practices that could facilitate, and have resulted in, tax evasion by U.S. clients. These UBS practices included maintaining for an estimated 19,000 U.S. clients ‘undeclared’ accounts in Switzerland with billions of dollars of assets that have not been disclosed to U.S. tax authorities. … Although UBS signed a QI [Qualified Intermediary] agreement with the U.S. in 2001, UBS has never filed 1099 Forms reporting those accounts to the IRS, contending that these U.S. client accounts fall outside its QI reporting obligations. UBS refers to these accounts internally as ‘undeclared accounts’.

“In response to Subcommittee inquiries, UBS has estimated that it today has 20,000 accounts in Switzerland for U.S. clients, of which roughly 1,000 are declared accounts and 19,000 are undeclared accounts that have not been reported to the IRS. UBS also estimates that that those accounts contain assets with a combined value of about $18.2 billion in Swiss francs, or about $17.9 billion.”

The Senate report details information regarding how UBS (i) violated its internal policies, (ii) violated U.S. law regarding known U.S. citizens, and (ii) covered up the known improprieties. Senator Carl Levin, the Chairman of the Subcommittee, threatened to shut down UBS in the U.S. entirely by saying:

“I don’t think that any bank that goes to the extent that UBS has gone through to avoid doing what their agreements with the United States require them to do, should be allowed to continue to do business unless they clean up their act.”

In response, a penitent UBS indicated that they would provide information about the undeclared accounts to the IRS, even though the same customers had previously been promised secrecy. UBS also said that they would not longer provide undeclared accounts to U.S. citizens, and is “winding down” its business with existing accounts.

Here is what we expect to happen:

1. The previously unreported UBS amounts are substantial by anyone’s measure, involving some obviously wealthy people. These folks will be assessed substantial interest and penalties once UBS turns over the previously secret information.

2. The Senate report made several recommendations involving strengthening the reporting of offshore amounts by banks. One of these recommendations involved lengthening the statute of limitation on tax assessments from three to six years when offshore reporting is involved. The nature of this problem and the amounts involved are such that some of these proposals will likely be put into law.

3. The IRS believes that the tax loss due to offshore tax abuses is a staggering $100 billion annually. Having obtained significant monetary results with UBS, the IRS will expand this program to other institutions.

4. UBS’s U.S. operations are too large for UBS to face the consequences that an angry U.S. government is capable of delivering. Consequently, UBS was quick to abandon its customers, even though these customers are exceptionally wealthy. Those with illegal unreported accounts should realize that the same thing will likely occur with any other bank that has meaningful U.S. operations.

If you (or a client) have an unreported offshore account, you should assess your exposure and what to do about it. If you never gave in to the obvious temptation to have such a “tax-free” account before, you should not start one now.

ABOUT THE AUTHOR: David Nolte
Mr. Nolte has 30 years experience in financial and economic consulting. He has served as an expert witness in over 100 trials. He has also regularly served as an arbitrator. Mr. Nolte has achieved the following credentials, CPA, MBA, CMA and ASA.
Fulcrum Inquiry performs financial investigations and forensic accounting services.

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While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.
For specific technical or legal advice on the information provided and related topics, please contact the author.

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