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IRS Aggressively Pursuing Off Shore Accounts

By Robert E. McKenzie, Tax Attorney
Arnstein & Lehr, LLP

On July 1, a federal judge in Miami issued an order authorizing the Internal Revenue Service (IRS) to
request information from Zurich, Switzerland-based UBS AG about U.S. taxpayers who may be using
Swiss bank accounts to evade federal income taxes.[1] The order, authorizes the IRS to serve what is
known as a “John Doe” summons on the bank. The IRS uses a John Doe summons to obtain
information about possible tax fraud by people whose identities are unknown. The John Doe
summons approved by the court directs UBS to produce records identifying U.S. taxpayers with
accounts at UBS in Switzerland who elected to have their accounts remain hidden from the IRS. It is
highly likely that the IRS will be successful in its efforts to secure the account information from UBS.

Based on a statement submitted to the court by former UBS banker Bradley Birkenfeld, UBS
employees assisted wealthy U.S. clients in concealing their ownership of assets held offshore by
creating sham entities and then filing IRS forms falsely claiming that the entities were the owners of
the accounts. According to Birkenfeld’s court statement, UBS had approximately $20 billion of assets
under management in “undeclared” accounts for U.S. taxpayers.

Voluntary Disclosure
The court order could lead to the disclosure of thousands of U.S. residents who have failed to report
UBS accounts. U. S. taxpayers who have banked with UBS should immediately seek the advice of a
competent tax attorney. The IRS has a voluntary disclosure policy that may allow UBS clients to
avoid harsh penalties and/or prosecution. The central concept of the voluntary disclosure policy is
that the taxpayer must come forward and self identify before the IRS opens an investigation of that
person. Before approaching the IRS for a voluntary disclosure a competent tax attorney will review
all appropriate facts and circumstances with a client to assure that the she qualifies for the program.
After a review of the facts, in most matters the tax attorney will then approach the IRS to negotiate
anonymously on behalf of the taxpayer and only upon agreement will the her identity be disclosed to
the IRS.

The Law
The law requires a United States taxpayer to report all financial accounts in a foreign country if the
total value of the accounts exceeds $10,000 at any time during the calendar year. A willful failure to
report a foreign account can result in a penalty of up to 50 percent of the amount in the account at
the time of the violation[2] or prosecution..
IRS Crackdown
Given its success in this case it is inevitable that the IRS will step up its efforts to find Americans
utilizing tax haven banks. Since September 11 the U. S. Financial Crimes Enforcement Network has
developed a coordinated program to find money laundering, foreign banking activity, and tax evasion.
In most white collar crime cases the Justice Department offers plea bargains to individuals like
Birkenfeld in return for cooperation in charging others involved in illegal activity. Therefore with
increased resources being allocated to seeking out foreign bank activities by Americans we can
anticipate will the first of many bankers who cooperate to reduce their potential jail time.

On June 19 Birkenfeld pleaded guilty today to conspiring with an American billionaire real estate
developer, Igor Olenicoff, Swiss bankers and his co-defendant, Mario Staggl, to help Olenicoff evade
paying $7.2 million in taxes by assisting in concealing $200 million of assets in Switzerland and

During the plea, Birkenfeld admitted that between 2001 and 2006, while he was employed as a
director of UBS, he routinely traveled to and had contacts within the United States to help wealthy
Americans conceal their ownership in assets held offshore and evade the payment of taxes on the
income generated from those assets.

According to statements and documents filed with the court, Birkenfeld’s services to American clients
violated a 2001 agreement that the UBS entered into with the United States. to identify and
document any customers who received reportable U.S. source income or would withhold and
anonymously pay a 28 percent withholding tax. This agreement was a major departure from historical
Swiss bank secrecy laws under which Swiss banks concealed bank information from the IRS.

$20 Billion In Assets

In evidence provided by Birkenfeld to the court, managers and bankers at the firm, including
Birkenfeld, assisted the U.S. clients in concealing their ownership of the assets held offshore by
helping these wealthy customers create nominee and sham entities. This was done to prevent the
risk of losing the approximately $20 billion of assets under management in the United States
undeclared business.

The Scheme
Birkenfeld admitted that he and additional private bankers at UBS advised U.S. clients to place cash
and valuables in Swiss safety deposit boxes, and purchase jewels, artwork and luxury items using
the funds in their Swiss bank account while overseas. Additionally, they advised the clients to
misrepresent the receipt of funds from UBS in the United States as loans from the bank; destroy all
off-shore banking records existing in the U.S.; utilize Swiss bank credit cards that they claimed could
not be discovered by U.S. authorities; and file false U.S. individual income tax returns that omitted
income earned by the clients and fraudulently misrepresented that the clients did not have an
interest in and signature authority over accounts held offshore.

Commissioner’ Comment
As an indicator of the importance of this case IRS Commissioner Douglas Shulman said on Julne 19,
“I believe this case will send a strong signal to anyone hiding money in offshore bank accounts to
avoid paying the taxes they should. The IRS will pursue people using offshore accounts in this
manner as well as financial advisers and others who orchestrate these tax fraud schemes,”.[4]

Final Comment
In summary U. S. taxpayers who may have dealings with UBS should immediately seek the advice of
competent tax counsel to determine their best options before the IRS successfully finds them by
other means.

[1] In the Matter of the Tax Liabilities of John Does, United states Taxpayers, S.D. Fla., No. 08--21864-
MC-LENARD/GARBER, order entered 7/1/08
Negligent Violation 31 U.S.C.§ 5321(a)(6)(A) 31 C.F.R. 103.57(h)., Non-Willful Violation , 31 U.S.C. § 5321(a)(5)(B), Willful
- Failure to File FBAR or retain records of account, 31 U.S.C. § 5321(a)(5)(C)
31 U.S.C. § 5322(a), and 31 C.F.R. § 103.59(b) for criminal. The penalty applies to all U.S. persons.[2]
[3](United States v. Birkenfeld, S.D. Fla., No. 08-CR-60099-ZLOCH, plea entered 6/19/08
[4] Department of Justice Press Release dated 6-19-08.

Changes last made on: 07/15/2009 05:47:00 PM

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