Prosecutions ‘tflEN.~ Criminal Investigations and

The enforcement effort includescriminal iiivestigations and prosecutions, IRS civil examinations and effortsby Congress to strengthen foreign bankobligatibns to report information onU.S account holders, as reflected in thetecently enactçd FATCA legislation.7Enact~d in 2010, and now scheduled to

Criminal Investigations andProsecutionsAs of the preser~t date, there have beenoVer 60 publicly announced criminalprosecutions arising ou~ of the ~BSforeign bank acqount investigation:The charges h?ve included the filir~g offalse income tax returns, tax evasion,

~‘b6nspiracy and the failure to file the~ ;FBAR form, all federal felonies. There~: have been 32 plea dispositions, three

guilty verdicts and no acquittals—yet.Additionally, it. is estimated there arean additional 100 p~nding criminalinvestigations for whicf~ charges have

‘ hot yet been brought. These criminalinvestigations and prosecutions include

‘~.S. taxpayers, attorneys, foreignbankers and foreign banks.

The sentences handed downfor foreign account bank viplationsunder the advisory Federal S~itencingGuidelines have ranged from probationto multiple years in jail. Very recently,on November 10, 2011, a former clientof UBS was.sentenced to one year and aday for conspiring to defraud the IRS.

Press reports suggest there areapproximately eleven Swiss banks underactive criminal grand jury investigationfor illegally assisting U.S taxpayersin evading taxes. Investigating andprosecuting the banks is a core strategyof the DOJ and the IRS. Without theassistance of the banks and bankers,U.S. taxpayers would find it difficult ifnot imppssible to avoid U.S. taxationthrough the foreign banking system.The strategy has paid big dividends forthe Govemme~nt. The UBS investigationand its failbut helped persuadeapproximately 30,000 U.S. taxpayers toenter into the OVDIs.

Credit Suisse Account HoldersThere is now a repeat of that strategyrelating to another Swiss bankinggiant—Credit Suisse. Taxpayers havestarted receiving the letters similarto those which UBS clients received,indicating that a request for informationon U.S. account holders has beenreceived and that Credit Suisse has beenordered to turn over the information tothe Swiss Federal Tax Administration(the Swiss IRS) and then to the IRS

• . ~ ~

&

—. ,, ~ ~ ~

/ ~ ~. ~ b.~ effective in 2014 FATCA will requir1’ - foreign financial institutions to report tc3’the IRS information on accounts held b

/ — .. ‘~‘~ U S taxpayers (or their entitles) Failur

r ~ ~, ~. .. ~. to make the required reports subjectsthe banks to substantial and punitivewithholding taxes.

‘tflEN.~t.’:~E~

I TAX ~hen~pnmarytjunsd1:ci~s knew what a foreign bank accoij.nt re~ofting was

— eign Bank Account Report turned over to the IRS.4 The watershed(“FBAR”) form’ looked like and even event occurred in February of 2009,

• fewer taxpayers new of their obligation when the giant Swiss bank, UBS, underto file the form. That is no longer the threat of criminal prosecution from thecase. The Internal Revenue Service U.S. Department of Justice (“DOJ”),(“IRS”) recently completed two Offshore turned over “secret” bank accountVoluntary Disclosure InitiativeS (“OVDI” information on approximately 280 ofor “Initiatives”) in which. approximately their U.S clients and subsequently30,000 United States taxpayers came ~agreed to turn over information onforwardand voluntarily discldsed their many thousai~ds more. The veil of Swissforeign bank accounts and past non- secrecy was breached—forever.5compliance to the lRS.2 With the end of the two OVDIs,

These taxpayers were able to one could reasonably ask: Is thisavoid potential criminal prosecution the beginning of the end of the IRS’under the IRS brig-standing voluntary enforcement effort? More likely, thisdisclosure practice and resolve their civil is the end of the beginning. If the

• liability for additional taxes, interest governthent can be taken at its word,and penalties. The most rccent Initiative the multi-Ffont enforcement effort ofended on September 9, 2011. The IRS the IRS and the DOJ will continue. Asannounced that it collected $2.2 billion nojed recently by IRS Commissionerfrom taxpayers i~i the 2009 Initiative DOug Shulman: “By ajiy measpre, weand an additional $500 million as down are in the middle of an unprecedentedpayments from taxp~yers on the 2011 period for our global international taxInitiative.3, enforcement efforts. We have pierced

Now that these two Initiatives international bank secrecy laws, and wehave ehded, what can now be expected are making a serious dent in offshore taxfrom the IRS in terms of criminal evasion.”~investigations and prosecutions; civilexaminatidns? And how will the IRSdeal with t~x~ayers who come for~vardnow and make a voluntary disclos~.ireafter the dose of these formal InItiatives?

The Government’s significantenforcement effortS in the foreign bankacCount area cdrnmenced in 2003

24 Valley Lawyer • JANUARY 2012 www.sfvba.org

urless the U.S taxpayer can demonstrate~the turnover of the information wouldviolate S~iss law, inc1udir~g the U.S.-Swiss TaN Treaty. Taxpayers who banked~vt~1 UBS did not fair well in preventingthe tutn over of account information.tb the I~S and it is unlikely that Cr~ditSu~sse äcicount holders will do anybetter.

Civil Enforéernent EffortsThe criminal investigations andprosecutions are b~it one prong of theGovernment’s multi-faceted enforcementeffort. There are not enough resourcesto prosecute every person who mightbe guilty of a tax crime, includingone related to a foreign bank account.Accordingly, a robust effort shouldbe expected by the civil examinationfunction of the IRS to examine thosetaxpayers who are believed to haveforeign bank accounts and who have notcome forward on their own through thevoluntary disclosure process.

While a letter from an IRS RevenueAgent investigating a civil tax matteris a far happier greeting than a grandjury subpoena served by the CriminalInvestigation Special Agent, these civilexaminations contain their, own set ofchallenges.

These challenges include thepotential of a referral to the CriminalInvestigation if “firm indications offraud” are discovered during theaudit and the large, some would saydraconian, civil penalty liabilities forfailure to appropriately report theexistence of a foreign bank account.While the more serious penalties relateto willful failures to report the income orthe existence of the foreign account, suchas the 50 percent willful FBAR penalty8or the 75 percent civil fraud penalty9,there are also substantial penaltieswhere the taxpayer will have to showreasonable cause in order to avoid thosepenalties, a standard more difficult for ataxpayer to meet.1°

The draconian nature of thepenalties is made clear from the IRS’ ownannouncements.1’ In their example of apenalty calculation, assuming there was$1 million in an account beginning in2003 and it earned a modest $50,000 ofinterest income each year, the potentialcivil liabilities, tax, accuracy relatedpenalty, accrued interest and the 50percent willful FBAR penalty, totals$4,375,000. As one can see, the civilexposure—even if a taxpayer is luckyenough to avoid a criminal investigation

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and prosecution—is very substantial,indeed life threatening from aneconomic point of view.

Many practitioners ask whether theIRS will really assert these draconianpenalties. ‘While the IRS may havea considerable burden of proof insustaining willful penalties and assertingthese very large penalties implicatesconstitutional limitations’2—the answeris yes. The leadership of the IRS appearscommitted to vigorously enforcingthe laws relating to these foreigninformation reporting penalties.

There is no question that the multifaceted enforcement effort will continue,

including criminal investigations andprosecutions, civil examinations and theassertion of large civil penalties. As apractical matter, just like every taxpayerwho commits a criminal violationwill not be caught and punished, notevery foreign account holder will fallwithin the net of IRS civil enforcementefforts. But if the enforcement effortcontinues as anticipated and the FATCAlegislation is implemented, the risks ofbeing caught will increase dramatically.Criminal investigations and prosecutionstake a severe toll on any taxpayer—eventhose who are not convicted. Civiltax enforcement efforts—when large

draconian penalties are at stake—posea similar hazard. Both can be “life”threatening.

A Voluntary Disclosure is StillPossibleThus far, 30,000 taxpayers have enteredinto the formal OVDIs. Some believemany more taxpayers have quietlyamended their tax returns or are startingto comply with their foreign reportingobligations prospectively. The questionis how many more taxpayers are still outin the cold, waiting for the next foreignbank to come under scrutiny? No oneknows for sure. Estimates range fromhundreds of thousands to millions ofU.S. taxpayers.

Based upon the recent activityconcerning Credit Suisse, there appearsto be many U.S. taxpayers who havenot come forward. What should thosetaxpayers do at this time? While theformal OVDIs have now terminated, theIRS and DOJ’s long-standing voluntarydisclosure practice and policies are stillin effect’3 and there is still time to comeforward with a voluntary disclosureif the taxpayer’s name has not alreadybeen turned over to the Government.

The current IRS policy on voluntarydisclosure generally provides that avoluntary disclosure occurs when thecommunication to the IRS is truthful,timely, complete, and when (a) thetaxpayer shows a willingness tocooperate (and does in fact cooperate)with the IRS in determining his or hercorrect tax liability; and (b) the taxpayermakes good faith arrangements with theIRS to pay in full, the tax, interest, andany penalties determined by the IRS tobe applicable.

A disclosure is timely if it is receivedbefore:

a. the IRS has initiated a civilexamination or criminalinvestigation of the taxpayer, orhas notified the taxpayer thatit intends to commence such anexamination or investigation;

b. the IRS has received informationfrom a third party (e.g.,informant, other governmentalagency, or the media) alertingthe IRS to the specific taxpayer’snoncompliance;

c. the IRS has initiated a civilexamination or criminalinvestigation which is directlyrelated to the specific liability ofthe taxpayer; or

d. the IRS has acquired informationdirectly related to the specific

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liability of the taxpayer from acriminal enforcement action(e.g., search warrant, grand jurysubpoena).’4

Even if the taxpayer has receiveda letter from Credit Suisse (or anotherforeign bank) stating that information hasbeen requested by the IRS, the taxpayermay still be eligible if the Governmenthas not received the information on thespecific taxpayer. However, if a foreignbanker or adviser has already providedthe name of the taxpayer to the IRS (e.g.,they are cooperating with the IRS orDOJ), it is likely too late.

When a taxpayer does come forwardand qualifies for a voluntary disclosure,the IRS will not recommend, and thetaxpayer will be able to avoid, a criminalinvestigation and prosecution. However,the termination of the formal OVDIsleaves taxpayers guessing as to what thecivil examination and penalty regimewill be.

Under the recently concluded OVDI,taxpayers were expected to file amendedreturns for the years 2003 through 2010,pay all tax and interest, a 20 percentaccuracy related penalty and a 25 percentforeign information reporting penalty onthe highest value of their foreign bankaccounts and other foreign financialassets during that period of time.

It is fair to conclude that unlessthere are mitigating circumstances, at aminimum, in any voluntary disclosuremade now, the IRS will be looking for acivil resolution framework similar to thelast OVDI, although the penalty structurewill likely be higher. The 2009 OVDIforeign information-reporting penalty of20 percent was increased to 25 percentin the 2011 program.

While the uncertainty of the civilpenalty structure does create a morecomplex judgment for both the taxpractitioner and the taxpayer—what isimportant is that the practice regardingvoluntary disclosures which allowtaxpayers to avoid criminal prosecutionis alive and well and taxpayers wantingto avoid potential criminal prosecutionshould act promptly. Moreover, the IRSCommissioner has made clear that inconsidering penalties, the IRS shouldcontinue to “draw a clear line betweenthose individual taxpayers with offshoreaccounts who voluntarily come forwardto get right with the government andthose who continue to fail to meet theirobligations.”~ The line referred to bythe Commissioner is a bright, rigid andunforgiving line.

A taxpayer who has committed avery serious and provable criminal tax

violation can receive the benefits of thevoluntary disclosure practice and avoidprosecution. The sins of the past arebasically forgiven, at least for criminalpurposes. But in order to qualify, thetaxpayer must get to the IRS before theIRS gets to the taxpayer.

A taxpayer whose case is much lessegregious—but on the wrong side ofthis line—may find himself the subjectof criminal investigation, potentialprosecution and incarceration. Timingis everything in the voluntary disclosureworld and the clock is ticking for U.Sholders of foreign bank accounts who arenot yet in compliance. ~..

Steven Toscher is aprincipal of the lawfirm of HochmanSalkin Rettig Toscher& Perez, PC., where hespecializes in civil andcriminal tax litigationand controversy. He isa co-author of the BNATax Management TaxCrimes Portfolio, No.636-3rd, and afrequent lecturer and authoron tax controversy topics. Toscher can bereached at toscher@taxlitigator corn.

The Foreign Bank Account Report form is a TO F 90 22 1 andis authorized under the Bank Secrecy Act (Title 31 U.S.C Sections5311-5330>. For more in depth analysis of the substantiverequirements and history of FBAR enforcerrient, see Toscher andStein, “FB.AR Enforcement is Coming!, CCH Journal of Tax Practice& Procedure (December-January 2004); Toscher and Stein, “FBAREnforcement—an Update, CCH Journal of Tax Practice & Procedure(April-May 2006); Toscher and Stein, ‘FBAR Enforcement—Fiveyears Later, CCH Journal of Tax Practice & Procedure (June July2008)

‘See IRS News Release, lR-2011-94, September 15, 2011~ Id.

See IRS News Release IR-2003-48, April 10, 2003.

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For a more complete discussion of the UBS matter, see Toscher,‘Civil and Criminal Tax Enforcement Implications of the UBSEnforcement Initiative and the Future of Voluntary Disclosure,” 52Tax Management Memo No 3, 43 (January 31, 2011).

See IRS News Release, IR-2011-94, September 15, 2011.

FATCA was added as part of the Hiring Incentives to RestoreEmployment Act of 2010 and is codified in Sections 1471-1474 ofthe Internal Revenue Code.

See Title 31 U.S.C. Section 5321(a)(5). The IRS must provewillfulness by “clear and convincing” evidence and a generalpresumption of correctness afforded to tax assessments does notapply. See CCA 200603026 (September 1, 2005). See also Williamsv Untied States, CA No. 1:09-cv-437 (ED. Va. Sept 1,2010). Seerecently, Browning v Commissioner, T.C. Memo 2011-261 (1113111)(holding taxpayer liable for fraud penalty in part because ofundisclosed foreign bank account).

See Title 26 U.S.C. 6663.‘° See for example, Title 26 U.S.C. Section 6677, relating to certain

failures to report transactions with a foreign trust.Il See IRS OVDI FAQ No. 12.

i2 See Toscher & Lubin, “When Penalties are Excessive — TheExcessive Fines Clause as a Limitation on the Imposition of theWillful FSAR Penalty,” CCH Journal of Tax Practice & Procedure,December 2009-January 2010.

“The current IRS policy is contained in Internal Revenue Manual(IRM) 9.5.11.9 (October 6, 2011) and the DOJ Policy is containedin the Tax Divisions Criminal Tax Manual (2008 Ed.), Sec. 4.01 andSec. 3 (Tax Division Policy Directives and Memoranda), pp. 3-12and 3-13.14 IRM 9.5.11.9 (October 6,2011).

~ See Statement by Commissioner Shulman on Offshore Income,

March 26, 2009, Doc. 2009-6833, 2009 TNT 57-11.

www.sfvba,org JANUARY 2012 • Valley Lawyer 27