In the first criminal case to result from a Swiss bank's identification of an American who held secret offshore accounts, the Department of Justice (DOJ) has filed felony tax charges against a Florida accountant. This prosecution is the product of the government's intense efforts to force Swiss banks to identify American account holders to enable the Internal Revenue Service (IRS) to assess and collect potentially hundreds of millions of dollars in unpaid taxes and penalties. In a further effort to bring American individuals and companies with offshore accounts into tax compliance, the IRS last week announced much anticipated guidelines for a new voluntary disclosure program that will enable many account holders to avoid criminal prosecution and reduce otherwise exorbitant penalties.

The Department of Justice filed a criminal complaint late last week in the Southern District of Florida against Boca Raton accountant Steven Rubinstein for concealing UBS bank accounts in Switzerland that he held in the name of an offshore nominee company. Rubinstein allegedly failed to disclose the foreign accounts to the Department of Treasury and failed to pay taxes on income earned through the accounts. Rubinstein could be the first of many American account holders to be charged as a result of UBS's recent identification to the DOJ of 250 to 300 Americans who hold accounts in Switzerland.

The DOJ and the IRS began a concerted effort several years ago to pressure Swiss banks to disclose their American account holders to enable the United States to enforce its income tax laws. As part of this effort, the DOJ sued Swiss banking giant UBS in 2008 seeking the identities of approximately 20,000 Americans with Swiss UBS accounts. In February 2009, UBS entered a settlement agreement with the DOJ that, in addition to the payment of penalties, required it to disclose the identities of "certain" (approximately 250 to 300) of its American account holders. Rubinstein is one of the account holders identified.

Just days after UBS entered the settlement agreement with the DOJ, the DOJ asked the court to enforce a John Doe summons against UBS and order it to disclose the identities of another 52,000 Americans, including individuals and companies, whom the IRS suspects may have engaged in conduct similar to Rubinstein's. UBS is vigorously contesting the DOJ's latest enforcement action, citing its obligations to its clients under longstanding Swiss bank secrecy laws. The court is expected to rule on the DOJ's motion to enforce the John Doe summons within the next three to four months. 

To encourage Americans with foreign accounts to voluntarily disclose their accounts and cooperate in the assessment of taxes and penalties due, the IRS announced guidelines for a new voluntary disclosure program on March 26, 2009, that will remain in effect for the next six months only. Under the new program, Americans with undisclosed offshore accounts not yet identified to the government may be able to avoid criminal prosecution and limit the penalties assessed by the IRS in connection with the offshore accounts. However, if the IRS identifies an American with a secret Swiss bank account before a voluntary disclosure is made, then the taxpayer is precluded from using the program. To qualify as a voluntary disclosure under the program, the taxpayer's disclosure must be voluntary, complete, and truthful; the taxpayer must cooperate with the IRS in determining the taxes and penalties due; and there can be no evidence of other criminal conduct. Eligible taxpayers remain responsible for the payment of all applicable penalties; however, the penalty amounts are capped under the program. Examples of penalties that may be due in connection with undisclosed foreign accounts include but are not limited to (1) failure to file Reports of Foreign Bank and Financial Accounts (FBAR), (2) fraud, (3) failure to file tax returns, (4) failure to pay tax penalties, (5) inaccurate returns resulting in underpayment, and (6) failure to file certain information returns. The IRS has released an internal memorandum that sets forth all penalty caps.

The guidelines for the new program establish that the Criminal Investigation Division (CID) of the IRS will conduct the first review of all voluntary disclosure requests to determine the taxpayer’s eligibility to participate in the program. Any taxpayer that the CID identifies as ineligible will immediately be assigned to a CID agent for further criminal investigation and prosecution. If the CID determines that a taxpayer is eligible to participate in the program, the taxpayer's voluntary disclosure request will be forwarded to the Philadelphia Offshore Identification Unit for civil processing and then assigned to an examiner for assessment of the taxes and penalties due.

In light of the fact that all requests for voluntary disclosure are made initially to the CID, offshore account holders are advised to retain an attorney with criminal tax experience. Moreover, an experienced criminal tax attorney can help guide individuals and companies with offshore accounts through the minefield of preparing amended income tax returns and FBARs, lawfully transferring or repatriating foreign funds, and communicating with the IRS. To inquire about the protections available to individuals and companies that may hold secret foreign accounts, or about the ramifications of the ongoing DOJ investigation to you or your organization, please contact Beth Moskow-Schnoll at 302.252.4447 or moskowschnollb@ballardspahr.com.


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This newsletter is a periodic publication of Ballard Spahr LLP and is intended to alert the recipients to new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your situation and specific legal questions you have.