An estimated half million Americans have a painful decision to make between today and August 31 — admit to the IRS that they’ve been hiding secret offshore bank accounts, or take their chances the government won’t find out about their secret horde and possibly send them to jail.
For many, it’s not an easy choice.
To take advantage of the amnesty program — the second one it has offered, though the IRS says it will be the last — the US government is asking account holders to pay a steep penalty: 25 percent of the highest value of the account in recent years.
In exchange, they get to avoid prosecution, and to bring the remaining money home with a clean conscience.
In 2009, the IRS offered a similar amnesty program that brought in about 15,000 taxpayers. The government is convinced so many additional taxpayers are hiding accounts that it decided to offer the new program, with tougher penalties for people who, after all, have already had one chance to come clean.
Many of the holdouts may have assumed they were in the clear because most of the government’s investigation and most of the media attention focused on UBS accounts in Switzerland.
That bank became locked in a titanic battle with the US government over the identities of its secret clients after one banker went to the feds with details on thousands of accounts. (Below, read about that banker's experience and why he's now in prison.)
But just last week, the government opened a second front in its war on global bank secrecy, filing a so-called “John Doe summons” against HSBC on April 8 and demanding the names of US residents who may have been avoiding taxes with undisclosed accounts at HSBC in India.
In that case, the government alleged HSBC engaged in an elaborate effort to convince American residents of Indian descent to put money in the bank’s Indian branches. The government said the bank even opened “representative offices” in New York and Fremont, Calif., to work with those clients.
“HSBC does not condone tax evasion and fully supports the U.S. efforts to promote appropriate payment of taxes by US taxpayers,” said spokeswoman Juanita Gutierrez. “While complying with the law in all the jurisdictions in which it operates, including India, HSBC cooperates with requests from U.S. authorities.”
Lawyers involved say other banks are almost certainly in the government’s crosshairs.
The End of Bank Secrecy?
The massive government investigation may mean the end of global banking secrecy as it has been known for centuries.
“The global financial system is becoming increasingly transparent,” said Scott Michel, an attorney at the law firm Caplin & Drysdale, which represents about 450 clients with offshore accounts. “In my judgment it is getting harder and harder to hide money anywhere in the world.”
Now, overseas tax cheats have one more big problem to worry about: An IRS whistleblower law that for the first time allows anonymous informants to collect a chunk of the cash recovered when they turn in people committing tax fraud.
On April 8, that program made its first payout, handing $4.5 million to a Philadelphia man who reported a $20 million tax fraud by his employer.
Bounties that large, say lawyers for the offshore account holders, will make it very difficult for anyone to trust that their financial advisors, colleagues and friends with the details of their accounts for fear that someone will run to the IRS in the hopes of scoring a piece of the wealth for themselves.
In Washington, a cash-strapped federal government is chomping at the bit to get at the money.
“In 2006, our subcommittee estimated that offshore tax abuses cost our Treasury about $100 billion a year in lost revenues,” said Sen. Carl Levin (D-Mich.), the chairman of the Permanent Subcommittee on Investigations, on Tuesday. “The big budget debate this year focused on about $70 billion in proposed budget cuts, which means the revenues lost to tax havens might have – all by themselves –resolved the problem.”
A Doctor, a Soccer Player, A Yacht Broker and More
Since its investigation began, the US government has uncovered a hidden underworld of Americans who hide money in Switzerland and other tax havens.
What’s most surprising is that they represent a relatively typical cross-section of America’s economic elite.
Among the account holders, the government found a doctor, a financial consultant, a watch distributor, an importer, a retired Boeing sales manager, a toy manufacturer’s representative and a yacht broker.
All of them, somewhere along the way, allegedly decided to cheat: “Greed has no limits in certain instances,” said Jeffrey Neiman, a former Assistant US Attorney who spent three years investigating UBS on behalf of the US government. “American taxpayers are going to game the system until they realize the system can't be gamed anymore.”
One client confided to his lawyer that he opened a secret Swiss account, “just because it sounded cool.”
The account holders aren’t necessarily sophisticated money launderers. One, a doctor in Virginia, pleaded guilty in February 2010 to conspiracy to impede the United States and to and to making a false statement.
The doctor, the government said, worked with his Swiss banker and attorney in Zurich to close a secret Swiss bank account and transfer the proceeds to himself in the United States. The bank gave him $200,000 in two individually wrapped "bricks" of $100,000 of sequentially numbered, new $100 bills.
The doctor used regular commercial mail to send himself more than $200,000 in 26 separate packages containing the bills.
Not all of the money made it safely home. And that presented him with a problem.
“What do you do when the money gets lost?” said Neiman. “Do you pick up the phone, you call the carrier and say, 'Hey, I mailed myself $200,000?'”
One of the more exotic clients was Leonid Zaltsberg, a septuagenarian former Soviet soccer star living in New Jersey, whose daughter said once played in the World Cup. In July 2010, Zaltsberg pled guilty to filing a false tax return. He had failed to disclose an account that at one point held $2.6 million.
Lawyers who defend the clients say that many of them used the money on typical pursuits of the wealthy: One woman used it to pay for plastic surgery, another sent children to camp overseas, and several appear to have purchased expensive art.
But it can be difficult to spend the money without attracting the attention of the IRS.
Secrets, Trust and Holocaust Survivors
And the need for secrecy means the account holders have to place enormous trust in the culture of Swiss banking, hoping the bankers and financial advisors won’t simply abscond with the money sitting in accounts with very little documentation of who owns the cash.
In one case, Neiman said, a Swiss banker told an American client to sign over $7 million to the banker’s elderly father in Europe. As soon as the father died, the banker promised, he would leave the money to the account holder in his will, tax-free because he is not a US citizen.
“Think about it from the American taxpayer’s perspective,” Neiman said. “They've just signed over $7 million to a banker who they probably met a handful of times father who've they've probably never met, in Switzerland.” That kind of trust is based on the global reputation of Swiss banking.
One of the objectives of the government’s probe is to crack Swiss banking secrecy to push the offshore accounts into ever more unstable cities and countries around the world, like Hong Kong, India, and Singapore, where American clients might begin to blanche when asked for a $7 million act of faith.
The Sympathetic Millionaires
Lawyers who defend offshore account holders say there’s another group of Americans holding money overseas that doesn’t quite fit the stereotype of a tax cheat: survivors of the Nazi Holocaust and refugees from other global instability, such as the Iranian revolution of 1979.
Now, the children and grandchildren of such survivors are inheriting offshore accounts — and are the recipient of a multigenerational family message of fear. The lesson of their elders is that governments can turn on you, and it may be wise to have secret money stashed around the world as a hedge against the next calamity.
“The stories that have been remarkable to me are the stories that of clients who survived the Holocaust,” said attorney Scott Michel. “Those stores are hard to listen to. They’re very difficult sessions with clients. They can be very emotional.”
Michel said he has clients who were rescued by Raoul Wallenberg in the Budapest ghetto, and others who are the only surviving members of enormous extended families.
“That doesn't necessarily excuse the failure to report account,” he said. “People are required to sign true and correct tax returns. But it does add a gloss and an atmosphere to why people thought they need to hide money.”
Some of the wealthy offshore account holders are having present-day problems, too.
Because the IRS amnesty program requires people to pay up to 25 percent of the highest amount in the account over the past several years, account holders who have suffered in the economic downturn may be left in an extremely difficult spot.
“Say there was $10 million in the account and the market went down to two million,” said Ian Comisky, an attorney at Blank Rome who represents clients with offshore accounts.
“So now if you come into the program, you have to pay $2.5 million – 25 percent of the highest balance, not what you have now and they may not have it. Some taxpayers may not have it.” What’s more, Comisky said, these people have to account for all their assets overseas – not just bank accounts.
That means confessing to property holdings, hard assets and even art work – a daunting prospect for many.
The Government’s Tool Kit – and the Nuclear Option
The John Doe summons the government filed against HSBC last week is just one of the tools the federal government has to get the information its still after.
It is also using the traditional prosecutor tactic of squeezing smaller players for confessions about the alleged crimes of bigger tax cheats.
In January, for example, a grand jury in Newark, N.J., indicted Vaibhav Dahake of Somerset, N.J., and charged him with conspiracy to defraud the United States by using undeclared accounts in the British Virgin Islands and at HSBC India to evade income taxes.
The government said employees of HSBC Holdings and its affiliates operating in the United States assured Dahake that accounts maintained in India would not be reported to the IRS.
Now Dahake becomes just the type of person who the government can use to continue its investigation further into the higher reaches of HSBC.
Also, earlier this year, the government charged four bankers at Credit Suisse with helping Americans conceal assets offshore.
Lawyers familiar with the probe say it goes beyond just the banks that have been publicly named so far.
“It would be anomalous if UBS was the only bank with a cadre of US taxpayers or only one of two banks with HSBC,” said Comisky. “There have to be more.”
If all that doesn’t work, the government still has what former federal prosecutor Jeffrey Neiman calls “the nuclear option.” That’s a subpoena for documents located in a foreign country known in the business as a “Bank of Nova Scotia subpoena.”
Using it is fraught with diplomatic and legal concerns, but the US government would be able to threaten to seize the US assets of any bank that did not comply with a request for client lists located in Switzerland or elsewhere.
If the subpoena is backed by a judge, Neiman said, “I think that that would be the endgame for secrecy in a lot of ways. It would be crippling to a bank with significant assets here in the United States.”
The Department of Justice says the rules are clear. American citizens who have an interest in, or signature or other authority over, a financial account in a foreign country with assets in excess of $10,000 are required to disclose the existence of such account on their income tax return.
Additionally, US citizens must file a foreign bank account report with the U.S. Treasury Dept. disclosing any financial account in a foreign country with assets in excess of $10,000 in which they have a financial interest, or over which they have signature or other authority.
So what should those hundreds of thousands of Americans do now? Not all of them are happy with the terms the US government is offering.
Said Bryan Skarlatos, a lawyer who represents clients with offshore accounts, “I do have a significant portion of customers, or clients really, who come to my office and they say, ‘Tell me about the penalties and how it works.’ And, when I tell them what the penalties are, and that they may lose up to half the account, a significant portion then goes away, and I never hear from them again.”
But Comisky said they ought to take the IRS up on the offer: “If you like sleeping at all at night, it’s probably a good idea to come in.”