Tax Cheaters' Choice: Reveal Secret Accounts Or Go To Jail
CNBC Washington Reporter
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.