Tax Cheaters' Choice: Reveal Secret Accounts Or Go To Jail
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.”