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Will Your Offshore Accounts Land You in Jail

Linda Sittenfield, CNBC Senior Producer
Thursday, 5 Jan 2012 | 1:20 PM ET

The days of hiding away your assets in a secret Swiss bank account are over. And you don't have to be a deposed dictator to be worried. U.S. authorities are hunting down wealthy American tax cheats all over the world, using a spate of new tactics aimed at closing the tax gap.

As of September 2011, the IRS had collected nearly $3 billion in taxes, interest and penalties from 30,000 taxpayers. Lurking in the background is serious jail time, as one father and son in Florida know. In March 2011 the two were sentenced to 10 years in prison for concealing $150 million in assets.

Asher Rubinstein, is partner at Rubinstein & Rubinstein, LLP, an international law firm based in New York City that provides specialized legal expertise in asset protection planning. Mr. Rubenstein has clients who have brought their offshore accounts into compliance, as well as clients who are now under investigation for tax fraud.

We had a very elderly gentleman client with a Swiss account that had been in his family for many years. They were Jews from Hungary. The father had put his life savings in a hiding place under the house. After surviving Auschwitz family members went back, recovered the money, and put it in a Swiss account. At the time they had no connection to the U.S. Later, they emigrated to the U.S. The account had grown to $2 million. Our client had no wilful intention of evading taxes. We got the IRS to settle for $20,000.

LS: Where can you hide your money these days ? Is there any secret jurisdiction ?

You can try to hide your money, but will you get away with it ? The sacrosanct Swiss banking secrecy has been shattered. They were happy to take your money whether you were an African dictator, a Nazi, a Jew, it didn't matter. But not anymore, at least with respect to Americans, but also others.

If you're looking for a first world democratic stable jurisdiction, there is no such place to hide your money. And now they're looking for assets flying from Switzerland to Singapore, Panama, and so on. The IRS is using the same tactics worldwide.

Maybe there's a renegade third world location. But is that a good place to put your million dollars ? In such a place your $1 million could represent the biggest chunk of assets managed by some uncooperative banker. But in such a place there could be political upheaval, or a coup.

LS: What tactics is the IRS using now ?

Tactics include -

- TIE - Tax Information Exchange Agreements. Signed with many jurisdictions - Lichtenstein, Andorra, etc. If the U.S. government is investigating a U.S. citizen, the signatory is obligated to assist. It covers criminal and civil tax fraud. This is important because in Switzerland they never recognized civil tax fraud, but that loophole's been closed.

- MLAT - Mutual Legal Assistance Treaties. Similar to TIEs.

- John Doe Summons - It's the DOJ that conducts the investigation. If you can name the person, no problem. A John Doe Summons permits access to a class of people. This happened some years ago with island banks that issued debit cards. The IRS used a John Doe Summons to access the names of the debit card holders. They used it again in 2009 against UBS, which gave up 5000 names. They're using it now against HSBC in India.

- FATCA - Foreign Account Tax Compliance Act. Requires people to report assets in excess of certain thresholds.

- Subpoenas - A new tactic used by prosecutors to get people to give up incriminating information. If they don't comply, they're charged with contempt. If they do, they're incriminating themselves. We'll see how this plays out. Clearly there could be a 5th amendment objection here, but there are exceptions to using the 5th.

How much money is offshore avoiding taxes ?

Some estimates are in the trillions of dollars. Clearly our government needs money. It calls on Treasury to get it, and Treasury looks to the IRS. The tax gap is something like $500 billion. We have a tremendous need for funds. Once the IRS won against UBS, they started utilizing the carrot and stick - come forward before we get your name from a bank and we won't prosecute you criminally. Now they're going after the bankers, not just the taxpayers. The U.S. just charged 3 Swiss bankers with conspiracy. And every banker or the IRS prosecutes cuts a deal by offering up other bankers and clients.

Two sons of a British national came to see us. The father was very successful and had accounts in former island tax havens in France and England, like the Isle of Man. The sons inherited everything and emigrated to the U.S. Later, at the urging of UBS bankers, they established a foundation in Lichtenstein. We brought everything into compliance. The UBS bankers who advised them are under indictment now. When bankers are indicted they cooperate and give up names. The IRS doesn't like this sort of intermediary step. The foundation would have been regarded as an added level of deception. If they hadn't come forward, these brothers would have faced millions of dollars in losses.

LS: What are the penalties ? How long are the jail terms ?

The basic penalty is 50% of the highest balance in the account, every year. So if you have $1 million in an account for 4 years, the penalty could be $2 million. You could lose the $1 million and still owe millions more. There's a tax fraud penalty, which can be 75% of the taxes due. And wilful fines could be $100,000 per account per year. Penalties could far exceed the balance, and result in bankruptcy. UBS paid $780 million in 2009 to avoid prosecution.

Jail sentences could be years. Though settlements have included house arrest and probation.

LS: Is there any reason now to keep your money offshore ?

You can keep your money anywhere, but you must pay the tax. There are still good reasons to be offshore - asset protection, diversification of investments, access to foreign investments.

And confidentiality is different from secrecy. Let's say I'm a doctor who wants to protect assets from malpractice lawsuits. The money can be well protected from private creditors. I have many clients who do this. But they can't hide from the IRS.

Other reasons to be offshore - you have real estate, you have relatives "back home", your kid is going to school somewhere overseas. Or maybe you want an account in a foreign bank so you can invest in alternatives, for financial diversification. But the accounts have to be tax compliant.

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