Andrew Mitchel LLC

International Tax Blog - New and Interesting International Tax Issues


U.S. Government Continues to Pursue Taxpayers Committing Tax Fraud

2021-08-04

As we have reported in past years the U.S. government actively pursues taxpayers that are committing tax fraud and other tax crimes.  The Justice Department publicizes its successes in its press releases.  The press releases continue to demonstrate an impressive list of tax-related convictions, guilty pleas, injunctions, summonses, and other actions against taxpayers (and tax preparers).  Many of the tax fraud schemes include offshore activities. See, for instance:

Tags: Other - Tax Fraud

U.S. Government Continues to Pursue Taxpayers Committing Tax Fraud

2019-06-05

Tags: Other - Tax Fraud

U.S. Government Continues to Pursue Taxpayers Committing Tax Fraud

2018-06-28

As we have reported in past years the U.S. government actively pursues taxpayers that are committing tax fraud.  The Justice Department publicizes its successes in its press releases.  The press releases continue to demonstrate an impressive list of tax-related convictions, guilty pleas, injunctions, summonses, and other actions against taxpayers (and tax preparers).  Many of the tax fraud schemes include offshore activities. See, for instance:

California Resident Convicted Of Tax Crimes

Connecticut Resident Sentenced to Prison for Concealing Assets in Swiss Accounts

Citizen of the Dominican Republic Sentenced to 11 Years in Prison for Stolen Identity Refund Fraud

Canadian Man Pleads Guilty To Conspiracy And To Making A False Claim Against The United States

Department of Justice Announces Settlement with Z Street Over Improper IRS Treatment

Resort Operator Pleads Guilty to Filing a False Tax Return

Nigerian Citizen Sentenced to 6 ½ Years in Prison for $12 Million Tax Refund Fraud, Voter Fraud, and Illegal Reentry

Tags: Other - Tax Fraud

U.S. Government Continues to Pursue Taxpayers Committing Tax Fraud

2017-06-11

As we have reported in past years the U.S. government actively pursues taxpayers that are committing tax fraud.  The Justice Department publicizes its successes in its press releases.  The press releases continue to demonstrate an impressive list of tax-related convictions, guilty pleas, injunctions, summonses, and other actions against taxpayers (and tax preparers).  Many of the tax fraud schemes include offshore activities. See, for instance:

Tags: Other - Tax Fraud

U.S. Government Continues to Pursue Taxpayers Committing Tax Fraud

2015-06-09

Tags: Other - Tax Fraud

IRS Documents Released Under Freedom of Information Act

2014-11-20

Recently the Brager Tax Law Group obtained over 6,500 pages of documents related to the Offshore Voluntary Disclosure Program ("OVDP") from the IRS through a Freedom of Information Act ("FOIA") request.  The list of documents can be viewed here.

We have previously blogged about the substantial penalties that the IRS can impose if foreign information returns are not properly filed.  We have a resource page that lists many of these information returns along with their associated monetary penalties.  We also have blogged how the statute of limitations is affected by failure to file such returns.  We have even created a video on how to prepare FinCEN Form 114 (the "FBAR").

The information released by the IRS included training material on discovering offshore tax avoidance and the application of related penalties.  The training material included a case study based off of an actual structure discovered by the IRS which illustrates many of the topics we have discussed on this blog.  Below is an IRS graphic of the structure and cash flow along with the IRS description of the scheme, which resulted in the imposition of penalties exceeding 2 million dollars:

Penalties 2 deceased taxpayer

Here we go….the Taxpayer owned a Domestic Corporation which is in the manufacturing field. The Corporation purchases much of its materials and supplies from Asian vendors.

The individual shareholder set up an Foreign Corp which is shown as FC1 in an offshore jurisdiction.

The shareholder then arranged for a fictitious Inspection Services to supposedly inspect the materials purchased from his foreign suppliers.  An unrelated Management Company, who was retained by FC1 , produced and mailed out invoices to the U.S. Corp on behalf of FC1 for these inspection services.  The U.S. Corporation remitted payments to FC 1 for the amounts shown on the false invoice.

Once the payments were sent from the domestic corp to the FC1, FC1 deposited the payments into an account located in Foreign Country C shown as Offshore Bank C. When the funds reached $50,000 in Offshore Bank C they were swept to an account located in a different foreign country which we will refer to as Offshore Bank B.  When the funds at Offshore Bank B reached $100,000 they were then transferred to and account in a third foreign country which we will call Offshore Bank A.

The Offshore Bank A credited the funds to an account owned by a Shiftung, which is akin to a Foreign Grantor Trust. It is denoted on the diagram as FTR A, it is organized in the same country as Offshore Bank A.  The Shiftung was titled a Foreign Foundation. The U.S. Taxpayer was the grantor/first beneficiary of the Shiftung.

Since the U.S. Taxpayer was the grantor/first beneficiary of the Foreign Foundation A and exercised direction and control over the funds within the offshore bank account A, he could access and repatriate the funds at will.

Over the course of 8 years the taxpayer was able to divert through his False Invoicing scheme $5 million.  He repatriated only $100,000.00.  The remainder of the funds remained on deposit for “a rainy day or for his retirement”. Unfortunately, the taxpayer passed away before he could partake in his ill gotten gains.

Rights to the account passed to his 3 sons in equal parts.  The U.S. Corporation and the Shareholder were examined by the IRS twice during the 8 year period and the scheme remained undetected.

The False Invoicing case was an actual IIC Case.  It was technically and procedurally challenging. It required the involvement  and input from IRS Management,  The Tax Attaché, a Fraud Technical Advisor, IRS Counsel, and the Department of Justice.  Together with the support and cooperation of all parties  the case was brought to a successful conclusion.

Even though the taxpayer had not diverted any funds during the years under examination we were able to assess tax was assessed  on the income generated from the Offshore Accounts.  The Accuracy Penalty was also assessed though the fraud penalty was very seriously considered.  However due to the small amount of unreported income and the fact that the taxpayer was deceased a decision was made not to apply the Fraud Penalty.  

The largest assessments from the Examination were not the tax assessment but rather the penalty assessments.  The IRS proposed Willful FBAR penalties for each open year after review and consultation with FBAR Counsel.  The actions of the taxpayer to divert the funds and his affirmative and confirmed instructions to hold statements, his refusal to complete a W-9 and other documented instructions to the Bank clearly illustrated that the taxpayer was aware of the FBAR filing requirements and willfully acted to avoid complying with them.  The total FBAR penalty exceeded $925,000.00. 

Information return penalties were also assessed for failing to file Form 3520 and 3520-A’s.  The Form 3520 penalties were over $175,000 and the Form 3520-A penalties were $1,100,000.00. 

Total penalties proposed exceeded $2.2 million.

The value of the account in the year of examination was around $2.2 million due to the market decline in 2008.  Therefore the total penalties wiped out in full the funds remaining.   The  Executors were not in agreement and requested to go to Appeals on all penalties.  The cases were sent to Appeals where the proposed assessments were upheld IN FULL!!  No amounts were conceded!  Subsequent to the Appeals decision the Executors agreed.  The Appeals Officer stated in the Memorandum that the actions of the taxpayer were so egregious and deliberate that a finding of Reasonable Cause was impossible.  She further stated that the development of the case was clearly documented and “Based upon such a thorough evaluation and gathering of all the salient facts a finding in the taxpayer favor would be deplorable.”

The emphasis is our own.  Note that where the IRS description above refers to a "Shiftung," it is likely referring to a Liechtenstein stiftung.  This type of entity is typically treated as a foreign trust for U.S. tax purposes. 

We will post other interesting information that we come across as we continue to go through the released documents.

Tags: Form 3520 / 3520-A, Other - FBAR, Other - Tax Fraud

U.S. Government Continues to Pursue Taxpayers Committing Tax Fraud

2014-06-13

As we reported last year, the U.S. government actively pursues taxpayers that are committing tax fraud. The Justice Department publicizes its successes in its press releases. The press releases continue to demonstrate an impressive list of tax-related convictions, guilty pleas, injunctions, summonses, and other actions against taxpayers (and tax preparers). Many of the tax fraud schemes include offshore activities. See, for instance:

Connecticut man who used offshore accounts sentenced to prison for tax evasion and conspiracy

Comments about the Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks

Mizrahi Bank client pleads guilty to filing false tax return

Portola Valley, Calif., man sentenced to prison for failure to report foreign bank accounts held at UBS

Swiss banker pleads guilty to conspiring with U.S. tax evaders, other Swiss bankers and bank management

Alaska Plastic Surgeon Indicted on Tax Evasion Charges for Concealing Bank Accounts in Panama and Costa Rica

Credit Suisse Pleads Guilty to Conspiracy to Aid and Assist U.S. Taxpayers in Filing False Returns

California attorney sentenced to prison in scheme to hide millions in secret Swiss accounts at UBS AG and Pictet & Cie

Swiss Offshore Tax Evasion Enabler Pleads Guilty

U.S. and Canadian citizens charged with using offshore accounts and foreign nominee entities to launder $200,000

California banker charged with helping U.S. taxpayers conceal secret Israeli bank accounts

Court authorizes IRS to issue summonses for records relating to U.S. taxpayers with offshore bank accounts

Texas tax preparer is permanently barred from tax preparation for allegedly falsifying returns for overseas customers and impeding audits

Department of Justice announces agreement with Liechtenstein bank to pay $23.8 million to resolve criminal tax investigation

Tags: Other - Tax Fraud

U.S. Government Continues to Pursue Taxpayers Committing Tax Fraud

2013-06-01

Tags: Other - Tax Fraud

U.S. Government Continues to Pursue Taxpayers Committing Tax Fraud

2012-06-02

As we reported last year, the U.S. government actively pursues taxpayers that are committing tax fraud. The Justice Department publicizes its successes in its press releases. The press releases continue to demonstrate an impressive list of tax-related convictions, guilty pleas, injunctions, summonses, and other actions against taxpayers (and tax preparers). Many of the tax fraud schemes include offshore activities. See, for instance:

  1. Wegelin Bank in Switzerland Indicted on U.S. Tax Charges (Feb. 2, 2012)
  2. UBS clients and tax attorney indicted in Phoenix for hiding assest in secret foreign bank accounts (Jan. 30, 2012)
  3. HSBC India client indicted for tax evasion and failing to report foreign bank accounts. (Nov. 17, 2011)
  4. UBS client pleads guilty to filing false tax return (Aug. 3, 2011)
  5. Former UBS banker charged with helping U.S. taxpayers use secret Swiss bank accounts to evade U.S. taxes (Aug. 2, 2011)
  6. Swiss international bank's former head of North America offshore banking, others charged with conspiracy (July 21, 2011)
  7. Jenkens & Gilchrist attorneys, former BDO Seidman CEO and Deutsche Bank broker found guilty in New York of multi-billion dollar criminal tax fraud scheme (May 24, 2011)
Tags: Other - Tax Fraud

U.S. Government Continues to Pursue Taxpayers Committing Tax Fraud

2011-06-24

Tags: Other - Tax Fraud

Tax Crimes, Tax Fraud, Tax Schemes

2010-08-30

Just in case you thought the U.S. government wasn’t going after taxpayers that are committing tax fraud, you should review some of the recent press releases from the U.S. Department of Justice.  The press releases demonstrate an impressive list of tax-related convictions, guilty pleas, injunctions, summonses, and other actions against taxpayers (and tax preparers).  Many of the tax fraud schemes include offshore activities.  See, for instance:

  1. Phoenix Attorney and Two Accountants Plead Guilty to Participation in Fraudulent Offshore Tax Shelter Scheme
  2. Former UBS Client Sentenced for Hiding $10 Million in Offshore Bank Accounts
  3. Former UBS Client Pleads Guilty to Hiding Assets in Secret Offshore Bank Accounts – Texan Moved Undeclared Assets from the Bahamas to Switzerland to China
  4. Virginia Doctor Pleads Guilty to Conspiracy Involving Undeclared Swiss Bank Account
  5. Department of Justice Asks Court to Serve Summons for Offshore Records
  6. Three Accountants Sentenced to Prison in $20 Million Offshore Tax Fraud Conspiracy

Perhaps the most surprising/disappointing thing is the large number of tax advisors on the list.  Even well a known tax advisor has recently been in the news for pleading guilty to failing to file federal income tax returns.

Tags: Other - Tax Fraud

UBS Client Pleads Guilty to Filing False Tax Return

2009-06-25

A UBS client pleaded guilty today to filing a false tax return for tax year 2004, the Justice Department and Internal Revenue Service (IRS) announced.  On April 1, 2009, the taxpayer, an accountant, was charged with filing a false tax return that intentionally failed to disclose the existence of a Swiss bank account maintained by UBS of which he was the beneficial owner and failed to report any income earned on that account.

The taxpayer had maintained a UBS bank account in the name of a nominee British Virgin Island corporation.  His tax return failed to report that he had an interest in, or signature authority over, a financial account at UBS in Switzerland.  Additionally, he failed to report the income he earned on any UBS Swiss bank accounts.

As part of his plea agreement, the taxpayer agreed to pay a 50% penalty for the year with the highest balance in the account as of June 30 in order to resolve his civil liability for failing to file FBARs for tax years 2001 through 2007.

The I.R.S. currently has a voluntary disclosure program in which taxpayers can file the prior 6 years of tax returns to declare unreported offshore accounts and unreported offshore entities.  Under the voluntary disclosure program, taxpayers generally must pay all taxes and interest on unreported income.  Further, certain penalties are imposed, including a penalty equal to 20% of the highest value in the foreign financial accounts during the past 6 years.

Andrew Mitchel is an international tax attorney who advises businesses and individuals with cross-border activities.

Tags: Other - Tax Fraud

Foreign Bank Secrecy & Tax Evasion

2008-11-26

On July 17, 2008, in conjunction with a hearing regarding Tax Haven Banks and U.S. Tax Compliance, the Permanent Subcommittee on Investigations of the U.S. Senate released a report (the “Subcommittee Report”) that reads like a spy novel.  The Subcommittee Report reviews the “global tax scandal” related to LGT Bank in Liechtenstein, and the “international tax scandal” related to UBS AG in Switzerland.

The LGT scandal erupted after a former employee of a Liechtenstein trust company provided tax authorities around the world with data on about 1,400 persons with accounts at LGT.  The UBS AG scandal broke when the U.S. arrested a private banker formerly employed by UBS AG on charges of having conspired with a U.S. citizen and a business associate to defraud the IRS of $7.2 million in taxes owed on $200 million of assets hidden in offshore accounts in Switzerland and Liechtenstein.

LGT Bank in Liechtenstein

LGT Bank in Liechtenstein is owned and controlled by the royal family in Liechtenstein.  According to the Subcommittee Report:

LGT employed practices that could facilitate, and in some instances have resulted in, tax evasion by U.S. clients.  These LGT practices have included maintaining U.S. client accounts which are not disclosed to U.S. tax authorities; advising U.S. clients to open accounts in the name of Liechtenstein foundations to hide their beneficial ownership of the account assets; advising clients on the use of complex offshore structures to hide ownership of assets outside of Liechtenstein; and establishing “transfer corporations” to disguise asset transfers to and from LGT accounts.  It was also not unusual for LGT to assign its U.S. clients code words that they or LGT could invoke to confirm their respective identities.  LGT also advised clients on how to structure their investments to avoid disclosure to the IRS . . . .

For many of its U.S. clients, LGT helped establish one or more Liechtenstein foundations.  Under U.S. tax law, the IRS generally views Liechtenstein foundations as foreign trusts.  U.S. persons with an interest in a foreign trust, including a Liechtenstein foundation, are required to disclose the existence of the trust to the IRS by filing Forms 3520 (Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts) and 3520-A (Annual Information Return of Foreign Trust With a U.S. Owner).  Financial penalties for failing to file these forms can be confiscatory.

The foundations provided strong secrecy protections and yet gave substantial control over the foundations to their beneficial owners.  In one case, a U.S. citizen pretended to sell his home in New York to what appeared to be an unrelated party from Hong Kong.  In fact, the buyer was a British Virgin Islands company with a Hong Kong address, and it was wholly owned by a Bahamian corporation which was, in turn, wholly owned by the U.S. citizen’s Liechtenstein foundation.

The foundations often would not name the grantor or his/her family members as beneficiaries.  Instead, the foundation instruments would include a complex mechanism providing for the naming of beneficiaries.  Despite these mechanisms, internal LGT documents were clear as to the the true beneficiaries of the foundation.

At times, LGT would set up for the foundation what LGT has sometimes referred to as a “transfer corporation” to help disguise asset flows into and out of a foundation’s accounts.  This transfer corporation acts as a pass-through entity that breaks the direct link between the foundation and other persons with whom it is exchanging funds, making it harder to trace those funds.

A strategy employed by LGT to enhance secrecy and client anonymity was to limit the ability of outside parties to trace client communications back to Liechtenstein.  To achieve this objective, LGT not only instituted a policy of retaining client mail at the bank in Liechtenstein, or sending mail to locations outside of a client’s home jurisdiction, but also undertook efforts to minimize the ability of outside parties to trace telephone calls back to the bank and even the country itself.  One LGT document, for example, providing information on how to contact a client, instructed that calls should be made only from public phone booths outside of Liechtenstein.

The Subcommittee Report stated:

These LGT accounts together portray a bank whose personnel too often viewed LGT’s role as, not just a guardian of client assets or trusted financial advisor, but also a willing partner to clients wishing to hide their assets from tax authorities, creditors, and courts.  In that context, bank secrecy laws have served as a cloak not only for client misconduct, but also for bank personnel colluding with clients to evade taxes, dodge creditors, and defy court orders.

UBS AG

UBS AG of Switzerland is one of the largest financial institutions in the world, and has one of the world’s largest private banks catering to wealthy individuals.  From at least 2000 to 2007, UBS made a concerted effort to open accounts in Switzerland for wealthy U.S. clients, employing practices that could facilitate, and have resulted in, tax evasion by U.S. clients.  These UBS practices included maintaining for an estimated 19,000 U.S. clients “undeclared” accounts in Switzerland with billions of dollars in assets that have not been disclosed to U.S. tax authorities, and assisting U.S. clients in structuring their accounts to avoid U.S. tax reporting requirements.

UBS assured its U.S. clients with undeclared accounts that U.S. authorities would not learn about them, because the bank is not required to disclose them; UBS procedures, practices and services protect against disclosure; and the account information is further shielded by Swiss bank secrecy laws.  In November 2002, for example, senior officials in the UBS private banking operations in Switzerland sent a letter to U.S. clients about their Swiss accounts which states in part:

“[W]e should like to underscore that a Swiss bank which runs afoul of Swiss privacy laws will face sanctions by its Swiss regulator … [I]t must be clear that information relative to your Swiss banking relationship is as safe as ever and that the possibility of putting pressure on our U.S. units does not change anything. . . .

The Subcommittee Report indicated that UBS also provided training to its client advisors on how to detect -- and avoid – surveillance by U.S. customs agents and law enforcement officers.  A UBS training document provides a series of scenarios designed to train its personnel.  An excerpt from one of the scenarios is as follows:

After passing immigration desk during your trip to USA/Canada, you are intercepted by the authorities. By checking your Palm, they find all your client meetings. Fortunately you stored only very short remarks of the different meetings and no names.

As you spend around one week in the same hotel, the longer you stay there, the more you get the feeling of being observed. Sometimes you even doubt if all of the hotel employees are working for the hotel. A lot of client meetings are held in the suite of your hotel.

One morning you are intercepted by an FBI-agent.  He looks for some information about one of your clients and explains to you, that your client is involved in illegal activities.

Question 1: What would you do in such a situation?

Question 2: What are the signs indicating that something is going on?

The document does not indicate UBS’ preferred responses to these questions.

The Subcommittee Report is 110 pages long and has many more details of the practices and procedures of LGT and UBS.  UBS is currently under investigation by the SEC, IRS, and Department of Justice.

Tags: Other - Tax Fraud