IRS Tax Evasion Investigations Leading to Scrutiny of Bankers, Dropped U.S. Clients

By Colby Adams

The U.S. crackdown on tax evasion that began with the UBS AG settlement is prompting widespread changes in how foreign banks serve American clients and bringing individual bankers under greater scrutiny.

Civil and criminal IRS investigators have increasingly been asking individuals suspected of hiding their assets which bank employees they92ve dealt with and whether anyone at the financial institutions consulted them on how to dodge reporting requirements, according to Asher Rubinstein, a lawyer at New York-based law firm Rubinstein & Rubinstein LLP.

In addition to the names of bank employees, the IRS has also asked suspects to disclose the number and size of their accounts at foreign banks, and gleaned additional details from submissions of tax returns and Report of Foreign Bank and Financial Accounts (FBAR) filings, said Rubinstein, who represents individuals suspected of tax evasion.

IRS questioning of suspects about their bankers increased in the wake of the U.S. Justice Department formally accusing UBS, the Zurich and Basel-based bank, of attempting to defraud the United States, and accelerated with the announcement of the latest IRS voluntary disclosure program in February, he said.

"Every piece of information given by the U.S. taxpayer is a potential lead to an investigation," said Rubinstein, adding that the criminal probes could ensnare other "professional enablers" of tax evasion, including accountants, attorneys and incorporation agents.

In February 2009, UBS paid a $780 million penalty as part of a deferred prosecution agreement with the Justice Department to avoid criminal charges after admitting it helped at least 17,000 Americans avoid reporting taxable revenue to the IRS. Later that month, the IRS discovered an additional 35,000 UBS accounts held by suspected U.S. tax evaders.

An IRS voluntary disclosure program that offered limited amnesty to tax payers illegally hiding money overseas resulted in an additional 14,700 U.S. taxpayers coming forward to declare their assets. That program ended October 2009.

Several foreign bankers and attorneys have been indicted since 2008 by the Justice Department for helping Americans evade tax, including a Zurich attorney and a former UBS executive officer. The three individuals, who still live abroad, have been designated fugitives by the United States.

In February and March, a Virginia federal court issued indictments against a Credit Suisse executive and four private bankers with attempting to defraud the United States by enabling U.S. tax evasion. The charges coincide with a wave of investigations into individual tax evaders by several countries, including Spain, France, Italy and Germany.

"We've recently been getting calls from the IRS and Justice Department asking if Mr. X or Ms. Y tried to discourage our clients from moving their assets to other banks or [if they are] avoiding the IRS voluntary disclosure program," said Dennis Brager, a tax litigation attorney based in Los Angeles.

That a U.S. court could serve a John Doe summons on an asset protection attorney to circumvent attorney-client privileges 93is not out of the question right now," said Brager. Complicit attorneys willing to cooperate with the IRS would be a "treasure trove of information about who formed offshore entities, and for what purposes."

Dropping U.S. clients

Scrutiny of foreign bankers comes as some of their employers consider dropping their American clients, according to Scott Michel, an attorney with Caplin & Drysdale in Washington, D.C.

The urge to drop accounts held by U.S. citizens is also getting a push from the Foreign Account Tax Compliance Act (FATCA), which goes into effect January 2013 as a part of the Hiring Incentives to Restore Employment Act (HIRE) of March 2010, Michel said. FATCA would impose a 30 percent withholding tax on U.S. payments to offshore banks that don't reveal their U.S. clients with accounts over $50,000.

Designed to help the IRS clamp down on tax evasion, FATCA could net the U.S. government an additional $850 million in tax revenue over the next decade, according to the Joint Committee on Taxation.

"There is absolutely no doubt that some foreign banks are denying banking services to U.S. citizens, especially under a certain dollar amount," said Bryan Skarlatos, an attorney with Kostelanetz & Fink LLP, a New York-based law firm that represents several UBS clients.

"The compliance costs are transferred down to the U.S. citizens or residents whose accounts are valuable enough for the bank to keep," he said.

At least two offshore banks have stopped taking U.S. clients and are advising their U.S. customers to move their money elsewhere in anticipation of the law, said Eugene Stearns, a Miami-based attorney who represented UBS in the John Doe summons filed against the Zurich-based banking giant by the U.S. Justice Department and IRS in July 2008.

It's not only the compliance burden that has catalyzed the trend, he said. "It's the simple notion that maintaining offshore accounts for U.S. citizens is now considered suspect," said Stearns.

Swiss banks, including UBS and Credit Suisse, have turned away new U.S. clients and closed accounts held for long-term customers, The New York Times reported in June 2009.

Even if foreign banks formally drop their American clients, the IRS will still demand that financial institutions audit their U.S. investments under threat of the [30 percent] withholding tax, Michel said. "So the only way to completely avoid FATCA would be to abandon the American market," said Michel.

91Room for interpretation92

The law may ultimately be softened by the IRS should the U.S. Treasury Department face pressure about divestitures, said Skarlatos. A clear regulatory definition of what a foreign bank is required to do under the law has yet to be drafted, he said.

Financial institutions also don92t know yet how they will be expected to identify their American clients who have dual citizenship, said Michel. "It's not the Americans they know about; it's the ones they don't know about which will be the hard cases," he said.

"As it stands, there's a lot of room for interpretation by the regulators," said Skarlatos. Financial institutions want the guidance to clearly define "how much due diligence is enough," he said.

Preliminary guidance released by the IRS in August exempts specialized financial entities, including certain holding companies, start-up companies, insurance companies and financial institutions organized in  U.S. territories. An IRS spokesman said that additional FATCA guidance could be released "within days."

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