May 2008 - cypherpunks-legacy

Tax Report - WSJ.com
by R.A. Hettinga 21 May '08

21 May '08

<http://online.wsj.com/article_print/SB121132463390508615.html> The Wall Street Journal May 21, 2008 TAX REPORT By TOM HERMAN Offshore-Account Holders Bite Their Nails May 21, 2008 As government officials intensify a multinational crackdown on offshore bank accounts, many wealthy Americans who use them to illegally shield income are facing a difficult decision: whether to turn themselves in -- and if so, how. "People are having trouble sleeping at night," says Charles Rettig, a tax lawyer at Hochman, Salkin, Rettig, Toscher & Perez in Beverly Hills, Calif. "They don't want to go to prison." Lawyers advising tax dodgers are saying their clients are struggling to decide among several alternatives. They can confess and plead for mercy. They can quietly file amended tax returns, pay up, make other required disclosures and hope overworked government prosecutors won't follow up. Or they could choose to do nothing and pray their names won't turn up. Tax dodgers are facing these stark choices as major cracks emerge in what once appeared to be an impenetrable wall of secrecy surrounding bank accounts in such well-known havens as Liechtenstein and Switzerland. While officials have launched many similar campaigns in the past, their latest efforts are attracting widespread attention because they are coming from so many different directions. "Nothing is secret anymore," says Cono Namorato, a lawyer at Caplin & Drysdale in Washington and a former official at the Internal Revenue Service and the Justice Department. "No individual should take any comfort in relying on any country's so-called bank-secrecy laws." Last week, the U.S. charged a former UBS AG banker and a Liechtenstein consultant with helping clients avoid taxes. One name already has surfaced: California real-estate developer Igor Olenicoff, who pleaded guilty late last year to filing a false 2002 tax return. U.S. officials are expected to press UBS, a large Swiss financial-services company, to disclose the names of wealthy Americans who may have used its services to evade taxes. The U.S. and other countries are also probing Liechtenstein's role as a haven for tax cheats. The IRS has confirmed it is investigating more than 100 U.S. taxpayers in connection with accounts in Liechtenstein. Those names haven't been made public. Joining the U.S. in the investigation are Australia, Canada, France, Italy, New Zealand, Sweden and the United Kingdom, the IRS said. If you have an offshore account with unreported income, you "should definitely be worried," says Mr. Rettig, who represents a number of clients with such accounts. And if you have an account in Liechtenstein, you should "lawyer up immediately." Offshore tax evasion costs an estimated $100 billion in lost revenue each year, said Sen. Carl Levin (D., Mich.), the chairman of the U.S. Senate Permanent Subcommittee on Investigations, which has launched its own probe. He has introduced legislation designed to combat offshore secrecy and end the use of havens by Americans dodging taxes. A staffer confirms the investigation has begun but declines to elaborate. IRS officials also are turning up the heat. "Combating offshore tax avoidance and evasion are high priorities for the IRS," says IRS Commissioner Doug Shulman. "Recent events show there is no safe hiding place for the proceeds of tax avoidance and evasion. Anyone with hidden income and gains would be well-advised to make a prompt and complete disclosure to the IRS." A law enacted late in 2006 authorized the IRS to pay sharply higher rewards to informants in cases involving large amounts of money. In some cases, the reward can be as high as 30% of whatever the IRS collects. Officials say valuable tips already have poured in because of this law. "Some clients are very concerned," says Bryan Skarlatos, a lawyer at Kostelanetz & Fink in New York and chairman of the American Bar Association tax section's committee on civil and criminal tax penalties. While there still are some "bank-secrecy jurisdictions," he says, "none of them are as safe as they used to be, and none are ironclad." In some cases, Mr. Skarlatos is talking to IRS officials about arranging for clients to come in from the cold, confess and arrange full payment -- in the hopes that prosecutors won't bring criminal charges. But he and other lawyers agree this "voluntary disclosure" approach isn't always the best choice. Here are the pros and cons of several options -- short of fleeing the country altogether -- facing scofflaws: The ostrich approach. Bury your head in the sand and hope the storm clouds will blow away without your being caught. This might work if you're reasonably confident your name won't be discovered. But lawyers say the odds of getting caught have grown rapidly because of the growing number of nations pursuing tax cheats and the increased willingness among them to swap information. "There are some people who are just brazen and think the government will never locate them," says Mr. Rettig, the tax attorney. But "doing nothing and hoping to not be located is not a viable option. Their confidence is misplaced. The issue is when the government will locate them, not whether. And when they're discovered, the house of bricks will literally fall on the person." Ostriches also risk getting hit with very stiff penalties -- and possible criminal sanctions -- just for failing to report foreign financial accounts. Make amends quietly. Another option is to file amended returns, using Form 1040X. Some lawyers suggest filing several years of amended returns all at once, while others prefer to send each year's return separately. Whatever the case, one lawyer says the amended-return approach is usually the best idea because filing and paying everything owed often can help ward off criminal prosecution, especially if the authorities were previously unaware that the client had done anything wrong. But it's certainly not a risk-free approach since the client is admitting that a previous tax return was erroneous, says Mr. Skarlatos. Surrender outright. Some people have hired experienced tax lawyers to test the waters with the IRS, initially on an anonymous basis, to see what might happen if they turn themselves in and pay everything they owe -- in the hopes of avoiding jail. This is sometimes known as a "noisy disclosure," as opposed to the quieter approach of filing amended returns and hoping for the best. "Most of our clients decide to opt for a formal or 'noisy' voluntary disclosure, notwithstanding its complexity, because they want the comfort of sleeping well at night at the conclusion of the process without worrying about future IRS actions," says Mark Matthews, a lawyer at Morgan, Lewis & Bockius in Washington and a former official at the IRS and Justice Department. But some people aren't eligible. Among them are those with "illegal source" income, such as money from bribes or securities fraud. A voluntary disclosure "probably makes sense" for someone who has "only legal sources of income, is not under audit or investigation and whose noncompliance is not likely to be imminently discovered" and who is "prepared to pay or make arrangements" to pay what they owe, Mr. Matthews says. As one New York lawyer puts it, the IRS is more sympathetic to people who have seen the light, rather than the light seeing them. An IRS spokesman cautions that a voluntary disclosure "will not automatically guarantee immunity from prosecution," but it "may result in prosecution not being recommended."

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