Tax Report - WSJ.com

[R.A. Hettinga]

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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."