Bank Secrecy Act Penalties
UBS and The IRS – What’s Next
U.S. Taxpayers with UBS accounts face civil tax audit risk. If UBS transfers account information to U.S. Taxpayers (as proposed) the IRS may then commence a civil tax audit (under a 6 year statute of limitations).
Under a civil tax audit, the IRS may obtain evidence that may be illegal under criminal proceedings (e.g., Fifth Amendment defenses, objections to “tainted evidence”). With tax evidence obtained from the civil tax audit, the IRS (with the U.S. attorney) may initiate criminal proceedings.
In 2006, the U.S. Senate reported $100 billion per year in taxes not being paid for U.S. Taxpayer offshore assets. Subsequently UBS, the largest Swiss Bank, was investigated for criminal tax evasion.
In February 2009, UBS AG, Switzerland’s largest bank, entered into a deferred prosecution agreement with the U.S.:
- Admitting guilt on charges of conspiring to defraud the U.S. by impeding the IRS tax collection.
- Paid $780 million in fines, penalties, interest and restitution.
- Agreed to provide the identities and account information of more than 4,000 U.S. Taxpayers with “cross-border” UBS accounts.
2/19/09 Forbes.com: Confirmed that, as part of the UBS deferred prosecution agreement ($780M fine), UBS supplied the IRS with the names of 323 Americans who wired money from their U.S. accounts to Switzerland. All the documents UBS turned over, however, were US records (not Swiss records).
11/18/09 Wall Street Journal: The Swiss government said it would turn over to US authorities by August 2010 the names of U.S. Taxpayers with UBS accounts of more than 1 million Swiss francs ($993,000), and also those holding suspicious accounts as low as 250,000 francs.
1/4/10 New York Times: Confirmed that UBS agreed to disclose to the American authorities the names of 4,450 wealthy Americans suspected of dodging taxes through secret offshore accounts (in addition to the 323 already disclosed; Total: Nearly 4,800 Americans).
IRS Prosecution
The IRS is prosecuting:
- U.S. Taxpayers who fail to report offshore income.
IRC §7201: Tax Evasion (Willful Evasion of Tax)
Felony: Up to 5 years in prison.
Fine: $100,000 (individual); $500,000 (corporation)
- Third parties who obstruct tax collection and commit conspiracy to impede tax collection face two separate felonies, which together may be punished by up to 8 years in prison.
IRC §7212: Obstruct (Impede) Tax Collection
Felony: Up to 3 years in prison. Fine: $5,000
18 U.S.C. 371: Conspiracy to Impede Tax Collection
(Separate Charge of Impeding)
Felony: Up to 5 years in prison
FBAR Filings
U.S. Taxpayers who have failed to disclose the foreign account under Form 1040 commit perjury (i.e., they are required to list any foreign accounts under Form 1040/Schedule B, Part III, Question 7(a)).
Taxpayer perjury is a willful violation. If a U.S. Taxpayer willfully violates tax reporting requirements while violating other laws of the United States, (or as part of the pattern of any illegal activity involving more than $100,000 in a 12 month period), such U.S. Taxpayer will be subject to a monetary fine of not more than $500,000 or imprisoned for not more than 10 years or both (31 USC 5322(b), 31 C.F.R. 103.59 (Criminal Issues)).
In the 3/18/10 Foreign Account Tax Compliance Act (as part of the Hiring Incentives to Restore employment Act “hire“), the new law provides for an extended 6 year statute of limitations for understated income (gross income in excess of $5,000).
The 6 year statute of limitations applies to income (in excess of $5,000) omitted from an income tax return, attributable to foreign assets for which a foreign financial disclosure is required (i.e., foreign financial assets greater than $50,000).
The 6 year statute of limitations is effective for tax returns filed after 3/18/10 (and for any other tax return for which the assessment period has not year expired as of 3/18/10, i.e., Tax Year 2006 forward).
Third Party Conspirators
Third party conspirators who benefit from tax evasion by U.S. Taxpayers include:
- Banks (who receive U.S. Taxpayer funds).
- U.S. Tax Professionals (Lawyers, Accountants) who recommend and participate in the tax evasion.
- Tax Promoters who facilitate tax evasion schemes.
Criminal attorney, Sanford Passman, Esq., discusses the UBS case and Co-Conspirator criminal penalties for facilitating tax evasion, including:
- Hidden Income in Offshore Banks and Brokerage Accounts
- Nominee Owners (acting on behalf of U.S. Taxpayers)
- Offshore Debit and credit Cards
- Undisclosed Wire Transfers (Unreported Income)
- Foreign Trusts
- Private Annuities
According to Mr. Passman:
18 U.S.C.A. §371 is the Federal Statute for conspiracy which provides that: “If two or more persons conspire either to commit any offense against the United States, or to defraud the United States, or any agency thereof in any manner or for any purpose, and one or more of such persons do any act to effect the object of the conspiracy, each shall be fined not more than $ 10,000 or imprisoned not more than five years, or both.”
Violations of the Internal Revenue laws speak to a statute of limitations of three years after the commission of the offense.
The statute of limitation shall be six years for offenses involving the defrauding or attempting to defraud the United States or any agency thereof, whether by conspiracy or not, and in any manner; for the offense of willfully attempting in any manner to evade or defeat any tax or the payment thereof.
Offenses include: willfully aiding or assisting in, or procuring, counseling, or advising, the preparation or presentation under, or in connection with any matter arising under, the Internal Revenue laws, of a false or fraudulent return, affidavit, claim or document (whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim or document).
Offenses include: willfully failing to pay any tax or make any return (other than a return required under authority of Part III of Subchapter A of Chapter 61) at the time or times required by law or regulations; for offenses described in Sections 7206(1) and 7207 relating to false statements and fraudulent documents.
Offenses for conspiracy arise under Section 371 of Title 18 of the United States Code (Conspiracy), where the object of the conspiracy is to attempt in any manner to evade or defeat any tax or the payment thereof.
If an individual or individuals charged with committing any of the offenses articulated above, are outside the United States or are fugitives from justice, within the meaning of Section 3290 of Title 18of the United States Code, the Statute of Limitations is tolled.
When individuals attempt to repatriate into the United States, the funds contained in the undisclosed foreign bank accounts, they may be culpable for money laundering. Individuals who maintain foreign bank accounts where disclosure of said bank accounts is not revealed pursuant to law, and who would be culpable under the various offenses recited above, may be culpable for money laundering (specifically 18 U.S.C. 1956 and 1957, which is part of the Money Laundering Control Act of 1986).
18 U.S.C 1956 penalizes individuals who knowingly and intentionally transport or transfer monetary proceeds from specified unlawful activities. While the funds reposing in the foreign bank accounts may have been derived from lawful activities conducted within or without the United States by American citizens, the various violations of the Internal Revenue Code and the conspiracy statute, could well subject individuals to charges of money laundering.
If in fact the unreported bank accounts contained funds derived from unlawful activities, it may subject individuals to not only violations of Federal statutes but California statutes as well (e.g., California Penal Code §§ 182 and 186.10, which deal with conspiracy and money laundering).
With the foregoing in mind, and with specific attention to the UBS matter concerning Switzerland’s largest bank, the defendant bank entered into a plea agreement with the United States Government, that consisted of a $780M monetary fine and the obligation by the bank to deliver to U.S. authorities the identity of United States citizens who maintain accounts with the bank and the attendant information concerning the contents and transactions of those accounts.
The Swiss Government has issued an edict mandating that the bank cease and desist “turning over” the identities of those U.S citizens and the attendant information, and there is presently pending in Switzerland, legislation to address that issue.
Faced with the dilemma of either breaching the plea agreement entered into with the U.S., or suffering sanctions from the Swiss Government, UBS proposed a course of conduct which insulates itself from conflicts with the Swiss Legislature and the United States authorities.
The action proposed by UBS was to send to each U.S. Taxpayer who maintained bank accounts with UBS abroad, a USB stick containing the respective bank records of those U.S. Taxpayers.
A USB stick is identical to a “flash drive” and places all the bank information sought by the U.S. authorities in the hands of the individual account holders (whose identities were revealed by a former UBS banker by the name of Bradley Birkenfeld to the United States authorities in the hopes that it would be a benefit to him when he was sentenced by the United States for banking violations).
It is the opinion of this author that UBS may “sell out” all of these American account holders due to the fact that the U.S. authorities may subpoena these USB sticks and obtain all tax information that was sought from the bank itself.
Account holders who received the USB sticks, were they to destroy them, would be culpable of an additional Federal felony (i.e., obstruct tax collection), which carries with it a fine and up to 3 years in prison.
Under the 6 year statute of limitations, the Internal Revenue Service could initiate a civil tax audit of a Taxpayer’s returns – (for six [6] prior years) and, attendant to said audit, request all information concerning bank accounts wherever located.
Given the fact that the government knows these individuals maintained undisclosed bank accounts with UBS, the Taxpayer has essentially been checkmated by UBS.
Faced with this dilemma, and prior to indictment by the Government for tax evasion and/or related offenses, U.S. Taxpayers can take steps to mitigate the impact of this conduct. Retaining counsel to amend the returns and pay the appropriate taxes and/or penalties and assessments, could be a firewall protecting them from criminal prosecution.
The reader of this information should keep in mind that any individuals who participated in any of the enterprises described herein, could and most probably would be susceptible to criminal indictments. Those persons would include, but not be limited to family, friends, business associates, accountants, financial advisors, attorneys and bank officials who created, choreographed and orchestrated the tax evasion/avoidance.
It is anticipated that the United States authorities will proceed against other foreign banks in a similar fashion, and that a greater number of account holders will be subject to scrutiny by the relevant authorities.
Civil/Criminal: Essential Issues (Tax)
- Burden of Proof: (Civil Fraud/Criminal Fraud)
Criminal fraud requires a higher standard of proof than civil fraud. The government must prove “beyond a reasonable doubt” that the defendant is guilty of criminal fraud, whereas in civil fraud, the burden of proof required is preponderance of the evidence (also termed a “by a preponderance of the evidence”).
A criminal decision of a court or jury will bind a civil decision, but a civil decision does not bind a criminal decision.
- Statute of Limitations: (Civil and Criminal Proceedings)
For civil tax fraud, there is no statute of limitations (the tax can be assessed at any time).
For criminal tax evasion, the criminal statute of limitations is only on the prosecution of the crime i.e. tax evasion (not the assessment of tax owed).
- Collateral Estoppel:
When criminal proceedings are followed by civil proceedings, the legal doctrine of collateral estoppel may apply. This doctrine provides that an issue necessarily decided in a previous proceeding (the 1st proceeding) will determine the issue in a subsequent proceeding (the 2nd proceeding), but only as to matters in the 2nd proceeding that were actually presented and determined in the 1st proceeding.
Conviction for criminal tax evasion collaterally estops the Taxpayer from contesting the existence of fraud for purposes of the civil fraud penalty because a finding of criminal fraud (beyond a reasonable doubt) establishes proof of civil fraud (by a preponderance of the evidence).
Acquittal of criminal tax evasion does not collaterally estop the government from proving civil fraud (by a preponderance of the evidence). The criminal acquittal may establish that proof of fraud did not exist beyond reasonable doubt, but that does not mean that proof of fraud by a preponderance of the evidence does not exist.
The Risks: Civil & Criminal Tax “Double Jeopardy”
U.S. Taxpayers with unreported foreign bank accounts (and income) are subject to IRS civil tax audits with civil penalties (monetary penalty, only) and criminal tax prosecution (monetary penalty and jail).
The U.S. Taxpayer’s tax records may include evidence which supports culpability for a crime (e.g., tax evasion) and civil penalties (e.g., 75% fraud penalty).
The U.S. Taxpayer’s exposure to civil penalty/criminal prosecution for unreported foreign bank accounts (and income) is a “double-edged” sword with dual civil/criminal:
- Evidentiary Standards of Proof
- Statute of Limitations
- Collateral Estoppel Issues
If the IRS, first institutes a civil tax audit they may summons evidence which may support both a civil penalty (e.g., fraud) and criminal culpability (e.g., tax evasion). The evidence from the civil tax audit may then be used for a subsequent criminal prosecution of the same U.S. Taxpayer.
Civil and criminal tax deficiencies may differ:
- Criminal violations are charged only against the tax deficiency that results from fraud.
- Civil tax deficiency includes all tax due on the tax returns (“evaded income and deductions adjustments”).
- Evidence that does not meet the burden of proof in a criminal investigation may be adequate for civil tax issues (i.e., the IRS standard of proof is “a preponderance of the evidence” for civil penalties, and “beyond a reasonable doubt” for criminal penalties).
IRS Criminal Investigation Division has authority:
- To examine criminal FBAR issues (since 1992)
- Investigate money laundering offenses where the underlying conduct is subject to investigation under the Internal Revenue Code (Title 26) or under the Bank Secrecy Act.
- Investigate unreported income felonies (e.g., tax evasion, conspiracy).
If the IRS, first institutes criminal prosecutions, rulings made in the criminal case on evidentiary issues (under the higher evidentiary standard, i.e., “Beyond a Reasonable Doubt”) apply in the civil case (which has a lower evidentiary standard (i.e., the “Preponderance of the Evidence”).
Under the Doctrine of Collateral Estoppel, the Court’s evidentiary rulings in the criminal matter collaterally estop the U.S. Taxpayer defenses on the same tax issues in the IRS Civil Tax Audit.
Failure to report foreign bank accounts (and income) under the “FBAR rules” risk both civil penalty and criminal prosecution. Under IRS procedure, civil FBAR assessments and penalties are not assessed until the criminal investigation is closed.
About the Author
Gary S. Wolfe is an international tax attorney specializing in asset protection, IRS tax audits and international litigation. Please see http://gswlaw.com for more information.
Gary S. Wolfe, A PROFESSIONAL LAW CORPORATION
9100 Wilshire Blvd., Suite 505 East, Beverly Hills, CA, 90212
(310) 274-3116 email: gsw@gswlaw.com
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