Going away for ‘real time’ — in a federal facility


    Evading taxes is one way to manage wealth, and U.S. Sen. Carl Levin doesn’t like that method one bit. The Michigan Democrat recently introduced legislation that would make it harder for U.S. corporations and wealthy Americans to have secret offshore accounts, and the current administration fully supports his attempt.

    “We look forward to working with you as part of the broader effort to address international tax evasion and close the tax gap,” said Treasury Secretary Timothy Geithner.

    Ducking taxes, of course, isn’t anything new. It’s an adventure that many have taken since President Abraham Lincoln established the nation’s first income tax in 1862. Now, however, using foreign accounts to try to dodge taxes has put such depositors under a harsher legal limelight, since Zurich-based bank UBS AG paid the U.S. $780 million in fines and turned over the names of 250 American account holders to the IRS a few months ago. 

    But Paul L.B. McKenney, an attorney who specializes in federal taxation for Varnum, said it isn’t just Swiss banks that have cracked under pressure from the IRS. Those in the Cayman Islands and even Lichtenstein, where the main bank is owned by the royal ruling family, have named Americans who have secretly held accounts.

    And the penalties for not reporting are stiff.

    McKenney said not checking “yes” to the foreign account and trust boxes on Schedule B constitutes a felony for making a false statement, and every year that the boxes are marked “no” is a separate offense. The IRS can go back six years to make criminal charges, but there isn’t a time limitation under civil law.

    “The problem is, under the sentencing guidelines, people won’t go away for Kwame-Kilpatrick time — they’ll go away for real time,” said McKenney of the four-month prison sentence the former Detroit mayor received. “It’s not 120 days, and that’s No. 1 because they didn’t check the box.

    “No. 2, they didn’t file the foreign bank account report, and there is a parallel universe for trusts — which means there are no dividends, interests or capital gains — which means there is tax fraud on the return. That’s a five-year felony, per return,” he added.

    McKenney said a ballpark sentence for a convicted first offender is 18 to 24 months, with that time to be served in a federal facility.

    “People can and will go away, and it’s not 120 days because they sentence under the guidelines, and the dollars in these things are very large.”

    Then there are the monetary penalties. McKenney said the IRS will take 35 percent of an account’s balance, not just the interest, per year for every year a foreign bank report wasn’t filed. Compound that penalty over a decade and a longtime holder of an unreported offshore account gets fined some very serious money.

    McKenney heads the federal tax practice at Varnum and his office has received a goodly number of hypothetical inquiries from attorneys that he suspects represent clients who have offshore accounts and are concerned their names will be sent to the IRS. He said most want to know the criminal penalties, then the civil consequences, and then what their theoretical depositors should do.

    “You’ve got to get to them before they get to you,” said McKenney, vice chairman of the American Bar Association’s Taxation Section, Sales, Exchanges and Basis Committee, of voluntarily going to the IRS.

    “If they find you, they’re going to pummel you,” he added, noting that a pummeling could translate into “several hundred percent” of the account balances. “By the way, taxes attributable to fraud are not dischargeable in bankruptcy. ‘The hits just keep on coming’ is what they get for answers.”

    McKenney said going to the IRS would kill a criminal complaint. It would also get someone a manageable resolution to the civil issue, if they are completely transparent about the accounts and if the source of the income is legal and not skimmed.

    “You may end up paying 35 percent plus a tax and fraud penalty on the income part and have to bring the account back into the U.S. reporting system. But that’s a whole lot better than ‘We want X times the account balance,’” he said.

    The IRS has a program it calls “The Last Chance,” which is an opportunity for offshore depositors to come clean and take their lumps minus the severe penalties. Those who prefer to take their chances and not give it up should realize the IRS office in the state is increasing its staff to look for offenders because of the recent offshore push.

    “It’s a totally different world in reception,” said McKenney for those who come forward. “You’re talking to civil tax people. There is a huge divide between the civil and the criminal investigations.”

    McKenney said the IRS approach to offshore accounts is not politically motivated, as the agency has been pursing depositors for the past 20 years under administrations headed by Democrats and Republicans. But the rest of the federal government didn’t share the IRS’ enthusiasm for that pursuit until the terrorists attacked nearly eight years ago. Congress then began to worry about money being transferred in and out of the country and put reporting measures into the Patriot Act.

    “I’ve been doing this for 35 years. With the structural deficits that we have — and forget the stuff in the last weeks and CBO projections — the pendulum is way over on the enforcement side. So they’re looking for big money. They’re looking for offshore. And you don’t see a lot of politicians defending people with undisclosed offshore accounts,” he said.

    When all the dust finally settles from the IRS push, McKenney sees a major change to the financial market coming. It won’t be particularly pleasing to foreign bankers, which could be banned from doing conventional business in the U.S., but it should make the palms of domestic bankers itch again.

    “This is to the offshore account business what the Internet has been to newspapers. It really is a sea change. It wasn’t just the U.S. that beat up on them. It was the Germans. It was the French. It was the Brits. They were losing massive amounts of revenue, and the Swiss got put on the tax-haven watch list with Angola and a few other countries,” he said.

    “We’ve heard the term ‘level playing field,’” he said of how U.S. bankers have described their feelings about the offshore pursuit. “That would be their talking point: numbers one, two, three, four and five.”

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