IRS vs. UBS: Tax case leads to more banks in Europe that may be helping tax evaders

The IRS' amnesty program, which ends Sept. 23, has helped the agency identify about 10 Swiss and European banks being used by U.S. citizens for offshore accounts. This does not necessarily mean that the banks are helping their U.S. account holders to evade taxes, but it gives the IRS new places to explore potential tax crimes. All of this is due in no small part to the agency's very public cases against UBS (UBS).

U.S. citizens who come forward to take advantage of the lower penalties during the amnesty period must disclose all of the banks with whom they hold offshore accounts and the dates for opening and closing those accounts. Some of the banks named include Credit Suisse (CS), Julius Baer, Zurcher Kantonalbank and Union Bancaire Privee. In response, some Swiss banks -- including Zurcher Kantonalbank and Sarasin & Ciehave -- have started to freeze out U.S. clients to avoid problems with the IRS.
Even among those that will continue to take U.S. money, the rules are getting tighter. For example, Raiffeisen Group and Migros Bank have both put stricter measures in place. Raiffeisen requires that an individual outside the U.S. must have power of attorney over the funds and that all correspondence must be sent to someone outside the U.S.

Clearly, the IRS' case against UBS has successfully exposed not only tax evaders aided by UBS, but also other possible banks and advisers who may have helped. This week, the IRS indicated that, of the 250 names UBS turned over as part of its first settlement in February, 150 U.S. citizens are under criminal investigation for concealing income and assets offshore. The prosecutor in the case against former UBS banker Bradley Birkenfeld revealed this information as part of a fling asking for leniency for Birkenfeld, who gave "substantial assistance" in the case against UBS and wealthy tax evaders.

The prosecutor asked that Birkenfeld's possible five-year sentence be reduced to 30 months in reward for his help. The banker's attorney called his cooperation "extraordinary" and asked for a sentence of five-years' probation. Birkenfeld is under house arrest with electronic monitoring near Boston. In June 2008, he pleaded guilty to helping Americans evade taxes.

Birkenfeld first noticed that UBS wasn't complying with U.S. tax laws came when he saw an internal legal document that differed from actual bank practices in 2005. Initially, he talked with his superiors, but the practice continued, and he began talking with U.S. prosecutors in 2007. He provided them with information about UBS's banking practices, internal reports and details about employee travel to the United States. He assisted with the investigation of California billionaire Igor Olenicoff, who pleaded guilty in 2007 to filing a false tax return. Olenicoff got two years' probation and had to pay $52 million in back taxes, interest and penalties. Birkenfeld had been his banker.

In April 2008, Birkenfeld and Liechtenstein investment adviser Mario Staggl were charged with helping Olenicoff and others evade taxes. According to the memo filed by prosecutors, Birkenfeld also gave evidence that led to the conspiracy indictment of Raoul Weil, who ran the UBS wealth management business. Weil and Staggl are both currently fugitives.

When Birkenfeld pleaded guilty, he said that UBS earned $200 million per year by managing $20 billion in assets and setting up sham entities for clients in tax havens like Panama and the British Virgin Islands. He also told investigators that as many as 60 UBS private bankers sought clients at UBS-sponsored art shows, yachting regattas and golf and tennis tournaments.

Now the case that Birkenfeld helped to start is reaping huge benefits. The disclosures that U.S. citizens are filing to avoid criminal prosecution and get agreements for reduced penalties are aiding the IRS in discovering the names of individuals and investment firms that provide financial advice to U.S. clients. These firms help their U.S. clients create complicated tax structures to avoid taxes.

In addition to exposing potential tax evaders and their advisers, the U.S. also reached agreements with several countries, including Luxembourg and Switzerland, to share more tax information. If you have have been avoiding taxes by hiding money offshore, you only have until Sept. 23 to take advantage of the amnesty. If the IRS gets your name first, you could face criminal investigation.

While the IRS won't say how many people are coming forward, it noted that 400 people applied for amnesty in just one week in July. Fewer than 100 people sought amnesty in 2008.

Lita Epstein has written more than 25 books including Reading Financial Reports and The Complete Idiot's Guide to Tax Breaks and Deductions.

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