The Supreme Court of the United States has held that taxpayers may “avoid” Federal taxes but cannot “evade” them. That is, one can “avoid” taxes by arranging one’s affairs in a legal manner and making legitimate use of valid Income Tax laws. However, one cannot “evade” taxes by using illegitimate or illegal schemes.

Tax evasion carries both civil (i.e. money) and criminal (i.e. jail time) penalties. Often, intent is the hinge upon which a civil matter can swing over to become a criminal matter. In general, U.S. Taxpayers must report all income earned, from whatever source, and from wherever in the world it is earned. Of course, there are many exceptions based upon the U.S. Tax laws, Treaties, etc. However, the general rule applies unless there is an exception.

Some taxpayers try to evade U.S. taxes by hiding assets. Often, they are hid in offshore banks, brokerage accounts, foreign trusts, private annuities and insurance plans. In fairness, not all people who hide assets are trying to evade U.S. taxes; some are merely trying to evade creditors.

Part of the “hiding” problem relates directly to hiding the asset itself (think transfers subject to Gift/Estate tax or IRS collection matters). However, in most cases, the taxpayer fails to report the income earned in such accounts; thereby illegally evading U.S. Income tax.

 

Disclosing Foreign Based Assets:

U.S. taxpayers are required to comply with a variety of reporting requirements designed specifically to declare ownership of foreign assets (financial accounts as well as other assets).

For example, when applicable, U.S. taxpayers are required to file the Statement of Specified Foreign Financial Assets (IRS Form 8938) and Report of Foreign Bank and Financial Accounts, FBAR (IRS Form TD F 90-22.1). Failing to file a complete and accurate Form 8938 and/or Form TD F 90-22.1 is a violation of the law by itself. There are stiff penalties (civil and criminal) that could be applied even if a taxpayer reports the income and pays the underlying tax.

 

Carrot and Stick:

For the past 5 years, the Federal Government has been offering the carrot and the stick. They have offered amnesty programs to taxpayers who have failed to report their foreign assets. At the same time, the Federal Government has instituted programs that are designed to ferret out hidden assets and the income earned thereon. Some are targeting taxpayers directly and others the “complicit” banks and other institutions. Swiss banks have long prided themselves on maintaining the secrecy of their depositors. This has made them attractive for those who want to hide assets. This has also made Swiss banks targets for inquiry by the U.S. For example, in February of 2009 UBS entered into an agreement with the U.S. in which it admitted that it assisted U.S. taxpayers in hiding assets from the IRS. UBS, and other banks, have been forced to disgorge information about U.S. customers. This was very bad news for some wealthy U.S. taxpayers.

More recently, Wegelin & Co. (a Swiss bank and among the oldest banks in the world) was shut down after pleading guilty to tax evasion.

 

Death and Taxes:

On February 27, 2013, the U.S. Attorney’s office announced that it had charged Peter Troost with failing to report foreign assets and failing to pay taxes on accounts held with UBS. Mr. Troost is the owner of a cemetery monument/gravestone company in Skokie, Illinois (not affiliated with Peter Troost Monument Co. of Hillside).

Mr. Troost pleaded guilty on July 16, 2013 and was ordered to serve a year and a day in prison plus 200 hours of community service after his release from prison. Mr. Troost also paid the IRS nearly $4 million in back taxes and penalties.

 

Cheating The Bean Counters:

In September, 2013, the U.S. Attorney’s office announced that it had charged H. Ty Warner with Federal tax evasion. Mr. Warner is a successful entrepreneur based in the Chicago area who, among other things, is the sole shareholder of TY, Inc. (best known for its Beanie Babies product line).

The charges include that:

  • Warner hid roughly $100 million in assets at UBS, and later in another Swiss bank, Zürcher Kantonalbank.
  • Warner did not report the income or pay the tax.
  • Warner went to great efforts to hide this from his accountants and the IRS.

Prosecutors claim that Mr. Warner failed to report nearly $25 million of income between 1999 and 2007.

Mr. Warner has since pleaded guilty and is due to be sentenced in January of 2014. He was hit with $53 million in penalties just for the failure to disclose his foreign accounts. Since Mr. Warner’s estimated worth nearly $3 billion, the roughly $60 million of taxes and penalties will likely have less impact upon him than jail time.

 

Conclusion:

The U.S. is encouraging U.S. taxpayers to come clean on ownership of foreign based assets while tightening the noose on those who intentionally hide assets and fail to report income. When there are high profile taxpayers, the IRS has an opportunity to get the matter into the news, thus encouraging other U.S. taxpayers to comply with the laws.

 

 

10/2013

Copyright ©, Keith B. Baker – 2013

This article is designed to be a public resource of general information. It does not constitute “legal advice” nor does it create a “client-attorney” relationship. While the information is intended to be accurate, this cannot be guaranteed. Tax laws are complex and constantly changing as a result of new laws, regulations, court interpretations and IRS pronouncements. Often, there are also various possible interpretations. Further, the applicable rules can be affected by the facts and circumstances of a particular situation. Because of this, some of the information may no longer be correct or may not apply to all situations. We are not responsible for any consequences or losses resulting from your reliance on such information. You are urged to consult an experienced lawyer concerning your particular factual situation and any specific legal questions you may have.

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