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"Beanie Baby" Creator  Popped in Offshore Sweep
Pleads Guilty to Tax Evasion Over His Swiss Bank Account

As the IRS moves into its tenth year of pushing hard to uncover offshore assets, the stakes keep getting higher for those who have not elected to step forward under the IRS’s Offshore Voluntary Disclosure Program (OVDP). I have written about this program several times in past issues of this newsletter. Most recently, I explained that the current OVDP does not have an expiration date. That is, there is no magic date by which you must apply in order to get the benefits of the program. For the details, see the April-May 2012 issue of PTT. 

But on the other hand, the longer you wait, the more likely it is that the IRS will find you before you have the chance to step forward. In that case, all bets are off since you can’t qualify for a voluntary disclosure if the IRS already has information, however fragmented, about your case. In order to qualify for a voluntary disclosure, you must step forward at a time when the IRS is not aware that you were involved in a violation of some kind. And as each day goes by, the likelihood that the IRS will learn through independent sources about your offshore assets gets greater and greater.  

There are several reasons for this. First, the IRS is getting more data every day from the people who have stepped forward. To date, over 39,000 people have acted under the OVDP to come clean with their foreign assets and back taxes. The IRS mines the data provided by these people per the disclosures they are required to make. That includes the names of bankers, attorneys, accountants, investment advisors, etc., with whom they worked to set up their accounts. The IRS pulls on all those strings to find new leads.  

Second, the IRS is systematically working its way through the 4,500 or so names that UBS, the Swiss banking giant, provided to the U.S. through their disclosure agreement. The IRS is getting additional information from other banks around the world, including Israel, nations throughout Europe, the Caribbean and Asia.  

Third, the IRS just recently received approval from a federal court to issue a new “John Doe” summons on Wells Fargo for the information related to the FirstCaribbean Bank, with whom it has a correspondence account. It is just a matter of time before the IRS has those names in hand.  

Fourth, more and more countries are entering into agreements to comply with the information reporting requirements of FATCA, the law that became effective in 2010. Starting in 2014, this requires foreign banks to provide financial account data on U.S. citizens who own accounts in foreign banks. If the bank fails to provide that data, it faces a 30 percent withholding penalty on U.S.-source payments to the bank. The bottom line with all this is that banking privacy in the previously thought-of “tax haven” nations is largely a thing of the past.  

And finally, as the house of cards continues to tumble, more “whistleblowers” are looking to get in on the action. It is reported (though not confirmed) that the UBS whistleblower was paid $104 million by the IRS for his act of exposing USB’s role in moving billions of untaxed dollars into Switzerland to be held in secret, undisclosed accounts. USB itself paid a fine to the U.S. of $780 million for its actions.  

Since the offshore enforcement initiative began in earnest ten years ago, the IRS has prosecuted nearly seventy U.S. citizens, thirty bankers and financial advisors, and three Swiss banks. Other Swiss banks are still in hot water with the U.S.  

The latest U.S. casualty in the IRS’s war against foreign-held assets is Ty Warner, the creator of Beanie Babies and other stuffed animal toys. He had a secret account with UBS in Switzerland. On October 2, in federal court in Chicago, Warner pled guilty to one count of felony tax evasion in connection with that account. According to the IRS and the Justice Department, Warner failed to report more than $3.1 million in foreign income generated from the account. 

According to the charges, Warner maintained a secret offshore account with UBS starting in 1996. In late 2002, Warner transferred the assets in his UBS account to a second Swiss financial institution, Zürcher Kantonalbank. At that time, the account had a balance of more than $93 million. He allegedly earned more than $3 million in gross income through investments held in the account, which he failed to report on his tax return for 2002. He amended the 2002 return in 2007 but again, failed to report all the offshore income. That failure on the amended return is the basis of the evasion charge.  

In addition to the criminal penalty, Warner faces liability for all the back taxes plus interest and the civil fraud penalty, which is equal to 75 percent of the tax owed. He also faces the civil FBAR penalty, which is up to 50 percent of the amount in the account at the time of the violation.  

The bottom line is that the substantial risks associated with the failure to report offshore income coupled with the increasing likelihood that the IRS will obtain information about offshore financial account holders makes it hardly worth it to not just pay the tax and be done with it. It also bears stating again that if you have or know someone who has an undeclared offshore account, you need to get counsel about what to do to get into compliance regarding the account. Failure to do so is, in a very real way, playing with fire.


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