Last week I wrote about the cross-border woes of Swiss banking conglomerate, UBS AG - U.S. Indicts Swiss Executive for Foreign Bank Account Tax Evasion.
This is from Lynnley Browning of the International Herald Tribune:
Under pressure from the authorities, UBS is considering whether to divulge the names of 20,000 of its well-heeled U.S. clients, according to people close to the probe, a step that would have once been unthinkable to Swiss bankers, whose practice of secrecy dates back to the Middle Ages.
U.S. investigators believe some of these clients may have used offshore accounts at UBS to illegally hide as much as $20 billion from the Internal Revenue Service. Doing so may have enabled these people to dodge $300 million or more in U.S. taxes, according to a government official connected with the investigation.
In August the U.S. District Court for the Southern District of Florida issued an order approving the Department of Justice’s issuance of a John Doe summons that would force UBS to close the foreign accounts of its clients and disclose their names to the IRS.
As a result of the issuance of the summons, several tax bloggers have raised the issue of whether and to what extent the IRS’s voluntary disclosure program will help insulate UBS clients from criminal prosecution.
The IRS Internal Revenue Manual (IRM) contains the following language under the category Tax Crimes - General:
Voluntary Disclosure Practice
(1) It is currently the practice of the IRS that a voluntary disclosure will be considered along with all other factors in the investigation in determining whether criminal prosecution will be recommended. This voluntary disclosure practice creates no substantive or procedural rights for taxpayers, but rather is a matter of internal IRS practice, provided solely for guidance to IRS personnel. Taxpayers cannot rely on the fact that other similarly situated taxpayers may not have been recommended for criminal prosecution.
Taxpayers who voluntarily disclose their wrongful acts decrease the chances that the IRS will recommend criminal prosecution; however, voluntary disclosure does not automatically guarantee immunity.
Authors Advice: If you are considering making a voluntary disclosure to the IRS you should not do so without first consulting an experienced tax lawyer.
The IRM defines when a voluntary disclosure will be deemed to have been made:
(3) A voluntary disclosure occurs when the communication is truthful, timely, complete, and when:
a. the taxpayer shows a willingness to cooperate (and does in fact cooperate) with the IRS in determining his or her correct tax liability; and
b. the taxpayer makes good faith arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable.
The big issue for UBS clients is going to be whether or not their voluntary disclosure is “timely.” Here’s how the IRM defines “timely”:
(4) A disclosure is timely if it is received before:
a. the IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation;
b. the IRS has received information from a third party (e.g., informant, other governmental agency, or the media) alerting the IRS to the specific taxpayer’s noncompliance;
c. the IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer; or
d. the IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena).
(The emphasis is mine.)
Based on sub-paragraph “b”, above, it would appear that should UBS disclose the names of its clients before those clients make voluntary disclosure, those voluntary disclosures will be considered “untimely” and no relief from criminal prosecution will be available under the voluntary disclosure rules.
Query: Does the fact that a summons has been issued to UBS requiring it to divulge the names of those clients constitute “alerting the IRS to the specific taxpayer’s noncompliance?” If so, it is too late for UBS clients to “voluntarily disclose” their wrongdoing.
On November 10, 2008, William M. Sharp and Larry R. Kemm wrote an article for Tax Analysts’ Practioners’ Corner titled Voluntary Disclosure Update for U.S. UBS Clients. In it they state,
[W]e understand that UBS will suspend the account termination pending resolution of a U.S. voluntary disclosure proceeding (as discussed below). This policy approach gives U.S. taxpayers (who notify UBS of their intention to undergo a voluntary disclosure) the opportunity to become U.S. tax law compliant before terminating their accounts.
Sharp and Kemm conclude,
In view of the UBS policy to “suspend” the completion of account closure under the impending termination letters, affected U.S. taxpayers clearly have a window of opportunity to use the IRS voluntary disclosure process to minimize if not contractually eliminate the criminal liability exposure and commensurately to reduce overall penalty exposure, as well as resolve all open prior tax years.
Related Articles, Blogs and Sites:
Revised IRS Voluntary Disclosure Practice - IRS
UBS Cheats Can Still Come Clean- Janet Novack, Forbes
Tags: Back Taxes · IRS penalties · Tax Collections · Tax Crimes
Ahhh, the weird, wild, wonders of Washington never cease to amaze.
Apparently, when a Democrat proposes a tax cut for the rich it’s an exercise in sound judgment, but when a Republican does it it’s an example of criminal mischief.
After eight relentless years of badgering George Bush and his corporate “cronies” for favoring wealthy corporations over the middle-class and the poor, House Ways and Means Chairman, Charlie Rangel (D-NY), and his fellow democrats have decided that U.S. corporations pay too much in taxes after all.
This is from a Bloomberg.com article titled Rangel Plans Push to Cut Corporate Tax Rate to 28%:
New York Representative Charles Rangel said he’s revising his tax overhaul proposal to reduce U.S. corporate tax rates to 28 percent, down from the current rate of 35 percent.
Rangel, in an interview with Bloomberg Television’s “Money and Politics,” said he’s changing the “mother of all tax reform” he unveiled in September 2007 to accommodate President- elect Barack Obama’s agenda. That earlier plan would have set the corporate tax rate at 30.5 percent.
Well, I guess we have to be on the precipice of economic doom for some lefties to be willing to put their partisanship and class-warfare demagoguery aside long enough to admit that taking capital away from the job creators and the wealth producers (i.e. the rich) ultimately hurts the poor and the middle-class.
Related Blog Posts:
The GAO Study on Corporate Taxes and the Scapegoating of Corporations
U.S. Corporate Tax Second Highest of 30 OECD Nations
Other Blog Posts and Articles:
Corporate Taxes in Need of Reform -The Brookings Institute
Corporate Tax Relief on the Way- PowerLine
Tags: Corporate Tax · Legislative Watch
The Wall Street Journal reports in an article titled AIG’s Tax Dispute With U.S. has Twist of Irony that,
American International Group Inc. is in a battle with the Internal Revenue Service over $329 million in back taxes and penalties in part stemming from the company’s use of a type of transaction the IRS has called “abusive,” securities filings show. The tax dispute puts AIG — recipient of a $150 billion federal bailout — in the peculiar position of effectively using government funding to fight the U.S. government.
The dispute began with AIG’s filing of Form 843, Claim for Refund, before the U.S. government’s bailout.
Kay Bell of Don’t Mess With Taxes takes up the issue in a post titled AIG Using Federal Funds to Sue IRS. Kay says,
[We] taxpayers are helping pay for AIG’s efforts against the IRS. The tax bill comes, in part, from IRS “disallowance of foreign tax credits associated with cross-border financing transactions.” Those maneuvers by AIG, says the IRS, were an abusive tax scheme. A huge international company using questionable tactics to avoid taxes is not a surprise. Neither is its use of every available avenue to argue for the validity of its tax techniques.
Tax Girl, Kelly Phillips Erb, jumps on the bandwagon and says,
Hmm, I wonder if [AIG will] return some of that bailout money if they win?
Oh wait. They won’t win.
We’re handing AIG more money so that they can pay off debts that they owe… to us.
I left the following comment on the Tax Girl’s blog. It serves also as a reply to Kay Bell, the Wall Street Journal and everyone else who is making the premature (and absurd) claim that AIG is somehow defrauding taxpayers by pursuing an IRS claim it obviously believes it will win:
Hold on there TaxGirl!
How do you know the IRS is right on this issue and AIG is wrong? As a tax lawyer do you often make the assumption that the government is infallible? I don’t.
Your claim that AIG schemed to use the government’s money to fund an IRS lawsuit ignores the fact that AIG filed it’s claim for refund before it was awarded the bailout funds.
AIG got the bailout money in order to keep it’s business afloat. It gets to decide how to use those funds, not the government. After all, do you really want government staffers making the business decisions of our corporate conglomerates?
By the way, what condition would you have put on AIG’s receipt of the bailout funds? Would you have required AIG to abandon it’s 329 million dollar refund claim?
As a taxpayer I, too, want to see the bailout funds put to good use, but if the IRS is wrong on the foreign tax credits and AIG is right, the use of AIG corporate funds (from whatever source) to pursue the IRS claim is not only a business but a moral imperative. The failure of AIG’s Board to approve the use of funds for this purpose would constitute a breach of it’s fiduciary duty to AIG shareholders.
Suing the IRS to get a refund of taxes AIG believes it should not have paid is the right thing to do. If the suit is frivolous as you suggest, AIG and its attorneys should be sanctioned and required to pay the government’s costs of its defense of the suit.
Finally, I don’t have anything remotely approaching your level of certainty about the outcome of AIG’s claim. Apparently, AIG’s tax attorneys disagree with you that AIG “won’t win.” I think it’s safe to assume that they are infinitely more informed than either you or I about the facts and law involved in the case.
Why don’t we just wait to see the outcome of the AIG claim? The IRS has been wrong before and it’s a good bet they’ll be wrong again in the future. It’s one of the reasons you and I have jobs.
We are inching every day towards the nationalization of our industries.
It is one thing to provide funds to corporations in order to keep them afloat so that American jobs won’t be lost and the economy won’t plummet into the abyss. It is quite another to require those corporations to ignore their own business judgment and defer to government employees who themselves have an abysmal record of using the taxpayers’ money wisely.
If the government were a publicly held corporation and the taxpayers were its shareholders, we’d be perp-walking half of Washington down the capitol steps every day.
Tags: Corporate Tax · Court Cases · Credits · Legislative Watch · Opinion
Horse's name is "Taxpayer"
In September the IRS started a mini-furor when it issued Notice 2008-83 which states,
For purposes of section 382(h), any deduction properly allowed after an ownership change (as defined in section 382(g)) to a bank (as defined in section 581) with respect to losses on loans or bad debts (including any deduction for a reasonable addition to a reserve for bad debts) shall not be treated as a built-in loss or a deduction that is attributable to periods before the change date.
Section 382 of the Internal Revenue Code limits the use by an acquiring company of certain net operating losses (NOLs) and built-in losses of the acquired company. The reason for the rule is to prevent profitable companies from purchasing loss companies to shelter some of it’s income from taxes.
Citizens for Tax Justice (CTJ) issued a report on the IRS rulingon November 7th:
[W]hile the major presidential candidates debated solutions for reforming the federal corporate income tax, a little-noticed ruling by the Internal Revenue Service (IRS) opened the door for widespread corporate tax avoidance by a few of the biggest, most profitable financial institutions in the country. The IRS ruling, which took Congressional tax writers by surprise, will almost certainly push the federal government—and many states—further into the red at a time when they can least afford it.
CTJ lists four reasons why the ruling is a bad one:
- Usurpation of Congress - The IRS has overstepped it’s authority by stepping into the domain occupied by congressional tax writers.
- Artificial Competitive Advantage - Banks will have a competitive advantage and will be able to grow more rapidly at the expense of taxpayers.
- Cost to Federal Taxpayers - It is estimated that the ruling could cost taxpayers as much as $140 billion.
- Cost to States - Most states base their corporate taxes on federal rules, therefore, the new ruling will have the effect of reducing state government revenues.
Wells Fargo will be the single biggest beneficiary because of it’s recent purchase of Wachovia Bank. It is estimated that Wells Fargo will get a federal tax cut of $19 billion dollars as a result of the rule.
In a letter to Treasury Inspector Eric Thorson, Senator Charles Grassley (R-IO) has asked for an investigation of the ruling raising concerns about “preferential treatment” of Wachovia.
Other blog posts on Notice 2008-83:
Tax Lawyers Decry Financial Bailoutt NOL Tax Break for Banks - Paul Caron
Bank Section 382 Ruckus - Joe Kristan
More on the Bailout: Treasury’s “Override” of Enacted Law - Linda Beale
Tags: Legislative Watch · State Taxes
The criminal tax evasion trial of two time Indy 500 winner and 2007 Dancing With the Stars champion, Helio Castroneves, will not be delayed, according to a report issued by the Miami Herald today:
A federal judge in Miami has rejected requests to delay the tax evasion trial of race car driver Helio Castroneves.
U.S. District Judge Donald Graham on Friday said the March 2 trial date will stand. Lawyers for Castroneves and Penske Racing Inc. had sought a delay until November to ensure he could drive in the 2009 IndyCar Series that runs April to October.
The trial will begin on March 2, 2009.
The 33 year old Castroneves was indicted in October on conspiracy and tax-evasion charges for allegedly using offshore companies in Panama to hide over $5.5 million dollars from the IRS from 1999-2004. If found guilty, he could be sentenced to serve up to 35 years in prison.
Castroneves’ sister and business manager, Katiucia Castroneves, 35, and his lawyer Alan Miller, 71, were also indicted. The indictment claims that the three of them,
[K]nowingly tried to conceal and disguise the true and correct amount of [Castroneves'] income.
When the indictment was handed down IRS Commissioner Doug Shulman said,
This case sends a clear message that the IRS is committed to vigorously enforcing the tax laws and stopping offshore tax evasion.
Related Tax Lawyer’ Blog posts on the issue of offshore tax havens:
U.S Indicts Swiss Executive For Foreign Bank Account Tax Evasion
Taxpayers Blame Tax Preparers for Failure to File FBAR TD F 90-22.1
Tax Court Update - October 2008 - The Limits of Tax Court Jurisdiction
Tags: News · Tax Crimes
