The Internal Revenue Service is cracking down on tax cheats hiding money in foreign countries, and financial advisors who have wealthy clients with cash stashed overseas better hope their clients properly reported such funds.
After a former private banker with Swiss bank UBS pleaded guilty in June to helping a client hide $200 million in an offshore account, he blew the whistle on the bank by claiming it holds billions of dollars for U.S. customers in secret Swiss bank accounts. In turn, the U.S. government has sued UBS in a Florida court to hand over names of 52,000 American depositors. The IRS is offering amnesty to people suspected of hiding money in such accounts-fess up and pay back taxes, or face penalties that could include up to five years in jail and fines of $100,000 or 50% of the amount in the unreported foreign account, whichever is more.
Robert McKenzie, a partner in the white-collar criminal defense and tax practice at the Chicago-based firm Arnstein & Lehr, says advisors who put client money in offshore accounts for diversification or other legal reasons should put in writing that they properly advised clients of the legal responsibilities for reporting that money. That entails filing a Foreign Bank and Financial Account report for overseas accounts worth more than $10,000.
If the client willfully failed to report the income and the IRS nabs them, the advisor who didn't put his legally defensible advice in writing could get dragged into the case and potentially-depending on the outcome of the case-stand accused of aiding and abetting tax fraud. The penalties include jail time and heavy fines.
McKenzie says about 15 people have sought his advice in the UBS case, and some are laying low because they don't think the IRS can possibly catch all 52,000 suspected accounts. "In a given year, the IRS usually prosecutes 2,500 for tax fraud of all types," says McKenzie, whose advice is to come clean. "How much is it worth to sleep at night?"
McKenzie says UBS is probably the tip of the iceberg in going after foreign accounts. Credit Suisse and HSBC have been mentioned in the press as possible targets, and he says he's advised people who've made voluntary disclosures with banks other than the aforementioned three.