August 28, 2009

UBS Settlement With DOJ: Time Running Out for U.S. Taxpayers With Undeclared UBS Accounts or Other Noncompliance Issues

Holland & Knight Alert
Kevin E. Packman

On August 13, 2009, the United States Department of Justice (DOJ) reached a settlement with Swiss bank UBS AG under which UBS will reveal the names of a number of U.S. taxpayers with undeclared foreign accounts. On August 19, 2009, details of the settlement were revealed, and we now know UBS will turn over identifying information on 4,450 U.S. taxpayers. The criteria set forth by the DOJ on which these 4,450 taxpayers were singled out is not known, but the settlement will permit the United States to seek information from other Swiss banks in which U.S. taxpayers meet the same criteria. Nevertheless, what is perfectly clear is that the time is quickly ending for U.S. taxpayers with undeclared UBS accounts to avoid severe penalties and criminal prosecution. Though not specifically health care related, we believe that information about this program may be of significant interest to our readers.

The IRS Offshore Income Reporting Initiative (Initiative) announced on March 23, 2009, which continues through September 23, 2009, is only available for those taxpayers who come into the system before the IRS receives their names. Under the settlement, UBS will advise its U.S. taxpayers who satisfy the above referenced and unknown criteria that the United States has requested their information. The notices will be sent over the coming weeks and months on a rolling basis. The IRS has indicated that such taxpayers are still eligible for the Initiative provided they come in before September 23, and they are in the system before the IRS receives their names from UBS.

Three Pre-Settlement Guilty Pleas

The settlement follows UBS’ deferred prosecution in February 2009, in which it admitted to helping U.S. taxpayers hide accounts from the United States government, paid $780 million in settlement and turned over the names of upwards of 250 U.S. account owners. From that initial list, there have been three guilty pleas entered by U.S. taxpayers: on April 14, 2009, Robert Moran pled guilty to filing a false 2007 income tax return; on June 25, 2009, Steven Michael Rubinstein pled guilty to filing a false 2004 income tax return; and on July 28, 2009, Jeffrey Chernick pled guilty to filing a false 2007 income tax return. All three taxpayers, in addition to having to resolve their income tax obligations for the open years under the statute of limitations (this includes payment of the omitted income tax, interest on the tax, and penalties), face a maximum fine of $250,000 and up to three years in jail. However, the Rubinstein plea makes it clear that he is also subject to an FBAR (Report of Foreign Bank and Financial Accounts) penalty, which is 50 percent of the highest balance in his foreign accounts over a six-year period.

A Fourth Post-Settlement Guilty Plea

On August 14, 2009, John McCarthy, a Los Angeles taxpayer, pled guilty to the willful failure to file an FBAR for the years 2003– 2008. Although this is the first plea following the DOJ/UBS settlement, it appears to mark a significant change in what the government will accept in the way of a guilty plea. McCarthy’s plea includes a civil fraud penalty (75 percent on the omitted tax) for the six-year period, a 50 percent FBAR penalty on the highest balance in the foreign accounts for each of the six years, and incarceration for up to five years.

In the press release announcing McCarthy’s plea, Eileen C. Mayer, chief of IRS Criminal Investigation, said, “The prosecution of John McCarthy is the tip of the iceberg.” This is consistent with a New York Times article on August 14, 2009 and the statements of a federal prosecutor in an August 18, 2009 court filing that states that the United States is building criminal cases against 150 U.S. taxpayers. These prosecutions stem from the initial list of names UBS provided in February.

Taxpayer Counsel

Whether taxpayers have an undeclared UBS account, other international noncompliance, or have already been contacted by the IRS, Holland & Knight is primed to offer assistance. For more information, read a detailed summary on the Initiative. To understand some of the most commonly overlooked filing obligations, see a recent Private Wealth Services alert.

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