Recent high-profile prosecutions of wealthy tax evaders have made headlines worldwide. What isn't well known, though, are the new ways tax authorities obtain financial data to unearth tax evasion.
The recent indictment of former UBS banker Brad Birkenfeld in a Florida district court is a case in point. In 2001, UBS entered into a "Qualified Intermediary" (QI) agreement with the IRS. Under this agreement, UBS agreed to have its customers fill out IRS Forms W-8BEN, which identify foreign beneficial owners of bank accounts, and IRS Forms W-9, which identify U.S. beneficial owners of bank accounts.
UBS—and the hundreds of other offshore banks—that signed QI agreements didn't exactly do so voluntarily. Failing to do so would essentially cut the bank off from the U.S. securities markets. That's because without a QI agreement, UBS and other foreign banks are subject to a draconian 31% withholding tax on any income or gross sales proceeds from U.S. securities they hold on behalf of their clients. The only way to avoid the 31% tax is to sign the QI agreement.
In the Birkenfeld case, the IRS claimed that Birkenfeld and others participated in a "scheme to defraud" the IRS by failing to comply with the terms of the QI agreement. Now, Birkenfeld has pleaded guilty in order to avoid a stiff prison sentence—and is reportedly prepared to testify his wealthy U.S. clients.
QI agreements are just one of the many tools the IRS and other national tax authorities use to ferret out tax evasion. Others include expanded information-sharing provisions of tax treaties, a special kind of treaty called a "Tax Information Exchange Agreement," and even paying multi-million-dollar bribes to bank employees to disclose account data.
Under this new spirit of cooperation, earlier this year, German authorities paid a former employee of a Liechtenstein bank five million euros for account data on over 4,500 depositors. Then, they shared the data with investigators in Australia, Canada, France, Italy, New Zealand, Sweden, the United Kingdom, and the United States. More than 100 U.S. clients of this bank are now under investigation for tax evasion. And reportedly, a number of bankers from other countries have approached the German tax authorities offering information on depositors in exchange for a generous payoff.
If you think a U.S. court might throw out evidence against a taxpayer obtained through bribery, think again. Nearly 30 years ago, the U.S. Supreme Court upheld a tax evasion prosecution made possible only through the theft of a Bahamian banker's briefcase. Essentially, in tax evasion prosecutions, it's "anything goes."
For U.S. taxpayers, the only saving grace is that if you admit wrongdoing to the IRS before an investigation begins, you can usually avoid criminal prosecution. But you'll remain subject to all back taxes, interest, and (in many cases) civil penalties.
One think is certain. Efforts to discover unreported offshore income will only intensify in the future. If you're an American with unreported offshore income or accounts, my advice is to "come clean" with the IRS. Otherwise, the IRS just might clean out your finances, and imprison you to boot.
Copyright © 2008 by Mark Nestmann
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