by Brian Mahany
Back in February, we reported on California attorney Christopher Rusch after he was indicted and arrested for helping two clients establish unreported foreign accounts. Rusch initially denied the charges but court documents released this month suggest he may have cut a plea deal with prosecutors. The case is being closely watched by those with unreported foreign bank accounts as well as the accounting and legal communities.
Tens of thousands of Americans have unreported foreign accounts. Some folks made a conscious effort to hide their money from the IRS and many more simply don’t understand the law. Although criminal cases against offshore bankers and the holders of unreported accounts have reached a record high, until recently few cases targeted accountants and lawyers.
That’s changing quickly.
Prosecutors say that Rusch helped his clients avoid U.S. taxes by helping them create nominee entities to conceal the true ownership of the accounts and by using his attorney trust account to help facilitate the transfer of monies to a Swiss account. Like his clients, all are charged with conspiracy to defraud the U.S. Treasury, a felony.
Lawyers and accountants frequently provide tax advice and help clients structure their business entities. Doing so for a client that intends to break the law can clearly land the lawyer or accountant in hot water even if the lawyer does not directly profit. While Rusch has denied the charges, a motion filed by his clients to disclose the terms of a secret plea negotiations states that Rusch has or is cutting a deal with the feds.
Besides serving as a warning to accountants and lawyers, the case is important for another reason. Predictably, investigators issued a Grand Jury subpoena for Rusch’s records. His clients claimed these were subject to the attorney – client privilege. While ordinarily that would be the case, in July the court ruled that the “Crime Fraud Exception” to the attorney – client privilege applied and said the records were not privileged.
Normally, everything that you tell your attorney is confidential. (The same does not apply to CPAs and other tax professionals, however.) The purpose of the privilege is to allow clients and lawyers to speak freely and frankly and without fear that the government can compel the lawyer to “spill the beans” as to what was revealed by the client.
There are a few rare but important exceptions to the privilege, however. One involves future serious criminal conduct. If you tell your lawyer that you just murdered your wife, the conversation is privileged. Tell her that you are about to detonate a bomb, however, and the conversation is no longer privileged.
In this case, the court said the “Crime Fraud Exception” applied. If the attorney and client are speaking or working together in furtherance of a crime, the privilege no longer applies. In this case, asking your attorney for help breaking the law means that the attorney can testify.
We are interested to see what happens with Rusch. As of this writing, his website is still up and he appears to remain in practice. Just how much Rusch knew about his clients activities is not yet known. If he does plead guilty then we can safely assume that he knew his clients were up to no good.
Lawyers and accountants are frequently asked by clients to take positions not supported by the tax code. In recent years, the Treasury Department has adopted Circular 230 which requires tax professionals to follow the law or risk losing their ability to practice. Recent criminal cases like this case show that now it’s more than the CPA or lawyer’s license on the line. It’s their freedom too.
What is the take-away from all this? Always be honest with your tax advisor but if you have done something that you know is or may be criminal, speak to a lawyer. Other professionals don’t have the attorney – client privilege. Remember, however, that while you should always communicate truthfully with your advisor, asking him or her to do something illegal means the privilege can be overcome and you may see your advisor on the witness stand testifying for the government.
The tax lawyers at Mahany & Ertl help people with unreported offshore accounts. If you haven’t filed an FBAR form, have hidden money offshore and are not sure how to come into compliance, have questions about the new FATCA law or just want honest answers about the IRS’ offshore amnesty plan (OVDI), give us a call. We can help you too if you are already under criminal investigation. Because we are lawyers, everything you tell us is kept in confidence (just don’t ask us to break the law).
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and coming soon, San Francisco, California. IRS / tax law services available worldwide.