[Updated May 2019] With the ink barely dry on Swiss private bank Wegelin’s guilty plea to criminal tax charges, a U.S. District Court judge today approved a summons for customer records from UBS. The IRS wants the records to identify Americans and other U.S. taxpayers with unreported foreign accounts.
Although owning or controlling a Swiss bank account is totally legal, foreign accounts must be reported yearly to the IRS on a Report of Foreign Bank and Financial Accounts (FBAR). Failure to file an FBAR can be a felony and also lead to huge civil penalties.
Prosecutors say that Wegelin maintained a correspondent account at UBS. That account was used to help Americans clear money transfers to and from Switzerland. Wegelin had no branches in the United States and so relied on a correspondent relationship with UBS. Other Swiss banks apparently did the same.
A correspondent account is a bank account that one bank maintains for another bank. Financial transactions involving U.S. dollars flow through U.S. banks; therefore, a foreign bank such as Wegelin with no US branches, needs a correspondent account in order to reach U.S. customers. Transactions in the correspondent account leave a trail in the United States that the IRS can follow, including by using a John Doe summons. (Wire transfers in dollars also leave a trail, all such transfers are processed in the United States.)
A John Doe summons is used when the IRS does not know the name of specific taxpayers who may be violating the law. Unlike a normal subpoena which seeks records on specified individuals, the IRS relies on the John Doe process where it believes there are violations but does not know the names of the people breaking the law. Unlike normal information requests, John Doe summonses must be approved by a federal judge.
U.S. District Judge William Pauley III of Manhattan approved the IRS request and authorized the Service to seek records as far back as 2003 from UBS. These are records of transactions Wegelin and other banks made on behalf of U.S. taxpayers. In a formal press release, U.S. Attorney Preet Bahara said the John Doe summons was, “the latest step in our efforts to identify and prosecute U.S. taxpayers who think they can evade their legal responsibility to pay taxes by secreting their money away in anonymous offshore accounts at Wegelin and other banks.”
What does this mean for Americans with unreported Swiss accounts? Your days are probably numbered.
Chances are that if your Swiss bank has a branch within the United States, Uncle Sam can easily obtain information through a John Doe summons. The bank has little standing to object since the bank is subject to the jurisdiction of the U.S courts by virtue of a branch on U.S. soil. If your Swiss account is maintained at a U.S. branch of a Swiss bank, there also probably isn’t any reporting problems. The U.S. branches report directly to the IRS (1099’s).
Now we know that courts will approve John Doe summonses on U.S. banks that act as a correspondent for an offshore bank. If your bank doesn’t have a U.S. branch you still aren’t safe because all transactions in U.S. dollars must be cleared through a correspondent branch. This is precisely how the IRS is able to reach Wegelin.
The IRS and Justice Department show no signs of backing down in their search for unreported Swiss and foreign accounts. If you have failed to file FBARs, the chances of getting caught have never been higher. Currently the IRS has several amnesty and opt out plans for taxpayers who wish to avoid criminal prosecution and draconian civil penalties. Consult with a tax advisor well versed in foreign reporting requirements before taking action but don’t delay. (The IRS operates on a “first contact” policy meaning if the IRS gets your name pursuant to John Doe summons, you automatically become ineligible for the offshore voluntary disclosure amnesty program.)
Offshore Tax Evasion and Whistleblower Rewards
For many years we helped people comply with the offshore reporting rules. We now refer those cases out unless the taxpayer is facing a risk of criminal prosecution. [If you need help complying and are not at risk of prosecution, write to us and tell us where you are located. We can probably refer someone great at handling your reporting requirements.]
Today our tax practice is almost exclusively focused on the IRS whistleblower program. People with inside information about offshore tax fraud are eligible for rewards of between 10% and 30% of whatever the government collects including interest and penalties.
The biggest awards typically are associated with banks, other financial institutions, offshore service companies and corporations that evade taxes through offshore accounts or assist Americans in doing so. Awards are available under the IRS Whistleblower Program for information about individuals evading tax if the tax is at least $2 million and the person evading the tax has gross annual income of $200,000 or more.
We like the IRS whistleblower program because whistleblowers can almost always remain anonymous. Unless there is a criminal prosecution and you are called as a witness, your identity remains a secret.
Another benefit of the program is that there is no requirement that you be a U.S. citizen. Congress and the IRS recognizes that some of the best information about offshore tax evasion comes from people living overseas.
Are the awards real? The largest whistleblower award to date was paid to Bradley Birkenfeld, a former UBS director. His actions helped the IRS collect a $785 million fine and earned Brad a $104,000,000.00 award.
For more information, contact attorney Brian Mahany at or by telephone at (202) 800-9791. All inquiries are protected by the attorney – client privilege and kept in strict confidence.Our services are available nationwide. We invite you to visit our IRS Tax Fraud Whistleblower page and our John Doe summons post for more information.