“Attorney Turns On Clients” – that was the headline of a story that ran last May in azcentral.com, an Arizona news source owned by the Gannett organization. According to the story, San Diego attorney Christopher Rusch was providing tax advice to clients while at the same time cooperating with Justice Department officials who were investigating his clients. This week Rusch was sentenced to 10 months in prison for his part in the crimes. Two of his clients are also serving prison sentences.
The Justice Department and IRS have long targeted accountants, bankers and lawyers that assist others in committing tax evasion. One banker, for example, can often identify hundreds or even thousands of clients with suspected unreported offshore accounts.
It’s bad enough for taxpayers to face off against the IRS and federal prosecutors in court. When your own lawyer takes the stand and calls you a crook, the game is basically over. Two of Rusch’s former clients, Arizona businessmen Stephen Kerr and Michael Quiel went to trial last year only to learn that Rusch was the government’s star witness.
Generally, clients enjoy an almost absolute privilege in what they tell their lawyer. There are two big exceptions. You can safely tell your lawyer of prior misdeeds but can’t tell your lawyer about certain future crimes nor can your lawyer be part of your criminal wrongdoing. The latter is called the “crime fraud” exception.
By way of example, if you tell your lawyer that you are going to murder your spouse or you and your lawyer plan on purchasing drugs together, there is no privilege. The attorney can be compelled to testify against you. Under the crime fraud exception, the attorney can be prosecuted as well.
Kerr and Quiel were both convicted after jurors believed they had intentionally set up offshore accounts using nominee names to avoid taxation.
Foreign bank accounts are completely legal if properly reported each year. Federal law requires most offshore accounts to be disclosed on one’s tax return as well as an FBAR form (Report of Foreign bank and Financial Accounts). Failure to file FBARs is a felony.
Prosecutors say that Rusch helped his two clients set up unreported accounts in Switzerland, the Caribbean and Panama. The banks involved were UBS and Pictet & Cie.
The prosecution of Kerr and Quiel was not without controversy. In addition to the attorney – client privilege issues, both men said they didn’t evade any taxes. Evidently the jury agreed as they were not convicted of tax evasion charges. Unfortunately, the mere willful failure to file an FBAR or not disclose a foreign account on a tax return is still a felony.
For his part, Rusch received a relatively light sentence. That’s because he agreed to cooperate and become a prosecution witness against his own clients.
In announcing the sentences, Tax Division Assistant Attorney General Kathryn Keneally said, “We are getting more and more information all the time about offshore banking activities. We are committed to investigating and prosecuting those who continue to evade taxes and reporting requirements. As these sentences show, those who fail to come into compliance risk high penalties and jail.”
Should taxpayers with unreported offshore accounts be concerned about these decisions? Probably not. What you tell your lawyer is confidential. Unless you ask your lawyer to participate in a crime or do something illegal, there is little to fear. The takeaway from this case, however, is to always remember that the government has become very good at ferreting out unreported offshore financial assets.
If you have more than 1 year of unfiled FBARs or have used nominee accounts to conceal your foreign accounts, consider hiring a skilled FBAR lawyer to help you come into compliance. Although the risk of becoming the target of a criminal investigation remains low, the risk of huge civil penalties is a very real possibility. In some cases, the penalties can exceed the amount of funds held offshore.
Mahany & Ertl – America’s IRS tax attorneys, FATCA lawyers & FBAR lawyers