For many years we counseled clients against 419 or so called “welfare benefit plans” sold by dubious Internet promoters. Those scams are now being replaced by “secret” offshore life insurance plans including those marketed by SwissPartners Investment Network AG and its affiliates SwissPartners Insurance Company, SwissPartners Wealth Management and SwissPartners Vericherung. Earlier this month the Justice Department and IRS announced a non-prosecution agreement against the company.
While a “non-prosecution” agreement and the attendant $4.4 million fine are not big news, buried in the fine print of the non-prosecution agreement is Swiss Partners pledge to turn over the names of all its U.S. clients. Those individuals face possible criminal prosecution and almost certain audits and huge civil penalties.
How SwissPartners operates is a cautionary tale to others lured by the promise of exotic insurance products that promise to eliminate income tax liabilities. There is a reason why conventional U.S. insurance companies don’t sell these products; they are illegal. The IRS considers them to be abusive tax shelters.
SwissPartners and other companies like them typically recruit professionals to sell their products. We know of at least one lawyer and several accountants who were approached to market these products to their clients as a tax planning tool.
The companies that sell these products claim you can sell your business to the offshore insurance policy. Instead of paying cash, the policy “pays” for the business with a promissory note. Any profits made by your business then get distributed to the policy; a policy conveniently located outside the United States. The promoter claims that the taxpayer – policy holder no longer has to pay tax on the business profits. (SwissPartners were located in Switzerland, the Cayman Islands and Liechtenstein, all reputed tax havens and secrecy jurisdictions.)
But how does the policy holder access the profits? Through “loans” from the policy.
Like what your parents would tell you when you were a child, if it sounds to good to be true, it probably is. The IRS says there is no valid business purpose for these transactions except to evade taxes. The IRS has codified an “economic substance doctrine” and these transactions certainly lack the required business purpose to pass muster. In fact, like the similar bogus 419 plans, the IRS considers them to be listed transactions and abusive tax shelters.
In announcing the non-prosecution agreement with SwissPartners, Manhattan’s U.S. Attorney Preet Bharara said, “This Office will continue to work aggressively to hold accountable not only those U.S. taxpayers who evade their tax obligations by hiding money overseas, but also those abroad who make such tax evasion possible.”
What does this mean for customers of SwissPartners? Folks who purchased these plans can expect an audit and may have to pay years of back taxes, penalties and interest. Some will likely be prosecuted criminally.
The silver lining may be the ability to recover damages from both the promoter and people who marketed or blessed these plans. Unfortunately, we have seen many otherwise good CPAs and lawyers themselves duped by slick marketing materials and questionable legal opinions offered by the promoters. Accountants and attorneys, however, are held to much higher standards and should have been able to determine that these transactions are not permitted by the IRS. Beginning in 1995, the IRS has released a series of bulletins and notices to professionals warning about these transactions.
If you purchased one of these plans, consider hiring legal counsel immediately. An experienced tax attorney can assist with both mitigating IRS penalties and avoiding prosecution. An experienced fraud recovery lawyer can help you collect damages against the person and companies marketing these products. At Mahany & Ertl, we do both. In fact, that is all we do; fraud recovery and tax controversy. For more information, contact attorney Brian Mahany at (direct).
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