Back in 2017 we warned about Swiss insurance wrappers. While these products aren’t necessarily bad investments, wealthy Americans often use them to avoid taxes. A recent felony conviction shows just how dangerous this practice is. In this post we will look at the recent IRS criminal prosecution and how whistleblowers can receive a cash reward for reporting taxpayers using these schemes.
First, let’s explain how these products work.
Swiss Insurance Wrappers
An “insurance wrapper” policy is an insurance product offered by Swiss and other insurance companies primarily to U.S. citizens to allow for asset protection and global investment benefits. They are legal for that purpose but some Americans use them to evade taxes.
Typically, insurance wrapper policies were private placement life insurance or annuity accounts that combined the benefits of insurance with those of private banking by funding a life insurance or annuity policy with investment assets of the client. In many instances, the product would not qualify for treatment as life insurance under United States law.
A foreign insurance company would maintain the policy assets in an offshore bank account in the name of the insurance company, rather than the U.S. citizen, while the U.S. citizen still maintained a level of control over the assets and how they were invested.
The investor has control of the money but nothing in his or her name.
The United States is one of just two countries that taxes both foreign income and requires taxpayers to identify foreign financial assets. While many taxpayers know they are required to report foreign bank accounts, the obligation is much broader. Brokerage accounts, insurance policies with a cash value and CD’s must also be reported.
If the account generates income (dividends, interest, etc.), that income must also be reported.
Failure to report foreign accounts and failure to report foreign source income are both crimes.
John Blandi Convicted of Filing a False Tax Return
John Blandi of Spokane Washington man was convicted this month of filing a false tax return. Prosecutors say Bland held $5,221,514 in an offshore account. In 2013 that account generated $1.4 million in income. None of that income was reported on Bland’s return. In fact, he never told his accountant about the offshore account.
We have seen many cases where U.S. taxpayers simply didn’t understand their obligation to report foreign accounts as well as the income from those accounts. These innocent mistakes frequently occur with American expats who live abroad, foreigners living in the United States but sending money to families in their home country and with Americans doing business internationally and needing to maintain accounts in foreign countries. None of those scenarios describe Blandi.
Blandi’s Swiss insurance wrappers were set up by an offshore asset manager. Often these folks will set up these wrappers specifically to help Americans evade taxes and hide money from Uncle Sam. We don’t know if idea to create these insurance wrappers came from Blandi himself of the asset manager. Either way, the Blandi’s plea agreement clearly shows an effort to evade taxes. According to the criminal charges,
“From at least January 2007 through at least August 2012, JOHN THOMAS BLANDI communicated with the [asset manager] by mail with questions and/or concerning regarding his foreign investments. JOHN THOMAS BLANDI expressed concerns about creating reportable events that would result in the United States being notified of his offshore accounts. For example, in February 2007, JOHN THOMAS BLANDI cautioned his offshore [asset manager] that he “(doesn’t] like paperwork etc. coming here from issuer on ongoing basis … but to [asset manager] who only drops me ‘cloaked’ memos as needed.
“[Blandi] also told the [asset manager] ‘appreciate all your diligence and assistance … and ‘cloaked’ correspondence … please address all correspondence to ‘John Thomas.’ In June 2008, [Blandi] instructed the offshore [asset manager] ‘no calls – careful correspondence please.’
In April 2010, [Blandi] instructed the offshore [asset manager] to use ‘NO name, letterhead, etc….’when responding to… questions regarding his offshore account because ‘ … under circumstances, it is best to exercise extreme caution … these are dangerous times.’”
If that wasn’t enough evidence, prosecutors say that he specifically asked his accountant about offshore reporting rules. He apparently didn’t like what he heard because he didn’t disclose the account or the income to his account resulting in a 2013 tax liability of $552,075.
After being caught, he cooperated and amended his return. Unfortunately, he is now a convicted felon facing prison.
After Blandi’s conviction, an IRS spokesperson said, “Placing unreported income in an offshore account is not tax planning, it’s tax evasion. IRS-Criminal Investigation has been very open about our aggressive efforts to combat offshore tax fraud schemes. We will investigate and seek prosecution of taxpayers.”
IRS Whistleblower Program and Swiss Insurance Wrappers
The IRS Whistleblower Program pays cash rewards to whistleblowers with inside information about offshore tax cheats. Rewards are up to 30% of whatever the IRS collects in delinquent taxes from the wrongdoer including any interest and penalties.
It is difficult for the IRS to identify offshore accounts and income. While many banks are finally beginning to cooperate with the IRS and other tax authorities internationally, some wealthy Americans are using exotic financial instruments such as Swiss insurance wrappers to hide their money.
We aren’t aware of any foreign or Swiss insurance wrappers sold in the United States since 2012 but older policies may still be active and they may still be sold by foreign insurance agents or asset managers. In 2012, the Department of Justice called Swiss insurance giant Swiss Life on the carpet for their Swiss wrapper business.
Using one of these devices for asset protection may be legitimate. Hiding either the account or income from Uncle Sam is not.
The IRS is interested in both wealthy Americans with unreported accounts or income as well as the lawyers / promoters / bankers / “asset managers” who put together these schemes. In fact, the largest whistleblower reward to date was $104 million to a former director of UBS who blew the whistle on his own employer, Swiss bank UBS.
To learn more, we urge you to visit our offshore tax fraud whistleblower page. Ready to see if you qualify for a reward? Contact us online, by email or by phone 202-800-9791. All inquiries are protected by the attorney – client privilege and kept strictly confidential.