TAX-CHEAT SHOWDOWN : FESS UP OR STAY QUIET ? / THE WALL STREET JOURNAL

AUGUST 14, 2009.

Tax-Cheat Showdown: Fess Up or Stay Quiet?

By LAURA SAUNDERS

The Internal Revenue Service is staging a massive poker game. It has invited 52,000 UBS AG account holders to the table.

Now that the U.S. and Swiss governments have resolved a longstanding dispute about disclosing the identities of secret Swiss bank accounts, the holders face an acute dilemma: Do they confess their tax-evasion sins and possibly give up a large portion of their offshore accounts? Or do they stay quiet, hoping to avoid detection, but risk far greater penalties or even criminal prosecution if exposed to authorities?

Their decision is made harder because the IRS is doing its best to keep account holders in the dark about both the timing and reasons for which names are disclosed. That is because the IRS hopes to use the threat of disclosure as leverage, coaxing offshore tax evaders to come clean on their own.

At this high-stakes game, numbers matter. A Swiss newspaper recently reported that the Swiss government will turn over 5,000 names, which is only a fraction of the total 52,000 accounts the IRS believes are used to avoid U.S. taxes. Some U.S. taxpayers hold more than one of the 52,000 accounts.

While holders of secretive Swiss accounts are reluctant to talk to the media, their lawyers say many are still undecided. One factor in play: The IRS only has resources to prosecute about 1,000 criminal tax cases each year. "I'm surprised at how many are willing to gamble," said Kevin Packman of Holland & Knight in Miami.

At least until recently, said George Clarke of Miller & Chevalier in Washington, the cost of a disclosure was persuading many with offshore accounts to take their chances: "For everyone I have talked to who decided to go forward with a disclosure, there are five who did not."

Attorneys say that many of those who confess are likely to pay 40% or more of the total account value in taxes, penalties and interest, plus state taxes, penalties and interest. That doesn't factor in legal and accounting fees, which can run from $20,000 to more than $50,000 per taxpayer in an expensive area like New York.
The IRS has vowed to be even more severe for those who don't step forward, by imposing massive, congressionally authorized penalties on offshore evaders. One recent example put the taxes and penalties on a hypothetical $1 million at $2.3 million, plus interest and the possibility of criminal prosecution.

Then there are the odds that any particular name will be on the list. If no one can figure out how names were chosen, it becomes harder for tax cheats to game the system and avoid disclosure.

"The best thing for the IRS would be if they get a large number of names and it's not clear how they were chosen," said Barbara Kaplan, of New York law firm Greenberg Traurig, who has UBS account holders as clients.

This is unlikely to happen. Disclosure is seldom permitted under rigid Swiss bank secrecy laws. The Swiss will probably have to redefine what a tax crime is, said Kenneth Rubenstein of Rubenstein & Rubenstein in New York. "If they move the goalposts of the law so that it becomes more like the U.S., then they can legally release the names to the U.S." This would mean the names released would be those of the "most guilty" of tax crimes. Those least likely to be released would be those connected with old, small or inactive accounts.

Coming forward to the IRS has its hazards. The agency is offering a special voluntary disclosure program for holders of any offshore accounts that promises a measure of clemency to those who report before Sept. 23. Taxpayers must fill out a three-page application for entry (or submit similar information). All applications are run through the IRS criminal division, and the agency reserves the right to reject an application, especially for those whose names it already has. "Our position is, you must come to us before we find you," said a spokesman. When UBS turned over 250 names to the government last Feb. 18, those on the list who hadn't already come forward were ineligible for clemency.

If a taxpayer does ask for clemency and the IRS grants it, the resolution is likely to be costly for all but those with small or inactive accounts, or very good excuses.

The IRS won't say how many taxpayers have applied to the clemency program since it began in March.

This year three UBS account holders have pleaded guilty in federal court. Although the government is likely to pursue more high-profile offshore tax-evasion cases in court, it is limited in the number of cases it could pursue, said Bryan Skarlatos, an attorney with Kostelanetz & Fink in New York.

Some holders, especially those with smaller or inactive accounts, may opt not to disclose and simply close the account. "But the problem is still there for the years in question," Mr. Skarlatos said. "I have had cases where the IRS discovered them and imposed penalties years later."

There is no statute of limitations in the tax code for fraud. For those who want to keep the account, he said, "I remind them that they are committing felonies each year when they sign their tax return."

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