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IRS $104 Million Whistleblower Payment Should Make Foreign Account Holders Nervous

Bradley Birkenfeld, a former UBS AG bank executive, was instrumental in helping U.S. authorities expose tax evasion facilitated by the Swiss banking giant.  The information Birkenfeld provided led to an investigation that ultimately resulted in a 2009 settlement between the United States and UBS, with the latter agreeing to pay $780 million in fines and to turn over the names of thousands of Americans suspected of using Swiss bank accounts to evade taxes.  This settlement would be the precursor to the breaking of the backbone of the Swiss banking industry as a haven for tax-dodgers.  On Tuesday, Birkenfeld got his reward from the IRS, in the form of $104 million, the most ever granted to an individual in a whistleblower case.

One thing that caught my interest was this statement by Birkenfeld’ attorney, Stephen Khon: “this sends 104 million messages to banks around the world that help Americans evade the IRS,” he said in an interview. “It sends 104 million messages to employees of those banks who are thinking of coming forward, and it sends 104 million messages to Americans who have those accounts.  It says they will get caught.”

Put another way, it is, and will remain, a bad time to have a foreign tax-avoidance account.

The IRS clearly appears to be winning the war against foreign tax havens.  In the years since the UBS settlement, Credit Suisse Group AG, Switzerland’s second-biggest bank, has agreed to disclose confidential U.S. client account data to the Swiss tax authorities; while at least five Swiss banks, including: HSBC Holdings Plc’s Swiss unit, Credit Suisse Group AG (CSGN) and Julius Baer Group Ltd. (BAER), have supplied e-mails, telephone records, correspondence, and even passport data on their own employees to the U.S. Department of Justice.

In the meantime, the IRS has capitalized on the sheer panic of thousands of foreign account holders by conducting several successful tax amnesty programs, raising as much as $5 billion in unpaid taxes.

Whatever one thinks about the propriety of the act of whistleblowing or the magnitude of the award itself, it is undeniable that a payout this large, coupled with the developments within the Swiss banking industry, should put fear into the minds of all foreign account holders.  Banks everywhere will be weighing the gains of holding dirty money against the cost of the (eventual) settlement with the United States, while employees of these banks will be paying far greater attention to the benefits of blowing the whistle on their employers.  At no point will the concerns of the individual account holders ever enter into either party’s consideration, which makes their position far and away the most undesirable of anyone involved.

If you are reading this article and you are one of those account holders, you might want to consider taking advantage of the IRS offshore voluntary disclosure program (OVDP).  The IRS renewed the program for 2012 after receiving a strong showing of interest in the 2011 and 2009 programs.  However, be forewarned, considering for too long may mean the loss of the opportunity, as the IRS can close the OVDP window at any time.  The terms of the latest disclosure program are not as favorable as those that came previously, and making a voluntary disclosure will certainly hurt the pocket book a lot more than paying no taxes at all, but it sure beats going to jail.

If you have questions about the IRS OVDP program, check out the IRS website or consider contacting a Florida tax attorney who can provide you with assistance.