Saturday, September 10, 2011

IRS Continues Mining the Gold from Voluntary Disclosures, and Picks Off a Liechtenstein Bank (9/10/11)

Lynnley Browning for Reuters reports today that USAO SDNY "are building a criminal-fraud case against Liechtenstein's oldest bank, Liechtensteinische Landesbank,"  Lynnley Browning, U.S. Probing Liechtenstein Bank Over Allegedly Helping Wealthy Tax Dodgers, (Huffington Post Reuters Report 9/9/11), here.

According to the article:
American officials learned of Liechtensteinische Landesbank's identity and alleged role through scores of voluntary disclosures made by `wealthy Americans in recent years to the U.S. Internal Revenue Service. The disclosures, which offer reduced fines and penalties in exchange for coming forward with secret offshore accounts, require U.S. taxpayers to provide detailed information about the network of banks, trusts, shell corporations and intermediaries they have used.
It has been clear for some time that the Government was picking up egregious enablers through the disclosures made in the special offshore voluntary disclosure programs.  The same database of information will produce the names and skullduggery of the egregrious financial institutions in this game as well.

In a similar vein, the Wall Street Journal reports today the the "golden age of offshore tax havens may be fading out." Robert Frank, 'Gold Mine' of Data Helps Officials Clamp Down on Offshore Tax Havens (WSJ 9/10/11), here. The Gold Mine is, of course, the data mentioned in the Browning article. Here are some excerpts:

The recent tax-fraud case involving Swiss bank UBS AG has been the biggest catalyst, tax lawyers say. As part of a deal with the U.S. Justice Department, UBS agreed to hand over more than 4,000 of names of U.S. account holders. Fifteen thousand others came forward under a voluntary disclosure program of reduced penalties.
Data from those accounts enabled the IRS to create a detailed roadmap of tax evasion around the world. Rather than just account holders, the IRS now is targeting banks, law firms, trust companies and accountants suspected of creating illegal offshore structures. It is getting help from its Global High Wealth Industry Group, formed in 2009 with agents better trained in complex financial structures.
"All of this data has become a gold mine for the IRS," says Bryan C. Skarlatos, an international tax lawyer at Kostelantez & Fink. "They can finally pierce the entire offshore banking infrastructure." The rise of computerized accounts has made it much easier to find and trace accounts and assets, he added.
* * * *
"Basically, the IRS wants to make it so that if you want to hide money, you're going to have to go to a small distant island in the South Pacific where you have to paddle over in a canoe to make a withdrawal," Mr. Skarlatos said. "You have to hope your money is there when you arrive."


  1. Oh, ye Rich, beware. That is the story line.. Doing the IRS work of spreading fear.

    ...but never a story of the unintended consequences of these actions by the IRS on the unsuspecting Minnows...

    Now that I think about it, the best selling book was about Moby Dick, not Minnie Minnow. So it goes.

  2. Jack and readers,

    I would bring your attention to the GAO report released yesterday concerning the IRS Tax Whistleblower Office. Here is the link:

    The report is pretty routine except for one point. Deep in the report at page 8-9, footnote c to Table 3, suggests a whistleblower turned in a rather large bank. "3000 taxpayer"

    Of course, there are alternative explanations but this seems the most likely.

    My point is that the DOJ is working from many angles, not simply OVDI.

    Seems the DOJ has them surrounded!

  3. This Lichtenstein Landesbank is like a Cantonal Bank, mostly owned by the government of Lichtenstein, which is a small country of about 35,000, headed by the Prince of Lichtenstein.

    I seriously doubt the US will receive much cooperation there. The bank is trying to attract new hedge funds and such, per their website. It's in German.

    The DOJ attorneys may have to review their German. (And French, Italian, Romansh, Spanish, Cantonese, and Creole). This will be a major stumbling block: foreign languages. How do you file lawsuits in foreign languages?

    I enjoyed the link to the Nova Scotia Bank summons. The Canadians were trying to be good neighbors, but after all these penalties, the US is losing the goodwill of its neighbors.

  4. To M's comment,

    Perhaps this will be an opportunity for Lichtensteinians to appreciate the nuance of the English language, and if they don't comply....

    Next season should have some interesting developments....

  5. You know, what really gets my goat, is how selective the tax code is, and how it is manipulated to special interest Corporate benefit. These provisions that allows Corporations to have their profits offshore, but let a measly little citizen with no lobbyist or loophole to use, have their money in a bank offshore, and the IRS uses it full legal authority to go after you.

    I guess, the ultimate loop hole, is for every citizen to be a Corporation for tax purposes and then be sure to have a former Administration Treasury person as your lobbyist and tax strategist..

    From the NYTs today, and I quote...

    Electronic Arts paid $60,000 early the next year to hire a prominent Washington tax lobbying firm. Soon after the law was signed, its lobbyist, Jonathan Talisman of Capitol Tax Partners, was granted a meeting with the Treasury Department’s deputy assistant secretary of tax policy — the same office Mr. Kohl once held — to ask that the deduction be extended to video game companies and the revenues they earned from online subscriptions.

    .....During Mr. Kohl’s seven years at the company, Electronic Arts also became more aggressive about assigning its intellectual property offshore, a move that often reduces a company’s tax bill. Mr. Kohl, who declined to be interviewed, is now running the tax department at Amazon, which is leading the legal battle by Internet retailers who want to avoid collecting state sales taxes from customers.

    In 2003, before joining Electronic Arts, Mr. Kohl co-authored a widely-cited proposal urging the federal government to crack down on corporate tax avoidance, warning that “the tax shelter problem is simply too detrimental to the tax system not to act.” As head of tax at Electronic Arts, he became a noted expert in using foreign subsidiaries to legally, and sharply, cut a corporation’s United States tax bill. As a co-chairman of the Silicon Valley Tax Directors Group, he also moderated a seminar in 2010 that showed technology companies how to use offshore subsidiaries to reassign the licensing of their intellectual property and, in some cases, reduce their effective federal tax rate substantially from 35 percent.

    Electronic Arts has more than 50 overseas subsidiaries, according to its recent regulatory filings, many in low-tax countries like Bermuda, Singapore and Mauritius. The company has also accumulated more than $1.3 billion in profits offshore, where it will not be taxed by the United States unless it is brought back into the country.

    Company officials say its overseas activities are not an attempt to avoid United States taxes and instead reflect how much of its business takes place in other countries. “E.A. is a global company with a majority of our customers and roughly 50 percent of our revenue generated outside of the United States,” Mr. Brown said. “Naturally we hire, build facilities, copyright our trademarks, invest and pay taxes in countries outside of the U.S.”

  6. WASHINGTON—The Treasury Department is considering a proposal to eliminate some but not all taxes on the overseas profits of U.S. multinational companies, a central element of the administration's broader plans to overhaul the corporate-tax code, according to two people familiar with the deliberations.

    U.S. businesses have pushed hard to exempt all overseas earnings from U.S. taxes, claiming the current system puts them at a disadvantage to foreign competitors.

    The taxation of overseas income is a political hot potato. Liberals and trade unions have warned that eliminating U.S. taxes on overseas earnings could encourage businesses to shift operations and jobs overseas. Conservatives and businesses, meanwhile, could be disappointed that the proposal from the Obama administration, which is still in the discussion stage, doesn't go far enough.

    The U.S. is rare among major industrial powers in maintaining a global taxation system, which often subjects the overseas earnings of companies to U.S. levies after they've been taxed by their overseas hosts. Most large countries primarily tax domestic earnings, in what is known as a territorial taxation system.

    The Treasury plan under consideration would create what officials refer to as a "tough" territorial system, which would shield some overseas profits from U.S. taxes. A key issue is what kind of profits would be excluded. The details of the plan couldn't be learned.

    The provision is part of a broader Treasury rewrite of the corporate-tax code that has been in the works for months. The rewrite could have a major impact on U.S. corporations. It is expected to include a significant cut from the current 35% corporate-tax rate and changes to various deductions that are a staple of American corporate finance.

    The White House had hoped to release its overall proposal in May or June, but shelved it after the debt-ceiling debate consumed Washington. Treasury officials intend to go public with the plan sometime in the fall. Any changes would require congressional approval. The chances of enactment as the 2012 election season heats up are slim.

    A Treasury Department spokeswoman declined to comment, saying no final decisions have been made.

  7. The system of taxing overseas profits has had the unintended consequence of discouraging companies from bringing earnings back to the U.S. That is because the U.S. allows companies to postpone federal tax on their overseas earnings indefinitely, as long as the money remains offshore. U.S. multinationals have more than $1 trillion in profits parked overseas, according to some estimates.

    The goal of the hybrid approach under consideration is to prevent companies from restructuring their businesses in a way that would shift U.S. jobs to other countries by concentrating assets or businesses in countries with lower tax rates.

    "There are some versions of 'territorial' that simply incentivize multinationals to create jobs overseas instead of here, and that's a version we want to avoid," said Jared Bernstein, a former economic adviser to Vice President Joe Biden who is now at the liberal-leaning Center on Budget and Policy Priorities.

    A territorial tax system would be a big win for U.S. multinationals. That includes many companies in the high-tech and pharmaceutical sectors, as well as consumer-goods makers. Large domestic companies such as utilities and retailers would prefer that overall tax rates be lowered, setting up a clash of priorities within the world of U.S. business.

    Because the White House wants any possible revamp to raise the same amount of money as the current system, domestic companies could see their tax breaks crimped to compensate for reduced revenues from taxing overseas profits. But multinationals could be concerned if a tough territorial system raised their tax burdens instead.

    "We would favor a territorial system that brings the U.S. in line with those adopted by other developed countries," said David Lewis, vice president of global tax at Eli Lilly & Co. "However, the inclusion of limits or other restrictions in a U.S. territorial regime that disfavor U.S. companies versus their foreign competitors would be counterproductive."

    In 2009, U.S. firms in the S&P 500 that reported foreign earnings had 55% of their income generated overseas, according to the Business Roundtable.

    On Aug. 12, Barack Obama summoned chief executives from some large U.S. companies to the White House to sound them out on ideas for his jobs proposal. Xerox Corp. chief executive Ursula Burns pressed him to include corporate-tax simplification and a territorial tax system, according to people familiar with the meeting.

    A partial move towards a territorial system could be used by the White House as an olive branch to U.S. corporations, who have battled the administration over a range of regulatory and tax issues.

    Prior proposals for a territorial tax system for the U.S. have produced widely varying revenue estimates, said Peter Merrill, director of the National Economics & Statistics Group at PricewaterhouseCoopers LLP. One recent plan that could be viewed as a tough territorial system was estimated to raise about $70 billion in additional taxes over a decade, while another, less-stringent plan would have cost the government $130 billion over the same period. The main difference involved the treatment of deductions and whether they were attributable to foreign income.

  8. With regard to "personal" corporations or trusts, I read that most offshore banks are moving in this direction, likely to avoid (existing or future) tax treaties.

    This is because the tax treaties, say between IRS and Switzerland, cover residents of the US and banks in Switzerland. Corporations from Cayman (for example) are not covered.

    And it is possible to structure these entities so that the owner's name is not on any papers.

    I think the IRS has extra penalties if caught using entities too.

    With regard to Lichtenstein, it is possible that Swiss banks directed US clients there (their next door neighbor) because the Swiss worried for their security in Switzerland, after the UBS debacle.

    Whereas the Swiss have numerous tax treaties with the US, Lichtenstein probably does not.

    Some Swiss banks apparently give US clients the option of filling out IRS reporting forms. Perhaps Lichtenstein does not.

    Thus the attention from the DOJ, perhaps to start the process of a tax treaty.

  9. Speaking to the Corporate tax issues, there was a good story on NPRs "All Things Considered" Saturday night... Here is the link if it interests anyone...


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