Wednesday, July 7, 2010

Government Sends Message to Aged and Infirm Offshore Bank Account Owners

The Government squeezed a plea from one Leonid Zaltsberg, a UBS depositor. On some factors, he looked liked a prime target. He had a high balance of $2.6 million, and he used an offshore entity to hide his ownership. Both of these likely made him appear on the initial round of disclosures from UBS. Also, he was an immigrant to the U.S. (the immigrant community being statistically more likely to have foreign bank accounts). He was also an international sports figure, at least in his younger days, and a message may be needed there. But, other factors might make him an unlikely candidate for the full court press in a prototypical criminal tax case. He is 75 years old and reportedly "suffers from bladder and prostate cancer, as well as depression." Is this someone the Government really wants to put in jail? Probably not. The UBS defendants are not generally going to jail anyway, even those much younger and healthier. Presumably, the hapless Mr. Zaltsberg will not either, particularly with the problems that could make his stay at club fed pretty expensive to the Government. So what's the point?

I speculate that the Government wants other aged and otherwise infirm offshore bank holders to pony up to the continuing voluntary disclosure opportunity. Of course, the Government did squeeze its typical 50% highest amount FBAR penalty from the Mr. Zaltsberg, walking away with a nice $1.3 million on the FBAR penalty alone. The income tax, however, appears to be slim pickings, at least relatively, for his lawyer is quoted as saying the "tax loss" was "about $60,000." (More on the income tax loss below.) But, this "return" from civil penalty exaction will be paltry if the message sent to others similarly situated that they should get into the program. For those entering the program after 10/15/09 (when the 20% penalty regime was offered), the penalty is expected to rise but will, it is speculated, be less than 50%, so if the message works there should be a whole lot more coming in to the fisc.

I think the background for the message is that U.S. taxpayers with Mr. Zaltsberg's profile, particularly if they were not UBS depositors, might otherwise be sorely tempted just to ride this tsunami out. The risk / reward ratio where their age and health made them historically unlikely for criminal prosecution might be very attractive. But the Government's message is that that risk / reward ratio is not quite so attractive as one might otherwise speculate. (It is always about speculation anyway.) The offshore bank initiative cannot be measured by historical tax prosecution imperatives.

For more on this plea (if not my speculations about it), see:

US DOJ Press Release
USAO D-NY Press Release
Criminal Information
Bloomberg Business Week Article

I said I was going to say more about the tax loss. I have not a clue as to whether Mr. Zaltsberg's lawyer was right in asserting that the tax loss was only $60,000, nor for that matter do I know what his definition of tax loss is. It seems to me, however, that the potential tax loss might be much greater than that. If fraud were involved (and that has not been conclusively determined because Zaltsberg admitted only tax perjury and not evasion), then the statute of limitations would be open for all years -- going back to the 1990s when, presumably, he socked away the loot perhaps without paying tax on it. Of course, for those taxpayers getting into the voluntary disclosure program, the IRS does not look beyond 2003, but Zaltsberg was not in the voluntary disclosure program so it is at least theoretically possible that a lot more civil tax dollars, penalties and interest could be at stake. Moreover, I presume that the parties negotiated over the sentencing tax loss in the plea agreement, but that does not mean that the Probation Office cannot look at all relevant conduct in calculating the tax loss for sentencing guidelines purposes and, of course, relevant conduct tax loss can go beyond the criminal statute of limitations.

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