Offshore tax evaders face carrots, sticks

A few weeks ago, attorney Michael Bachner noticed that he was suddenly hearing from a lot of wealthy callers with bank accounts in Switzerland or the Cayman Islands.

They all had the same question: Should they take up the Internal Revenue Service’s new offer of leniency for offshore tax evaders who come clean in the next six months?

Or should they risk the crackdown they might face if they don’t take up the offer?

With severe budgetary distress in Washington, the IRS is using both carrots and sticks to make those with illicit offshore bank accounts pay up an estimated $100 billion in unpaid annual taxes.

The carrots include a generous offer of leniency for offshore evaders, but experts say such tax amnesties often don't net more than a fraction of tax cheats.

It’s the small-time offenders who usually come forward under such amnesty schemes. The rest remain in the shadows, betting on the passage of time and inadequate IRS manpower to keep them safe – even when a famously secretive Swiss bank such as UBS buckles as it did in February under pressure from US federal authorities.

“These types of individuals in my experience … they have been engaging in these activities for a long time. They get lawyered up, and they think, ‘What are my chances of getting caught?’ ” says Mr. Bachner, a former Manhattan assistant district attorney who has traveled to Switzerland twice in recent weeks to help clients reach a settlement with the IRS.

The tax amnesty announced three weeks ago by IRS commissioner Douglas Schulman lets previously undiscovered offshore tax evaders avoid prosecution in exchange for six years of back taxes, fees, and interest, plus a 20 percent levy on an account’s single highest balance in that period of time.

Normally, fines can exceed the amount of money being hidden. The offer is good for six months, after which Mr. Schulman warned that “the situation will only become more dire” for those who do not “get right with the government.”

“This amnesty is a good deal, but that’s a ton of money to come up with,” says Bachner.

The IRS is also taking punitive action. It started using “sticks” in February, when Swiss bank UBS agreed to pay the US government a $780 million fine to avoid a tax-evasion prosecution. UBS also agreed to hand over the names of American account holders for a federal investigation.

The US government promptly asked the institution for more than 50,000 names, leading many to predict an end to centuries of Swiss banking secrecy. Last week, UBS banned some of its executives from overseas travel pending a review of its wealth-management business.

Arrests are also under way. Authorities apprehended accountant Steven Rubinstein of Boca Raton, Fla., for allegedly helping a client conceal at least $6 million in UBS bank accounts over the period 2001-08.

The case points up what the IRS says is the purpose of its plan: Collect intelligence on, and ultimately arrest, the tax preparers, lawyers, and bankers who enable tax evasion.

But this carrots-and-sticks approach may not dislodge too many cheats. Meanwhile, honest taxpayers could grow cynical about the fairness of a tax system that bends the rules for cheaters.

The IRS could haul in approximately $5 billion to $10 billion this time, says Alex Raskolnikov, a federal tax expert at Columbia Law School in New York. That would be twice as large as the last big federal settlement, a bond-and-options pricing strategy called “Son of Boss” that netted around $3.5 billion in 2004. But it’s still only a fraction of total offshore tax evasion.

The biggest reason the receipts won’t be larger this time is that many tax cheats won’t be eligible for the amnesty, says Bachner.

Only those who haven’t been previously approached by the IRS qualify. The money must have been gained honestly, ruling out the many who hide or launder money to conceal criminal activity such as drug trafficking or fraud. And the possibility of other government agencies learning of the misdeeds and taking action also looms large.