LA TIMES: Tax penalty reprieve brings collective sigh of relief at firms

It appears that the movement to repeal or modify 6707(a) penalties has finally reached critical mass. This story from the Los Angeles Times illustrates the inherent problems with these penalties and the failure to give the IRS any discretion in imposing these penalties.

http://www.latimes.com/business/la-fi-smallbiz14-2009jul14,0,3018084.story

I recently met with a client who also illustrates this point. She was a long time employee. Her employer wanted to do something for her, and for himself. He purchased a 412(i). As the plan has collapsed, she is facing $100,000 per year in penalties for a plan she was not involved in purchasing or funding, and for which she was to receive relatively little benefit.

IRS SUSPENDS 6707a PENALITES UNTIL SEPTEMBER 30, 2009 AFTER CONGRESS & GAO URGE REFORM

Last week, IRS Commissioner Douglas Shulman agreed to temporarily suspended 6707a penalties until September 30, 2009 in his letter to Congress.

(See Shulman response letter here)

The IRS Commissioner acted in response to a June 12, 2009 letter from the Senate Finance Committee, which urged the IRS to suspend its efforts to collect penalties for some listed tax shelter transactions, or 6707a penalties. (See Congressional letter here.)

Last month, the IRS received a report with recommendations from the Government Accounting Office indicating that the IRS should develop a plan to better focus its penalty efforts (see the GAO report here.)

The report says the GAO conducted their work “from October 2007 through May 2009 in accordance with generally accepted government auditing standards."

The GAO recommended:

"The Commissioner of Internal Revenue should direct the Office of Servicewide Penalties (OSP) to evaluate penalty administration and penalties’ effect on voluntary compliance and develop a plan to focus its efforts. The Commissioner also should use IRS’s standard outreach methods to again alert taxpayers of the need to disclose reportable loss transactions. In commenting on a draft of this report, IRS concurred with GAO’s recommendations, and summarized the actions it plans to take."

Congressional Response : (See Press Release)

Sen. Grassley said “It’s good to have the reprieve from the IRS, though the suspension will probably need to be longer in order to get necessary changes through Congress.”

“The IRS should also do the right thing by studying why only small businesses have been hit with the penalties since they’re less likely to have the expensive lawyers that big corporations do. It’s a matter of tax fairness for both the IRS and Congress.”

Sen. Baucus also commented: “I’m pleased the IRS complied with our request so that Congress can do its part to ensure the Tax Code treats small businesses fairly.”

“Make no mistake, I will continue to go after tax cheats and tax shelter investments, but these are disproportionate and undue penalties on honest, hardworking American business owners and their employees. I appreciate the IRS’ help on this, and I will move this forward until the issue is resolved.”

“We are working — both sides of the aisle and the Capitol — to ensure assessed tax penalties fall in line with received tax benefits. Until we reach that goal, we require cooperation from the IRS so that millions of American small businesses don’t get another chip stacked against them in the lagging economy."

UBS Case Update: Judge Turns Heat Up on UBS to Get Disclosure

On Monday, July 13, 2009 we will know the Swiss response to the US governments demand to obtain approximately 52,000 Swiss Bank account holders names, that the IRS is accusing of skirting taxes and not reporting accurate financial information in violation of federal law.

The IRS believes that Americans shelter approximately 15 billion dollars in UBS Swiss Bank accounts, who have a strong US presence which the government argues subjects UBS to American law.

In February, the DOJ sued UBS for access to some 52,000 accounts belonging to it U.S. clients, widening a probe that initially had targeted an estimated 19,000 accounts.

A day earlier, the agency announced a settlement with UBS in which the bank agreed to pay $780 million in fines and give names and account information for a group of clients to avoid prosecution. Swiss authorities said that group numbers between 250 and 300 clients.

On Monday, the U.S. government is likely to make it clear that it expects UBS to comply with the summons, and that in the event they don't, a very hard line stance will follow.

The options available to the Government are: seizure of property, staggering fees, or potential arrests and imprisonment of UBS decision makers.

UBS might reach a settlement with U.S. regulators on the turning over of confidential client data, even as public positions harden between the Swiss and U.S. government days before the landmark court case begins in Florida.

Arguments between the parties and government have intensified this past week as reported in the media.

The chief executive of UBS, Oswald J. Grubel, sent a memo on Thursday to the bank's top executives saying that disclosing the names of the account holders would require UBS to violate Swiss criminal law, and that it couldn't comply.

On Wednesday, the Swiss government said it would block any move by UBS to turn over the names.

Meanwhile, Swiss bank account holders have been turning themselves in to the Internal Revenue Service in the past months, in hopes of finding leniency under a voluntary disclosure program at the agency. This is true especially since the IRS has a civil penalty deal on the table right now that for some people may be too good to pass up, and it expires in nine weeks.

The IRS is cracking down on people who hold U.S. securities in offshore accounts but don't declare the accounts or pay taxes on income from the securities.

http://online.wsj.com/article/BT-CO-20090710-712796.html

http://www.thisislondon.co.uk/standard-business/article-23717478-details/US+judge+turns+up+the+heat+in+UBS+disclosure+case/article.do

http://www.bloomberg.com/apps/news?pid=20601085&sid=a5YQivGDnNjA

UBS Case Update: Justice Department Continues Its Pursuit to Obtain American Swiss Bank Account Holders Who Evaded Taxes

In the case U.S. v. UBS AG, 09-cv-20423, the Justice Department argued in U.S. District Court, Southern District of Florida (Miami), that UBS should be forced to divulge the private and long-time regarded secret account information of Americans with Swiss Bank accounts who are evading taxes.

The DOJ argues approximately 52,000 names should no longer be held secret since UBS violated US laws on American soil, providing jurisdiction to authorities to pursue legal action in American courts against the tax evaders.

Justice Department filling stated “UBS has systematically and deliberately violated the laws of the United States on U.S. soil.” It further said UBS “regularly conducted business in secret” in the U.S. and routinely sent private bankers into the U.S. to solicit business." The UBS business “cost the U.S. Treasury hundreds of millions of dollars in unpaid taxes.”

Contrary to reports earlier this week about a settlement, the DOJ pushed forward with a lawsuit to force the Swiss bank giant to identify offshore clients since the estimated 52,000 Americans are suspected of using secret foreign accounts to hide nearly $15 billion in assets from the IRS.

The DOJ filing says UBS earned more than $100 million in fees in helping US clients set up secret offshore accounts and that the business cost the US Treasury hundreds of million of dollars in unpaid taxes.

UBS has resisted the request because it says it would violate Swiss bank secrecy laws. The lawsuit against UBS is being closely watched by the offshore banking industry amid a global crackdown on tax cheats.

UBS and the Swiss government have argued that any exchange of confidential banking information should be handled through existing legal treaties rather than in the courts. The Swiss government has said the lawsuit would “seriously jeopardize” efforts to revise a 1996 tax treaty. Under that treaty, Switzerland can turn over account data only on a reasonable suspicion of “tax fraud or the like,” according to a UBS court filing.

Unlike the U.S., the Swiss don’t view tax evasion as a crime.

UBS is facing a first court hearing July 13.

UBS agreed in February to pay $780m to avert criminal charges related to the tax dispute while UBS admitted it helped taxpayers hide money in Swiss accounts and provided the IRS more than 250 clients’ names. UBS also admitted that its private bankers marketed securities and banking services in the U.S., even though it didn’t have the required license from the Securities and Exchange Commission. Those bankers, UBS admitted, met with clients in the U.S. and communicated with them regularly as they traded securities in their accounts or transferred assets.

The Justice Department filing stated “UBS must disclose the identity of every U.S. taxpayer with an undisclosed UBS account” so they can “get right with their government." It further said “the United States has a strong national interest in making sure that all U.S. taxpayers comply with the tax laws.”

UBS is hoping for a settlement, which would be the bank's second with US authorities and would allow the world's biggest wealth manager to concentrate on a badly needed restructuring after it lost billions of dollars in the global financial crisis and had to be rescued by the Swiss state.

Sources:
Bloomberg News

Gulf DailyNews

Former Promoter of Abusive Trusts Pleads Guilty To Tax Evasion

Roderick Prescott, the former principal of National Trust Services (NTS) in San Jose, Calif., and later Selma, Ore., pleaded guilty today to tax evasion. Prescott admitted to evading at least $550,000 in personal income taxes for 1998 and 1999.

Prescott was scheduled to begin trial on July 7, 2009, before Chief U.S. District Judge Ann Aiken in Eugene, Ore.

According to the indictment, the plea agreement and the government’s trial brief, Prescott and his former business partner Leroy Fritts (now deceased) earned significant income from the nationwide promotion and sale of abusive trusts through NTS, which they founded in 1988.

Prescott and Fritts deposited approximately $3.5 million into various bank accounts through the sale of such trusts. They also earned income from recruiting clients of NTS to invest in Fountainhead Global Trust (FGT), a purported offshore investment that promised returns as high as 50 percent per year.

According to the government’s trial brief, FGT was a Ponzi scheme which collected approximately $20 million in investors’ funds from 1995 through 1999.

FGT transferred some of the money to an offshore account in the Cayman Islands at the Bank of Bermuda, ostensibly to be invested in high-interest debt through a Florida entity called “Cash 4 Titles.”

Prescott and Fritts then funneled part of the money in the account back to themselves. They also took large sums of investors’ funds without ever sending the money offshore.

The government asserts that instead, they spent the funds often by direct payments from FGT bank accounts on luxury goods and real estate. Eventually the scheme broke down and the vast majority of investors lost their full investments.

According to the government’s trial brief, despite making significant income from NTS and FGT, neither Prescott nor Fritts filed any individual federal income tax returns for 1998 or 1999. Prescott last filed a tax return in 1991.

Prescott and Fritts used FGT money to purchase, among other items, a nearly $3 million ranch near Grants Pass, Ore., on which they began construction of two custom-built luxury log homes.

The construction budget was approximately a combined $2 million, and they spent over $465,000 before halting construction in 1999.

Prescott and Fritts also purchased solar panels for the ranch for over $328,000, frozen food in anticipation of a year 2000 apocalypse for over $1.1 million and numerous vehicles and other personal items.

According to the government’s trial brief, Prescott and Fritts used an array of purported trusts and related bank accounts, including numerous offshore bank accounts at the Bank of Bermuda in the Cayman Islands, to conceal their income from the IRS. Prescott and Fritts also used false or fictitious taxpayer identification numbers and offshore credit cards in fake names issued to them by the Bank of Bermuda in the Cayman Islands.

Judge Aiken scheduled sentencing for Sept. 9, 2009. Prescott faces a maximum sentence of five years in prison and a maximum fine of $250,000.

Acting Assistant Attorney General John A. DiCicco commended the IRS-Criminal Investigation special agents who investigated the case, as well as Tax Division trial attorneys Jay Nanavati and Timothy Stockwell who prosecuted the case.

Source: Department of Justice


http://www.usdoj.gov/tax/Aldridge_PermInj.pdf


http://www.usdoj.gov/tax/RRenfrow_Memo_and_Recommend.pdf

SEC Staying Busy: Files Lawsuit Over Excessive Investment Fees and Charge Brokers With Fraudulent Sales of Variable Annuities to Elderly

SEC files Lawsuit Over Excessive Investment Fees

The SEC accused Omaha investment adviser, Ryan Jindra, of improperly charging at least $773,000 in fees to clients since last August, while approximately $250,000 remains missing.

The SEC filed a federal lawsuit June 30 against Ryan Jindra and his company to recover the improper fees. Regulators also asked for an order freezing Jindra's assets and his investors' accounts.

The SEC says Jindra used some of the fee money to pay business debts at his company, some for personal benefit, and some to repay investors who had been charged fees earlier.

The SEC says the fees charged in the past year exceeded what's allowed under the agreements Jindra's investors signed.

Source: http://www.ketv.com/news/19907156/detail.html

SEC accuses Prime Capital Services of Fraudulent
Variable Annuity Sales Practices

Yesterday, The Securities and Exchange Commission instituted an enforcement action against Prime Capital Services (PCS), a Poughkeepsie, N.Y.-based firm that is a registered broker-dealer and wholly-owned subsidiary of Gilman Ciocia, Inc. (G&C), an income tax preparation business.

The SEC allege several representatives and supervisors engaged in fraudulent and unsuitable sales of variable annuities to senior citizens who were lured through free-lunch seminars at restaurants in south Florida.

Prime Capital Services (PCS) and its parent company recruited elderly investors to attend the seminars, after which the seniors were encouraged to schedule private appointments with PCS representatives who then induced them to buy variable annuities.

The sales pitches allegedly concealed high costs, lock-in periods, and other material information. While the firm and its representatives earned millions of dollars in sales commissions, the SEC alleges that many of the variable annuities were unsuitable investments for the customers due to their age, liquidity, and investment objectives.

"They used free lunches as the low-tech bait for their high-scale scheme," said Robert Khuzami, Director of the SEC's Division of Enforcement. "These con men lured elderly and retired investors into purchasing highly unsuitable variable annuities, enriching themselves with commissions while ignoring the financial goals of their victims."

James Clarkson, Acting Director of the SEC's New York Regional Office, added, "No investor should be misled into investing in unsuitable products, but fraud against the elderly is especially egregious because they often never recover financially from ill-advised investments that devastate their retirement savings."

SEC enforcement action: http://www.sec.gov/news/press/2009/2009-145.htm


Pittman Dutton Kirby & Hellums currently represents individuals and small businesses against brokers, promoters, accountants, and in some cases attorneys, regarding the sale of 412(i) plans. If you have purchased a 412(i) or have any questions about this litigation, please do not hesitate to contact us.