More on Section 6707A Penalties

I receive quit a few calls about 412(i) plans and the subject of 6707A penalties seems to be an issue that is on the minds of almost every accountant, attorney, or individual who contacts me. It is for this reason that I wanted to post some additional information on this issue. Let me begin by saying that I am not an accountant or tax attorney.

I am a litigation attorney who represents individuals and small business against the entities or individuals involved in selling or promoting what I consider to be inappropriate, improper, or fraudulent plans. As part of that endeavor, I have come to learn quite a bit about 412(i) and 6707A penalties.

BACKGROUND ON 6707A

The American Jobs Creation Act of 2004 created Section 6707A of the Internal Revenue Code which was intended to stop the proliferation of multi-million-dollar abusive tax shelters. Pursuant to the Act, a strict liability penalty was imposed on "listed transactions" not reported to the IRS.

A listed transaction is a transaction the IRS has determined, through audits and reviews of other returns, has the potential for avoidance or evasion. The strict liability penalty applies if the taxpayer fails to disclose a listed transaction. The penalty is $100,000 per year for individuals and $200,000 per year for corporations and these penalties are stackable.

6707A penalties are in addition to the 30% accuracy related penalty imposed on the tax understatement under section 6662A. The 6707A penalties apply regardless of the amount of the understatement and regardless of whether the taxpayer can show a "reasonable cause" for the failure to make a disclosure AND regardless of whether the taxpayer amends prior to audit. Furthermore, the Commissioner of the IRS has no discretion to abate the listed transaction penalty. As if it could not get any worse, 6707A does not grant due process of law because there is no judicial review in the Tax Court.

WHAT IS BEING DONE ABOUT THIS PROBLEM

Currently, there are bills pending in both houses of Congress to address the 6707A problem. The National Taxpayer Advocate and the IRS Commissioner have both indicated the need for change and the IRS is currently in a stand down position on some of these penalties (for more information, see prior post http://412ilitigation.blogspot.com/2009/07/irs-suspends-6707a-penalites-until.html). The Small Business Council of America is releasing a position paper on the legislation and I will review and post it shortly.

In my opinion, despite what happens in Congress, Taxpayers need to understand that there are going to be penalties. There is not going to be a magic bullet. We are not going to wake up one day and these plans are going to be "legal" and the penalties are going to magically disappear. The penalties may become proportionate to the tax understatement, the pass- through penalties may be reduced, the Commissioner may be allowed discretion to review, and the taxpayer may get judicial review---BUT---taxpayers should not think that this is all simply going to go away.

Taxpayers who are confronted with these penalties need to evaluate a realistic strategy to include to include claims against the individuals responsible for promoting and selling of these plans, and the insurance companies who sold them after being advised of the ultimate result.

Chris Hellums can be reached at Chrish@pdkhlaw.com or toll free at 1-866-515-8880.

UBS UPDATE: Swiss & US Government Reach Confidential Settlement In Tax Evasion/Bank Secrecy Case Involving 52,000 Names

An agreement reached Friday between the Swiss and US governments prevents an interesting trial proceeding today. On Friday, U.S. District Judge Alan S. Gold told the parties at a hearing that it was the last chance for to strike a deal before trial would begin Monday.

Just a few weeks ago, the Swiss government made it clear that their long-standing bank secrecy laws do not allow UBS to disclose information wanted by the Americans; Swiss bank account holders who are American citizens.

"The US civil proceedings against UBS are to be settled out of court after Switzerland and the USA reached an Agreement in Principle on Friday," Swiss Federal Department of Foreign Affairs (FDFA) said in a statement on Friday.

The dispute involves about 52,000 Americans the U.S. believes are hiding billions of dollars of assets possibly evading taxes. Swiss government and the UBS bank say the names cannot be disclosed without violating long-standing Swiss bank secrecy laws.

In February, UBS had paid USD 780 million to the US government to settle criminal charges related allegations of the bank helping Americans in tax evasion.



Check out the LA Times article describing the time line of legal events this past year.
http://www.latimes.com/business/nationworld/wire/sns-ap-eu-ubs-timeline,0,7323298.story


May 2008: Authorities in the United States begin investigating the Switzerland-based services UBS offers to customers living in the United States. UBS manager Martin Liechti is detained as a witness in the United States.

June 19, 2008: Former UBS client adviser Bradley Birkenfeld admits to a U.S. District Court in Fort Lauderdale, Florida, to assisting tax evasion.

June 30, 2008: The U.S. Department of Justice applies to a U.S. court in Miami for the Internal Revenue Service to be allowed to issue a "John Doe" summons for the Swiss to provide information about American clients of UBS without singling them out by name. The court approves the request a day later.

July 17, 2008: The Swiss government receives a formal request for assistance from the IRS to help uncover UBS clients involved in tax fraud. UBS manager Mark Branson apologizes to a U.S. Senate panel for the bank's failings and announces that UBS will accelerate its withdrawal from
the U.S. cross-border business.

Nov. 12, 2008: A U.S. court in Miami charges senior UBS manager Raoul Weil with conspiracy to commit tax fraud.

Feb. 18, 2009: UBS reaches a settlement with the Justice Department and the U.S. Securities and Exchange Commission in a U.S. District Court, agreeing to pay $780 million dollars in fines, penalties, interest and restitution. On the same day Swiss officials give U.S. authorities files on 255 American clients suspected by the U.S. of tax fraud without allowing for the right of appeal required under Switzerland's banking secrecy law.

Feb. 19, 2009: The IRS submits the John Doe summons in a civil lawsuit in Miami, asking for the details on 52,000 UBS clients to be handed over.

March 13, 2009: Threatened with international sanctions, the Swiss government agrees to drop the distinction between tax fraud and tax evasion when dealing with foreign requests for legal assistance. Until then Switzerland had refused to provide information to other countries in cases of alleged tax evasion, which is an administrative offense in Switzerland but not a felony.

June 18, 2009: Switzerland and the United States agree on a new double taxation accord to increase Swiss cooperation in U.S. tax evasion probes.

July 2009: UBS freezes the accounts of U.S. offshore clients who failed to act on a letter asking them to close their accounts or transfer funds to a U.S.-supervised unit of the bank.

July 7, 2009: The Swiss government announces that it may seize UBS customer files to prevent them from being handed over to the United States.

July 8, 2009: Federal Judge Alan Gold in Miami asks the U.S. government whether it would consider seizing the U.S. assets of UBS in order to enforce the outcome of the case.

July 13, 2009: Judge Gold postpones until Aug. 3 the trial at the request of the U.S. and Swiss government and UBS in order to give the governments more time to negotiate a settlement.

July 31, 2009: The U.S. and Swiss governments say they have agreed on most major disputes in the U.S. effort to get names of thousands of wealthy Americans suspected of evading taxes by hiding billions in assets with UBS. The trial is postponed.

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

Latest Information on 6707 Penalties

I recently found this blog which tracks the latest developments regarding the current status of legislation to reform 6707 penalties.

I think it is a great resource for anyone who is potentially subject to those penalties.

Yesterday, I was told that legislation is expected out of the Finance Committee which will reduce the penalties to a percentage of the taxes owed (20-30%) rather than a flat amount of $100,000 per year for individuals and $200,000 per year for corporate entities, that the IRS may be given some discretion on levying these penalties, and that the IRS may stand down on these penalties pending the outcome of the legislation.

http://6707a.wordpress.com/