by Emily J. Kingston, Partner

Under federal law, U.S. taxpayers are obligated to report their worldwide income, and those having foreign accounts holding an aggregate value of over $10,000 in any given year, are required to file with the IRS a Report of Foreign Bank and Financial Accounts ("FBAR"). In just the beginning of what is sure to be a wave of prosecutions, on April 15, 2010, the U.S. Department of Justice announced that seven former clients of Swiss banking giant UBS AG, were charged by the U.S. Attorney's Office for the Southern District of New York with failing to report their interest in various foreign accounts on FBARs and collectively hiding from the Internal Revenue Service over $100 million in secret Swiss bank accounts.

Two of the seven charged, Jules Robbins and Federico Hernandez, pled guilty agreeing to pay federal civil penalties of $20.8 million and $4.4 million, respectively. Robbins, a watch salesman, who had been hiding money at UBS since 1967, had accumulated nearly $42 million in his Swiss accounts, while Hernandez, who masked his ownership of the accounts under British Virgin Islands and Panama corporations, had accumulated nearly $8.8 million. Charges remain pending against the other five charged, Kenneth Heller, a disbarred maritime attorney who allegedly deposited $26.4 million in a UBS account in 2006 using an offshore corporation and later moved the funds to another smaller private Swiss bank when he learned that UBS might disclose account information, Sybil Nancy Opham, who allegedly held a UBS account with $11.3 million under a Liechtenstein foundation that she moved to a smaller Liechtenstein bank when she learned of the U.S. government's criminal investigation of UBS, Richard Werdiger, who allegedly held three separate UBS accounts with $7 million using Liechtenstein and Panama foundations, Ernest Vogliano, who allegedly held UBS accounts with $4.9 million in the names of Liechtenstein and Hong Kong corporations that he moved to a Liechtenstein bank upon learning of the criminal investigation of UBS's cross-border banking business, and Shmuel Sternfeld, who allegedly held a UBS account with $2.9 million in the name of a Hong Kong corporation.

In a news release about the charges, IRS Criminal Investigation Chief Victor S.O. Song, formerly the Special Agent in Charge of IRS Criminal Investigation in the San Francisco Bay Area, indicated that the IRS will continue to vigorously pursue those Americans who are "still hiding in this shadowy world of secret offshore accounts," in order that "America's taxpayers who play by the rules ... can be assured that the Government will hold accountable those who don't."

These charges came close on the heels of earlier successful prosecutions of eight other former UBS clients, the two most recent of which resulted in the sentencing on March 22, 2010 of California businessman John McCarthy who hid in his Swiss account set up in the name of a Hong Kong entity more than $1 million from his U.S. business operations between 2003 and 2008, and the entry of a plea agreement on April 12, 2010 by Harry Abrahamsen who hid in two USB accounts some $1.3 million of unreported income. McCarthy was sentenced to six months of home detention, three years of probation, and ordered to pay the taxes on all unreported income and a 50% penalty; Abrahamsen is scheduled to be sentenced on July 27, 2010.

McCarthy's sentence was far more lenient than the 40-month prison sentence handed down in August, 2009, to Bradley Birkenfeld, a former UBS banker who, in April, 2007, voluntarily exposed UBS AG's efforts to aid U.S. taxpayers in evading their U.S. tax obligations. The provision of information by Birkenfeld led to an extensive IRS criminal investigation of UBS AG and ultimately a deferred prosecution agreement with the U.S. in February, 2009, whereby the Swiss bank admitted to helping U.S. taxpayers hide accounts from the IRS and agreed to pay a $780 million fine and provide the U.S. with the identities of, and account information for, some 250 U.S. taxpayers/customers of UBS's cross-border banking business.

On the heels of the deferred prosecution agreement with UBS, in March, 2009, the IRS announced an "amnesty" program, whereby it invited taxpayers who had previously hidden the existence of offshore accounts to come forward by October 15, 2009, and make disclosure of such accounts under the long-existing voluntary disclosure program ("VDP"), in exchange for a reduced 20% FBAR penalty (as compared to the usual 50% penalty provided by applicable law). Some 14,700 taxpayers took advantage of the amnesty program. In the meantime, to support the IRS's continued efforts to find those taxpayers with hidden accounts who chose not to participate the program, in August, 2009, the U.S. government encouraged the Swiss government to enter into an agreement, still awaiting parliamentary approval, whereby the Swiss Federal Tax Administration would provide to the U.S. by August, 2010, the identities of some 4,200 additional UBS customers believed to have evaded U.S. taxes through their hidden Swiss accounts.

With 250 client accounts already revealed, and thousands more expected, the prosecutions to date are surely just the beginning of the IRS's legal scrutiny of taxpayers with hidden Swiss accounts. Moreover, after its successful efforts to pierce the veil of bank secrecy in Switzerland and Liechtenstein, the focus of the IRS's offshore enforcement efforts is expected to expand to Asia, whose financial institutions have long believed themselves to be insulated from the controversies taking place with the European banks.

Sideman & Bancroft's tax attorneys have the experience and familiarity with IRS civil and criminal procedures to effectively represent and protect the rights of taxpayers who have foreign bank account issues or are the subject of IRS civil or criminal investigation or prosecution. In many instances, taxpayers with undisclosed foreign bank accounts or foreign entities can still take steps to avoid criminal prosecution or reduce potential civil penalties. For those taxpayers who are contacted by the IRS, the initial response can be critical to the final outcome. Please call us for further information or to discuss your particular situation.

For further information about the IRS's voluntary disclosure program and the amnesty program implemented in March, 2009, see the articles The Door Closes on IRS Offshore Amnesty Program: What's Next?, by Jay R. Well, and IRS Focus on Offshore Account Holders: What's Next? (pdf), by Wendy Abkin on this website.

This publication is for informational purposes only and is not intended to provide legal or tax advice, or to create an attorney-client relationship.

Pursuant to IRS Circular 230, unless expressly stated to the contrary, any tax advice is not intended and cannot be used to (i) avoid penalties under the Internal Revenue Code or (ii) promote, market or recommend any transaction or matter to another party.