Rudolph Claus and the Extra-Territorial Enforcement of US. Tax Law. Michael J. Legamaro

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1 Rudolph Claus and the Extra-Territorial Enforcement of US Tax Law Michael J. Legamaro 1

2 Story of Rudolph Claus Rudolph is a US citizen born in US while Austrian-citizen parents were vacationing He has not spent much time in the US except to attend university in Colorado He has, however, maintained a US passport and relied upon it to avoid long lines at customs while entering the US for ski vacations 2

3 His Success Rudolph has earned $1MM/year for 40 years He has total assets in excess of $100MM He has businesses around the world He has no fewer than 20 bank and brokerage accounts at 3 banks 1 Austrian and 2 Swiss Taking advantage of downturn in real estate markets in 2007, he started acquiring US business interests (real estate, corporate ownership) purchased in corporate blockers 3

4 But Rudolph Has been a Bad Boy He has never filed a tax return in the US, and underreported his income to Austria He has hung his hat on bank secrecy moving accounts from the UK to Switzerland once told that he was required to pay US tax.... Now FATCA has caught up with Rudolph and his bank in Austria has disclosed his status as a US person 4

5 What are his Failures? No FBARs, no tax returns His corporate blockers are CFCs with investment in US property and taxable income His non-us portfolio has been full of passive foreign investment companies and correspondingly large amounts of income, and... crime of all crimes, he has ignored advice that he is subject to tax on worldwide income 5

6 Santa Comes to Town The Internal Revenue Service has audited Rudolph, leaving him with an assessed tax liability in excess of $5MM DOJ is conducting a criminal investigation of Rudolph and has turned to his banks and bankers Rudolph is considering his options, including cooperating as part of larger ongoing investigation against Swiss and Austrian bankers, or refusing to pay and run... 6

7 Tools in the Arsenal of US Big Brother Bilateral Tax Conventions Bilateral Conventions for Mutual Assistance in Recovery of Claims Multilateral Instruments (OECD or Nordic Convention on Mutual Assistance in Tax Matters ) Tax Compliance Directives throughout EU Force of Seizure and Branding International Outlaw 7

8 US-Austrian Tax Treaty Austria has agreed to assist US in enforcement of its tax claims (Art. 25(7)) requested State shall effect recovery in accordance with the rules governing the recovery of similar tax debts of its own; however, tax debts to be recovered shall not be regarded as privileged debts in the requested State... and appeals concerning the existence or amount of the debt shall lie only to the competent tribunal of the requesting State 8

9 Other Countries Where Mutual Assistance Clauses Exist for US Enforcement Belgium Cyprus France Finland Germany United Kingdom Luxembourg Netherlands In other words, Rudolph can run but he can t hide 9

10 Notable Developments Switzerland has stated its intention to adopt the OECD standard for administrative assistance in tax matters New Swiss protocol to US treaty where Switzerland expands information disclosure beyond the narrow concept of tax fraud under Swiss law into areas of tax evasion, or the failure to report income Singapore s Ministry of Finance has endorsed OECD s Standard for the Exchange of Information for Tax Purposes and a delegation of the Singapore government has traveled to the United States to engage in discussions on information exchange and tax agreements Tax Information Sharing Agreements and Mutual Assistance are being adopted 10

11 Where Does that Leave Rudolph? No more cookies from Mrs. Claus, I m afraid Chances are that absent flight and fugitive status Austrian government is bound to participate in collection Will Switzerland? 11

12 Change in Tactics: Will Rudolph Rat Out His Bankers? Instead of pursuing cheats themselves, US government pursues facilitators bankers, attorneys, accountants, trustees UBS $780MM and counting Wegelin Indicted, Dead and Gone Credit Suisse In Tax Shelter Case, U.S. Bars Ex-Credit Suisse Banker From Leaving 12

13 Serious Business: Politics in US The Tax Division's top litigation priority is the concerted civil and criminal effort to combat the serious problem of noncompliance with our tax laws by U.S. taxpayers using secret offshore bank accounts... The results so far have been encouraging : 150 investigations of offshore-banking clients 36 client cases have been charged, 31 guilty pleas entered, 2 convicted after trial Number of facilitators have been indicted 13 bankers and 2 attorneys being charged and awaiting trial, investigations have been opened into numerous additional offshore banks across the world. 13

14 DOJ s Proudest Achievements Enforcement effort has dealt fabled Swiss bank secrecy a devastating blow buoyed by our success in the United States, a number of European countries have pressed Switzerland to provide similar account information for their nationals Put simply, the word is out that placing assets in foreign accounts no longer provides the protection from disclosure it once did. 14

15 Offshore Compliance Initiative: Indictments, Pleas, Sentencings, and Other Developments July 30, 2012 California UBS Clients Sentenced to Prison for Hiding Assets in Secret Bank Accounts Around the World June 15, 2012 Three Tax Return Preparers Charged with Helping Clients Evade Taxes by Hiding Millions in Secret Accounts at Two Israeli Banks February 2, 2012 Swiss Bank Indicted on U.S. Tax Charges January 30, 2012 UBS Clients and Tax Attorney Indicted in Phoenix for Hiding Assets in Secret Foreign Bank Accounts January 3, 2012 Manhattan U.S. Attorney Charges Three Swiss Bankers with Conspiring to Hide More Than $1.2 Billion in U.S. Taxpayer Accounts from the IRS Swiss Banks Risked Indictment Without Data Handover (Aug 22, 2012) HSBC, Credit Suisse Sacrifice Employees to U.S., Lawyers Say (Aug 18, 2012) 15

16 Now What? Current & Expanding Disclosure High Net Worth Initiative within IRS Voluntary Disclosure & Cooperation to Avoid Prosecution FATCA production Whistleblowers -- Bradley Birkenfeld s $104MM award changes the game Swiss banks exposing their employees to DOJ to avoid prosecution Swiss bankers afraid to leave Switzerland 16

17 Only in America... Coming Soon to A Theater Near You Bradley Birkenfeld, 40 months and $104MM IRS pays awards to people who provide specific and credible information if the information results in collection of taxes, penalties, interest or other amounts from the noncompliant taxpayer. If taxes, penalties, interest and other amounts in dispute exceed $2 million, and a few other qualifications are met, IRS pays 15 percent to 30 percent of the amount collected. If the case deals with an individual, his or her annual gross income must be more than $200,000. [Doesn t matter if whistleblower is convicted.] Smaller awards available for smaller amounts in dispute 17

18 Will the SEC Be Next? Dodd-Frank amends the US securities law to give federal courts extraterritorial jurisdiction over actions brought by the SEC or the United States where "conduct within the United States... constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the United States and involves only foreign investors" or "conduct occurring outside the United States... has a foreseeable substantial effect within the United States." 18

19 That means that... Investment Advisers are required to register when they advise more than $25MM from US clients or have more than 15 US clients Foreign private fund advisers are required to register if either (a) they advise one or more US non-funds (i.e., managed accounts) and have more than $25M in US investor assets or (b) they advise only funds, but advise more than $150MM from a US offices 19

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