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Deadline looms for Americans to disclose accounts in foreign tax havens

Under an amnesty program, the IRS is allowing taxpayers to avoid prosecution for failing to report those accounts. Tax attorneys have been besieged by wealthy clients who are lining up to apply.

October 13, 2009|Stuart Pfeifer

Wealthy U.S. taxpayers, concerned about an Internal Revenue Service crackdown on the use of secret overseas bank accounts as tax havens, are rushing to meet a Thursday deadline to disclose those accounts or face possible criminal prosecution.

The concern was triggered this summer when Switzerland's largest bank, caught up in an international tax evasion dispute, said it would disclose the names of more than 4,000 of its U.S. account holders.

The decision shattered a long-held belief that Swiss banks would guard the identities of its American customers as carefully as they did their money, and it raised concern that other international tax havens might be next.

Under an amnesty program, the IRS is allowing taxpayers to avoid prosecution for having failed to report their overseas accounts. As a result, tax attorneys across the nation have been besieged by wealthy clients who are lining up to apply even though they will still face big financial penalties.

Tax lawyers in Southern California say they've encountered an array of clients concerned about international bank accounts: Hollywood producers, immigrants who left behind foreign accounts and business owners who have stashed money overseas to avoid taxation.

"It's crazy busy," said Pasadena tax attorney Phil Hodgen, who for a brief period in September stopped accepting new clients because he was overwhelmed with amnesty requests. "These people are calling, saying, 'I can't sleep at night.' "

Some 3,000 U.S. residents have voluntarily disclosed their foreign bank accounts to the IRS this year, compared to fewer than 100 in 2008, said one U.S. government official who asked not to be identified.

Demand for the amnesty program exploded in August when Swiss bank UBS agreed to settle U.S. criminal charges that it had engaged in a "multibillion-dollar scheme" to help U.S. taxpayers hide assets from the IRS.

In all, UBS agreed to pay $780 million in penalties and to disclose the names of 4,450 American clients to Swiss officials, who would then provide them to the IRS.

The original deadline to apply for tax amnesty was Sept. 23, but the IRS -- acting at the request of overwhelmed tax attorneys -- extended it until Thursday.

"I think the intent of the IRS in getting those names from UBS was to scare everybody into coming forward," Hodgen said.

Shahzad Malik, an international tax attorney with Century City law firm TroyGould, said a wide variety of clients were coming forward.

"You have a lot of people in the entertainment industry, movie producer types; they do business everywhere and have royalties coming to them internationally. I've had to clean up a lot of those," he said.

Other clients, Malik said, are immigrants who left behind bank accounts in their home countries or people who inherited foreign bank accounts who didn't realize those assets are taxable in the United States.

"L.A. is very ethnically diverse, so we have a lot of those folks," Malik said. "I'd say it's the minority who knew there was something shady about having a foreign bank account."

Among Malik's clients is one who received notice from UBS that his name was one of those that would be forwarded to the IRS. Some calls have come from holders of accounts with other foreign banks who don't know whether their bank will start cooperating with the U.S.

"Some people have called me and asked, 'How likely is it the government is going to get my name?' " Malik said. "I say, 'I simply can't handicap that. . . . But if you want me to fix it, I can.' "

Once the amnesty deadline passes, a wave of prosecutions of U.S. tax evasion cases may follow. Some UBS clients have already faced criminal prosecution.

In August, Malibu resident John McCarthy agreed to plead guilty to a felony charge of failing to disclose his UBS account to the IRS. He has yet to be sentenced and is free on $50,000 bail.

UBS, meanwhile, has taken steps to cease efforts to attract American clients to its private bank in Switzerland. The bank shut down its cross-border division, but it still operates a brokerage in the U.S. It purchased PaineWebber in 2000.

"It has become pretty much impossible for American citizens to have a bank account in Switzerland if you are not living there," said Alfred Mettler, a professor of finance at Georgia State University. He is a member of a task force advising the Swiss government on banking and taxation.

Mettler said he believed that UBS and other Swiss banks would eventually accept money from U.S. citizens again, but only with the understanding that the accounts and interest would be disclosed to the IRS.

The changing landscape in Switzerland may not spread worldwide, he said. "As long as the world consists of different nations with different laws, there will always be countries that follow the rules more strictly than others."

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stuart.pfeifer@latimes.com

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