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Mark Matthews Comments on IRS' Pursuit and Prosecution of U.S. Tax Evaders in Countries Outside of Switzerland

October 27, 2015, Tax Notes Today

Caplin & Drysdale's Mark Matthews, a former IRS Deputy Commissioner, spoke on October 22, 2015 at the annual University of San Diego School of Law-Procopio International Tax Law Institute, where he and other panel members discussed the IRS pursuit and prosecution of U.S. citizens with offshore accounts in countries other than Switzerland.  For the full article, please visit Tax Notes website (subscription required).

Excerpt taken from the article "Focus Shifting Away From Switzerland, Former Investigators Say" by William Hoke for Tax Notes.

Matthews, now with Caplin & Drysdale Chtd., said earlier efforts to combat offshore evasion proved largely ineffective. He said he would send agents into tax havens to attend what he called "festivals of tax evasion." There were "literally long tables with people hawking their wares of 'try this, try this,'" he said, adding that it was "very open and very notorious. The treaties were there, but no one basically responded, or [they] slow-walked your request," he explained. IRS Cozies Up to Historic Enemies.

IRS Cozies Up to Historic Enemies

. . .

Matthews said 106 of the over 300 banks in Switzerland indicated their willingness to work with the IRS by entering the program. The IRS "turned their historical enemies . . . the Swiss banks, into those pushing people in," he said. "So suddenly, the banks had a motive because every client that you get to go into the program was a free pass."

Matthews said a team will be looking to see if the U.S. has a tax treaty with the country where the funds transferred out of a Swiss account were sent. "They will now have the beginnings of the evidence to create a valid treaty request . . . and go after that same information in that other bank," he said, "so [the IRS has] put together a pretty neat little vice here." The message for individuals who think they're safe because they got their money out of Switzerland and into countries such as Panama is that "there's a very high chance they're going to find you," Matthews said.

Banks that actively market themselves as discreet destinations for undeclared cash have cause for concern as well. "There's sort of a special place in hell in the Justice Department's mind for people who run and hide," Matthews said. "And the banks who took on people . . . who were running from Switzerland, the Department of Justice really finds that behavior offensive, both on the part of the banks and people who are running. That is a very dangerous thing to be doing these days."

Nowhere to Hide

. . . 

Matthews said banks in other countries may soon be knocking on the DOJ's door, looking to cut a deal. "So beware Singapore, Hong Kong, Dubai, Israel, Panama," he said. "Your day may come."

The panel moderator asked whether the statute of limitations provides shelter for assets that were in an undisclosed account in 2008 or earlier. Matthews said the DOJ can still resort to conspiracy charges, which he said go back six years from the date of the last act of the conspiracy.

. . .

Courts Frown on Unequal Punishment 

Matthews compared the earlier penalties for people who had money squirreled away offshore with those given to small business owners in the U.S. who underreported income, implying that the latter group is often punished more harshly. "You would think that, dollar for dollar, [those involved in hiding assets in Switzerland] would get more jail time than the . . . regular tax cheat," Matthews said. "As [of] a few months ago, over 60 percent of the defendants got probation on an average account size of $7 million.

The government started off with bad case selection, Matthews said. One of the early prosecutions involved a 72-year-old woman with a high school education who wanted to enter the voluntary disclosure program but whose lawyer missed the deadline. Matthews said the government rejected her application (apparently because UBS had already turned over her name as part of its deferred prosecution agreement). The woman was fined $22 million on a $44 million account. Despite facing a six-year prison term, the woman was sentenced to a single year of probation. According to Matthews, the judge told the defendant after announcing the probation, "Oh, by the way, looking at my watch, I see five seconds have passed. I now end your sentence of probation." Matthews said the judge terminated the probation because he was mad about the DOJ's case selection.

. . .

Matthews said the DOJ failed to understand the weight that judges were giving to the fact that up to 60,000 people who were later entering into the disclosure program did not suffer a similar fate.

Matthews represented H. Ty Warner, creator of Beanie Babies, who pleaded guilty in 2014 to evading taxes on income derived from an undisclosed account at UBS that he moved to another bank in 2002. Warner was fined $53.6 million and sentenced to two years of probation and 500 hours of community service. (Prior coverage.)

Although the DOJ appealed Warner's sentence, it was upheld by the Seventh Circuit in July.

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