Scott Michel Comments on U.S. Strengthening International Tax Enforcement Efforts

During the 25th Annual Philadelphia Tax Conference, Caplin & Drysdale's Scott D. Michel commented on the implications to offshore tax enforcement from recent acquittals of two private bankers. Mr. Michel notes that notwithstanding these courtroom setbacks, the U.S. government will continue its international tax enforcement efforts against Americans secreting offshore assets. Mr. Michel also comments on FBAR civil penalty enforcement and the DOJ's Swiss Bank Program.

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Excerpt taken from the article "U.S. Strengthening International Tax Enforcement Efforts" by Margaret Burow for Worldwide Tax Daily.

The defeats won't slow down the government's tax enforcement efforts, Scott D. Michel of Caplin & Drysdale said at the American Bar Association Section of Taxation tax conference in Philadelphia. "It is a mistake for anybody to take comfort in the fact that these cases ended in acquittals. In court, anything can happen, and the government has got multiple ongoing investigations in a variety of phases," he said.

The DOJ's Swiss bank program, international information exchange legislation, and the Foreign Account Tax Compliance Act are all being used to share information among countries and aid prosecution of account holders and financial institutions that fail to disclose assets held offshore, said Michel.

Pressure is being put on banks in Switzerland to voluntarily disclose account information in order to avoid prosecution and be eligible for reduced U.S. penalties, Michel said.

U.S. corporations can be convicted of a crime based on the actions of one or more employees who violate the law. The threshold to establish corporate criminality is quite low, said Michel, adding that there are 14 ongoing criminal investigations against Swiss banks or subsidiaries and that criminal indictments have been brought against individual bankers.

Since the DOJ's Swiss bank program was announced August 29, 2013, 104 Swiss banks have agreed to participate, although some have since withdrawn.

That method of tax enforcement has been "extraordinary," said Michel. A bank is required to disclose its actions in opening accounts, the provision of favorable tax benefits, and the identity of relationship managers who had discussions with clients about not reporting the accounts, and to state that those are the activities for which the bank wants protection in terms of a non-prosecution agreement, he said.

Michel said his own experience shows that banks are disclosing to the DOJ lists of account numbers, the size of accounts, whether the beneficial owner of an account is an American, power of attorney forms, the destination of cash out of the account, and whether the account was closed after 2008.

This "data dump" is processed in order to find tax cheats that have not come forward through their own voluntary disclosures, he said. Banks are also turning over information on the use of foreign and U.S. external advisers, presumably to begin investigations into those parties.

Banks are being motivated to disclose the information by penalties based on the size of an account at a specific point in time, unless the bank can prove that the account was in compliance with U.S. tax law, said Michel. 

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FBAR Penalties

This past year the government brought a case against Carl R. Zwerner of Miami for willful failure to file foreign bank account reports. The penalties were originally assessed at three times the value of an undisclosed account that Zwerner held offshore. The case was taken to trial, and the jury found for the government   for about 150 percent of the value of the account. The jury was also asked to decide whether the FBAR penalties were constitutional under the Eighth Amendment. On the eve of a hearing on the issue, the case was settled and Zwerner agreed to pay 100 percent of the value of the account.

The case shows that the government won't be a "shrinking violet" in bringing similar judicial action, said Michel.

The case will likely raise government concerns about the Constitution argument, because in light of existing case law it is hard to imagine that a similar case wouldn't raise judges' eyebrows when a penalty exceeds the value of the taxpayer's assets, said Michel.