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America’s Offshore Tax Cheats Are Feeling the Heat Once Again

(Bloomberg) -- U.S. taxpayers who entered into an IRS program that made it easier to disclose their hidden offshore bank accounts may have thought they put their legal troubles behind them. Instead, prosecutors may try to put some of them in jail for not telling all.

Since 2012, 30,000 Americans avoided stiff tax penalties by declaring they had innocent reasons for failing to disclose offshore holdings. But under the program they received no guarantees that they wouldn’t be prosecuted in the future. And now the Justice Department and the Internal Revenue Service are combing through thousands of secret records obtained from 80 Swiss banks to determine whether the taxpayers were truthful.

We’re “taking all of that data and scrubbing it for leads,” Nanette Davis, a trial attorney in the Justice Department’s tax division, said at the New York University Tax Controversy Forum last week. The effort has been fruitful already, she said. With some taxpayers, “we say ‘we could indict this case tomorrow,”’ said Davis, who is overseeing the review.

The U.S. government got a trove of data from Swiss banks under settlements in which they disclosed how they helped Americans evade taxes. The banks handed over account information, as permitted by Swiss secrecy law, and recordings of phone calls with U.S. clients. In exchange for the cooperation, the U.S. agreed not to prosecute those banks, which paid penalties totaling $1.37 billion.

The risk of being scrutinized falls on those taxpayers who came forward under the government’s so-called streamlined program. Those living in the U.S. paid penalties of 5 percent of their undisclosed offshore assets, while overseas residents paid none.

Another 54,000 Americans took a more arduous route in voluntarily disclosing their offshore accounts to the IRS since 2009, including their dealings with bankers and advisers. They were hit with penalties of as much as 27.5 percent of their assets, in addition to the total of $8 billion in back taxes and other penalties. But the government agreed to never prosecute these taxpayers over the disclosures.

Lawyers Critical

Some tax lawyers were critical of Davis’s warnings about possible prosecutions.

Those statements might have “a chilling effect” on people considering using the streamlined program, said tax attorney Barbara Kaplan, of Greenberg Traurig LLP. That “undermines the IRS interest in bringing as many people as possible” into tax compliance, she said.

But attorney Jeremy Temkin said it’s been clear to tax advisers for the last year that the Justice Department might prosecute people who lied in their declarations. His advice: Clients should disclose any bad facts to the IRS.

“It is important to present both the positive and negative facts and let the IRS decide,” said Temkin of Morvillo Abramowitz Grand Iason & Anello PC.

IRS trial attorney John C. McDougal suggested at the conference that the review of the streamlined submissions isn’t as dire as Davis made it sound because they’re being looked at in the same way as other tax returns. The IRS has begun formal examinations in some of the cases, he said.

Still, the threats to taxpayers who lied may be mounting as more financial institutions step forward. Davis said offshore entities not yet under investigation are voluntarily approaching the U.S. to cooperate.

“We’re getting spreadsheets with U.S. client names, account numbers, details, entity names, account balances,” she said. “It’s a little bit of a dangerous time if you are an offshore account holder and have not gotten right, because there’s just been an avalanche of information that’s come to the department and the IRS.”

To contact the reporter on this story: David Voreacos in federal court in Newark, New Jersey, at [email protected] To contact the editors responsible for this story: David Glovin at [email protected] Joe Schneider, Larry Reibstein

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