Friday, June 12, 2009

As offshore financial centers capitulate to US pressure, first steps are "crucial" to a successful tax evasion defense, says top attorney

The days when U. S. taxpayers could rely on offshore jurisdictions to stymie tax investigations by the IRS are long gone, says a criminal tax defense attorney.

"It no longer takes months or even years for U.S. authorities to obtain cooperation and tax/financial information "Under the Obama Administration, the IRS, Treasury, and Department of Justice are making offshore account holders a top priority. The UBS investigation is just the forefront of the enforcement wave – much more is coming."from foreign jurisdictions," said Robert Bernhoft, whose clients have included actor Wesley Snipes and 'Girls Gone Wild' video producer Joe Francis. "New treaty provisions and Tax Information Exchange Agreements have significantly expedited the process.

"If you have offshore involvements and get audited, you can no longer play the waiting game and see what leads the IRS will follow up. You need to take defensive action immediately."

TIEAs are among the "new weapons" the IRS has at its disposal to tackle "the complex world of offshore trusts and corporations, life insurance constructs, re-invoicing schemes, and wire transfer mechanisms", said Bernhoft.

"Previously, the IRS was limited to antiquated "letters rogatory" requests to foreign governments for banking and tax information – which took many months or even years to obtain."

Apart from formal mechanisms such as TIEAs, "European and Caribbean jurisdictions are increasingly responding to informal "counterpart" requests from the U.S. tax police for banking and tax information", he added.

Meanwhile, a relatively new IRS technique closer to home is to "attack through accountants", said Bernhoft.

"Increasingly, the IRS serves administrative summonses on accountants for the entire client file because they have no attorney-client privilege or confidentiality over documents and discussions," he said.

When such summonses are served, the manner and speed of the accountant's response can make or break a client's defense of a subsequent tax evasion charge.

"If accounting professionals involve criminal tax counsel in a case that has offshore involvements or indicia of tax fraud too late, the entire accounting file is exposed to the IRS, which can often debilitate an otherwise sound defense," said Bernhoft.

"More and more, accounting tax professionals are responding to so-called 'routine' audits by bringing criminal tax counsel into cases early on. I've spoken to the heads of several major accounting firms, and many are coordinating criminal tax counsel referrals through a senior risk management partner. They appreciate the significant liability they face if they make made disclosures during civil tax representation that lead to a criminal tax fraud referral."

Bernhoft said there are several Fifth Amendment issues to consider when deciding how to respond to a tax-related summons or subpoena, such as:

  • Can a corporation assert a Fifth Amendment objection to a summons or grand jury subpoena demanding tax/financial documents?;
  • If a summons directed to a corporation is really after the records of that corporation's sole shareholder, does that shareholder have standing to assert the Fifth Amendment with respect to the "corporate" summons?;
  • How should the targeted taxpayer respond to a "subterfuge" summons?; and
  • Do U.S. taxpayers involved with offshore entities and dealings have enforceable rights with respect to IRS' attempts to obtain tax/financial information from foreign jurisdictions?"

In instances where an investigation leads to a U. S. taxpayer being criminally charged with tax evasion, pre-trial disclosures must be handled with extreme care, said Bernhoft.

"In numerous cases, defendants have been convicted because they failed to consider how their pre-trial disclosures and admissions would affect the outcome," he said.

"It's absolutely critical to carefully evaluate the client's circumstances from the trial endgame perspective and make 'cooperation' decisions early in the investigation. With the new legal and practical landscape of IRS enforcement policy, unthinking disclosures can compromise a defense early on and lead to disastrous consequences for the targeted taxpayer."

He added: "I recently attended the American Bar Association's White Collar Fraud Conference and one of the presentations featured a panel of trial attorneys who had defended felony tax and conspiracy cases over the past year. In each case the defendants were convicted and a significant reason was mistakes of 'pre-trial' counsel – lawyers who represented the targets prior to indictment: they disclosed too much and talked too much. In turn, these disclosures and admissions greatly benefitted the government and hampered the defense's ability to mount a successful trial defense. If the pre-trial practitioners had viewed the investigation representation from the trial endgame, their clients might not have been convicted."

There's no doubt that taxpayers with offshore structures have more to fear from President Obama's than his predecessor, George W. Bush, said Bernhoft.

"The Obama Tax Enforcement Policy regarding "domestic" audits and collection proceedings that reveal offshore components is much harsher than under the Bush Administration," he said. "The IRS is now focusing on criminal investigation, indictment, and prosecution of these matters. Under Bush, the civil side of the agency was more likely to engage in discussions and negotiations.

"The highly-publicized developments regarding UBS holding "undisclosed" accounts for 50,000 U. S. Taxpayers is a harbinger of more investigations to come.

"Under the Obama Administration, the IRS, Treasury, and Department of Justice are making offshore account holders a top priority. The UBS investigation is just the forefront of the enforcement wave – much more is coming."

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