Thread: IRS crackdown brings tax-evasion secrets to light

IRS crackdown brings tax-evasion secrets to light

Updated 4h 25m ago
By Kevin McCoy, USA TODAY

Jeffrey Chernick, a New York representative for Asian toy manufacturers, paid his expenses with checks drawn from one of his bank accounts, just like millions of average Americans.

Average, that is, if the account was held at a Swiss bank and listed under the name of a company in Hong Kong.

And if the owner carried 12 checks totaling about $285,000 into the USA from the Hong Kong firm each year for deposit in a domestic business account. And if the transactions weren't disclosed to the IRS, evading taxes on holdings that in 2005 totaled about $8 million.

Caught in the ongoing U.S. crackdown on offshore tax evasion, the 70-year-old businessman acknowledged the maneuvers to federal prosecutors and tax authorities as he pleaded guilty in July to one count of filing a false tax return. Chernick faces an Oct. 30 sentencing at which he could get up to three years in prison and a fine as high as $250,000.

UBS TAX EVASION CASE: 12 key figures

Details of Chernick's tax evasion — along with similar court cases of other defendants and two Americans who discussed details of their offshore holdings in USA TODAY interviews — provide a look at secret dealings that cost the U.S. $100 billion in annual tax revenue, according to a 2008 Senate report.

It is a world of bank accounts held under corporate names in Switzerland, Hong Kong, the Cayman Islands and elsewhere. A place where wealthy U.S. clients meet their offshore bankers in furtive hotel conferences. And where foreign financial advisers and lawyers deter clients from disclosing assets to the IRS.

"For those still hiding in this shadowy world, it is time to come in and get right with your government or face stiff criminal and financial penalties," said IRS Commissioner Douglas Shulman when Chernick pleaded guilty.

Offering a carrot with the rhetorical stick, the IRS last month extended a six-month program that offers leniency to offshore-account holders who come forward. Now set to end Thursday, the program offers lower civil penalties and in most cases no criminal prosecution.

More than 3,000 have applied, the IRS said in September. Many were clients of UBS, the largest Swiss bank and first target in the U.S. crackdown.

In February, UBS agreed to a $780 million settlement of criminal charges that it had sent bankers posing as tourists into the USA to help clients evade taxes.

Then, in a major crack in Switzerland's reputation for bank secrecy, UBS in August agreed to settle an IRS civil lawsuit by providing data for nearly 4,500 U.S. clients whose accounts once held an estimated $18 billion.

The historic disclosure follows UBS' earlier hand-over of information on 250 Americans whose accounts bore signs of suspected tax evasion — such as being listed under foreign corporations.

'The clients are not victims'

So who are these wealthy Americans? And how and why did they keep assets offshore?

As lawyers around the nation who specialize in tax cases tell it, some are otherwise ordinary Americans seeking deductions not found on any IRS form. "The clients are not victims. The clients are willing participants," says Martin Press, a Fort Lauderdale lawyer who says his firm represents dozens of applicants for IRS leniency.

Chernick, an avid sportsman and hunter who after his guilty plea had to surrender his collection of antique firearms, was among the willing, federal court records show. His attorney, Douglas Tween, declined to comment.

The resident of Stanfordville, N.Y., about a two-hour drive north of New York City, opened an offshore account in 1981 under a Hong Kong entity called JCHERN, the records show.

When he needed money back home, Chernick hand-carried bank checks from the offshore account to a domestic account listed under Jeff Chernick Inc., the firm through which he represents toymakers in Hong Kong and mainland China.

For at least the last decade, Chernick managed foreign accounts in Switzerland and the Cayman Islands via telephone, fax, e-mail and occasional U.S. hotel and Zurich meetings with UBS bankers and other Swiss financial advisers. That group included Swiss banker Hansruedi Schumacher and Swiss attorney Matthias Rickenbach, who were indicted in August on a charge of conspiring to defraud the IRS. They have not been arrested and are believed to be in Switzerland.

Schumacher and Rickenbach "would dress as tourists to avoid detection" during their meetings with Chernick, court records say. Before giving him his financial statements, Schumacher and two UBS client advisers would cut Chernick's name and account number from the paper records "so that they could not be tied to" his offshore holdings.

Schumacher and Rickenbach also allegedly helped arrange Chernick's purchase of a 30-acre parcel next to his home in 2004, the court records show. To avoid the IRS, Chernick arranged the deal to look as if he had borrowed $700,000 from a Hong Kong entity he owned. In turn, the entity purportedly borrowed the money from Simba International, the Hong Kong name on one of Chernick's UBS accounts.

While Chernick knew the transaction "was a sham, he instructed his United States tax preparer to deduct the 'loan interest' he paid on his income tax returns," the records show.

Last year, alarmed over the UBS battle, Chernick raised his concerns with Rickenbach. The lawyer allegedly advised him not to apply for IRS leniency.

Rickenbach said Schumacher knew "a high-ranking Swiss government official" able to get the names of Americans whose UBS accounts would be disclosed to U.S. authorities.

Schumacher allegedly reassured Chernick his accounts would not be turned over. The businessman authorized a $45,000 payment from his UBS holdings to cover what Rickenbach said was the cost of the purported tipoff, court records show.

Only later did the hunter learn that federal investigators were, in fact, hunting him.

Now, on top of criminal penalties, Chernick must refile his taxes for 2001 through 2007 and pay back taxes, interest and penalties for himself and any related corporate entities. And, for failure to disclose the accounts, he faces a 50% penalty for the year with the highest account balance.

The Russian billionaire

This year, five other U.S. clients of UBS — including a Fort Lauderdale yacht broker, a retired Boeing sales manager from the Seattle area and the owner of a New Jersey building supply firm — have been criminally charged. Like Chernick, all have pleaded guilty or signaled plans to do so.

They joined arguably the most prominent UBS client charged by federal tax investigators to date: Russian-born billionaire Igor Olenicoff. He runs Olen Properties, a California firm that owns thousands of residential and commercial units.

U.S. Tax Court records show the IRS alleged that Olenicoff and his wife, Jeanne, owed $44 million in unpaid taxes and $33 million in penalties for 1996 and 1997. The amounts were based on money that purportedly flowed to Olen Properties from Sovereign Bancorp, a company based in the Bahamas.

The IRS argued that Sovereign was a sham company controlled by the billionaire. But Olenicoff, who did not respond to messages seeking comment, contended in Tax Court filings that the firm was formed by the Vozrozhdeniye (Renaissance) Fund, an entity that Russia's then-President Boris Yeltsin created to make foreign investments.

In 2007, Olenicoff pleaded guilty in federal court to a criminal charge of failing to disclose offshore bank accounts he controlled. He paid $52 million to the IRS for back taxes, interest and penalties.

Olenicoff now is suing UBS and Bradley Birkenfeld, his former UBS banker who provided internal banking information to the IRS. The lawsuit accuses UBS of plotting to take control of Olenicoff's accounts while secretly reporting him to U.S. authorities. UBS has denied the allegations.

Unintended consequences

For every Olenicoff and Chernick, tax lawyers say, there are many Americans who used offshore accounts without intentionally evading federal taxes.

People such as the 86-year-old German-American retiree who, with his wife, splits the year between homes in Maine and Florida and recently applied for the IRS leniency program.

He spoke on condition of anonymity because the IRS processing has not yet been completed. USA TODAY interviewed him during a conference call with Press, the Fort Lauderdale lawyer who represents him and verified his statements to the IRS. Press said the man and his wife had a "seven-figure" Credit Suisse account opened about 20 years ago with European inheritances.

"We don't consider ourselves tax cheats," said the retiree, who said he formerly captained a corporate yacht used by one of the world's wealthiest executives. "That money had nothing to do with America. It had never been here. It wasn't earned here."

He said he opened the account because the Polish government at one point tentatively agreed to give him land that had belonged to his ancestors after World War I but had been taken away after World War II. The offer required him to restore the property.

"I thought it would be easier if the money was in a bank in Europe," he said, explaining that the deal later fell through. "I certainly didn't open an account to cheat the U.S. government."

The retiree said he didn't get annual account statements and had little direct contact with his Swiss bankers, apart from one meeting in a Miami hotel.

Americans who inherited assets from family members overseas — including from relatives who died in the Holocaust— make up one of the largest groups of offshore-account holders seeking IRS leniency, says William Sharp, a Tampa lawyer whose firm represents numerous clients who have applied for the program.

Another sizable group, the tax lawyers say, is made up of Americans who opened the accounts while living and working in Europe: account holders such as a California businessman who says he transferred the equivalent of 600,000 Swiss francs from a domestic account to UBS when he worked at a multimedia job in the United Kingdom during the early 1990s.

The businessman, who now works in technology, says he was worried at the time about the state of the U.S. economy after the crash of the dot-com industry. He spoke on condition of anonymity because IRS reviews of his application are still pending.

"It was, to me, just a bank account. California seemed very far away," said the businessman, whose Chicago tax attorneys, Adam Fayne and Robert McKenzie, participated in the telephone interview and verified statements he made to the IRS.

His UBS bankers never mentioned U.S. tax requirements, the businessman says. And, he said, they avoided providing account information via e-mail or traditional mail for fear that they might run afoul of U.S. Patriot Act provisions designed to stop suspicious banking activities.

When he e-mailed requesting investment updates on his account, he'd invariably get a two-word reply: "Call me."

But, even then, "You could never get an exact answer if the question was somewhat complicated," he said.

Concerned after hearing about Birkenfeld, the former UBS banker who gave information to the IRS, the businessman said he opted to close the account this year.

While awaiting an IRS decision, the businessman says, he discovered that UBS' fees deeply eroded his investment gains.

If he had a chance to do it again, he says, "I would never have transferred the money out of the States."

http://www.usatoday.com/money/perfi/tax ... sion_N.htm

Here is a problem that doesn't affect poor and moderate income people.