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Secret Bank Accounts in Israel and Switzerland Result in a Guilty Plea

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The earlier IRS and DOJ (U.S. Department of Justice) investigations of secret bank accounts in Israel and Switzerland continue to produce new guilty pleas. On September 28, 2016, Mr. Markus Hager, a New York City resident, pleaded guilty to tax evasion for the tax years 2003-2005 and 2007-2010 with respect to his secret bank accounts in Israel and Switzerland.

Facts of the Case: Secret Bank Accounts in Israel and Switzerland

The facts of the Hager case are somewhat typical, but contain an exhilarating story of Mr. Hager’s attempts to conceal his ownership of the account – the fact that the IRS and the DOJ were able to uncover the entire history of these transfers of his funds under different names is impressive.

According to information presented in court, between 1987 through 2011, Mr. Hager utilized various secret bank accounts in Israel and Switzerland to hide his foreign funds and foreign income from the IRS. In order to do it, he opened a sham BVI (British Virgin Islands) entity which owned three accounts (two of them were numbered accounts) at UBS. It appears that, until 2008, Mr. Hager also owned some of his UBS accounts personally. By the end of 2004, the value of his undeclared UBS accounts exceeded $7.3 million.

With the IRS victory over UBS in 2008, Mr. Hager closed his UBS accounts and transferred all of his assets to a new opened account at Clariden Leu (which was already controlled at that time mostly by Credit Suisse; in 2012, the bank was integrated into the Credit Suisse corporate structure); the account was held in the name of his BVI entity.

Shortly thereafter, Mr. Hager closed the account at Clariden Leu and transferred the assets to a newly opened account held in the name of the BVI entity at a different Swiss bank. Mr. Hager caused that Swiss bank to falsely record Hager’s Belgian cousin as the owner of the assets on the account. Approximately six months later, he closed this account at the Swiss bank and transferred the assets to an account at a bank in Israel that Mr. Hager caused to be opened in the name of yet another Belgian cousin.

Between 2005 to 2011, Hager also controlled an undeclared bank account at Bank Leumi in Israel, which he falsely held under the name of a relative who was not a U.S. person and who resided outside the United States. In February of 2010, after obtaining an Israeli Identity Card, Hager opened an account in his own name at Bank Leumi in Israel but falsely reported that he lived in the United Kingdom and signed a document, under the penalty of perjury, declaring that he was not a U.S. citizen.

According to the information filed, Mr. Hager repatriated some of the funds from his secret bank accounts in Israel and Switzerland by having his attorney draft a sham loan agreement between himself and the BVI entity. The funds were wired from some of his undeclared bank accounts in Israel and Switzerland into the attorney’s escrow account.

During the relevant years, Mr. Hager filed false federal and New York State income tax returns on which he failed to report the income from his bank accounts in Israel and Switzerland and failed to pay tax on that income. It appears that Mr. Hager evaded approximately $652,580 in federal taxes for tax years 2003 through 2005 and 2007 through 2010. Hager also failed to file his FBAR even though an accounting firm had informed Hager of his obligation to do so and advised him of the civil and criminal penalties he could suffer for the failure to do so.

Sentencing for Failure to Disclose Assets and Income from Secret Bank Accounts in Israel and Switzerland

Sentencing has been set for January 4, 2017. Hager faces a statutory maximum sentence of five years in prison, as well as a term of supervised release and monetary penalties. According to the plea agreement, Hager agreed to pay restitution to the IRS. It is not clear if the FBAR penalty has been resolved by the plea.

Secret Bank Accounts in Israel and Switzerland: Lessons from the Hager Case

The Hager Case contains a full range of facts that lead to a criminal prosecution by the DOJ: the use of a sham foreign corporation in a tax shelter, the conscious and intentional effort to conceal the ownership of the funds by closing and opening bank accounts under different names, the failure to report the ownership of secret bank accounts in Israel and Switzerland even after Mr. Hager was advised by his accounting firms about the existence of the FBAR and its penalties, the failure to report the income from accounts, the filing of false tax returns and the repatriation of funds through a sham loan agreement and using his attorney’s escrow account. All of these items are a checklist of things that one should not do in order to avoid a DOJ criminal prosecution.

One interesting aspect of this case is the number of years for which Mr. Hager was charged with tax evasion. Apparently his especially egregious conduct had earned a total of seven years instead of the usual five years of counts of tax evasion. It is also interesting that the year 2006 was skipped in the plea; it is not clear from the plea why this was the case. My supposition is that the omission of the tax year 2006 was related to the statute of limitations concerns.

Contact Sherayzen Law Office for Professional Help with Disclosure of Your Bank accounts in Israel and Switzerland

If you have undisclosed bank account in Israel, Switzerland or any other country, please contact Sherayzen Law Office, Ltd. for help as soon as possible. Attorney Eugene Sherayzen and his highly-knowledgeable team of tax professionals have helped hundreds of U.S. taxpayers around the world to bring their tax affairs into compliance. You can also benefit from their knowledge, experience, creativity and devotion to their clients’ cases by scheduling a Confidential Consultation today!

Hapoalim Prepares for Settlement with DOJ | FATCA Tax Attorney

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On October 6, 2016, Israeli bank Hapoalim Ltd. announced that, in order to cover the costs of a future settlement with the US Department of Justice (DOJ), it will add a $70 million charge to an existing $50 million provision in its third-quarter results. The expected settlement will cover Hapoalim’s role in helping US tax residents to evade their US tax obligations.

In its news release, Hapoalim stated that its representatives held an initial discussion with the DOJ on September 30, 2016, to discuss the future settlement. The bank did not indicate whether $120 million in charges that it booked to date is the actual amount that Hapoalim will pay under its settlement with the DOJ. Rather, the news release emphasizes the uncertainty that still exists with respect to the actual amount.

The issue of the DOJ investigation dates back to the year 2011. In its recent (June 30, 2016) financial statements Hapoalim confirmed that its Swiss subsidiary Bank Hapoalim (Switzerland) Ltd. had been notified by Swiss authorities in 2011 that it was being investigated by the US government as a result of the DOJ’s suspicions that the bank had assisted US clients in evading federal taxes. The Swiss subsidiary could not resolve this issue in 2013 in the DOJ’s Swiss Bank Program due to the fact that it could not be classified as a Category 2 bank.

It is important to remember that the DOJ is not the only institution that is going after Hapoalim. The State of New York is conducting its own review. In its news release, Hapoalim indicated that the $120 million charge is not related to the New York investigation.

While all of this legal uncertainty makes it difficult for Hapoalim to assess its future liability under any deferred prosecution agreement, one can compare its situation with Bank Leumi. In 2014, Bank Leumi Group entered into a Deferred Prosecution Agreement with the DOJ under which it paid $270 million ($157 million of this penalty was allocated to Bank Leumi’s Swiss accounts held by US taxpayers).

If we rely on this precedent, it appears that Hapoalim is greatly underestimating its penalty, because Bank Leumi and Hapoalim are fairly similar in size as well as their actions in soliciting US clients. One also must not forget about the possible future indictments of Hapoalim’s employees (at least in the United States) by the DOJ.

Types of Assets Covered by OVDP Offshore Penalty

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Before one enters into the 2012 Offshore Voluntary Disclosure Program (“OVDP”), it is highly important to understand what kind of assets are covered by the OVDP Offshore Penalty. In this essay, I intend to broadly outline some of the major types of assets covered by the OVDP Offshore Penalty.

From the outset, it is important to emphasize that this article does not set forth the exclusive list of assets; rather, only some of the types of assets are covered. Also, this article does not represent a legal advice; rather, it is meant only for educational purposes. I strongly recommend retaining an international tax attorney before entering into the OVDP; only your attorney experienced in voluntary disclosures can assess what type of assets are covered by the OVDP Offshore Penalty.

OVDP Offshore Penalty is Broader Than the FBAR Penalty

It comes as a surprise to many of my clients that the OVDP Offshore Penalty is not equivalent to the FBAR penalties in terms of the types of assets covered. The Offshore Penalty is much broader than the FBAR penalty.

The general rule is that the offshore penalty is intended to apply to all of the taxpayer’s offshore holdings that are related in any way to tax non-compliance, regardless of the form of the taxpayer’s ownership or the character of the asset.

This is an extremely broad definition; in fact, it is so broad that it practically incorporates the assumption of willfulness and fraud on the part of the taxpayer who enters the OVDP. This is why it is important for your attorney to advise you on the possibility of other of your foreign assets to be covered in the calculation of the Offshore Penalty.

While there are many types of assets that fall under the general rule above, I would like to concentrate on the fivemajor types of assets that the OVDP Offshore Penalty covers: (1) FBAR assets not otherwise excluded; (2) real estate; (3) art and collectibles; (4) intangible assets; and (5) interest(s) in a U.S. or foreign business.

FBAR Assets Covered by Offshore Penalty

The Offshore Penalty covers all of the financial accounts listed on the FBAR, including bank accounts, securities accounts, precious metals custodial accounts and other assets that should be reported on the FBAR. Unless any of these assets are otherwise excluded under the OVDP rules, they will be used in calculation of your Offshore Penalty.

Real Estate Covered by Offshore Penalty

This type of asset constitutes a major deviation from the FBAR penalties. Under the OVDP rules, the real estate assets related to tax non-compliance are included in the calculation of the Offshore Penalty. It is important to understand that if the real estate was acquired with funds that were subject to U.S. tax but on which no such tax was paid, the offshore penalty would apply regardless of whether the real estate produced any income. Obviously, the rental real estate is also likely to be included in the calculation of the Offshore Penalty if this real estate produced income that should have been disclosed on U.S. tax return and on which U.S. taxes were not paid.

Artwork and Other Similar Assets Covered by Offshore Penalty

The same principal applies to artwork and other similar assets. As long as the artwork was related to income tax non-compliance or was acquired with funds that were subject to U.S. tax but on which no such tax was paid (so-called “tainted funds”), the offshore penalty is likely to be applied to these assets.

Intangible Assets

Intangible Assets constitute another major deviation from the FBAR penalties. The Offshore Penalty is likely to apply where intangible assets, like patents and trademarks, were acquired by tainted funds and/or are related to income tax non-compliance.

Interest in a U.S. or Foreign Business

It is important to remember that the Offshore Penalty applies in lieu of the FBAR penalty as well as other penalties that would be applicable to information returns such as Forms 5471, 8865, 8858, 926 and so on. This is why the Offshore Penalty also applies to ownership of foreign businesses.

What is unique to the OVDP is the application of the Offshore Penalty to the ownership of U.S. businesses acquired with tainted funds. The only justification for such a broad coverage of the Offshore Penalty is that it most likely comes from the aforementioned assumption that the non-compliant taxpayer engaged in fraudulent behavior.

In another article, I will explore how the Offshore Penalty applies to ownership of business interests including possible exceptions to the general rule. For the purposes of this essay, it is important to understand that the Offshore Penalty may be applied to such ownership interests.

Other Assets Maybe Covered Under the General Rule

It is important to emphasize that other assets may be included in the calculation of the Offshore Penalty pursuant to the general rule above (i.e. offshore penalty is intended to apply to all of the taxpayer’s offshore holdings that are related in any way to tax non-compliance, regardless of the form of the taxpayer’s ownership or the character of the asset). It will be up to your attorney to assess which of your assets are subject to the Offshore Penalty.

Broad Coverage of Offshore Penalty Complicates the Entrance of Non-Compliant Taxpayers into the OVDP

Such a broad application of the Offshore Penalty greatly complicates the decision to enter into the OVDP. In some situations (particularly, where the IRS cannot establish willfulness), the taxpayer may be better off taking his chances under the existing FBAR penalty structure and face the individual information return penalties rather than subject themselves to a 27.5% penalty on the highest value of all of his assets (the so-called Modified Voluntary Disclosure or Noisy Disclosure).

Again, this is the decision that can only be taken only after your attorney examines your particular situation and makes the recommendation of not entering into the OVDP.

Contact Sherayzen Law Office for Help With Your Voluntary Disclosure of Offshore Assets

Sherayzen Law Office can help you with the disclosure of any of your foreign assets. Our international tax firm is highly experienced in conducting offshore voluntary disclosures. We will thoroughly analyze your case, assess your current FBAR liability as well as the liablity that you would face under the OVDP, determine the available disclosure options and implement the disclosure strategy (including preparation of all legal and tax documents as well as IRS representation).

Contact Sherayzen Law Office NOW to schedule your consultation!