Asher Rubinstein interviewed by Swiss TV regarding Swiss bank accounts
Asset Protection for Money Managers, Investment Advisors and Financial Professionals
Asset Protection for Money Managers, Investment Advisors and Financial Professionals
(Or, We hate to say “I told you so” #2, but look here)
by Asher Rubinstein, Esq.
New York’s attorney general has sued Ivy Asset Management, a hedge fund manager, and two of its former executives, its CEO and its CIO, claiming that they knew years ago that Bernard Madoff was a fraud, but did not disclose that knowledge to the fund’s investors.
Attorney general suits against hedge funds are not new. Lawsuits related to Madoff’s fraud are not new. But recently, we have seen more and more lawsuits filed against fund managers and investment advisors personally. In other words, the plaintiffs not only target the funds or financial institutions, but the people who make the investment decisions, naming these people personally and putting their personal assets at risk.
We wrote about this development just last week; please click here.
In that article, we discuss why indemnification is often of little comfort. We outlined domestic and international asset protection strategies that will effectively protect personal assets from these kinds of claims.
Recent events make clear the need for asset protection by financial professionals. Following the charges filed last month by the Securities and Exchange Commission against Goldman Sachs, there is a real possibility that individual Goldman Sachs executives may face government investigation and charges. Investors in Goldman products may also file civil charges, in addition to charges filed by the government. In today’s news, Morgan Stanley is being investigated for wrongdoing in connection with investment activities. Actions against Morgan Stanley executives are a possibility also. The need for asset protection by financial professionals is continually reinforced in today’s climate.
Contact us for additional information.
The Latest on “Noisy” Disclosure of Foreign Accounts
The Latest on “Noisy” Disclosure of Foreign Accounts
(Or, We hate to say “I told you so” #1, but look here.)
On May 8, at the meeting of the American Bar Association Tax Section, an IRS representative discussed the situation of a taxpayer filing amended tax returns for past years and including previously unreported foreign income from foreign accounts. This is known as a “quiet” disclosure because it contrasts with a taxpayer who formally makes a Voluntary Disclosure, through the established procedure.
Not surprisingly, the IRS representative took a dim view of quite disclosures and stated that a taxpayer who makes a quiet disclosure will not be eligible for terms available to taxpayers who make a formal or “noisy” disclosure.
The open issue is: for clients wishing to make a noisy disclosure, what will the penalties be, after the expiration of the special Voluntary Disclosure Program (VDP) in October, 2010?
The answer is: almost certainly not the same penalty regime as that of the special VDP (including 20% of the highest balance in the account during 2003-2008). The IRS has not advised what the penalties will be for people who come forward now. Everyone we have spoken with at the IRS – – including those at the highest levels administering the VDP – – can offer no guidance, because there has been no official word.
So, for clients who came forward prior to October 2009, we can estimate the penalties with some certainty. For clients who want to come forward now, even with noisy disclosures, we can’t make the same estimates.
But we can advise as follows: Quite disclosure will offer no concessions, no reduced penalties and above all, no understanding that criminal prosecution will be avoided.
There are other problems with “quiet disclosures”. They only address payment of back taxes and interest, but not penalties. Also, they leave open the issue of the taxpayer not having complied with reporting requirements, i.e., filing U.S. Treasury Form TD F 90-22.1, Report of Foreign Bank and Financial Account (the “FBAR”), and IRS Form 1040 “check the box”. If the foreign account was in the name of a foreign trust or foreign foundation, then IRS Form 3520 was probably due also. Quiet disclosure does not correct those past non-reporting issues.
Given the current environment – – UBS revealing client identities and accounts, HSBC and Credit Suisse under investigation, the proliferation of Tax Information Exchange (TIE) Agreements, and the new offshore disclosure requirements set forth in the recently enacted HIRE Act – – there is no longer any offshore banking secrecy. Taxpayers with non-declared, non-compliant accounts must come forward. Unfortunately, quiet disclosures are not the prudent way to bring your account into compliance.
See other related articles:
Quiet Disclosure of Foreign Bank Accounts Still Causes Noise
When Dealing with the IRS, Proceed with Caution
When Dealing with the IRS, Proceed with Caution
We have long advised our clients that, when dealing with the IRS, proceed with caution. This message was furthered by an article that appeared in the Wall Street Journal, titled “IRS Faulted for Prosecuting Confessed Evaders of Taxes” (May 5, 2010).
The article concerns a group of taxpayers who voluntarily disclosed to the IRS the existence of their undeclared foreign bank accounts, and are now being prosecuted for criminal tax fraud. Under the official IRS Voluntary Disclosure Program (VDP), which was announced in March 2009 and expired on October 15, 2009, there was an “understanding” that people who came forward and disclosed would avoid criminal charges. (“Understanding”, as contrasted with “guarantee”; the IRS made no guarantees of non-prosecution.) The taxpayers discussed in the article, however, came forward in 2008 and early 2009, before the existence of the official VDP. In other words, they came forward too early, and the IRS was not bound by the “understanding” not to prosecute criminally.
We’ve written elsewhere about the IRS agreeing to settlement terms, and then a new IRS agent reneging on the terms agreed to by his predecessor agent.
When up against the IRS, it is crucial to have attorneys on your side who are aggressive in protecting your rights, and who will fight on your behalf.
As the Wall Street Journal guides, “Having a smart, well-prepared tax expert on your side can be a tremendous advantage. Not only will they know the ins and outs of the tax code, but also they can take over the often-exhausting job of dealing with the IRS – and help you decide how far to push a fight.” (Wall Street Journal, “How to Fight the IRS”, April 13, 2010)
The attorneys at Rubinstein & Rubinstein, LLP have extensive experience with the I.R.S. We have led many clients through tax audits, tax challenges and voluntary disclosures. We have successfully represented and defended numerous clients against the I.R.S. and negotiated favorable settlements with the I.R.S. We zealously protect our clients, and their interests and rights, when challenged by the IRS. At the same time, we have excellent relationships with the IRS agents with whom we interact. While cordial and professional, we are strategic and aggressive when necessary. We have a successful track record against the IRS on behalf of our tax clients.
Please contact us if you have been contacted by the I.R.S. regarding a request for information, an audit, a notice of tax due, or have any other issues relating to taxation.
Other relevant articles:
Get Ready for a One-Two Punch: More Taxes and More IRS Audits
Asset Protection for Financial Professionals, Hedge Fund Managers and Investment Advisors
Asset Protection for Financial Professionals, Hedge Fund Managers and Investment Advisors
Traditionally, professionals in certain high-liability professions were most interested in asset protection. Examples include doctors facing the threat of medical malpractice lawsuits, and landlords and real estate developers facing lawsuits from purchasers or tenants of the real estate.
Lately, we’ve been seeing the emergence of a new group: investment advisors, hedge fund managers and other financial professionals. This group is faced with an increase in lawsuits brought by litigious investors against their financial advisors and those charged with making investment decisions. As investors seek to blame others for investment losses, plaintiffs are now suing fund managers personally, in addition to suing the fund itself. In the past, it was routine to sue the fund or financial institution; naming the fund manager or investment advisor personally is something new, but something that we are seeing in increasing numbers.
In addition, government investigation and prosecution of financial firms, including the recent charges against previously-untouchable Goldman Sachs, add a further challenge for investment advisors and financial professionals. Individual professionals can be investigated and charged, in addition to the firm or fund itself. A finding of wrongdoing, or criminal charges, could form the basis of a civil suit by investors against the investment advisor or money manager.
Domestic asset protection (for example, a family limited partnership, or FLP) will, if properly established and maintained, be 100% effective against all future claims. Such asset protection should discourage future lawsuits and give defendants significant leverage to force favorable settlements. One caveat: it is imperative that financial professionals protect themselves before the commencement of a lawsuit by a disgruntled investor.
Domestic asset protection via FLP’s is extremely effective against future claimants, but may not be as effective with respect to pre-existing claimants. In such cases, a financial professional may not be completely protected by domestic asset protection and may have to utilize international asset protection strategies. International asset protection strategies are effective primarily because they involve the physical transfer of an asset to a safe and secure foreign locale where the asset is beyond the jurisdiction of U.S. courts. Money, for example, may be wired offshore in order to be completely protected from disgruntled investors.
While in the past, hedge fund managers and investment advisors could take comfort in the indemnification offered by the their funds or investment houses, these days, adequate indemnification is far from certain. For one thing, indemnification would not occur in case of negligence or activity determined to run afoul of law, or even activity deemed to be contrary to internal fund or investment house policy. Of greater importance, indemnification is “after-the-fact”; it seeks fund reimbursement after you have already lost your assets. Proper asset protection is pre-emptive; it is designed to discourage lawsuits in the first place and to protect your assets from future claimants. It eliminates the need for indemnification or, at the least, significantly reduces the amount of indemnification needed.
Proper asset protection strategies offer financial professionals piece of mind and provide the protection their hard-earned assets need to withstand the inevitable attacks by investors looking to blame someone else for their investment losses.
Recent Updates on Non-Declared Offshore Banking
A few recent updates regarding the crackdown on non-compliant offshore accounts.
On April 15, 2010, the same day income tax returns were due, seven new defendants were charged with criminal tax fraud for failing to declare offshore accounts. The charges included failing to declared monies at UBS and other banks, and using foreign corporations and foundations in Panama, British Virgin Islands, Liechtenstein and Hong Kong to obscure the true beneficial ownership over the accounts. This type of offshore structure has been a particular target of prosecutors, with Hong Kong and Panama entities appearing frequently in the criminal charges. Of course, prosecutors are not limiting themselves to this type of structure, nor to UBS accounts, nor to accounts only in Switzerland. With 15,000 taxpayers coming forward under the Voluntary Disclosure Program, the IRS is now cataloging and linking foreign banks and service providers, and it is safe to say that more prosecutions will ensue, involving other banks and other foreign countries. If you still have a foreign account that is not tax-compliant, it may not be too late to make it compliant and avoid criminal charges.
Second, it appears that the Swiss Parliament will pass a law that will solidify the settlement between the U.S. Justice Department and UBS and thereby allow UBS to hand over to the IRS between 4,500 and 10,000 names of Americans with undeclared UBS accounts. In January, the Swiss Federal Administrative Court ruled that the failure to file an IRS form W-9 regarding a UBS account did not constitute tax fraud, and thus UBS could not disclose account information to the IRS. The ruling was thus at odds with UBS’ obligations under the settlement agreement. However, it now appears that in June, the Swiss Parliament will legislate around that court ruling. (This occurs frequently in our own system of government and its “checks and balances”. If a court rules one way, the legislature can pass a law to reverse the court’s ruling.) In June, the Swiss Parliament will likely pass legislation that will elevate the UBS agreement to the level of international treaty. Tax fraud and tax evasion will become indistinguishable under Swiss law for purposes of disclosure under the settlement agreement and the treaty. The effect will be to neutralize the court’s contrary January ruling, and mandate UBS’ compliance with the settlement agreement.
In addition, on March 31, 2010, Switzerland and the US signed an amended protocol to the settlement agreement. As UBS has advised us, “Under the new protocol, the Treaty Process will continue even before the June [Parliament] sessions.”
Americans with Swiss accounts who have not yet come forward are well-advised to come forward now, before UBS names names, and before other banks receive summonses from the US.
Liechtenstein is also contemplating legislation, which would prevent Liechtenstein from assisting a tax inquiry from a foreign government, if the basis of the investigation is derived from stolen banking data. Earlier this year, the German government paid millions of Euro for banking data stolen by an employee of a Swiss bank. In 2008, a renegade employee of LGT Bank in Liechtenstein stole data about client accounts and sold the data to the German intelligence service in return for more than four million Euros. With that data, the German government prosecuted Germans for tax fraud. The German government also shared the data with other governments around the world. Liechtenstein, which has signed various Tax Information Exchange (TIE) Agreements, including with the US, will continue to provide banking information in response to inquiries by foreign governments, except when the basis of the inquiry is from stolen banking data.
These recent events all point to the continuing erosion of offshore banking secrecy. It is completely legal to have funds offshore, and there are many good reasons for having a foreign account (e.g., international business transactions, global investment and diversification, asset protection), as long as the foreign accounts are part of a tax compliant strategy or are disclosed and taxes are paid on foreign the income. If the offshore accounts are tax-compliant, then the erosion of banking secrecy and revelations by foreign governments to the IRS are not threats. Strategies exist for the minimization of tax on foreign income in a tax compliant manner. The lesson: if you have assets in foreign banks or foreign brokerages, make sure they are tax compliant. As the window of banking secrecy closes further, taxpayers with tax-compliant accounts need not worry. Non-compliant account owners, however, are again advised to see us, before the IRS sees you.
The Wall Street Journal on Fighting the IRS
The Wall Street Journal on Fighting the IRS, and How Rubinstein & Rubinstein Can Help You
by Asher Rubinstein, Esq.
The Wall Street Journal published a long article titled “How to Fight the IRS” (April 13, 2010). Its lead is compelling:
“Brace yourself: The chances of being audited are rising. So if it happens to you, here’s what to do – and what not to do.
Get ready for increased scrutiny by the Internal Revenue Service. With Washington searching for ways to cut the budget deficit, IRS officials face intense pressure to collect more revenue. The agency plans more audits, especially of taxpayers in high brackets or those who are self-employed and deal in large amounts of cash. The IRS also has turned up the heat in such areas as offshore tax evasion, including undisclosed foreign bank accounts.
If you become an IRS target, what should you do?”
We’re proud that we’ve been highlighting the same issues. For instance:
Get Ready for a One-Two Punch: More Taxes and More Audits
What to do if the IRS Comes Knocking On Your Door
As the Wall Street Journal guides, “Having a smart, well-prepared tax expert on your side can be a tremendous advantage. Not only will they know the ins and outs of the tax code, but also they can take over the often-exhausting job of dealing with the IRS – and help you decide how far to push a fight.”
The attorneys at Rubinstein & Rubinstein, LLP have extensive experience with the I.R.S. We have led many clients through tax audits, tax challenges and voluntary disclosures. We have successfully represented and defended numerous clients against the I.R.S. and negotiated favorable settlements with the I.R.S.
We are available to speak with you if you have been contacted by the I.R.S. regarding a request for information, an audit, a notice of tax due, or have any other questions concerning issues relating to taxation or protection of assets, domestic and offshore.
Ongoing Tax Reporting Requirements
We take this opportunity to remind Voluntary Disclosure clients of important ongoing tax reporting requirements that must be met with respect to foreign accounts.
As you already know, voluntary disclosure of a foreign financial account requires amendment of your past tax returns from 2003 through 2008, to include previously unreported foreign income. However, having entered the voluntary disclosure program and made the account tax compliant, you must still ensure ongoing tax compliance.
Thus, if you entered the Voluntary Disclosure Program and still maintained a foreign financial account at any time during 2009, you must still “check the box” on your 2009 IRS form 1040, Schedule B, Part III, line 7. This requirement is applicable to clients who had beneficial ownership of, or signature authority or other authority over, a financial account in a foreign country. If you entered the Voluntary Disclosure Program and still maintained a foreign financial account at any time during 2009, you must check the box. Even if you closed the account during 2009, you must still check the box if you maintained the account during any part of 2009.
In addition to “checking the box”, beneficial owners of a foreign financial account must report all income (including interest, capital gains and dividends) realized during 2009 in the foreign account, on their 2009 IRS form 1040, due April 15, 2010. As part of the Voluntary Disclosure Program, you will pay back taxes on income earned during 2003 through 2008. Please remember that ongoing tax compliance means that you must pay tax on foreign income earned in 2009 onward.
Moreover, the FBAR, Report of Foreign Bank and Financial Accounts (Form TD 90-22.1), must be received by the IRS by June 30 (unlike a tax form such as Form 1040, which must be mailed by the due date of April 15). The FBAR must be filed by clients who had beneficial ownership of, or signature of other authority over, any foreign financial account, including bank or securities accounts, if the aggregate value of these accounts exceeded $10,000 at any time during 2009. Clients who participated in the Voluntary Disclosure Program should ensure their ongoing compliance by timely submitting the FBAR. The Voluntary Disclosure Program covered tax years 2003 through 2008, but if the account existed at any point during 2009, then the FBAR must also be submitted for 2009, by the June 2010 due date.
Finally, if you had an interest in a foreign entity such as a foreign trust or foreign foundation, and/or during 2009 you received assets from the foreign entity, then you may also be required to file IRS form 3520 or 3520A. Please contact us for a copy of our memorandum about this issue.
The Voluntary Disclosure Program allowed you to bring your foreign account into tax compliance. Please ensure that your account continues to remain tax compliant by adhering to the ongoing reporting and tax requirements.
If you have any questions or would like our assistance in preparing the 2009 FBAR, please feel free to contact us.
Offshore Voluntary Compliance Initiative: New Jersey Changes its Position, Demands Payment Now
Offshore Voluntary Compliance Initiative:
New Jersey Changes its Position, Demands Payment Now
We were recently advised of a change in the position of the New Jersey Department of the Treasury, Division of Taxation, regarding its Voluntary Compliance Initiative for foreign bank accounts. The new position requires an immediate payment of estimated tax due.
In January, we were advised by the New Jersey Division of Taxation that it understood that taxpayers needed time to obtain financial statements from foreign sources, as well as time to amend their Federal and New Jersey income tax returns. These are pre-requisites to making a payment for taxes due on foreign income. In addition, the Division’s conditional acceptance letter stated that “In lieu of an estimate of the tax due, a detailed explanation is required that explains the basis for difficulty in determining the estimate of tax and the steps being taken to acquire the necessary information for both the IRS and for NJ.” We provided such an explanation, advising that we were obtaining statements from foreign sources and will prepare amended Federal returns in order to prepare amended state returns.
However, we recently received a letter from the Division that a “good faith estimate for each tax year must be remitted” within fifteen days. This letter provided no guidance as to what might constitute a “good faith estimate”. In our subsequent discussions with the Division in an attempt to understand its new position, it was clear that the Department is aware that foreign banking information may be incomplete, and that amended federal returns may not yet be prepared. We further informed the Department that there is no such deadline, on the federal level, to make an estimated payment. Further, many clients who have passed the IRS Criminal Investigations Division have yet to be assigned to a civil agent for determination of tax due. While we made these points clear to the Division, it still insists upon a “good faith estimate” now, notwithstanding its earlier position.
If you have already amended your past tax returns to include foreign income, then you should be able to calculate New Jersey income tax due, and send in a payment for these amounts.
If, however, you are still awaiting statements from foreign sources, and/or have not yet prepared amended returns for past years, you should still consider making a “good faith estimate” now. We suggest the following formula, for each tax year, 2003 through 2008:
(estimated foreign income earned) x (New Jersey tax rate, e.g., 6.37%) = good faith estimate of tax due.
However, in many cases, foreign income may still be unknown. We have been advised by the Division that the taxpayer should send in “something” now. We have been further advised that if a taxpayer sends, e.g., $1,000 now, but later the taxes due are significantly greater, the taxpayer would not be assessed additional penalties for making too low a payment now. Of course, such advice from the Division is informal and non-binding. The representative reasoned that if a taxpayer over-pays now, the Division would send a refund later. The representative advised that no extension is possible for making an estimated payment.
We believe that because of the State’s fiscal crisis, the New Jersey Division of Taxation is attempting to obtain revenue as fast as possible. We understand from a contact at the Division that the directive to send immediate payment comes from the Director of the Division of Taxation. The State’s goal, however, clearly does not take into account that taxpayers are constrained by the long process of obtaining information from foreign banks (which only recently and begrudgingly accepted greater bank transparency) and amending past tax returns. Nevertheless, we do not expect clients to commence legal challenges against the Division based on its lack of understanding and sudden change in its position. In addition, because taxes will be due at the end of the Voluntary Compliance process, challenging payment now may be have limited benefit.
Please contact us to discuss how to proceed.