Why I Think Romney Might Have Used the 2009 IRS Foreign-Bank-Account Amnesty Program

Beverly Mann | September 11, 2012 8:25 pm

Law

[A]n unusually high foreign tax credit in 2008 raises questions about the size and source of Mr. Romney’s foreign income that year and how it was treated for tax purposes. 
— Tax Credits Shed Light on Romney,* James B. Stewart, New York Times, Aug, 24
I don’t follow finance-industry news very closely, and the only technical knowledge I have about U.S. tax law for foreign income is what I’ve read in the last few months concerning the foreign bank accounts that Romney’s 2010 income tax return shows he had in 2009.  Including his UBS account, which was opened in (if I recall correctly) 2003 and had $3 million in it at the end of 2009.  That account was managed by a trustee, a Boston lawyer and close friend of the Romney’s, who apparently closed the account in 2010; the account doesn’t appear in Romney’s 2011 tax-return estimate. 

So it is only because of the controversy surrounding Romney’s tax returns and offshore bank accounts that I even know about the 2009 IRS amnesty program for Americans who evaded U.S. income taxes by hiding income in foreign bank accounts, and that why the program was initiated: UBS, Switzerland’s largest bank had been forced to identify thousands of U.S. citizens who had accounts there, many of whom, the IRS presumed accurately, had used the bank to evade payment of U.S. taxes.  The large number of identified evaders would make it difficult to prosecute them all; thus the temporary amnesty program.

I’d wondered how this all had come about so suddenly, but hadn’t bothered to research it.  But I learned the answer today.  An American-born UBS banker named Bradley Birkenfeld decided in 2007 to try to cash in on a newly-enacted whistleblower statute that would garner him 30% of the taxes that the IRS recouped as a result of the information he provided.  He hoped also to trade his information for immunity from criminal prosecution.  Only the monetary goal succeeded.  He was released last month from prison after serving a more-than-three-year sentence. And he was just awarded $104 million under that whistleblower statute.

According to Wikipedia, Birkenfeld, who was among UBS employees whose job it was, beginning in 2001, to solicit American customers to use the bank to evade U.S. taxes, pled guilty in June 2008 to a single count of conspiracy to defraud the United States, but he was not sentenced until August 2009.  He spent the intervening 14 months earning the $104 million that he will now be paid, most of it the result of the amnesty program, which reportedly was verysuccessful.  “In February 2009, UBS paid $780 million to resolve a criminal tax avoidance investigation. It also admitted to assisting 17,000 clients evade their taxes through the use of offshore accounts between 2000 and 2007,” Wikipedia says.  “In July 2009, to avoid additional fines, UBS agreed to provide the names of 5,000 Americans who had offshore accounts with UBS.”

The New York Times article from which I quote above was published on the Saturday before the start of the Republican convention and best as I can tell received little attention.  So let me give it some.  All with the caveat that I probably don’t know what I’m talking about when I conclude that the information in the article seems to suggest, if I understand it correctly, that in 2008, when the U.S. and European economies were collapsing, Romney suddenly paid a seemingly inexplicable $800,000 in foreign income taxes, “far more than any other year,” as indicated in the 2010 tax returns.  Stewart writes that Romney “reported more than $800,000 in taxable refunds from 2009, which seems very high.” 

Stewart wondered how Romney’s blind trust could have earned such amounts in foreign countries and generated such large tax credits,” and so he consulted to experts,  Daniel Shaviro, professor of taxation at New York University School of Law, and James R. Hines Jr., a professor of international taxation at the University of Michigan Law School. “One possibility,” Stewart says, “is that the financial crisis and resulting bleak economic outlook caused Mr. Romney’s trustee to cash in long-held, appreciated foreign assets. Another possibility is that they resulted from some kind of more elaborate tax shelter, or some combination of the two.”  

Might one other possibility be that Romney suddenly paid several years’ back taxes to foreign governments in 2008 or 2009?  After all, although people like me were unaware of the Birkenfeld matter, people like Romney and like the trustee of the Swiss account of course were.  (Is Romney trying to protect the reputation of his friend, the trustee?)

The large foreign tax credit for 2009, Shaviro told Stewart, “has baffled tax experts.”  It “makes no sense to me at all’.” But, Shaviro said, the IRS has challenged many tax-shelter “deals intended to generate foreign tax credits.”  And Hines said, “Lots of people are speculating about the source of this tax credit, but at this point it’s just conjecture.”

Conjecture, yes.  And I’m not even an expert.  But conjecture about this sure is fun.

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*Corrected link.

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