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

[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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Why aren’t the law and order types excited?

by Linda Beale
crossposted with Ataxingmatter

More On UBS and Whistleblower Bradley Birkenfeld

The Washington correspondent for Feature Story News, Daniel Ryntjes, interviewed Bradley Birkenfeld in jail recently. You can find the audio interview and other items on the UBS banking secrecy case, at this link.

Birkenfeld says that most of the US clients were “sophisticated investors” who traveled to Switzerland expressly to set up secret accounts and take advantage of the anonymity in a bank that had been operating this business for decades: they didn’t need to talk about that motive, because everyone knew that was what the service was all about. He notes that the bankers didn’t provide the tax advice, but there were lawyers and trust officers who handled that part of the deals, including setting up Hong Kong or Singapore corporations and otherwise.

Birkenfeld, as a director at UBS with signatory power at the bank, had a base salary of about 160 thousand Swiss francs and bonuses that ultimately landed him just under a million dollars a year for his banking work. Birkenfeld claims that he saw a document not provided to employees that raised questions about the legality and ethicality of the bank’s activity in having bankers travel to the US to meet with US clients. While the activity may have been legal in Switzerland, he asked the bank to explain the issues in the US. He claimed to see a pattern in which “the bank was trying to distance itself and have a corporate cover for itself, but not for its employees.” Meanwhile, it was “compensating, training, encouraging” the employees to do those activities. When the bank declined to answer his queries, he sought outside advice and was told to resign, which he did. In his exit interview (with human resources and other officials), he argued that he should get an answer to those questions.

While on leave, he wrote the bank stating his concern about violations. An investigation commenced, which he saw as a cover-up. Based on this, he traveled to the US and met clandestinely with the DOJ, SEC, IRS and the Senate permanent subcommittee on investigations to testify about the bank’s activities, “out of pure principle”, he says. So he took on the largest bank in the world about the “largest in US history” tax scandal, and now says he wonders why the DOJ had not acted on this issue beforehand. He also thinks that he shouldn’t have gone to the DOJ, since he ultimately was prosecuted after sharing, he claims, information with them about the bank. He says the DOJ is “incompetent”, and using the KPMG case as the example, in which the judge concluded that failure to provide financial support for expensive legal counsel was a violation of the tax evasion promoting defendants’ constitutional rights to counsel. (I find that conclusion highly dubious, but it is the result of the case.)

Birkenfeld sees himself as the victim–the only person in prison after the exposure of UBS. The interviewer notes that he was, in fact, breaking the law for the four years that he worked at UBS pursuing these criminal acts. He notes that there are thousands of Americans who took advantage of the UBS practice who are NOT in jail, and he is not satisfied with the job done by DOJ with the information provided. He notes that the “kingpin” knew all 25,000 clients, but the DOJ failed to extract all of those names because of the deal they made with UBS for a mere 4500. They gave the “kingpin” immunity and he pled the Fifth at the Senate, then they released him in August 2008 while the Senate was on recess. Birkenfeld had a long prison sentence, and no other person in the scandal, so Birkenfeld thinks this will discourage whistleblowers from exposing these kinds of criminal acts in the future. They have prosecuted very few of the names they got early on, so he notes it will take them a long time to prosecute the additional 4500 names.

There is more to the interview, and more in the other links. Enjoy. [hat tip to Daniel Ryntjes]

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More on UBS and Secret Banking Jurisdictions

by Linda Beale
crossposted with Ataxingmatter

More on UBS and Secret Banking Jurisdictions: Birkenfeld Tells All to Global Post

Bradley Birkenfeld, the UBS banker who opened the floodgates of information on the bank’s nefarious practices of aiding and abetting tax evasion, is currently in prison. But he has also done a tell-all interview with the Global Post, a series that began on August 5. See Michael Bronner, Telling Swiss Secrets: A Banker’s Betrayal, GlobalPost, Aug. 5, 2010. Links to additional articles in the series are provided at the end of each post and here:

Part 2: 222 billionaires

Part 3: The golden goose

Part 4: A triple-double cross

Part 5: A reversal of fortune

Remember the banking sequence in the Da Vinci Code movie/book. A mundane world from the outside reveals itself to be a high-tech world of illusions, where bank vehicles can easily evade police inspectors and move clients beyond their range. Birkenfeld’s description of the real Swiss bank is not so different–or if anything seems more surreal, since the bank even taught its bankers how to fool FBI and customs inspectors in order to move client assets around without the authorities knowledge. As the article notes:

The bank had held training sessions for cross-border bankers on how to elude FBI and U.S. Customs scrutiny when traveling with sensitive bank documents; how to obscure client information on PDAs and encrypted laptops; and various other evasive trade craft not usually associated with honest banking. Birkenfeld had the pilfered PowerPoints to prove it.

***

The bank would admit to intentionally subverting U.S. tax laws and defrauding the U.S. government by sending dozens of unregistered bankers, Birkenfeld among them, to the United States on thousands of illegal trips to facilitate tax evasion schemes for wealthy U.S.-based clients — a fraud hiding as much as $20 billion in secret undeclared accounts and earning UBS up to $200 million a year in ill-begotten profits. Id.

Birkenfeld’s lifestyle, of course, was similar to the Wall Street titans with their million-dollar bonuses eating holes in their pockets.

He cultivated contacts among event organizers so he could swing VIP treatment for himself and his clients. “I just generally spent money the way I saw fit,” he said. “I wouldn’t go out and buy somebody a Rolex, but I mean, if I spent $500 for a lunch I could justify it.”

Birkenfeld got paid, too: A starting salary of 180,000 Swiss francs (just over $170,000) plus an American-style bonus, which in his best year, he said, put him at one million Swiss francs in total compensation (about $946,000). When home from the road, Birkenfeld drove a BMW M5 and split time between a plush apartment in Geneva and a chalet in the shadow of the Matterhorn in the Swiss Alps. Id, Part II.

Birkenfeld’s defection was a game-changer. The IRS got some names right away, thousands through an amnesty program that had clout because of the settlement with UBS which promised 4500 names, and with the Swiss Parliament’s decision in June, those thousands more. Each account name provides tie-ins to other sources of information–Bahamian or Singaporean companies, bankers, lawyers, etc. UBS is not the only bank whose secret operations will be exposed with the new information provided by those who came in under the IRS amnesty program–Credit Suisse and HSBC are also under investigation, as the article notes; and German authorities have purchased additional information on secret bank accounts, which led to German raids on Credit Suisse’s German branches in mid-July of this year. This will provide still more information in months to come.

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