David Leon Fredrick and Patricia Lynn Hough of Englewood, Florida were indicted by a federal grand jury for conspiring to defraud the IRS by hiding millions of dollars in assets and income in offshore bank accounts at UBS and other foreign banks, the Department of Justice and IRS announced last week.
According to the indictment, Fredrick and Hough, married doctors, served on the Board of Directors of two Caribbean-based medical schools. The indictment alleges that Fredrick and Hough conspired with each other, a citizen and resident of Switzerland, and a UBS banker to defraud the IRS.
They carried out the alleged conspiracy by creating and using nominee entities and undeclared bank accounts in their names and the names of the nominee entities at UBS to conceal assets and income from the IRS.
It is further alleged that Fredrick and Hough used the funds in their undeclared accounts to purchase an airplane and two homes in North Carolina.
Fredrick and Hough were also charged with four counts of filing false tax returns for 2005, 2006, 2007 and 2008. The indictment alleges that they filed false tax returns which substantially understated their total income and failed to report that they had an interest in securities or other financial accounts located in foreign countries.
U. S. citizens, resident aliens and legal permanent residents of the United States have an obligation to report to the IRS on the Schedule B of a Form 1040 tax return whether they had such an interest by checking “Yes” or “No” in the appropriate box and identifying the country where the account was maintained. U.S. citizens and residents also must report all income earned from foreign bank accounts on their tax returns.
The conspiracy charge carries a maximum potential penalty of five years in prison and a $250,000 fine. The false return charges each carry a maximum potential penalty of three years in prison and a $250,000 fine.
If you have a foreign bank account, it might be good to know that foreign financial institutions are closing accounts of U.S.-based customers.
If this happens to you, your offshore financial institution will send you a letter asking where you would like the money in your account sent. If you have not done your homework, that would be a very unpleasant surprise.
Deposit the money in the U.S. and the IRS likely will discover it. If, like many, you have failed to report income from these accounts on properly filed IRS tax forms over the years, you could get hit with serious fines and/or imprisonment.
Already, Mary Estelle Curran of Florida, who says she inherited a Swiss bank account from her husband, was convicted of filing false tax returns for tax years 2006 and 2007. She agreed to pay a civil penalty of nearly $22 million. A federal judge placed the 79-year-old woman on probation for one year, despite immediately ending it and suggesting that her attorney seek a pardon. Curran, who said her husband largely handled the finances, was known for devoting her life to charitable work.
The heat is on right now because of the Foreign Account Tax Compliance Act of 2010, designed to nail offshore tax evaders. Under the act, foreign entities are required to start sharing information on their U.S. account holders with the United States annually or face a steep 30 percent withholding tax on certain U.S. transactions.
The United States says it has been in talks with 50 countries to implement the act. It already has announced bilateral international tax compliance cooperation agreements with the United Kingdom, France, Spain, Germany, Italy, Norway, Ireland, Mexico, Switzerland and Denmark.
Swiss banks have been the fastest to start closing client accounts, which they seem to prefer to the alternative of having to go through the costly hassle of filing the required disclosures on U.S. account holders.
Once you get a notice from your offshore bank to move your funds, you have four choices:
Many taxpayers are joining the voluntary disclosure program. To join, you must apply for pre-clearance to determine if you qualify and give the IRS limited information about your offshore accounts. It generally takes two days for a response.
Applicants run the risk that the IRS already has obtained their names from a financial institution — a factor that could disqualify them from the program. Meanwhile, once the IRS is contacted, it obtains information that can help in any prosecution.
Reduce your risk of serious penalties by consulting a tax attorney experienced and knowledgeable in the recent laws relating to foreign bank account disclosure. If you think this could be an issue for you, act now, before the IRS withdraws the current voluntary disclosure program. The alternative option is not really an option.