Texas Tycoon Wyly Charged in Years-Long Offshore Tax Evasion Scheme

For years, Sam Wyly and his brother were known as “maverick investors” who bucked trends and used their insight and cunning to carve out an immense empire in the technology, restaurant, and retail industries. Many of the companies associated with the former billionaires from Texas are household names including Michael’s craft stores, University Computing Company, Bonanza Steakhouse, Green Mountain Energy, Sterling Software, and Sterling Commerce. These companies and investments provided thousands of jobs for individuals across the nation and contributed to the development of the computing and telecommunications industry.

However, Sam Wyly has been dogged by allegations that he and others engaged in a massive multi-year fraud to boost earnings and evade taxes. At the heart of the allegations are the offshore trusts Wyly and his brother set-up on the Isle of Mann – a nation traditionally associated with tax evasion and often characterized as a tax haven. Wyly is already under court order to pay the SEC nearly $300 million in fines due to the use of the offshore trust to conceal $550 million in stock trading profits. Now, Wyly is facing additional proceedings.

Wyly and Wife Face Offshore Tax Evasion Charges

The IRS is seeking an additional $2.03 billion in back taxes from the Sam Wyly and his brother Charles Wyly’s estate. That $2.03 billion figure includes the brothers combined alleged tax debt and is inclusive of fines, penalties, and interest. While the $2.03 billion number is eye-popping in its own right, consider that the peak of Sam Wyly’s fortunate was estimated at just over $1 billion. While this is an extreme example, it show just how much penalties and interest can inflate a back tax bill.

The assessment against the Wyly brothers is believed to be the largest in IRS history. Since Sam Wyly filed for Chapter 11 bankruptcy after the order regarding the SEC fines was issued, the IRS has been forced to stake-out its place in line in U.S. Bankruptcy court. The prosecuting attorney has characterized the matter as such, “This is a case of lies, deception and fraud. This is not about tax avoidance but rather tax evasion.”

In response, the attorney for Mr. Wyly has stated that the tycoon and his brother “left the details to their advisers.” Many believe that the attorney is modeling the Wylys’ defense on the allegations against and bankruptcy of the Hunt brothers. The brothers were charged with illegally cornering the silver market in the late 1970s and in the early years of the 1980s. In that case, the brothers were able to work out a settlement with federal regulators. However, there is a long road of negotiation and legal proceedings ahead.

Case Illustrates the Reach and Power of FATCA

While in its own right, the case is particularly interesting due to the personalities, liabilities, and tax law involved  another relevant factor is the role Foreign Accountant & Tax Compliance Act played in how the IRS reached its assessment number. Since the tax bill was established on the basis of offshore dealings through trusts, it is highly probable that, for a time, the IRS lacked reliable information regarding the trusts the brothers established back in the early 1990s. However, the reach of the IRS and federal regulators was significantly expanded with the passage of FATCA and its information sharing provisions.

The Isle of Mann agreed to an intergovernmental tax information sharing agreement with the United States government in 2013. Under FATCA, covered foreign financial institutions must provide information regarding U.S. linked accounts. Banks are encouraged to comply because of the significant withholding penalty they can face due to non-compliance. Thus, for a number of years, the U.S. government has likely received data from financial institutions in this jurisdiction and used it to build its case. It would be rather surprising if this information was not utilized when calculating the Wylys’ alleged back taxes. Taxpayers that fail to comply with the disclosure provisions of this law can also face significant penalties.

The Risk Presented by Undisclosed Offshore Accounts Has Never Been Greater

The case by the IRS against the Wyly brothers illustrates that if billionaires with nearly unlimited resources and the ability to hire the best and brightest financial advisors cannot escape the information-sharing provisions of FATCA, FBAR, and other laws then an offshore tax strategy is not viable. Furthermore is likely to result in significant fines, penalties, interest, and possible criminal tax investigation. If you are concerned about undisclosed foreign accounts, assets, or trusts, the experienced attorneys Tax Law Offices of David W. Klasing can provide advice and guidance to mitigate your legal exposure and financial liability. To schedule a reduced-rate, confidential consultation call us at 800-681-1295 or contact us online today.