Wyly Brothers Found to Have Committed Offshore Tax Evasion through Trusts and Shell Companies

We have written about the “maverick investor” Wyly brothers in the past. Back in January, we wrote about the brothers’ various investments and business ventures – including those in the technology, restaurant, and retail industries – in relation to recent enforcement actions against Sam Wyly and the widow of the deceased Charles Wyly, Caroline “Dee” Wyly.

At the time, we discussed the circumstances that led to a thorough inquiry into the brother’s financial practices while they maintained a luxurious lifestyle. Unfortunately, for the brothers, they had been dogged by accusations that they had engaged in illegal offshore schemes to conceal income and assets and fraudulently reduce their tax liability. These suspicions and allegations came to a head when, in 2014, Sam Wyly filed for bankruptcy protections to handle a $299 million damages award stemming from a 2010 enforcement action for federal securities law violations involving the offshore trusts. However, their problems also included the fact that the IRS filed additional claims against the brothers alleged that they owed the government $3.22 billion in back taxes, penalties and interest due to an offshore scheme that began as early as 1992. The IRS later reduced its demand to $1.43 billion from Sam Wyly and $834.2 million from Caroline Wyly.

Bankruptcy Judge Rules Brothers Committed Tax Fraud

In a 425 page opinion, U.S. bankruptcy judge Barbara Houser found that “clear and convincing evidence” existed that Charles and Sam Wyly had engaged in tax fraud. The tax fraud scheme involved a system of offshore trusts and accounts set up in the early 1990s in the Isle of Man. In the opinion, the judge writes that the “heart of the Wyly offshore system had been established through deceptive and fraudulent actions.” The judge took the brothers to task for an excessively complicated system for which there was “little legitimate business explanation.” The court inferred that a primary reason for this opaque system was the goal of making it impossible for anyone – including the court – to figure out what was going on. This is a shot across the bow for wealthy individuals who attempt to disclaim knowledge regarding their own financial affairs. The judge also wrote, “To accept the Wylys’ explanation requires the court to be satisfied that it is appropriate for extraordinarily wealthy individuals to hire middlemen to do their bidding in order to insulate themselves from wrongdoing so that, when the fraud is ultimately exposed, they have plausible deniability.” However, Houser found that, “Sam knew what was happening in connection with the offshore system and that no money or assets moved within that system without Sam’s knowledge and express direction. He does not simply turn his wealth over to others and wish them luck.”

Caroline Wyly Found Eligible for Innocent Spouse Relief

The only silver lining for the Wylys in this decision is the fact that the widow of Charles Wyly was found to qualify for innocent spouse relief. Innocent spouse relief is only granted rarely. However, in this case, the court found that it, “simply cannot imagine her even being interested in having a conversation with Charles about the complexities of the Wyly offshore system.” Furthermore, the court believed that “even if she had asked Charles questions, it is unlikely that she would have understood the implications of what she heard — particularly given the complexities of the offshore system here.” Under innocent spouse relief, the innocent spouse can be relieved of civil and criminal tax liability, penalties, and interest imposed on a joint tax return.

Wyly Tax Fraud Ruling Showcases Power and reach of FATCA

Thus, many may wonder how a system that worked for nearly two decades seemed to not only fail suddenly but also how the federal government was able to penetrate and understand this complex web of transactions. The big thing that changed from when the system was established to the present day is the establishment of Financial Account Tax Compliance Act (FATCA) and a willingness to prosecute wealthy individuals accused of committing tax fraud. While many have derisively called FATCA, America’s global banking disclosure law, the truth is that the law has expanded the reach of IRS auditors and federal prosecutors beyond their wildest dreams.
FATCA is one of a number of disclosure laws. Under FACTCA covered individuals with foreign assets exceeding certain thresholds are required to make annual disclosures when filing their taxes. The aggregated foreign asset limits are adjusted based on whether one lives at home or abroad and one’s tax filing status. Assets covered under FATCA include:

  • Most foreign financial account maintained by a foreign financial institution
  • Foreign stocks
  • Foreign securities
  • Interests in foreign entities

The failure to file FATCA and make required disclosures can be punished by a fine of up to $10,000 with additional penalties of up to $50,000 for continued failure to file after IRS notification. Furthermore, a 40 percent penalty on an understatement of tax attributable to non-disclosed assets can apply along with the unpaid taxes on any income derived from the asset.

However, FATCA hasn’t expanded the reach of federal prosecutors through individual disclosures alone. As part of offshore enforcement and FATCA implementation efforts, the United States has signed international agreements (IGAs) with more than 100 nations. These IGAs require foreign financial institutions (FFI) to make disclosures regarding accounts and U.S. linked accounts. Failure to make these disclosures can subject an FFI to a significant withholding penalty. Furthermore, targeted efforts like the Swiss Bank program has made FFIs that previously engaged in offshore and cross-border banking activities come clean about these past acts and agree to disclose prospectively. Therefore, banks and financial institutions in former secret banking nations are likely providing information to the U.S. government.

In sum, this means that a reliance on offshore accounts to conceal income and assets from the government for tax or other purposes is not a viable strategy. Due to the wealth of information provided to government auditors and prosecutors, reliance on offshore accounts, trusts, and other entities is likely to result in identification. Once identified penalties, liability for unpaid taxes, and interest will be imposed. If the situation illustrates a willful intent to evade taxes, criminal charges are even possible. Offshore tax evasion and the related perjury committed on tax filings can result in years in federal prison. Unfortunately, the risks of discovery have never been greater.

ISLE of Man is an FATCA Signatory Nation

It is highly likely that offshore account information gathered through FATCA and other offshore enforcement efforts contributed to the government’s ability to make a case against the Wyly’s and their complex, opaque offshore scheme. This is due to the fact that The Isle of Man signed intergovernmental agreements with both the United States and the United Kingdom in 2013. The agreement with the United States came into effect in 2014. Subsequent agreements signed include information sharing agreements with an array of former “tax havens” including the Swiss government and the governments of the Cayman Islands, Isle of Jersey, and other nations. In short, this means that financial information from the island is far from secret. If obscurity is the only line of defense between you and tax evasion charges, needless to say, this is a precarious position to maintain.

OVDP can Offer a Way out of Offshore Penalties

If you did engage in an offshore strategy to conceal income and assets, all is not lost. However, you will have to move quickly because your ability to participate in Offshore Voluntary Disclosure Program will be closed if you come under investigation prior to making your disclosure. Depending on your level of risk and attendant circumstances, both a standard and streamlined program exist. While Streamlined Disclosure is less onerous and allows for reduced or no penalties, it does not provide any level of protection from prosecution if the conduct is viewed as willful in nature. By contrast, disclosure requirements for OVDP are more onerous and an offshore penalty does apply, but these consequences are far more favorable than those associated with an offshore tax enforcement action.

If you are concerned about your liability due to offshore accounts and non-disclosure under FATCA, tax attorney, and CPA David Klasing can help. David is a former public auditor and can put his knowledge of audit techniques and strategies to work for you if you face an investigation. If you take timely action and avoid an audit, he can also assist with bringing you back into compliance with the tax code through ha voluntary disclosure. To schedule a confidential, reduced-rate consultation at the Los Angeles or Irvine locations of the Tax Law Office Of David W. Klasing call 800-681-1295 today or contact us online.