SwissPartner’s Offshore Life Insurance Deal Finally Falls To Earth

Here is what we do. Just follow these few easy steps, and I’ll have you on your way to the Land of the Tax Free.

First, I’ll have you buy a life insurance policy. Not a common life insurance policy that any Joe Blow agent could sell you, but a really specialized cash-value life insurance policy. In fact, a life insurance policy so specialized that it is only sold by a few companies worldwide, and most of those companies are offshore, i.e., outside the U.S., as in Switzerland. You know, Switzerland, which has bank secrecy laws that cannot be busted, even by the IRS. Follow me? You don’t even have to put much money into the life insurance policy, just some small amount to get it started.

Second, we’re going to sell your income-producing business to your offshore life insurance policy! That’s right, sell it, but your offshore life insurance policy isn’t going to have to pay cash for it. Instead, we’ll sell it to the offshore life insurance policy for something like a long-term promissory note, or a private annuity, that may never actually make any payments back to you. The offshore life insurance company will go along with it; no problem there. Now, your business is in the offshore life insurance policy.

Third, and here is what is really cool, your business is going to distribute profits to your offshore life insurance policy, instead of to you! That way, you’ll no longer have to pay those pesky taxes on profits, but instead those profits will come off your income tax return and instead go into your offshore life insurance policy. Then, you can “borrow” against the increased cash-value in your offshore life insurance policy completely tax free!

Voila! We’ve very substantially eliminated your income tax problem.

There is only one catch — if the IRS figures all of this out, you just might go to jail for tax evasion. You see, there is utterly no reason to do this transaction except to convert formerly taxable business profits into growth of the cash-value of the life insurance policy that you can then borrow against, tax-free. In other words, it is a tax shelter if not outright tax fraud.

As crazy as all this sounds, not just a few very wealthy people across the United States fell for this particular tax shelter, often sold to them for exorbitant fees by fast-talking but usually only marginally competent tax attorneys. This tax scam had a significant weakness, which was that it relied upon the offshore life insurance company not “turning” on its customers, and turning over the information on their life insurance policies and activities. It also requires less-than-honest reporting of the transaction, or else the IRS would pick it up, and blow it up under the Step Transaction Doctrine, Lack of Economic Substance, or any one of a number of other theories.

One of the most prolific sellers of offshore life insurance was SwissPartners, who regularly sent its agents to the U.S. to hawk its super-secret life insurance policies to U.S. tax professionals to then sell to their clients. I’ve actually met with one of their representatives in my office who was selling this particular transaction — “Here’s how we’ll have your client’s SwissPartner’s life insurance policy buy their business and sponge up all the taxable distributions”.

Mention why the transaction doesn’t work and you’ll get the usual hem-hawing about how the IRS can’t easily find out about the deal, how low audits rates have been, but most importantly how the IRS will absolutely not be able to get any client information because of Swiss law.

Most of us who reviewed this transaction said that it was bound to blow up on one theory or another. Most of the people who were selling it pointed out, quite accurately, that it hadn’t yet blown up after many years and their clients had saved a gazillion dollars in avoided taxed. This latter point was, in fact, so compelling that those of us who were suspicious of the transaction started musing that maybe we had gotten it all wrong after so many years, and whether we ought to start putting our own clients into these deals if the IRS wasn’t going to do anything about them.

Then, on May 9, 2014, the SwissPartner’s deal blew up. As in a Megaton explosion on Eniwetok atoll in the Pacific Proving Grounds. As in SCTV’s Big Jim McBob (Joe Flaherty) and Billy Sol Hurok (John Candy) saying “They blowed up real good!”

On that day, all of the U.S. Department of Justice, IRS Criminal Investigations, and the U.S. Attorney for the Southern District of New York, announced that the U.S. had entered into a Non-Prosecution Agreement (“NPA”) with SwissPartners and three of its subsidiaries — SwissPartners Wealth Management AG, Swiss Partners Insurance Company SPC Ltd., and SwissPartners Vericherung AG.

Under the terms of the NPA, SwissPartners agreed to pay $4.4 million in fines and restitution to the U.S., of which $3.5 million were fees that SwissPartners had earned on egregious transactions, and $900,000 to cover certain unpaid taxes.

But even more important, SwissPartners agreed to cough up the files on 110 of its U.S. clients. The DOJ’s Deputy Attorney General, Mr. James Cole, commented that:

The extraordinary cooperation of Swisspartners has enabled us to identify U.S. tax cheats who have hidden behind phony offshore trusts and foundations. In this and other cases around the world we will continue to provide substantial credit for prompt and full cooperation.

Doubtless, the SwissPartner clients are today scrambling to contact their criminal tax counsel to see if they can quickly file back returns and make everything right, before IRS Criminal Investigation agents come knocking on their doors. Too late, says Ms Kathryn Keneally, Assistant Attorney General of DOJ-TAX:

As today’s announcement shows, we receive information about U.S. taxpayers with undisclosed accounts from many sources, some of which are not public. For many accountholders, the time to come forward voluntarily to avoid criminal prosecution has run out.

Most interesting is that SwissPartner’s recognized that it had a problem as early as 2008, and started taking voluntary steps to shut down its operations. In 2012, SwissPartners started voluntarily providing information on its tax-evading clients to the IRS.

All this helped SwissPartners to avoid even larger penalties, as did the fact that SwissPartners admitted its wrongdoing:

As part of the NPA, the Swisspartners Group admitted various facts concerning its wrongful conduct and the remedial measures that it took to cease that conduct. Specifically, the Swisspartners Group admitted that it knew certain U.S. taxpayers were maintaining undeclared foreign bank accounts with the assistance of the Swisspartners Group in order to evade their U.S. tax obligations, in violation of U.S. law. The Swisspartners Group acknowledged that it helped certain U.S. taxpayer-clients conceal from the IRS their beneficial ownership of undeclared assets maintained in foreign bank accounts by, among other things, creating sham foundations and other sham entities that served as the nominal account holders; placing accounts or insurance policies in the names of non-U.S. nationals; facilitating the transportation of large amounts of cash into the United States on behalf of U.S. taxpayer-clients; and arranging for the bulk deposit of cash at Swiss depository financial institutions on behalf of U.S. taxpayer-clients.

And thus endeth one of the most abusive offshore tax-evasion strategies of the last decade.

ANALYSIS

The SwissPartners’ deal is yet another in a long line of examples of “If it sounds too good to be true, it probably is.” The truth is that it was an obviously flawed transaction from the very beginning, primarily because there was utterly no (real) reason for the transaction than to avoid taxes.

Oh sure, the planners selling the deal would mumble something about “asset protection” or privacy or whatnot, but of course the real reason that clients got into this deal was just to avoid taxes. Pretty much any minimally-skilled tax professional could look at the deal and articulate at least a few painfully obvious reasons why it wouldn’t withstand scrutiny, but the planners selling the deal overlook its glaring negatives because of the big fees the deal generated to their firms.

So obvious were the reasons that the deal didn’t work, that it ended up relying on one fact alone — because of offshore secrecy, the IRS would never figure it all out.

The problem with secrecy-based planning is that “somebody knows”. Here, that somebody was the insurance company that was providing the cash-value life insurance policy that was the vehicle for tax evasion. In other words, SwissPartners knew . . . and now so does the U.S.

Indeed, the U.S. Department of Justice Tax Division has been very successful at breaching the vaunted Swiss bank secrecy, mainly by the threat of criminally prosecuting the companies involved and thus depriving them of their future ability to use the U.S. banking network through which so much money worldwide passes at one time or another.

Years ago, one could safely and successfully hide money in “secret” accounts abroad with the absolute comfort that it would never be discovered. But the world has since turned, and we live in a very different world today where electronic banking transactions create a long and practically indestructible paper trail, and where the industrial countries have finally brought their vast financial weight to bear on the offshore jurisdictions.

Thus, IRS-CI Chief Richard Weber could state quite accurately in the press release regarding the SwissPartner’s NPA:

Anyone who is hiding money or assets offshore with the intent of committing tax evasion will be found and prosecuted. It’s not a matter of ‘if,’ it’s a matter of ‘when.’