Reporting Income from Offshore Investment: A Cautionary Tax Tale

The lesson from the ongoing trial of former UBS wealth management chief executive Raoul Weil really shouldn’t be a surprise, but we’ll say it anyway: Do not fail to declare income from offshore investments to avoid taxes.

Unless, that is, you and your clients would prefer a really close relationship with the IRS and prosecutors.

Weil allegedly assisted UBS in a conspiracy to solicit deposits from U.S. citizens trying to avoid taxes, and then used various methods to keep their accounts secret. He was indicted in 2008 but, as a Swiss resident, couldn’t be extradited. Nevertheless, he was nabbed in Italy last year while on vacation.

Weil says he’s the victim of “rogue subordinates” and was unaware of assets running through Caribbean shell companies and Liechtenstein foundations into UBS accounts, according to the Daily Business Review.

“The investigation and prosecution of Raoul Weil demonstrates the government’s persistence and tenacity in pursuing those who aided and abetted in the tax evasion of U.S. taxpayers regardless of where they live,” said Miami tax litigator Robert Panoff in the article.

Attorney Kevin Packman, a tax specialist and partner at Holland & Knight in Miami, told the Review that the prosecution of bankers and tax scofflaws so far has been aimed at “low-level, hanging-fruit kind of guys, … but Weil is the guy. This is his division. He is going to pay the price of what his underlings did.”

If this isn’t yet crystalline clear, your clients are entitled to invest their assets with a bank or financial institution outside the U.S., says CPA and attorney James Mastracchio, co-lead of BakerHostetler’s national tax controversy and litigation team, who is not involved in the Weil case. “The requirement is to report the income,” he says. Mastracchio leads the firm’s criminal tax defense team and is the tax group coordinator for the firm’s Washington, D.C., office.

There are several takeaways here for accountants, Mastracchio says.

“It’s very important when interviewing your client for the preparation of a tax return or sending a questionnaire for preparation of the tax return [to ask] ‘Where are your assets?’ or, more specifically, ‘Do you have signatory authority over an account or structure outside the U.S. or are you a beneficiary of a trust outside the U.S.?’”

Over the last several years, accountants have become more attuned to informational returns that have to be filed, he says. “The safe route is to ask that those questions be answered,” he adds.

What’s more, don’t assume by your client’s appearance or lifestyle that they couldn’t possibly have offshore accounts.

For example, Mastracchio notes that it was not uncommon during World War II or civil wars for people to set up accounts purely for safety.

“That’s particularly if the family’s heritage was subject to government takeover,” he says. People who fled their countries and businesses would want to protect their assets, not to hide them from taxes.

But when the next generation is a beneficiary or inherits the accounts, they question what to do with the money. “Now there is a tax problem landing on every beneficiary’s lap and conflicting opinions of family members about what to do and what to disclose,” Mastracchio says.

But after the voluntary disclosure form is completed, “most people feel relieved and, if they have good accountants, they are getting the right advice,” he says.

And don’t let your clients dump knowledge of unreported income on your lap, Mastracchio warns.

“If your client says, ‘I have something to say and I’m concerned about it,’ tell the client to stop and talk to an attorney first,” he advises. “That protects the accountant from having information that would turn them into a witness against their client.”