Offshore Tax Evasion Investigations by IRS and Justice Department Expand, As IRS Whistleblowers Continue to Come Forward

The Justice Department has announced that its investigation of offshore tax evasion will expand to include Europe’s largest bank, HSBC in London, and Credit Suisse in Zurich. The increasing scrutiny of illegal offshore tax schemes comes as the Wall Street bailout and turmoil in the banking and financial services industries generate more interest in IRS Whistleblower Program claims.

DOJ and IRS continue to investigate UBS, Switzerland’s largest bank. Last month saw the unsealing of the an indictment of Raoul Weil, a UBS senior executive, who faces charges of conspiring to defraud the United States by concealing American clients’ taxable assets.

Scrutiny of Credit Suisse and HSBC reportedly includes whether the two banks may have helped U.S. clients hide up to $30 billion from U.S. tax authorities.

The IRS and DOJ investigations highlight differences in U.S. and Swiss law. Switzerland does not criminalize routine tax evasion, and bank secrecy rules in Switzerland prohibit disclosure of account holder information in these cases.

U.S. officials have already obtained previously “secret” UBS bank information reportedly revealing that some 20,000 U.S. citizens have maintained offshore accounts with UBS, and that approximately 17,000 of those accounts were never disclosed to the IRS. Estimates of willful tax evasion of $300 million per year have been reported previously.

These investigations also underscore problems in compliance with the IRS qualified intermediary program. Foreign financial institutions and foreign branches of U.S. financial institutions can agree with the IRS to be qualified intermediaries, and thus be subject to simplified withholding and reporting rules. The program seeks to make sure that the IRS is informed of foreign accounts with taxable assets, but many of these assets continue to be concealed from the IRS.

As U.S. taxpayers face an ever-increasing cost to “rescue” or bail out financial institutions, tax evasion and tax fraud schemes revealed by whistleblowers through the IRS Whistleblower Program will attract greater and greater scrutiny. Perhaps some of these whistleblowers can help offset the bailout’s ultimate costs by reducing the several hundreds of billions in unpaid tax liability each year (the “tax gap”).

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