Tax Evaders Face Choice: Pay or Pray

Published: October 12, 2009

Many Americans dread April 15, the deadline for filing their income tax returns. But some well-heeled people are trembling over another looming tax day: Oct. 15.

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Thursday is the deadline for Americans to come clean about the money they have hidden offshore, in places like Swiss bank accounts. No one can say with certainty how much money is out there — the accounts are secret — but the hoard may be tens of billions of dollars.

Several thousand wealthy people have come forward, hoping to avoid large fines or possibly even prison. But many others are still weighing their options. The choice is stark: They can confess and pay the penalties, or gamble that they will not get caught. With the deadline only days away, tax lawyers say they are being inundated by anxious clients.

“We’re seeing a flood of people,” said Scott D. Michel, a tax lawyer in Washington. His firm, Caplin & Drysdale, has 350 clients who are preparing to report their offshore accounts to the Internal Revenue Service. The firm has 14 lawyers handling their cases, one of which involves a tax bill of hundreds of millions of dollars.

The deadline is part of a broad crackdown on Americans who use offshore accounts to evade federal taxes. As part of the effort, United States authorities have challenged the long tradition of banking secrecy in Switzerland, and, in particular at UBS, that nation’s largest bank.

The I.R.S. is offering tax dodgers some leniency. Penalties will be reduced for people who come forward by Oct. 15. They will be assessed fines equal to 5 to 20 percent of their tax bills, rather than the usual 50 percent. They also will pay that penalty once, based on the highest balance in their offshore accounts over the last six years, rather than for each of those six years.

At least 4,000 clients of UBS and other private banks have come forward in recent months, a government official who had been briefed on the matter said.

One of those clients was Bruce Krasting. Last December, UBS, under sharp scrutiny from federal officials, told him that the bank was closing his offshore account and mailing him a check for the balance: $830,000.

Mr. Krasting, 59, realized that if he didn’t own up to the I.R.S., he had just two other options: Find another offshore bank in Switzerland or the Caribbean — and risk being discovered — or leave a trail for the I.R.S. by depositing his money into a United States bank.

“I knew I was walking into a buzz saw that was going to cost me and my family half a million dollars, and that it was triggered by UBS,” Mr. Krasting, a former Wall Street trader, said in a telephone interview from his home in Westchester County, N.Y. Worried about steeper penalties and potential prosecution, he decided in the spring to disclose his identity to the I.R.S.

But scores of other UBS clients hope the I.R.S. will not catch them, tax lawyers say. The bank divulged the names of 4,450 wealthy American clients to federal authorities, but some clients bet that their names were not on the list.

It is a big gamble. Once the deadline passes, tax cheats will face stiffer penalties and, if caught, will have a far greater chance of being prosecuted. Prosecutors are already building criminal cases against 150 bank clients. UBS turned over the names of many of those people in February, when the bank admitted to having defrauded the federal government and agreed to pay $780 million to settle the matter. Six wealthy American clients of UBS have pleaded guilty to tax evasion in recent months.

“A lot of people remain in denial and remain willing to take their chances,” said Robert F. Katzberg, a white-collar criminal defense lawyer in New York, who has nearly 20 clients with hidden accounts.

Some people who hold offshore accounts are trying to file amended returns for previous years, pay their ordinary tax bills — minus the steeper penalties — and hope that the I.R.S. does not detect that those taxes cover money that was hidden offshore.

“The numbers are much larger on the amended returns side,” said a second government official briefed on the matter. “It’s a high-stakes poker game.”

The whole issue has become a minefield for some wealthy families. Many offshore accounts are held in the names of several family members, who do not always agree on what they should do.

Bruce Zagaris, a tax and criminal defense lawyer in Washington, said that in some instances, one family member was pushing to disclose an offshore account, while another wanted to keep the money hidden. One of his cases involves parents with an offshore trust for their three children, only two of whom had disclosed the assets. If the parents want to disclose the accounts, “they have to rat on one of their kids,” he said.

The I.R.S. disclosure program is also creating headaches in the hush-hush world of private banking. It requires people to disclose the names, addresses and telephone numbers of bankers, lawyers, accountants, tax advisers and trust officials who helped them evade taxes.

One client of Martin Press, a tax lawyer in Fort Lauderdale, Fla., hid money in Panama, another offshore tax haven. The client — a Florida surgeon, who spoke on the condition he not be named, given his tax troubles — said his accountant never told him he had to disclose the assets to the I.R.S.

“I really was convinced that the money was sitting somewhere legally and wasn’t taxable,” the doctor said. But after reading about the crackdown, he entered the I.R.S. disclosure program in July.

RecommendNext Article in Business (9 of 33) »A version of this article appeared in print on October 13, 2009, on page B1 of the New York edition.