Who Cheats on Their Taxes with Offshore Accounts?

Right now, the U.S. government -- facing hulking deficits -- needs all the money it can get. But how many American citizens are willing to do whatever it takes to avoid contributing to the federal pot?

At least a few.

The recent indictment of four Credit Suisse Group AG bankers is the only latest tax evasion case in a long-running series of indictments and accusations. The bankers have been accused of facilitating illegal offshore bank accounts for U.S. citizens. The case is reminiscent of the near-prosecution of UBS AG, another Swiss bank, for helping “thousands of Americans” avoid paying taxes. UBS paid a $780 million dollar fine. Since that landmark case, nearly 20,000 U.S. citizens have revealed offshore accounts to the IRS in order to reduce the risk of fines and prison time.  

Offshore bank accounts are by no means illegal by nature—in fact, many people who have offshore accounts have inherited them from relatives, have business interests abroad, or have some other reason that makes having such an account convenient, even necessary. For some, however, offshore accounts provide a means of hiding income and avoiding the IRS.

For the majority of those who are prosecuted for abusing offshore accounts, it seems to be a calculated risk—literally. Although chances of getting caught evading taxes offshore have increased since the initial UBS clean-up, the likelihood of the IRS finding an illegal offshore account has been relatively low; this fact coupled with the alluring prospect of huge savings in taxes makes the risk seem like a distant, though not deterring, caveat. Because the rewards have to be high enough to merit the risk involved, the majority of offshore tax-evaders are wealthy. Also, many have interests abroad and are involved in international business dealings where their clients or partners regularly use offshore accounts. In many of the fastest growing business centers, such as Hong Kong, financial regulation is low and doing whatever it takes to grow your company, interests, or business is not so much encouraged as it is mandated.            

A particularly brazen instance of an offshore account abuse is the case of the father-son team, Mauricio Cohen and Leon Cohen-Levy, Miami-based hotel developers who hid approximately $200 million in income and assets in foreign banks and on foreign soil. They were recently sentenced to ten years in prison  and mandated to pay nearly $20 million in "restitution." This $20 million, if it is roughly equal to what they originally owed, is approximately the equivalent to 10 teachers’ lifetime salaries. The Cohens were found guilty of filing false tax documents, forging tax documents, and using "tax havens" and shell companies to hide their income in the Bahamas, Panama, and Switzerland.          

Here are a few other recent and relevant tax evasion cases:

• Arthur Joel Eisenberg was sentenced to three years’ probation on March 4^th of this year for failing to report over $3 million in assets and income he was keeping in Switzerland. Eisenberg had been hiding assets and income since 1983, when he opened an account with UBS AG in the Cayman Islands. He was fined $2.1 million.
• Paul Zabczuk, a Texas-based business man, pleaded guilty to tax fraud in 2010 but avoided serving time by providing the IRS with information concerning Swiss bankers and their clients involved in committing fraud. Zabczuk’s offenses include: failing to report over four years’ income hidden in a Swiss bank (a tax loss of $260,000), receiving payments from foreign clients in offshore accounts without notifying the IRS, and using wire-transfers to move his money from UBS AG to an ‘agent’ in China ‘who made purchases on his behalf.’ Throughout the entire process, he was aided by bankers in various countries. He served one year of house arrest and paid a mere $2,000 in fines.   
• Jack Barouh, another UBS client, was sentenced to ten months in prison for falsifying tax documents. Barouh failed to report $10 million in holdings he first kept in Switzerland before transferring it—on the advice of a Swiss banker—to Hong Kong. According to the Justice Department, he was also advised to pay himself an “annual consulting fee.” Barouh is one of the eleven U.S. citizens who pleaded guilty to fraud as a result of their business with UBS.
• Richard S. Taylor was indicted for filing false tax returns and tax evasion. In 1997 and 1998, he opened bank accounts in the Bahamas in which he deposited income and commissions. Taylor earned these commissions from the ‘Cash 4 Titles’ program which was later revealed to be a combination Ponzi/Pyramid scheme. Participants in the program used investors’ money to loan to consumers (usually low-income consumers) at extremely high interest rates. Taylor invested nearly $1 million in income offshore over a two-year period.  
• Jeffrey P. Chernick, a UBS client, pleaded guilty to filing false tax returns in 2009. Chernick admitted to hiding $8 million dollars in offshore accounts. He (owner of a corporation that represents toy manufacturers in China) opened an offshore account around in the name of Simba International Ltd so that he could hide the toy sale commissions he had been earning since the 1970’s. He also made a fake $700,000 loan between Simba and another Hong Kong corporation in order to repurpose the money for use in the U.S. Chernick used this money to purchase property in New York. According to documents, Chernick began to fear discovery by the IRS but was persuaded by Swiss bankers to continue to conceal his offshore assets.   
• Samuel Phineas Upham, a Wharton MBA who works in finance, was charged with "conspiring to defraud the IRS, by, among other things, hiding over $11 million at UBS and smuggling
  $450,000 in cash from UBS’s offices in Zurich to the United States. UPHAM is also charged with aiding and abetting the preparation of his close family member’s false federal income tax returns that failed to disclose the existence of, and the income earned in, UBS bank accounts."
• Sybil Nancy Upham, a wealthy Manhattite and the mother of Samuel, pled guilty in November 2010, to "conspiring to defraud the IRS, by, among other things, smuggling large quantities of cash into the United States from Europe, and to three counts of subscribing to false federal income tax returns." She agreed to pay a penalty of over $5.5 million. (To learn more about the Upham's case, read the full complaint against Sybil Nancy Upham below.) The Uphams seem to be among the tonier defendents caught up in the offshore crackdown so far.
• Federico Hernandez, a New York financial adviser, was sentenced in September 2010 to twelve months in prison and six months of home confinement for "hiding $8.8 million from the IRS by using sham companies to conceal his ownership of secret Swiss bank accounts held at UBS AG."
  Hernandez pled guilty to filing five false tax returns. "He also agreed to pay a civil penalty of $4.4
  million, an amount equal to 50 percent of the highest total value of his unreported foreign accounts as of December 31 for the years in which he failed to file with the IRS a Report of Foreign
  Bank and Financial Accounts."
• Richard Werdiger, a diamond and jewel dealer who lives in Westchester, New York, and hid millions in illegal UBS accounts for over twenty years, lying about his income and siphoning money to Switzerland. 
• Ernest Vogliano, who ran a well-known Upper East Side Italian restaurant in New York -- with an indoor bocce court -- and stashed $5 million in UBS accounts channeled through sham offshore corporations. He agreed to pay a nearly $1 million penalties.
• Jeffrey Chatfield, a San Diego business consultant who helps companies go public, received a three-year probation sentence and was ordered to pay $96,000 after filing false tax returns from 2000 through 2008 and hiding the assets in UBS and Credit Suisse accounts.

Wealthy U.S. citizens looking to hoard a higher percentage of their income are the most common perpetrators of tax fraud via these offshore accounts, and they’re costing U.S. tax payers hundreds of millions each year.  Most of those listed above, such as Chernick and Taylor, are involved in multiple levels of fraud and in trying to avoid persecution and discovery, they only make their crime more obvious and egregious--especially when they're in an environment where the popular attitude is to follow the lead rather than the law.  Not only are these offshore investors taxing citizens who promptly and responsibly pay their taxes—they further aggravate the issue by forcing the IRS to exhaust its time, money, and manpower tracking them down. 

There are plenty of U.S. citizens who don’t agree or like our current tax system. Most of them still pay their taxes because they are considerate enough to realize that somebody else picks up the tap when they don’t.

More information about tax crimes and offshore accounts, including specific case information, can be found at the Justice Department’s website.

Upham Indictment