In Tax Probe, IRS May Shoot the Messengers

Even the lawyers may not get off the hook on this one.

The IRS is planning to expand its investigation of Americans suspected of evading taxes through offshore bank accounts to include the bankers, lawyers and accountants that advised these well-heeled fraudsters.

According to a report published today in USA Today, Uncle Sam’s investigators are grilling folks that disclosed their offshore holdings at UBS (UBS) and other foreign banks directly about the intermediaries who helped them set up the accounts. Questions include: who told the taxpayer about the bank account? Who assisted the taxpayer in opening the bank account? And who prepared the tax returns?

Yikes. 

Federal investigators know that every rogue advisor they nail could actually represent multiple clients, says Bryan Skarlatos of Kostelanetz & Fink, a New York-based law firm that represents clients in tax fraud, tax evasion and securities fraud.

“The key is that they want to get the gatekeeper because then they can really shut it down,” says Skarlatos.

The IRS has reportedly been going head-to-head with UBS about the names of 52,000 American accounts, but Skarlatos says that could be just the beginning. “It’s the largest investigation of potential tax evasion I have ever seen,” he says. “There are 52,000 accounts just at UBS. How many are there at Credit Suisse (CS)? At HSBC (HBC)? It definitely involves many tens of thousands, if not hundreds of thousands of US taxpayers who are putting their money offshore and not properly reporting it to the IRS. That’s what makes it huge.”

The IRS has certainly been busy cracking the whip on tax cheats. In fiscal year 2008, IRS-developed cases related to foreign and offshore issues resulted in 61 criminal convictions, and the average term for those going to jail was 32 months. For the first four months of fiscal year 2009, there were 20 convictions and the average sentence was 84 months.

The decision by tax collectors to hunt down attorneys and accountants doesn’t surprise Leslie Samuels, a partner in the New York office of law firm Cleary Gottlieb whose practice focuses on international and domestic taxation. 

“The IRS is trying to send a signal to the international tax and financial advisory community that if you are advising people to evade US taxes then the IRS will find you,” Samuels told Minyanville. “They’re telling advisors that they shouldn’t be doing this and to be careful.”

Samuels points out that there is offshore financial activity by taxpayers that isn’t illegal, of course. They may have an account open across the pond because they own property outside the US, for instance. But then there are those shady businessmen, drug dealers and other derelicts that are simply squirreling away greenbacks offshore because they want to give tax collectors the slip.

A veteran accountant at Los Gatos, California-based Deaton, Michaels & Hall, who spoke on background, says he also detects a broader political shift at work in Washington under the Obama administration.

“They are really cracking down,” he says. “The last administration was more laissez faire. This new administration is saying they will shut this stuff down and they’re serious about it.”