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One mistake after another: how NOT to do 'quiet disclosure'

In tax compliance as in anything else, one mistake can lead to another. And eventually the consequences can have a cascading effect.

In this post, we will consider how a series of mistakes recently led to a criminal tax fraud conviction against an entrepreneur who ran afoul of offshore account reporting requirements. It’s a case that underscores how badly things can go wrong without sound advice from a skilled tax lawyer.

The Atlanta-area man was the creator of a popular virtual world online called Second Life, as well as the father of two. During the so-called Third Reich, his grandfather had helped people escaped Nazi tyranny.

It was this grandfather who had encouraged him to keep some money in a Swiss account “just in case.”

But when the man opened an account at UBS in 2000, he did not disclose the account to the IRS on the Report of Foreign Bank and Financial Accounts (FBAR). The account was worth more than $10,000, so an FBAR would have been in order.

As we noted in our October 26 post last year, UBS and other Swiss banks have run into a lot of trouble with the IRS for allegedly facilitating tax evasion by their U.S. customers.

But it wasn’t only opening the UBS account and not reporting it for ten years that led to the tax fraud charges against the Second Life entrepreneur. He also added money to the account over the years and didn’t report the income on his tax returns. This happened even as the value of the account grew to more than $1 million.

The man also left his Swiss assets off of financial aid documents and moved several hundred thousand dollars from his UBS account to a different bank in 2009. This came at a time when U.S. officials were beginning to investigate UBS for suspected tax evasion.

Finally, in 2010, the man amended his tax return to reflect the offshore accounts. But this “quiet disclosure” didn’t work out because the IRS found out that the man didn’t include all of the income he had earned from his virtual reality game.

Now he is headed for prison for four years, to be followed by two years on supervised release. It’s not a life sentence, but it will be a very different kind of second life.

Source: Wall Street Journal, “How Cheating on Your Taxes Can Lead to Prison,” Laura Saunders, March 13, 2015

 

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