California Consultant Pleads Guilty To IRS UBS Related FBAR Violation

The US Department of Justice (DOJ) scored yet another victory in its crusade against Offshore tax evasion. Christopher B. Berg of Portola Valley, Calif. pleaded guilty in U.S. District Court in San Jose, California of one count of willful failure to file, in 2005, the required report of foreign bank account (FBAR) for a bank account he opened with UBS in Switzerland. This resulted in an IRS UBS related FBAR violation.

The details of the IRS UBS related FBAR violation:

According to the information regarding this IRS UBS related FBAR violation, in 1999, Berg began working as a consultant. In 2000, Berg met with Beda Singenberger, a Swiss financial consultant and a vice president of banking at UBS in San Francisco. They spoke about setting up a bank account at UBS in Switzerland to shelter a portion of his consulting income from taxation. Beginning in 2001 and continuing through 2005, funds representing $642,069 in compensation earned by Berg from consulting services were deposited by wire transfer to UBS accounts. Berg used the money in these accounts at UBS in Switzerland to purchase a vehicle, to obtain cash while in Europe, and to pay the balance on a Eurocard he used while traveling in Europe. Berg did not disclose the existence of his accounts at UBS in Switzerland to his certified public accountant, and did not disclose the income earned by these accounts or the consulting income deposited to the accounts. These actions resulted in the IRS UBS related FBAR violation.

My initial thoughts:

Excellent work by his legal team, considering some of the huge penalties the Department of Justice was able to squeeze out of other FBAR defendants guilty of IRS UBS related FBAR violation.

The DOJ likely didn’t have the leverage they did in other recent FBAR cases.

It appears that the bulk of the tax evasion was from unreported earned income as a consultant, as opposed to unearned income from interest in dividends from a foreign bank account and because there is no “FBAR penalty” for failing to report worldwide wages. So on international tax evasion, in cases where there are no unreported earnings from non-disclosed foreign bank accounts, the IRS basically has the same tools available for a domestic tax evasion case pursuant to 26 USC 7201. Which are typically penalties of up to $250,000 and up to 5 years in prison (Note: most resources on the internet list the old fine amount of  $100,000; this was once the case, but was increased to $250,000 for individuals and $500,000 for  corporations  by the Criminal Fine Enforcement Act of 1984 (P.L. 92-596) for crimes that occurred after 1984).

The Department of Justice claims Berg’s conduct regarding his IRS UBS related FBAR violation cost the US Treasury $270,757 in lost revenue off of a total of $642,069 in unreported income.

This makes for a 42.2% effective tax rate? Something seems off here.

Was Mr. Berg one of the 4450 names the DOJ received from UBS?

Did he have an opportunity to disclose in 2009 or did this investigation already start? I suppose we will find out more at sentencing.

If restitution is ordered for the IRS UBS related FBAR violation, and Mr. Berg can’t pay, he will likely have a parallel civil tax assessment and an ugly tax problem.

In order to settle the civil tax assessment with an Offer in Compromise, he must first pay the criminal restitution amount. The other hurdle is that the IRS does not like to settle back taxes if they feel someone is dishonest or not worthy of consideration. It is very difficult to settle back taxes due to tax evasion. Lastly, even discharging tax debts in bankruptcy (after waiting the appropriate time) is difficult as well, as the Chapter 7 bankruptcy code states that any tax that arises from a willful attempt to evade or defeat tax is non-dischargeable.  So the best hope in cases where a defendant is given an order of restitution and civil assessment that he can’t afford to pay is, on the civil side, to get into a Partial Payment Installment Agreement, or Currently Non-Collectable status, wait out the IRS civil statute of limitations and then seek to modify the criminal restitution (which has no statute of limitations) in criminal court.

Again, a plea to those considering using the IRS Offshore Voluntary Disclosure Initiative — IRS UBS related FBAR violations and other criminal cases are very difficult to recover from financially. It is nothing like settling back taxes from such calamities as divorce, unemployment, or health problems. Criminal tax problems are usually fairly catastrophic — even without jail time.