Recent headlines and articles in the financial press have been rich with inflammatory buzz words referencing “whistleblower payouts”, “indictments for tax evasion”, “state & local tax enforcement”, renewed threats of a “wealth tax” etc. A closer look at the details of these stories makes it clear that the government (both federal and state) is now comfortable exercising its powers globally and reaching across international borders in pursuit of alleged non-compliant taxpayers.
This new attitude on the part of the government means it is time for taxpayers with complex global holdings to perform an internal risk assessment with the goal of quantifying any exposure they may have (actual or perceived). In performing an internal risk assessment, it is important that “exposure” be viewed as actual noncompliance (something to hide or something that needs to be corrected) as well as perceived noncompliance. Sometimes wealth, mixed with complex facts can lead to a perception on the part of an outsider of “something to hide”. Wealthy clients should be wary of how expensive homes, boats and cars are viewed by people close to them. The same can be said for social media postings. Sometimes it is better to keep a new car in the garage and to not post photos of the Caribbean vacation on social media when everyone else is at work in the dead of winter. It is important to stress that the IRS and NYS will look at social media posting during an audit as well.
Earlier this week the financial press reported that a Swedish hedge fund manager, Thomas Sandell has paid $105,000,000 in NYS and NYC taxes as a result of an action brought against him by the New York State Attorney General’s office. This case in involved a large, deferred income amount where the taxpayer moved to London and tried to avoid having to pay the New York tax on it. The government did not let up on its pursuit of the taxpayer even though he was in London. The press has reported that he ultimately settled the matter without admitting or denying the allegations and paid the tax. New York State it known for its aggressive pursuit of unpaid taxes. However, this matter is of interest because they used the Federal False Claims Act and pursued the matter across international borders. As a result of the recovery an unnamed whistleblower was awarded approximately $22,000.000 for bringing the matter to the attention of the state (and they took it from there).
The very next day the WSJ ran an article about Robert Brockman titled “The Billionaire Behind the Biggest U.S. Tax Fraud Case Ever Filed”. The Brockman case has been reported on often in recent months because it involves billions of dollars of hidden income and a number of parties who really should have known better. For people who follow these matters this case is also known for facts that really could (or perhaps should) have resulted in an array of even broader criminal indictments. Again, it involved the U.S. government using its global powers, which are now enhanced by the expanded powers of the 2010 Foreign Account Tax Compliance Act (FATCA) to reach into information on Cayman Islands Corporations, Bermuda Trusts etc. Once again, this matter involved someone providing information to the government for their own benefit. In this case it was a onetime “close confidant” of Mr. Brockman who appeared to agree to testify against Brockman for leniency in his own tax case with the government.
All of this comes while the U.S. is still trying to extradite Oleg Tinkov from the U.K. Tinkov is a well-known Russian businessman, a previously naturalized U.S. citizen, who then relinquished his U.S. citizenship. He has been indicted criminally by the U.S. government based on allegations that he filed false forms with the IRS regarding his foreign holdings at the date he relinquished his U.S. citizenship. The so-called expatriation rules that apply when someone renounces U.S. citizenship have been around for quite some time with little or no enforcement action by the government. This IRS has stated this is going to change and this indictment and extradition request indicates they are serious.
Wealthy families need to be focused on privacy now more than ever. The government is purposely not shy about announcing these leniency deals and cash whistleblower payments as they know that by publicizing this that “close confidants” of wealthy people may make a call to the IRS.
Getting advice in some counties on sensitive matters may be complicated by internal laws in the country that “require” an advisor to disclose certain criminal acts when they become aware of them!
In the U.S. when a law firm is retained the legal advice and related discussions between the lawyer and client remain private and protected by attorney client privilege. However, due care must be exercised in lawyer-client relationships. The discussions must involve the rendering of “legal advice” (not mere accounting or investment advice). Furthermore, when a non-lawyer such as a CPA, financial advisor etc. is required (such as to help the lawyer quantify the extent of the legal exposure from a financial perspective) it is best for the law firm to hire the non-lawyer to assist them (the law firm) in rendering advice to their client. This issue has been litigated in the past with the Kovel case now being considered the prevailing authority on how a law firm should structure an agreement with an outsider to assist with the rending of legal services. It is important to stress that conversations outside of a very narrowly defined attorney-client relationship are often not protected. Taxpayers should assume that brainstorming discussions with CPA’s, financial advisors and even lawyers prior to a formal attorney-client relationship being formed are not protected. The Internal Revenue Code provides a limited privilege between CPAs and taxpayers, but it has been interpreted very narrowly and cannot be relied upon for criminal matters.
Although we are always happy to have an initial conversation to help someone understand the extent of their risks it is important to stress that any pre-engagement discussions are not covered under the privilege rules.