It’s Deja-vu For UBS – A French Court Rejects UBS’ Request To Drop Financial Charges

It appears that Switzerland’s largest bank, UBS Group AG, is in hot water again – this time over France’s allegations of money laundering charges and tax fraud charges.

French Allegations Against UBS

A French constitutional court on October 11, 2018 rejected a request by UBS, to drop money laundering charges and limit proceedings to complicity in tax fraud. UBS Group, its French unit along with six executives and former executives are accused of helping wealthy clients avoid taxes in France. They are facing charges of aggravated tax fraud and money laundering after a seven-year investigation and aborted settlement negotiations. Defendants in France are allowed on the first day of a trial to raise objections against the case moving forward on the grounds the constitution has been flouted. The court dismissed the bank’s arguments as “devoid of seriousness”.  UBS must also answer to allegations that it illegally solicited clients in France. If found guilty of money laundering, UBS could be fined up to 5 billion euros (CHF5.7 billion) and its executives could also face jail time.

UBS History Of Tax Evasion Controversy

The first major tax evasion controversy the bank was involved in occurred in 2007. Bradley Birkenfeld, an American banker stationed at UBS broke Swiss banking secrecy laws to disclose client information to the U.S. Department of Justice (DOJ) alleging suspected tax evasion. The DOJ opened an investigation which eventually resulted in a settlement with UBS where the bank was fined US$780 million. With this breakthrough by the U.S. and Congress enacting the Foreign Account Tax Compliance Act (“FATCA”) which is in full force requiring all foreign financial institutions to disclose U.S. accountholders to the U.S., no longer can U.S. taxpayers avoid reporting income on their foreign bank accounts and no longer can U.S. taxpayers avoid disclosing their foreign bank accounts.

Impact On Holders Of Crypto-currency

But with Bitcoin and other crypto-currencies, there is no such third party reporting.  Digital exchanges are not broker-regulated by the IRS. Digital exchanges are not obligated to issue a 1099 form, nor are they obligated to report to the IRS calculate gains or cost basis for the trader – but that could be changing sooner than you think!

IRS Investigative Action

Given the ability for taxpayers to engage in bitcoin transactions without proper tax reporting, the IRS though has stepped up its investigation efforts to uncover non-compliant taxpayers.

A John Doe Summons issued by IRS was ruled enforceable by U.S. Magistrate Judge Jacqueline Scott Corley in November 2017 (United States v. Coinbase, Inc., United States District Court, Northern District Of California, Case No.17-cv-01431).  Coinbase located in San Francisco is the largest cryptocurrency exchange in the United States.  Under the order, Coinbase was to turn over the names, addresses and tax identification numbers on 14,355 account holders. The Court ordered Coinbase to produce the following customer information: (1) taxpayer ID number, (2) name, (3) birth date, (4) address, (5) records of account activity, including transaction logs or other records identifying the date, amount, and type of transaction (purchase/sale/exchange), the post transaction balance, and the names of counterparties to the transaction, and (6) all periodic statements of account or invoices (or the equivalent). The information was turned over to the U.S. government on March 16, 2018.

Now while this net may not pick up taxpayers whose accounts have less than $20,000 in any one transaction type (buy, sell, send, or receive) in any one year from 2013 to 2015, it should be clear that this is the first step for the IRS to crush non-compliance for all taxpayers involved with cryptocurrency just like the IRS was successful in battling taxpayers having undisclosed foreign bank accounts.

Penalties For Filing A False Income Tax Return Or Under-reporting Income

Failure to report all the money you make is a main reason folks end up facing an IRS auditor. Carelessness on your tax return might get you whacked with a 20% penalty. But that’s nothing compared to the 75% civil penalty for willful tax fraud and possibly facing criminal charges of tax evasion that if convicted could land you in jail.

Criminal Fraud – The law defines that any person who willfully attempts in any manner to evade or defeat any tax under the Internal Revenue Code or the payment thereof is, in addition to other penalties provided by law, guilty of a felony and, upon conviction thereof, can be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than five years, or both, together with the costs of prosecution (Code Sec. 7201).

The term “willfully” has been interpreted to require a specific intent to violate the law (U.S. v. Pomponio, 429 U.S. 10 (1976)). The term “willfulness” is defined as the voluntary, intentional violation of a known legal duty (Cheek v. U.S., 498 U.S. 192 (1991)).

And even if the IRS is not looking to put you in jail, they will be looking to hit you with a big tax bill with hefty penalties.

Civil Fraud – Normally the IRS will impose a negligence penalty of 20% of the underpayment of tax (Code Sec. 6662(b)(1) and 6662(b)(2)) but violations of the Internal Revenue Code with the intent to evade income taxes may result in a civil fraud penalty. In lieu of the 20% negligence penalty, the civil fraud penalty is 75% of the underpayment of tax (Code Sec. 6663). The imposition of the Civil Fraud Penalty essentially doubles your liability to the IRS!

What Should You Do?

The IRS has not yet announced a specific tax amnesty for people who failed to report their gains and income from Bitcoin and other virtual currencies but under the existing Voluntary Disclosure Program, non-compliant taxpayers can come forward to avoid criminal prosecution and negotiate lower penalties.

With only several hundred people reporting their crypto gains each year since bitcoin’s launch, the IRS suspects that many crypto users have been evading taxes by not reporting crypto transactions on their tax returns. 

Now is the ideal time to be proactive and come forward with voluntary disclosure to lock in your deferred gains through 2017, eliminate your risk for criminal prosecution, and minimize your civil penalties.  Don’t delay because once the IRS has targeted you for investigation – even it’s is a routine random audit – it will be too late voluntarily come forward. Let the tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Bay Area (including San Francisco, San Jose and Walnut Creek) and offices elsewhere in California get you qualified into a voluntary disclosure program to avoid criminal prosecution, seek abatement of penalties, and minimize your tax liability. And if you are involved in cannabis check out was the cannabis tax attorneys can do for you.