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TAX NEWS - 2010

IRS Tax: IRS Offshore Account Probe Widens

The crackdown on offshore tax evasion has officially moved beyond UBS AG, and Switzerland.

After months of expecting U.S. authorities to reach beyond the Swiss banking giant to other banks, tax advisors say clients with HSBC Holdings PLC overseas accounts are getting letters from the U.S. Department of Justice alerting them that they are being investigated.

The agency's criminal investigation is focused on U.S. residents who may have evaded taxes through HSBC accounts in India and Singapore, the advisors say. The DOJ is looking into whether taxpayers may have violated federal criminal laws by failing to report an interest in, or authority over, a financial account located in a foreign country, according to a DOJ letter obtained by Dow Jones Newswires. The letter from DOJ was directed at the account holder, rather than the bank itself.

The move suggests the probe of HSBC accounts could follow the same course as the one that unfolded against UBS last year. And that is likely to have account holders wondering if the IRS will repeat a special penalty cap deal if they turn themselves in voluntarily. Of course, another question is which financial institution might be next.

In general many, but not all, of the rules that applied in the UBS case are likely to do so now.

The IRS and DOJ have been saying for months that their efforts to track down Americans with undeclared foreign accounts "is not just about UBS," said Scott D. Michel, an attorney at Caplin & Drysdale in Washington, D.C. Given the information the agencies have obtained from 15,000 or so voluntary disclosures as the UBS case went forward, and from potential whistleblowers and informants, it is "utterly unsurprising that the probe appears to have expanded to another worldwide financial institution," Michel said.

While the probe into HSBC account holders resembles the one against UBS, special penalty caps like those the IRS offered voluntary disclosers last year isn't likely in the new investigation, according to tax advisers. The agency needs to protect the integrity of that program, which ended on Oct. 15, 2009, according to Charles P. Rettig, a partner at law firm Hochman, Salkin, Rettig, Toscher & Perez. (That program applied to anyone who came into the voluntary disclosure program at the time, not just UBS account holders.)

The IRS has kept a voluntary disclosure process open, and many U.S. taxpayers have come into compliance with their foreign accounts since October 15, although the civil penalties they will owe are uncertain. Civil penalties for everyone who comes in after October 15 — whether the account is at UBS, HSBC or another bank — will be more than under the special deal, and less than the 50% of the high account balance that applies to those who were criminally prosecuted and pleaded guilty, according to Rettig.

Taxpayers who come under their own steam will pay a civil penalty less than that assessed on those the government uncovers. In the latter cases, civil penalties will likely exceed 30% of the high account balance between 2003 and now.

As to which bank could be next: Credit Suisse is reportedly on the IRS's radar, and tax attorneys named it as a possibility.

The DOJ and IRS did not immediately comment. HSBC declined to comment.

The message for anyone with an offshore account who hasn't yet stepped forward? It is the same as it was in the UBS case: Waste no time in contacting the IRS. Those who do can "basically assure they'll have a civil resolution," said Rettig.

Those who don't could get a letter from the IRS or the DOJ, and that letter may mean the start of a criminal case.
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