U.S. citizens are taxed on their income wherever derived anywhere in the world. Even if a U.S. citizen lives outside the country, they are still liable to report and pay taxes on their income. But nobody likes to pay taxes, and some folks don’t like paying taxes to the point where they will risk crossing the line between legal tax avoidance and illegal tax evasion. Doing this is not particularly difficult, particularly if somebody lives outside the U.S. for the reason that an entire industry known as the offshore sector exists primarily for the purpose of helping folks avoid taxes, legally or illegally. This industry is mostly located in smallish jurisdictions and micronations (Switzerland is the most notable exception), all of which have laws that emphasize financial secrecy, do not recognize the tax judgments of other jurisdictions, and are at best ambivalent about outright tax evasion committed by the patrons of their banks and trust companies. This brings us to today’s true story.
Stephen L. Schechter was a U.S. citizen who was all of a licensed U.S. investment bank, a U.K. corporate finance advisor, and also the owner of a financial investment advisory firm that was U.S.-based. Apparently, Schechter made good money but decided that he could maximize his income if he cut out Uncle Sam. So, Schechter in 2002 created an entity in the British Virgin Islands, a well-known offshore tax haven, called Charles Penn Longview (CPL). Schechter then had CPL open a bank account in Switzerland with Piguet Galland & Cie SA (Piguet), a Swiss bank. The bank manager dealing with the CPL account worked with Schechter to conceal Schecter’s involvement in the bank account documents ― including by falsely telling Piguet that Schechter and his wife had renounced their U.S. citizenship some 20 years previously (they had not). Schechter also told Piguet that he had been born in Kew Gardens in the United Kingdom, although he had really been born in Queens, New York. Anyway, this account lasted until 2013 and Schechter never reported the account or income received into the account, and never paid taxes on that money.
In June of 2011, Schechter sold his apartment in Monaco for €14 million, and deposited that money into the CPL account in Switzerland. The capital gains from the sale were not reported and taxes on it were not paid. Later, Schechter would use these moneys to purchase a little over $8.8 million in various securities, and the income from those securities flowed back into the CPL account.
Fast forward to 2013, where Piguet became suspicious of Schechter’s involvement with the account and demanded that he provide proof that he had renounced his citizenship. Piguet also suggested the Schechter that he should take advantage of the IRS’s Offshore Voluntary Disclosure Program (known as the OVDI program) which would have allowed Schechter to come clean on his tax evasion, albeit paying back taxes to do so. In return for this good advice, Schechter threatened to sue Piguet for violating Switzerland’s bank secrecy laws if they disclosed his information to the IRS.
With Piguet no longer playing ball, Schechter opened a new account for CPL with UBS Monaco SA and transferred to this new account all the money in CPL Swiss account (about $10.2 million) and then closed the Swiss account. This new account was maintained until 2017 and Schechter did not report the new account or the income from the account. I am guessing, without knowing, that it was about 2017 when Schechter’s involvement with the UBS Monaco SA became known to the U.S. tax authorities.
This whole time, from 2002 through 2017, Schechter was paying U.S. taxes on the income that he was reporting with the help of a U.S. tax preparer. However, Schechter did not disclose his foreign accounts to his tax preparer, and thus filed false returns. Moreover, in all these years, Schechter failed to file FBARs (a/k/a FinCEN Form 114 entitled the Report of Foreign Bank and Financial Accounts) as he was required to do annually.
According to the Criminal Information filed by the U.S. Department of Justice, by all his offshore machinations, Schechter ended up saving $820,391 in taxes. Yes, for a measly $820,391 in tax savings did Schechter risk his entire career, reputation, and ultimately charges of tax evasion ― to which he has since plead guilty. Suffice it to say that all the back taxes, interest, and penalties that Schechter will now have to pay will likely be more than what he thought he was saving in taxes, plus he might get time at Club Fed (his sentencing is still pending as of this writing).
Now that’s a bad trade.
ANALYSIS
The problem with betting on offshore secrecy, whether as a tax evader or a deadbeat trying to dodge creditors, can be boiled down to this one immutable fact: Somebody knows. The bank’s personnel know, and the folks who run offshore trust and company management firms also know. While the offshore jurisdictions have their strict financing secrecy laws, somebody knows, and the tax authorities and aggressive creditors have figured out that for the right price there will usually be somebody willing to covertly spill the beans. Recall that a former UBS employee obtained a reward of $104 million from the IRS for providing information on U.S. citizens who were using that bank to hide money. On top of that, offshore institutions are high priority targets for hackers who then sell the information for profit through the dark web.
Even when somebody thinks they have gotten away with offshore tax evasion, in most cases they really haven’t. A couple of times a year, I get a call to the effect of “Dad died and left us with money in an offshore account that was never reported. What do we do?” The only advice that I can give them is to (1) immediately contact a tax attorney who specializes in reporting offshore accounts, (2) don’t touch the money, and (3) absolutely do not transfer the money back to the U.S. as that could be the crime of money laundering. What almost invariably happens then is that the back taxes, fines and penalties eat up all the offshore money, thus eliminating the problem (and the money).
If somebody really wants to leave the U.S. system, there is probably one truly effective method to do so, which is to renounce one’s citizenship and move away from the U.S., but even that can come with some costs. But simply holding money in an undisclosed offshore account is simply not a realistic option.
Somebody knows.
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