A Wake-Up Call for Global Tax Cheats

Emboldened by better tracking tools and cooperation, the IRS is on the hunt for hidden overseas assets
Illustration by Alex Nabaum

The May 13 indictment of UBS (UBS) private banker Bradley Birkenfeld, accused by federal prosecutors of helping a U.S. billionaire hide some $200 million overseas to avoid U.S. taxes, might seem like an isolated case. But attorneys and Washington insiders say it's likely to be the first of many. "They're getting some momentum going, and they're going to keep going," predicts tax lawyer Edward M. Robbins Jr., a former assistant U.S. attorney who is representing Igor Olenicoff, the billionaire in the UBS case.

Three developments point tax watchers to that conclusion: the advent of more robust tools for authorities to track bank transactions, stiffer penalties, and a climate shift that has made politicians around the world eager to catch tax cheats.

After the September 11 terrorist attacks, law enforcement, banks, and regulators started sharing more information about possible tax evaders as Washington focused intently on tracking global money movements. The Patriot Act, for example, allows the IRS to peer more easily into offshore bank records. And former IRS commissioner Mark W. Everson, who left last year, beefed up enforcement, which his successor has continued to do. "We're better positioned than ever to tackle these things," says an official at the IRS.

Other nations around the world are ramping up their enforcement efforts, too—and coordinating more with each other. As of 2005, any European Union nation can obtain bank records and prosecute a tax evader from another country in the EU. Crackdowns by authorities in Germany and Britain have recovered more than $1.5 billion from outside their borders since January, according to the countries' tax authorities. In 2006, Brazil, India, and South Africa began helping each other identify suspect transactions. Says Grace Perez-Navarro, a deputy director of tax policy at the Organization for Economic Cooperation & Development in Paris: "There's strength in numbers when countries start to cooperate."

Cross-border collaboration is humming in Washington and London. Since 2004, tax shelter sleuths from five countries—the U.S., Britain, Australia, Japan, and Canada—have shared workspace, tactics, and real-time information from a joint office at IRS headquarters. The groups expanded last year, opening a London-based multinational unit. Says Oakland (Calif.) tax lawyer Karen L. Hawkins: "As the world has become smaller and costs have become bigger, everybody appreciates [that] when you have tax scofflaws on your hands it doesn't matter what country they're from."


It's not just blatant tax cheats who have reason to worry. The IRS has also focused increased attention on the more than 700,000 U.S. taxpayers thought to be concealing assets in overseas accounts. Some may be doing so unintentionally, like expatriates living abroad and banking locally. A law dating back to 1970 requires a U.S. taxpayer with an overseas account of $10,000 or more to disclose it to the IRS. Until 2004, people who failed to file that special form received a maximum fine of $100,000, and the law was rarely enforced. Now they can face penalties that amount to as much as half the balance in the cloaked accounts, along with prison terms of up to 10 years.

Meanwhile, the recent developments have unsettled wealth managers, who are paid in part to help minimize clients' tax hit. Says Ted Wilson, a senior consultant at London-based Scorpio Partnership: "There's a certain amount of dread in the industry."

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