I cannot
understand people who go to great lengths to underreport income. I am not
talking about tax planning – perhaps even aggressive tax planning – to reduce
one’s tax under the law. Some actions are so routine one may not even see them
as tax planning, such as moving from a higher-tax state (say Ohio) to a
lower-tax state (say Florida or Nevada).
What I am
talking about is flat-out tax evasion. We have now crossed a line. The Supreme
Court has acknowledged that no one is under compulsion to pay more tax than
necessary, but likewise all are under compulsion to pay the appropriate tax.
Enter Ty
Warner. He was responsible for the “beanie babies” from the 1990s and is the
100% owner of TY Inc and other business interests. There must be a LOT of money
in beanie babies, as Forbes has ranked him as the 209th wealthiest American,
with a net worth estimated at $2.6 billion.
He opens a
secret bank account with UBS in 1996. In 2002 he transfers over $93 million
from there to another Swiss Bank. He obfuscates the ownership of the account by
tagging it with the name “Molani Foundation.” The UBS account threw off $3.2
million in income for 2002. This income is
not reported to the accountants and is not included on his tax return. Mind
you, he had already reported $49.1 million on his income tax return.
QUESTION: Is it possible to have so much income that one
forgets some of his/her income?
You can
pretty much guess that there was no FBAR filed. How could there be? There apparently
was no "foreign" account, at least to Warner.
Fast forward
the conversation and UBS gets dragged into the IRS and Justice Department hunt
for secret Swiss bank accounts.
Oh, oh, Warner
realizes the jig is up. He tries to enter the IRS Offshore Voluntary Disclosure
Program, but he was denied entry. A likely reason is that the IRS had already
identified him as owner of one or more unreported accounts.
Now he has a
serious problem. Could there be tax fraud? I cannot say. I can say that I recall
sitting across a conference table from a client who could not tell you (or me)
if his tax return – showing $33 million in gross income – included all his
income for the year. Is it possible that $3.2 million got lost in Warner’s reported
income of $49.1 million? It is possible, but the other actions – like fudging
the name of the Swiss account or not telling the accountants – look bad.
What Warner
did run into face-first is the FBAR reporting. This is the filing for foreign
accounts over $10 thousand. It is mailed separately from the tax return, and it
is due July 1. For decades no one paid much attention to these reports, but in
the aughts the IRS decided that there was money to be found. They began the
crackdown on foreign bank accounts, starting with UBS - eventually ensnaring Ty
Warner. The penalties for an FBAR are confiscatorily insane, as the government somehow
justifies that they can take up to half of whatever is in the account. For
multiple years. Reflect for a moment that the government is saying that – should
they press beyond two years - they can take from you more than you have – or ever
had – in the account.
This has
nothing to do with the earnings from the account. For example, for 2002 Warner’s
secret account generated approximately $3.2 million in income. Did the government
want taxes on the $3.2 million, which would be about $1 million? Nope. Did they
want all of that $3.2 million? Nope.
What they wanted
was one-half of the highest balance in the account. What was that amount for Warner?
Try $53.6 million.
Warner doesn’t
pay taxes on $3.2 million. Let’s be generous and say that it was $3.2 million for
several years. It now costs him $53.6 million to cash-out?
Set aside
whether this is confiscatory. I cannot understand why Warner –or anyone - would
even go there. Let’s be honest: would he even have noticed the taxes had he
correctly reported the $3.2 million to begin with?
