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Gimme Shelter: Tax Evasion And The Obama Administration

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If government watchdogs -- determined to root out waste, fraud and abuse -- want to go after big game, they should skip chasing nickel-dime welfare cheats, and learn from an IRS foray into Miami's exclusive Art Basel festival -- the annual December event sponsored by Davidoff cigars, Cartier, Net Jet and, of course, banking giant UBS -- where wealthy patrons forge the 'relationships' that will enable them to avoid sharing their hard-earned income with Uncle Sam.

For UBS, sponsorship of Art Basel has done more than burnish the Swiss wealth management specialist's corporate image. It has been an opportunity to make money, and lots of it, wooing clients (perhaps better described as co-conspirators) seeking advice on tax shelters.

It's not just a Swiss thing. As watchdogs get a taste for pursuing tax scams, they are exploring some intriguing findings by the Government Accountability Office. A 2008 GAO study shows that 83 of the top publicly held U.S. companies have set up operations in such tax havens as the Cayman Islands, Bermuda, and the Virgin Islands. In addition, 14 of the corporations with operations in tax-haven countries are beneficiaries of the current $700 billion government bailout, including American International Group (AIG), Bank of America, Citigroup and Morgan Stanley.

The GAO report and the activities of UBS at Art Basel both go directly to the issue of tax avoidance.

A unique combination of events -- the GAO report, the economic collapse, the bank bailout, the pressure to raise federal revenues without hiking taxes, and a series of tax fraud indictments in Southern Florida -- has set the stage for what could become a serious assault on tax shelters, tax havens, tax loopholes, tax evasion, and what are known to economists as "tax expenditures."

For those determined to wring out every drop of "waste, fraud and abuse" from the federal budget, blocking and restricting tax evasion offers the potential of boosting revenues by multiples of billions. One tax break that looks to be a particularly inviting target, for example, allows companies to avoid paying taxes on overseas income until they bring the money back to the US. Obama and others have attacked this break as a federally subsidized incentive to invest abroad. If left intact, this provision will cost the federal government $56.4 billion from 2008 to 2012, according to Congressional tax analysts.

Or take the case of the festivities at Miami's Art Basel, where the fabulously rich spend the tax dollars they have 'conserved' on everything from $1.5 million De Koonings to $1,500 hookers, as chronicled by Conde Nast Portfolio's Jay McInerney.

Until February 19, 2009, when UBS for the first time agreed to release to the US Department of Justice (DOJ) an as yet undetermined number of the names of bank account holders, the closed-door private Miami sessions sponsored by UBS were not just opportunities for people with a lot of extra cash to get tips on hot artists. They were also events where rich people could learn how to avoid paying taxes altogether.

UBS offers put to shame more traditional tax shelters. UBS folks presented to some very receptive Americans ways to avoid paying anything to the IRS, taking advantage of the bank secrecy rules in Switzerland and Lichtenstein.

The one hitch was that the schemes were illegal. But, the UBS folks noted, they had ways to structure transfers from phony Bermuda and Cayman Island accounts to overseas accounts held by shell corporations that were so complex and arcane that U. S. authorities -- mired in confusion -- would give up the chase.

An estimated $20 billion flowed from American clients into UBS tax avoidance schemes in recent years, according to DOJ officials. If, conservatively, just 30 percent of that amount should have been paid in taxes, these scams saved the well-to-do clients of UBS just under $7 billion.

The only problem was that in 2004 a relatively small crack opened up in the scheme. That year, the IRS and the Justice Department found out that Bradley Birkenfeld, a US citizen working for UBS, and Mario Staggl, a Lichtenstein resident, had devised a tax evasion plan for Igor M. Olenicoff, a billionaire California developer.

The Birkenfeld indictment does not spell out who talked first, but Olenicoff, who pleaded guilty on December 13, 2007, to a charge of filing a false tax return, and who eventually paid $52 million in back taxes, later filed a lawsuit against UBS that accused Birkenfeld of luring him into an illegal tax scheme.

The who-fingered-who dispute is, however, secondary to what followed. South Florida U.S. Attorney R. Alexander Acosta has moved steadily up the chain to reach the top management of UBS, and, more significantly, to force unprecedented disclosure of the identity of thousands of U.S. taxpayers who took up the UBS offer to cheat on their taxes -- an extraordinary setback for Swiss banking authorities who have guarded their clients names for centuries, and whose business has been built on the rock of the once-sacred promise of secrecy .

"In an unprecedented move, UBS, based on an order by the Swiss Financial Markets Supervisory Authority (FINMA), has agreed to immediately provide the United States government with the identities of, and account information for, certain United States customers of UBS's cross-border business," the DOJ proudly declared on February 18 of this year.

An undetermined number -- anywhere from just 250 to 19,000 -- of US taxpayers with Swiss bank accounts face the prospect of IRS examination of their bank documents with an eye to prosecution and/or civil litigation of the account holders. The DOJ, in addition, on February 19 -- the day after reaching an initial settlement with UBS -- demanded UBS bank account documents for a total of 52,000 additional depositors.

Swiss banking authorities are claiming that their guarantee of absolute banking privacy will somehow survive this attack -- "Banking secrecy remains intact," declared Hans-Rudolf Merz, Switzerland's president and its finance minister.

That is small comfort to the uncounted thousands of folks in the United States, potentially subject to criminal charges, who are using other banks and shell accounts in Switzerland and in select countries with a history of safeguarding the names of banking customers. As the Asset Protection Law Center (a California law firm which advertises itself as "A complete reference source on offshore trusts, family limited partnerships, limited liability companies and advanced asset protection strategies") helpfully points out, European countries with bank secrecy laws include:

"Austria, Switzerland, Liechtenstein, Luxembourg, the Channel Islands, and Gibraltar. In the Caribbean, the established havens are the Bahamas, Bermuda, and the Cayman Islands. Some of the newer entries such as the Cook Islands and Turks and Caicos now provide legitimate bank secrecy products."

The $20 billion salted away by Americans at UBS only touches the surface of the use of countries with bank secrecy protections to evade US taxation.

There is, however, much more money escaping taxation through entirely legal means -- through provisions in the U.S. tax code -- and there is an accurate accounting of the revenues that are lost. Every year, the Congressional Joint Committee on Taxation puts out an illuminating but little-read document with the bestselling title "Estimates of Federal Tax Expenditures," subtitled this year, "For Fiscal Years 2008-2012."

While few people read this slender publication, it is a bible to two very wonkish constituencies: tax reformers who, in the main, hate "tax expenditures," and tax lobbyists and lawyers, who, in the main, love them. And behind every tax expenditure, there is a constituency -- ranging from the 1.3 million member National Association of Realtors to the 184-member National Indian Gaming Association.

The list of tax expenditures fills 28 pages of small type, and runs the gamut from the mortgage interest deduction, which will reduce federal revenues by an estimated $443.6 billion from 2008 to 2012 and is politically inviolable, to the exclusion from taxation of housing provided for ministers at a five year cost of $3.3 billion -- also unlikely to be challenged by elected officials.

There are, in addition to the $56.4 billion break for corporations that delay repatriating foreign profits, a host of ripe targets, especially for a new Democratic administration determined to cut the deficit in half by 2012. Congress has incrementally enacted a Byzantine collection of 39 energy tax breaks in what amounts to a piecemeal energy policy costing $29 billion over five years, affecting every industry from wind to coal. Any tax expert worth his or her salt could advise ways in which to cut this tax expenditure in half -- although there is no guarantee that Congress would go along.

With Obama now on the hunt for revenue, the Joint Committee's publication is very likely to become a bestseller, at least on Washington's K Street. It might be something the sponsors of Art Basel should consider handing out on an annual basis. The tax expenditures described in the government volume provide not only ideas for direct tax breaks, but also material for tax lawyers and accountants to structure new tax shelters -- a process that continues regardless of the actions of Congress.