Taxpayer Using Swiss Accounts to Hide Income from His Wife and IRS Subject to Civil Fraud Penalty

(Parker Tax Publishing October 2022)

The Tax Court held that a taxpayer who funneled income into numbered foreign bank accounts and did not report investment income earned in the accounts or disclose the accounts on his tax returns, and expressly denied holding the accounts, was liable for the civil fraud penalty under Code Sec. 6663. The court found that the taxpayer's fraudulent intent was established based on the underreporting and concealment of his income, his false responses to IRS questions about the accounts, and his lack of cooperation and intentional keeping of inadequate records relating to the accounts. Estate of Clemons v. Comm'r, T.C. Memo. 2022-95.

Background

In 2001, Brett Clemons, Sr., opened a Swiss bank account with Union Bank of Switzerland (UBS). At the time, he was married with children and worked for Hewlett Packard HP USA in Tampa, Florida. He hid his plans about opening a foreign bank account from his wife because he intended to get a divorce, to exclude his wife from the contents of that account, and "to move to Europe without [his] wife."

Clemons opened an investment account with UBS. The account was numbered, meaning UBS replaced Clemons's name with a number as the accountholder. Clemons waived his right to invest in U.S. securities, thereby avoiding U.S. tax reporting requirements. Through a hold-mail agreement, Clemons paid UBS a fee to hold his account correspondence and to destroy any unclaimed mail after holding it for three years. As a result, UBS never mailed account statements to Clemons in the United States. Clemons deposited over $400,000 in the account and authorized UBS to invest those funds. Over the years, Clemons followed careful steps to access his UBS funds. He periodically traveled to Switzerland to meet with a UBS representative. On these visits he withdrew funds and received checks from UBS. He never wired money directly from UBS to his own domestic accounts.

Beginning in 2003, Clemons experienced a series of life and career changes. He divorced his wife in 2003. He did not disclose the UBS account to his wife or to the divorce court. He began working for various companies, some of which were located outside the United States. He often caused his compensation to be deposited into his UBS account. He lived abroad at various times, including in Germany and the Netherlands. In 2004, his teenage daughter was murdered. Although grief stricken, Clemons continued to manage his professional and financial affairs.

On Clemons's tax returns for 2003-2007, he did not report income from his UBS account or the account's existence. In 2008 the IRS issued a summons to UBS requesting information about U.S. accountholders, leading to the discovery of Clemons's UBS account. That year, UBS began advising U.S. persons of new reporting requirements. Clemons closed his UBS account and opened another numbered account with a different Swiss bank, Dresdner. On his 2008 tax return, Clemons reported that he held a foreign financial account in Germany, where he had opened a savings account, but did not report his Swiss accounts. Clemons's 2009 tax return reported the existence of a savings account in the Netherlands but did not report his Dresdner account.

In 2011, the IRS began an examination of Clemons's 2003-2009 returns. Clemons filed delinquent FBARs for 2005 through 2009, some of which falsely described his UBS account as a savings account. In an interview with the IRS, Clemons told revenue agents that he had opened the UBS account for privacy reasons and that the account was an unnumbered, interest-bearing savings account. Clemons also gave an incomplete response to an IRS request for additional documents. A revenue agent eventually issued a third-party summons to Clemons's attorney, who provided the records in her possession. In 2012, a revenue agent performed a bank deposits analysis on Clemons's foreign and domestic accounts and discovered unreported income.

In 2016, the IRS mailed Clemons a notice of deficiency for years 2003-2009 based on unreported income from the bank deposits analysis. The notice was issued more than three years after Clemons filed his return for any of the years at issue. Accuracy-related penalties were applied to the underpayments of tax and civil fraud penalties under Code Sec. 6663 were determined for all years at issue. Clemons file a petition with the Tax Court, disputing the entire amount of the deficiencies, penalties, and additions to tax for each year.

Clemons challenged the deficiencies on various grounds. With regard to the penalties, Clemons argued that he acted reasonably and in good faith under Code Sec. 6664. In particular, Clemons said that he had reasonable cause for the late filings in 2005 and 2007 through 2009 on the basis of his daughter's death in 2004. Clemons also argued that the notice of deficiency was untimely under Code Sec. 6501 because it was issued more than three years after the filing of his returns.

Analysis

The Tax Court held that Clemons underpaid his tax for each year at issue and that his underpayments were due to fraud.

The court determined that Clemons did not have reasonable cause for his failures to timely file his returns. The court noted that in some circumstances the death of an immediate family member may constitute reasonable cause. However, the court said that a taxpayer's selective inability to meet his tax obligations when he can otherwise carry on normal activities does not excuse late filing. The court reasoned that although Clemons's daughter died in June 2004, that did not prevent him from timely filing his first return that was due after she died nor his ability work, travel, and carry on with his normal business activities. In the court's view, because Clemons could tend to his financial affairs and selectively chose not to meet his tax filing obligations, his failures to timely file did not fit within the exception for reasonable cause.

The court also rejected Clemons's argument that accuracy-related penalties should not apply because he acted reasonably and in good faith. The court noted that Clemons was an educated and experienced taxpayer and found that he did not exercise ordinary business care or prudence in reporting expenses for which he lacked adequate substantiation.

In addition, the court held that Clemons was liable for the civil fraud penalty for each year at issue after finding that his fraudulent intent could be inferred from the presence of several "badges of fraud." The court found that Clemons substantially underreported his income for seven consecutive years, which in the court's view was persuasive evidence of fraudulent intent. The court further found that Clemons's choice to open Swiss bank accounts with secretive features was ample evidence of another badge of fraud, concealment of income. The court said that Clemons's actions in funneling income into his Swiss accounts, and carefully accessing those accounts in manners to avoid detection, made clear that their very purpose was concealment. Further, the court found that Clemons concealed his Swiss accounts by failing to timely disclose them on his tax returns.

Clemons's filing of false documents, in the court's view, was additional evidence of his fraudulent intent. The court noted that Clemons filed late FBARs which contained false information about his Swiss accounts and his returns omitted substantial income and contained false responses to questions regarding the existence of foreign financial accounts. Clemons's fraudulent intent could also be inferred, the court found, from his failure to cooperate with the IRS when he was questioned about his Swiss accounts. The court noted that the IRS obtained Clemons's personal account ledger - one of the few documents he possessed - only after issuing a third-party summons to his representative. The court also found that Clemons's implausible and inconsistent explanations for his behavior were evidence of fraud. For example, Clemons claimed ignorance of the investment activity with respect to his accounts and suggested that UBS controlled his account even though he signed documents specifying limits on the investment activity and directed how his account would be invested. Finally, the court found that Clemons purposely kept inadequate records to prevent discovery of his Swiss accounts. In the court's view, Clemons did not merely fail to keep records, but took affirmative steps to see that records were destroyed by UBS.

The court also rejected Clemons's argument that the notice of deficiency was untimely. The court explained that under Code Sec. 6501(c)(1), if a taxpayer files a false or fraudulent return with the intent to evade tax, the general three-year rule does not apply and tax may be assessed at any time. The court concluded that because the IRS had established Clemons's fraud, it could assess the tax, penalties, and additions to tax at any time.

For a discussion of the civil fraud penalty, see Parker Tax ¶262,125.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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