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Foreign Account Holders Face Off Against IRS

Jul.1,2009

Introduction

IRS’s quest to identify 51,000 suspected tax cheats from Swiss banking giant UBS has ended in a settlement. Rumor has it that the Swiss will reveal the names of 5,000 U.S. taxpayers in an unprecedented reversal of its vaunted secrecy laws.

U.S. taxpayers with secret Swiss holdings must either fess up and pay hefty fines, or play Russian roulette with IRS criminal investigators. If caught, they will face lengthy jail time and monstrous penalties.

UBS Settlement

UBS assisted U.S. taxpayers in hiding billions in Swiss bank accounts, assuring them that Swiss secrecy laws would prevent IRS disclosure. The scheme collapsed when UBS plead guilty to several tax felonies and was forced to cooperate with IRS.

Although the Swiss government initially balked, it capitulated in settlement and will now identify thousands of tax evaders.

Disclosure

IRS has a limited amnesty program in effect until September 23, 2009. To avoid criminal prosecution, taxpayers must disclose their foreign bank accounts and pay all taxes due on unreported income, plus additional penalties.

See my March, 2009 Newsletter, Limited Amnesty for Offshore Accounts.

IRS Limitations

IRS has a limited capacity to prosecute tax crimes. During fiscal year 2009, there were slightly under 2,000 criminal referrals.

Assuming there are 51,000 potential tax criminals with Swiss accounts and IRS receives the names of 5,000, the chances of being caught is about 10% and the probability of being prosecuted drops to 4% (1 in 25).

Russian Roulette

Do the tax cheats comply with the amnesty and potentially lose up to 50% of foreign holdings, or play the odds, hoping to escape detection? The chances of being identified greatly increase if IRS nabs a promoter, a bank, investment advisor, accountant or attorney, who was actively involved with UBS.

In contrast, if an individual taxpayer travelled to Switzerland and dealt with UBS directly without an intermediary, the likelihood of being caught should be greatly diminished

Conclusion

Tax cheats with Swiss accounts face a high stakes, bet-your-life decision. Given their proclivity to commit tax fraud in the first place, I doubt many will divulge their holdings.

Those who were not actively engaged in tax fraud are the most likely candidates for limited amnesty offered by IRS.

Are Michael Jackson’s Memorial Expenses Tax Deductible?

Jun.1,2009

Introduction

On June 25, 2009, pop star Michael Jackson died suddenly and last week, the world witnessed his huge L.A. send-off, replete with movie stars, recording artists and political savvy preachers.

If Jackson’s estate winds up paying the estimated $1.4 million in costs for the whole shebang, will these expenses be deductible?

General Rule

The cost of the last illness and funeral expenses may be deducted. According to tax regulations, deductible expenses include the private funeral, transportation of Mr. Jackson’s body to its final resting place and reasonable maintenance of the burial cite, including any tombstone, monument, or mausoleum.

Public Memorial

A public memorial service, however, is not considered a funeral expense and should not be deductible.

The deduction is limited to necessary expenses incurred in connection with the decedent’s funeral, which would exclude a public memorial service attended by those not present at the actual funeral service.

Conclusion

Expect Jackson’s estate to claim a full deduction for the cost of the public memorial, then use the deduction as a bargaining chip with IRS regarding the amount of estate taxes owed. Complicating Mr. Jackson’s estate is the knotty issue of valuing the publicity rights to his name and likeness. Early estimates peg the estate tax at approximately $100 million. Stay tuned.

Is Your Life Insurance Policy Imploding?

May.1,2009

Introduction

Taxpayers often use life insurance to fund potential estate tax liabilities, as well as provide for their families.

However, with certain policies (such as universal life, adjustable premium, variable life and variable universal life) your insurance company could be draining the cash value to keep it in force.

Imploding Policies

You may wrongly assume your policy is paid in full or generating sufficient income to pay premiums. Surprise! Policies in which premiums were based on investment results or interest rate levels could be targets for implosion.

The benchmark 10-year Treasury Note hovered in the 7-8% range in the early 1990’s, when many policies, promising hefty returns, were purchased. Today, the rate is closer to 3.5%. Thus, policies that projected a 4%-6% rate of return could crumble in today’s interest rate environment.

In addition, the stock market decline, coupled with low interest rates, creates a potential double-whammy that could trigger the collapse of many policies their owners thought were safe.

Internal Loans

You may be unaware that insurance companies borrow against the policy’s cash value to pay shortfalls between the premium due and the earnings generated by the policy. Under some circumstances this borrowing could result in taxable income to you.

Action Steps

Compare your policy’s current performance and cash value with the projections used when you purchased it. If the cash value dropping, your policy could be disintegrating, in which case have your insurance agent run another projection using current investment assumptions.

Conclusion:

If you are not paying the full premium on your life insurance policy, chances are your policy relies on internal growth to fund premium based on outdated financial assumptions.

With the combination of low interest rates and the decline in the stock market, the health of your policy could be at significant risk.