In the last issue of PLN Banknote, we reported on the landmark case of US v. UBS.  Under the settlement reached in that case, the US has agreed to make a treaty-based request to the Swiss Government for information about hundreds of US citizens who were UBS customers.  UBS will produce the requested information to the Swiss Government, who will then turn it over to the US.  The complex diplomatic protocol notwithstanding, the case represents a major crack in Swiss banking secrecy, and a milestone in the US Government’s efforts to corral tax owed on offshore assets.  As US Internal Revenue Service Commissioner Doug Shulman recently said: the IRS goal is “clear – to get those taxpayers hiding assets offshore back into the system.”

The UBS settlement has received enormous attention around the world, notoriety that works in tandem with the OECD’s push for tax transparency and implementation of tax exchange agreements.  On the OECD front, its decades-long effort is paying off, and the recent surge in the number of tax information exchange agreements and tax treaties signed by previously grey-listed nations allowed OECD Secretary-General Angel Gurria to make a glowing report to the G20 leaders at their recent Pittsburgh meeting.

But the drama of big lawsuits and international meetings duly noted, the only aspect of the IRS’s – or any tax collector’s -- effort that really matters is collection of overdue tax and penalties from individual taxpayers.   At that level, the process gets painful, as shown by a recent case from Seattle.

Robert Cittadini is one of at least five US taxpayers facing criminal charges for failure to report offshore income in schemes engineered by UBS.  Apparently, Mr. Cittadini’s name was on the initial list of some 250 names that were provided by UBS earlier this year, as a partial response to the government’s lawsuit against the bank.

Mr. Cittadini, now 67 years old, is a retired international salesman for Boeing.  A few days ago he entered a plea agreement admitting guilt to a felony count of intentionally filing a false tax return for the year 2002.  His plea agreement(1) sets out the story thus:  In 1991, the defendant opened a UBS account in Switzerland, and for years made trips to Zurich to confer with UBS bankers.  In 2000, in order to avoid new US tax withholding laws, a UBS banker named Hansruedi Schumaker advised Mr. Cittadini to set up a Hong Kong corporation and transfer his assets there, away from prying IRS eyes.  The HK corporation had as directors Swiss lawyers, apparently provided by UBS.  The HK accounts contained somewhere around two million dollars.

As part of his plea agreement, Mr. Cittadini agreed to pay back taxes and a 50% penalty on the amount of his highest one year tax liability.  He also agreed to “cooperate completely and truthfully [with the IRS’s] investigation and prosecution of other individuals involved in criminal activity,” and his final sentence will depend on his complete fulfillment of that cooperation obligation.  There is no report yet of the extent of Mr. Cittadini’s knowledge, if any, about the wider world of UBS-facilitated tax evasion. 

But although the Cittadini case looks to be of relatively modest size and devoid of sensational facts, the IRS certainly will be interested in reviewing his UBS files. 

Mr. Cittadini’s case itself has received attention in US financial media.  The news of his guilty plea comes in the last weeks before the October 15, 2009, deadline set by the IRS for voluntary disclosure by transgressing US taxpayers.  The IRS has announced that that deadline, already extended, will not be extended beyond October 15.  News stories report that business has been brisk at IRS and US Attorney offices, as taxpayers take advantage of, not a tax haven, but a safe haven from criminal prosecution.   

The prosecution of Robert Cittadini may prove to be only one of scores, or even hundreds, of criminal cases that will be filed in the US against taxpayers who evaded taxes with the active assistance of UBS.  The criminal cases can be expected to be lucrative for the US Treasury, both in terms of taxes collected in each particular case and taxes paid voluntarily by other nervous taxpayers.  Most of the cases surely will end in plea agreements.  If any actually go to trial, jurors should not be expected to have much sympathy for defendants.

This article has been prepared for the general information of clients and contacts of PLN Lawyers Sydney and the affiliated firms of the Pacific Legal Network. While it deals with and comments on the law in specific areas it is not intended nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations.

PLN BankNote October 2009