Beanie Baby Creator Avoids Jail Time, Pays Steep Penalties for Undisclosed Offshore Accounts

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On January 14, 2014, Beanie Baby creator H. Ty Warner was sentenced to two years of probation and 500 hours of community service resulting from his guilty plea for tax evasion.  In addition, Warner was required to pay approximately $16 million in back taxes and interest and a $53 million fine for failing to file FBARs.

At the beginning of the Beanie Baby craze in 1996, Warner personally travelled to Switzerland to open a secret account at UBS AG.  Since that time, the account earned $25 million in income that was not reported in Warner’s income tax returns, thus avoiding $5.5 million in taxes.

According to a recent Bloomberg article,[1] some have questioned whether the sentence imposed was too lenient, considering (1) the advisory federal sentencing guidelines that called for a prison term of 46 months to 57 months, (2) the amounts involved, and (3) the length of the secrecy regarding the account.  U.S. District Judge Charles Kocoras in Chicago disagreed and imposed the lighter sentence noting the many charitable activities described in letters of support for Warner filed with the court, the fines he paid, and the fact that he previously tried to join the government’s 2009 Offshore Voluntary Disclosure Program.  Warner was not accepted to the OVDP because the government knew about his Swiss account before he attempted to join the program.

The government prosecutors stated that they knew about Warner’s UBS account in 2008, likely from the “Qualified Intermediary Agreement” the bank had with the IRS since 2002 or through Warner’s Swiss banker, Hansruedi Schumacher, who had been indicted prior to Warner’s attempt to enter the 2009 OVDP.

U.S. taxpayers are increasingly being forced to face the issue of their undisclosed foreign accounts as foreign banks are freezing accounts until the individual signs a Form W-9.  These steps by the banks are the result of the Foreign Account Tax Compliance Act (“FATCA”), which requires foreign financial institutions to report to the IRS about their U.S. clients.

Foreign financial institutions are beginning to support their governments entering into Intergovernmental FATCA Agreements (“IGAs”) to avoid the withholding taxes on payments due to them from U.S. sources.  In fact, the United States has recently signed six more IGAs, bringing the current total of cooperating governments to 18.  Alternatively, in the absence of an IGA between the United States and their government, individual foreign financial institutions are entering into their own separate FATCA agreements with the United States.

With increased cooperation from foreign governments and foreign financial institutions, the days of a U.S. taxpayer avoiding disclosure of foreign assets, accounts, or income are numbered.


[1] Andrew Harris, “Beanie Baby Maker Ty Warner Avoids Jail in Tax Case,” Bloomberg, Jan. 14, 2014 (http://www.bloomberg.com/news/2014-01-14/beanie-baby-maker-ty-warner-avoids-jail-in-tax-evasion-case.html).

 

Topics:  FBAR, Offshore Funds, OVDP, Tax Evasion

Published In: Criminal Law Updates, Finance & Banking Updates, International Trade Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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