Beanie Babies creator Ty Warner has plead guilty to a single charge of tax evasion for not reporting more than $3.1 million in foreign income generated in a secret Swiss bank account. The Bank Secrecy Act requires U.S. citizens and residents, whether here legally or illegally, to report foreign accounts on Form TD F 90–22.1, Report of Foreign Bank and Financial Accounts (FBAR). The FBAR is an information return, in other words no tax due is reported, but rather its purpose is to disclose offshore accounts. The purpose behind the FBAR is to facilitate the government in its effort to detect tax evasion, terrorism, and money laundering.
As part of the plea agreement, Warner has agreed to pay a $53.6 million civil penalty for not filing a FBAR. The billionaire chairman and CEO of Ty Inc. is cooperating with the IRS, according to the U.S. attorney’s office in Chicago.
According to prosecutors, Warner “went to great lengths” to hide his accounts and more than $3.1 million in foreign income. The charges against Ty Warner are connected with an ongoing investigation of U.S. taxpayer clients of Union Bank of Switzerland and other banks that hid foreign accounts from the IRS. The UBS entered into a deferred prosecution agreement in 2009 after admitting it helped taxpayers hide accounts.
In 1996 Warner created an offshore UBS account and then in 2002 transferred $3.2 million made through investments in UBS into a second Swiss financial bank. Prosecutors alleged that Warner committed tax evasion by failing to tell his accountants and the IRS about the earned income and the existence of the UBS account.
In 2002 Warner initially failed to pay $1.3 million in income tax on the unreported income but the amount owed was amended to $885,300. Schedule B on the Form 1040, U.S. Individual Income Tax Return is where a taxpayer discloses ordinary dividends and interest. US residents are taxed on worldwide income. “By omitting his UBS income, Warner falsely reported his total income in 2002 was $49,124,095,” prosecutors said.
On the bottom of Schedule B, it asks the taxpayer if at any time during the year the taxpayer had a financial interest in or signature authority over a financial account in a foreign country. If the answer is yes, the Schedule B goes on to ask are you required to file the Form TD F 90-22.1 to report the foreign interest or signature authority and to enter the name of the foreign county where the account is located. Tax returns are signed under the penalties of perjury and Schedule B can supply proof of criminal intent. Intent is a necessary element for the government to prove tax evasion beyond a reasonable doubt.
“This is an unfortunate situation that Mr. Warner has been trying to resolve for several years now, including through an attempt to enroll in the IRS’ Offshore Voluntary Disclosure Program in 2009,” said Gregory Scandaglia, Warner’s attorney.
In 2009, the IRS initiated a series of offshore voluntary disclosure (OVD) programs to settle with taxpayers who had failed to report offshore income and file any related information returns. The 2012 Offshore Voluntary Disclosure Initiative (OVDI) is the third offshore disclosure program offered by the IRS. The program does not have a termination date. Each program has assessed steeper penalties. To start the program, clearance from the IRS criminal investigations unit is necessary. It would appear that Warner did not receive clearance. Warner is being arraigned on October 2nd and faces up to five years in prison.