The newest target of U.S. authorities appears to be HSBC, the London-based retain bank prominent in Asia.

“It appears that it is indeed the next bank in what is likely a series of banks that will be targeted by the IRS,” said Miami tax litigator David Garvin.

“Since June of this year, there has been at a minimum 15 or more clients of HSBC who have already received letters from the United States government and are being investigated for tax evasion.”

Other HSBC clients are seeking legal consultations, concerned they will be caught up in another tax-evasion dragnet, lawyers said.

There is an estimated $700 billion in untaxed wealth in Asia, Garvin said. The owners are required to report taxes in the country where the
businesses are domiciled as well as their home country. The IRS plans to beef up its overseas operations with 800 new agents, most of them
heading to the Pacific Rim.

Not surprisingly, there is a South Florida component, as there was in the UBS case. A tax case against two HSBC customers is set for trial Sept.
7 in Fort Lauderdale federal court.

The HSBC probe shows how the U.S. is expanding its crackdown on offshore tax evasion beyond Switzerland and UBS. The largest Swiss bank paid a $780 million fine for hiding assets of U.S. taxpayers, often in Caribbean accounts.

About 15,000 taxpayers filed for amnesty under an IRS program to disclose offshore holdings to keep from being prosecuted, and 16 UBS clients have been charged with tax crimes.

But South Florida tax attorneys say it’s unlikely there will be such a large fine for HSBC, which is cooperating with authorities. While UBS refused to release the names of its U.S. customers, HSBC is releasing not only names but customer service audio tapes.

“HSBC has more leeway in cooperating, and it may not be breaking any laws of any particular jurisdiction by cooperating with the Department of Justice,” said attorney Martin Press, a partner at Gunster in Fort Lauderdale. But it hasn’t been all strawberries and cream between the bank and investigators.

“The IRS appears to be suspicious that HSBC tipped their customers to what was about to happen,” Garvin said. “It let their better customers do what actors term ‘exit stage right.”

A lot of tax attorneys said many of those already targeted are just confused about reporting income in two countries.
Kevin Packman, a partner at Holland & Knight in Miami, said the Justice Department is lumping in those who simply did not know the international reporting rules on income tax with the true tax scofflaws.

“I look at this stuff as low-hanging fruit. The size of the account should not matter. Whether it’s $1 million or $15 million, the focus should be on intent and willfulness,” he said. “I have people who failed to report accounts with $100,000, and they are being treated the same way as those who intentionally evaded tax.”

Packman said an HSBC client who got a “subject letter” from the Justice Department already came forward under the voluntary UBS amnesty to disclose his HSBC holdings.

“It’s troubling that one side did not know what the other side was doing,” he said. “I was certainly stupefied. You’d think they would be working in conjunction.”

He declined to discuss the specifics of the case.

For those who wanted to hide foreign assets, HSBC could be the perfect vehicle. It prides itself on its brick-and-mortar operation with branches throughout the world.

The bank founded in Hong Kong in 1865 is doing everything it can to avoid becoming the next UBS by cooperating with U.S. authorities.
While UBS said it cooperated with U.S. authorities, it cited Swiss bank secrecy law when withholding the identities of U.S. account holders and didn’t produce an indicted executive.

“HSBC is interesting because they have taped a number of their customers who are just patently discussing during the taped conversation the best ways to open accounts with

HSBC and avoid the reporting requirements to the IRS,” Garvin said.
One of the first signs the bank was targeted was when father-son developers Mauricio Cohen Assor and Leon Cohen Levy were charged in April with pocketing $33 million in a

New York hotel deal in 2000 without paying taxes.

The Cohens ended up in Fort Lauderdale federal court.

An IRS agent testified about the Cohens’ business with HBSC, which is described in the complaint only as “one of the largest international banks.”

AUDIO TAPES

HSBC audio tapes allegedly have the elder Cohen talking to a staff member about hiding millions of dollars in the names of relatives, according to court documents. Paul Calli and

Michael S. Pasano, partners at Carlton Fields in Miami who represent the Cohens, claim the Justice Department is carrying water for a French bank suing the father and son over an unresolved loan.

“We are following this case very carefully to see if anyone with the right set of facts successfully can be found not guilty,” Press said.

In a legal showdown with the IRS, the Miccosukees say their members don’t owe any taxes on income they receive from the tribe’s gambling operation — a stance that sets them apart from possibly every Indian tribe with casinos in the United States.

Every year, the Miccosukees distribute millions in profits from the tribe’s West Miami-Dade casino to their 650 members. They say that distribution constitutes a “tax” by a sovereign government, so, they argue, the IRS cannot tax the income, too.

The Miccosukees may be the only one of about 240 Indian tribes with American gambling facilities to deploy such a defense, which has failed in the past, according to legal experts and Indian regulatory authorities.

Tribe lawyers, in a new Miami federal court filing, accuse the Internal Revenue Service of “abuse of authority” in its ongoing investigation into the tribe’s gambling distributions and former chairman Billy Cypress.

But the Miccosukees’ counterattack seems to fly in the face of a key federal law regulating Indian gaming operations, the experts and authorities said.

The Indian Gaming Regulatory Act, passed by Congress in 1988, requires tribes with gambling facilities to report all member payments to federal authorities. It also requires tribes to notify the recipients that they may have to pay income taxes to the government.

The law specifically says such “payments are subject to federal taxation.” Unlike the Seminole Tribe, which operates the Hard Rock Hotel & Casino in Hollywood and Tampa, the Miccosukees have never filed a required “revenue allocation plan” with the Bureau of Indian Affairs to show how much gambling income from their bingo-style slot machines and poker games is distributed to members.

Attorneys for the Miccosukees, represented by the Jorden Burt law firm in Miami, declined comment.

In court filings, IRS officials also cited federal law saying that while Indian tribes and their businesses are exempt from paying taxes, tribal members who receive income from such operations — including gambling casinos — are subject to federal reporting and taxes.

An often-cited analogy is nonprofit organizations, which are tax exempt. Such organizations’ earnings are not taxable, but salaries paid to staff are subject to income taxes.

HISTORICAL VIEW

Historically, Indian tribes have imposed taxes on non-Indian timber or mineral companies operating on their reservations to pay for public services such as roads or police — but they have not taxed their own gambling operations, said a Washington, D.C., attorney who specializes in Indian and income tax laws.

Lawyer Dennis Whittlesey described the Miccosukee Tribe’s defense against the IRS’ probe as “disingenuous and pettifogging.”  “It’s basically legal chicanery. They’re trying to scrub the gambling payments of their casino character,” said Whittlesey, who is involved in a wrongful-death lawsuit against a Miccosukee Indian in Miami-Dade court. “There’s no such thing as a nontaxable gift.”

Miami attorney David Garvin, who successfully represented Indy 500 champion Helio Castroneves in a criminal tax-evasion trial last year, said the tribe’s legal argument “is not novel and has been rejected in the past.”

Garvin said that many appellate cases have held that tribal income derived from any business on tax-exempt Indian land is not subject to taxes. But as soon as a tribe distributes any of that income to members, it becomes taxable under federal law, he said.

He cited a major federal appeals court case in which a Yakama Indian in Washington state was ordered to pay taxes on $18,000 he had received as income in 1976 for his duties as a tribe council member and smoke shop operator.

“There are a number of well established and often-cited cases that hold that individual tribe members’ payments are taxable,” Garvin said.

Garvin, a tax specialist, said he understands the Miccosukees’ legal strategy, describing it as “damage control.”

“It’s a slippery slope once the financial records for Mr. Cypress are turned over,” he said.

SUMMONS ISSUED

In April, the IRS issued a civil summons to Morgan Stanley Smith Barney, the tribe’s Miami bank, seeking Cypress’ credit card statements and other tribe financial records from 2003 to 2005. The summons also demanded the tribe’s credit card records and the names of members authorized to use the Morgan Stanley account for the same three-year period.

After the tribe refused to turn over the records, Justice Department lawyers and IRS agents disclosed that an earlier investigation into the Miccosukees’ unreported gambling distributions led them to the related probe of Cypress.

The former chairman, deposed in January, is suspected of charging at least $3 million on tribe credit cards for personal travel to casinos in Las Vegas, Foxwoods and other glitzy gaming venues, records show.

As a sovereign nation, the Miccosukees argue they don’t have to turn over any records on Cypress or the tribe to the IRS, though they agreed to hand over some of the tribe’s financial records in 2006 during the earlier probe.

In their latest court filing, the tribe’s lawyers said the U.S. government’s intent is to “harass” the Miccosukees and “punish” them for objecting to the summons, adding that the IRS improperly disclosed “confidential” records in court filings in the current case.

They also took umbrage at the IRS’ allegations that the Miccosukees have used armored vehicles to deliver up to $10 million four times a year to members, attacking the agency for trying to “malign the tribe by making public accusations based upon rumor and innuendo.”
“No armored trucks are ever used to transport currency from Miccosukee Resort and Gaming to the Miccosukee reservation or to any other place other than local banks,” Magdalena Salinas, a casino treasury manager, said in court papers.

PAYMENTS MADE

According to court records and people familiar with the Miccosukees, the tribe has handed out millions in cash payments from the gambling operation to every member on a quarterly basis for years.

Last August, for instance, the Miccosukee police delivered $18 million in cash from the casino off the Tamiami Trail to the tribe’s government center about 20 miles west, according to one person aware of the transport. SWAT team members accompanied the motorcade of three unmarked black Chevy Tahoes.

Miccosukee police officers carried the cash packed in five burlap sacks, each weighing over 100 pounds, to the government center’s safe, the person said.

Early the following morning, hundreds of tribe members — mothers, fathers and children carrying IDs — lined up outside the building to collect their quarterly payout,in a manila envelope or check.   Each received about $48,000, the knowledgeable source said.

An article written by Jay Weaver published in The Miami Herald on August 2, 2010