For more than a quarter-century, attorney John P. Karoly Jr. led a charmed life, winning millions in jury awards for his clients and earning the distinction of being perhaps the Lehigh Valley’s best-known lawyer.

But Karoly’s successful and at times controversial career might have come to an end Monday, when he pleaded guilty to three counts of willfully filing false tax returns for failing to pay taxes on $5.2 million in income during 2002, 2004 and 2005.

As part of the deal, Karoly also agreed to renounce any interest in his late brother’s estate, and prosecutors will drop charges that he and two others submitted phony wills. He still faces a nonjury trial on money laundering and wire fraud charges in September.

Karoly, 59, of South Whitehall Township could serve up to nine years in prison and pay a $750,000 fine. He agreed to pay $1.9 million in back taxes to the Internal Revenue Service.

The plea means Karoly cannot appeal and probably will go to prison and face disciplinary action, including suspension of his law license or even disbarment.

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The U.S. Justice Department said on Tuesday it was pressing ahead with its five-month-old lawsuit against UBS AG to force the Swiss bank to identify thousands of U.S. clients with secret UBS accounts.

Despite recent media speculation about a possible settlement of the case, the Justice Department said in a brief filed with a Florida court that it was seeking to enforce tax compliance with the full weight of U.S. law.

“The United States has a strong national interest in making sure that all U.S. taxpayers comply with the tax laws, including disclosing their offshore accounts, and paying all the taxes they owe,” the department said in the brief.

The U.S. government sued UBS in February in the U.S. Southern District Court of Florida, seeking the names of 52,000 Americans suspected of using the bank to hide nearly $15 billion in assets and evade U.S. taxes.

“The United States has proven its case for enforcement. The Court should order UBS to comply in full,” the Justice Department said in its filing.

In response, a spokesman for UBS said enforcement of the U.S. summons would require the bank to violate Swiss law and was inconsistent with U.S.-Swiss treaty frameworks.

A court hearing on the U.S. government case against UBS has been scheduled for July 13.

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A Florida millionaire pleaded guilty to filing a false tax return that failed to disclose secret accounts he held at UBS AG, the largest Swiss bank by assets.

Steven Michael Rubinstein, 55, of Boca Raton, was the first U.S. taxpayer charged after UBS gave more than 250 customer names to the Internal Revenue Service under a Feb. 18 agreement to avoid prosecution for helping wealthy Americans evade taxes. He entered his plea today in federal court in Miami.

UBS handed over account data on Rubinstein, a chartered accountant who has worked since 1994 at an international yacht company. He is cooperating with a U.S. probe of scores of U.S. taxpayers. He pleaded guilty to filing a false return in 2004 and admitted failing to disclose UBS accounts from 2001 to 2007.

“Today’s guilty plea resolves the first prosecution of a UBS client based upon records received from UBS,” Jeffrey Sloman, acting U.S. attorney in Miami, said in a statement. “More prosecutions are expected to follow.”

Rubinstein, who was arrested on April 2, faces up to three years in prison. He also admitted failing to file reports of foreign bank and financial accounts, or FBARs. He must pay back taxes, fines and a penalty of 50 percent of the highest annual balance from 2001 to 2007. He is free on $12 million bail.

Rubinstein admitted UBS helped him set up the British Virgin Islands corporation Hybridge International Ltd. Over seven years, his UBS bankers helped him buy and sell securities worth 4.5 million Swiss francs ($4.1 million), he admitted.

Real Estate, Krugerrands

He also admitted transferring $3 million from UBS to a Monaco account and then to the U.S. to buy property and build his home in Boca Raton. In all, he transferred $7 million from a Monaco account to build his home. He also used his UBS accounts to deposit and sell more than $2 million worth of South African Krugerrands.

UBS, based in Zurich, avoided prosecution by admitting it helped taxpayers hide money in Swiss accounts to dodge paying U.S. taxes. UBS also agreed to make reforms and pay $780 million in fines and penalties.

As part of its agreement, UBS admitted that from 2000 to 2007, its Swiss private bankers helped wealthy Americans evade U.S. taxes by setting up sham offshore companies in tax havens. UBS said it created misleading forms saying those offshore companies, not taxpayers, were the beneficial owners.

On Feb. 19, the U.S. government sued UBS to try to force disclosure of the identities of as many as 52,000 American account holders who allegedly hid their secret Swiss accounts.

Passports, Boat Keys

A U.S. magistrate judge at a bail hearing April 8 ordered Rubinstein to surrender his U.S. and South African passports and keys to his 45-foot boat.

Rubinstein’s home is worth $5 million to $6 million, he said at the hearing. He said he owned two condominiums in Boca Raton worth about $1 million and a condominium near Tel Aviv worth about $800,000. He said he also owned a 2007 Mercedes and a 2002 Mercedes and leased a Lincoln Navigator.

Rubinstein’s attorney, Robert Panoff, declined to comment.

The case is U.S. v. Rubinstein, 09-cr-60166, U.S. District Court, Southern District of Florida (Miami).

UBS AG (UBS) was again at the center of relations between Switzerland and the U.S. Tuesday as the two countries launched talks aimed at agreeing a double-tax treaty which experts say could have implications for the Swiss bank’s ongoing legal battle with the Internal Revenue Service.

Switzerland wants a speedy resolution to the talks after inking double-taxation agreements with several European countries in recent weeks, a spokeswoman for the finance department said Tuesday.

At the same time, the IRS is continuing with its demands for access to data on more than 50,000 UBS clients through the civil court in a move that strikes at the heart of Switzerland’s traditional banking secrecy.

But even if the IRS succeeds in its demands, UBS is likely to continue to refuse to hand over data because doing so would violate Swiss law. Therefore, if the court case persists, the Swiss government is expected to seek a political solution that falls back on the terms of the planned tax treaty between the two countries, experts say.

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The Internal Revenue Service is considering registering or licensing paid tax preparers such as H&R Block Inc. and Jackson Hewitt Tax Service Inc. as part of a broad review of the way Americans file tax returns, Commissioner Doug Shulman said.

Shulman told a House Ways and Means subcommittee today he is preparing a “comprehensive set of recommendations” that may include new regulations for preparers to help recover an estimated $290 billion in uncollected taxes. He later told reporters that may include a registration or licensing requirement.

Requiring paid tax preparers to register or become licensed would establish a national accreditation framework for the industry for the first time, with the goal of improving accuracy of tax filings and ending fraud that investigators say fleeces both taxpayers and the government.

“This is nothing less than a transformational shift,” Shulman said.

Sixty-one percent of individual tax returns are done by paid preparers, according to IRS Taxpayer Advocate Nina Olson, the chief ombudsman for U.S. taxpayers, who has recommended licensing of preparers since 2002.

“Untrained and unscrupulous preparers present a serious problem,” Olson wrote in a 2006 report to Congress.

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Troubled bank UBS has been dealt another blow in the United States. The pension fund for public employees in Arkansas will end its relationship with the bank.

Trustees voted to end the contract with UBS over the US justice department’s probe of the Swiss banking giant, in a move announced on Sunday.

Officials in Arkansas said that UBS currently manages around $160 million (SFr173 million) in stock market investments for the pension fund.

The state’s teacher retirement scheme - a separate entity - has around $532 million invested with UBS.

The Internal Revenue Service has sued UBS to try and force the bank to hand over information on around 52,000 account holders. The agency says that these account holders have an estimated $14.8 billion in assets and are using Swiss bank secrecy to shield the money.

UBS has asked for a Miami federal judge to deny the IRS petition.

The Internal Revenue Service has increased its audit rates of the wealthiest individuals and corporations, according to testimony by IRS Commissioner Douglas Shulman.
Shulman told a hearing of the House Appropriations Committee’s Financial Services Subcommittee that, in fiscal year 2008, the IRS conducted nearly 1.4 million examinations of individual tax returns, an 8 percent increase over fiscal year 2006. The audit coverage rate also rose from 0.58 percent in fiscal year 2001 to 1.01 percent in fiscal year 2008.

“While the growth in examinations of individual returns is visible in all income categories, it is most apparent in examinations of individuals with incomes over $200,000,” said Shulman in his prepared testimony. “Audits of these individuals increased from 105,549 in FY 2007 to 130,751 during FY 2008, an increase of 24 percent. Their coverage rate has risen from 2.68 percent in FY 2007 to 2.94 percent in FY 2008.”

In the business arena, he added, audit coverage rates for small corporation returns (with assets under $10 million) increased slightly over fiscal year 2007 by 0.03 percent. However, coverage rates for three classes of large corporations with assets between $50 million and $250 million and higher all increased. Coverage rates for partnership returns stayed even as compared to fiscal 2007, while Subchapter S returns reflected a small 0.05 percent drop due largely to an increase in the number of S corporations. The coverage rate for tax-exempt organizations increased slightly.

Rep. Jose Serrano, D-N.Y., pointed out during the hearing that Shulman’s figures contradicted the findings of Syracuse University’s Transactional Records Access Clearinghouse, which showed that audit rates for wealthy individuals had declined steeply (see IRS Audit Rate for Millionaires Plummets). Shulman disputed those findings, saying, “We think some of it is wrong and some of it is looking at unfair comparisons,” according to Reuters. The IRS’s own Web site, however, shows that the agency audited about 5.6 percent of individuals making over $1 million in fiscal 2008, compared to 6.8 percent in 2007.

The IRS Criminal Investigation Division has also been vigorously attacking egregious tax avoidance, money laundering and other financial crimes, Shulman noted. The overall number of individuals charged in an information or indictment rose from 2,323 in fiscal 2007 to 2,547 in fiscal 2008. Over the same period of time, prosecution recommendations for employment tax evasion more than doubled. The incarceration rate in these investigations was 81 percent and the average sentence was 29 months.

In fiscal 2008, IRS-developed cases related to foreign and offshore issues also resulted in 61 criminal convictions, and the average term for those going to jail was 32 months. For the first four months of fiscal 2009, there were 20 convictions, and the average sentence was 84 months.

President Barack Obama outlined a series of steps Monday aimed at overhauling U.S. tax policies that he says reward companies for shifting American jobs overseas and allow wealthy people to avoid paying taxes by using offshore accounts.

The president expressed his wishes to raise taxes on the overseas profits of U.S. companies and to go after evaders who abuse offshore tax shelters.

Mr. Obama said the existing laws make it possible to “pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, N.Y. ”

The White House estimated the plan would inject $21 billion a year into U.S. coffers over the next decade, but that would amount to only about 2 percent of next year’s projected deficit of $1.2 trillion, however.

Under existing laws, companies with operations overseas pay U.S. taxes only if they bring the profits back to the United States. As long as those earnings are plowed back into the foreign subsidiaries, they can defer paying taxes indefinitely. The president’s plan, which would take effect in 2011, would change that.

The White House said that in 2004, multinational corporations enjoyed an effective tax rate of 2.3 percent in the United States because of such allowances. Aides said that was the most recent year available for analysis, according to media reports.

Critics say those rules encourage businesses to bolster foreign operations instead of creating jobs in the U.S. During his campaign last year, Mr. Obama promised to change those provisions.

Drew Lyon, a tax expert at PriceWaterhouse Coopers, told Reuters the changes to the “deferral” provision would be sweeping, since half of multinationals firms’ income is earned abroad.

“It’s really hitting most Fortune 100 companies that depend to a great deal on growth of foreign markets for growing their total earnings,” Lyon said.

The president also said he would close loopholes and bolster enforcement to prevent tax avoidance by companies and individuals.

“The steps I am announcing today will help us deal with some of the more egregious examples of what is wrong with our tax code,” he said at a joint announcement with Treasury Secretary Timothy Geithner.

Democratic Montana Sen. Max Baucus, chair of the Senate Finance Committee that writes tax legislation, offered a tepid response to the president’s proposals, signaling that they could be a hard sell in Congress.

“Further study is needed to assess the impact of this plan on U.S. businesses,” he said Baucus. “I want to make certain that our tax policies are fair and support the global competitiveness of U.S. businesses.”

But several lawmakers, including House Ways and Means Chairman Charles Rangel, signaled support for Mr. Obama’s proposals.

In March, 200 companies and trade groups like the U.S. Chamber of Commerce sent congressional leaders a letter opposing changes to the “deferral” provision. The letter said the firms would not be on a level playing field with international rivals, many of which are not required to pay taxes at home on overseas entities. Pfizer, Oracle, Microsoft Corp, Johnson & Johnson and General Electric were among the firms that signed the letter.

Under President Obama’s plan, companies would not be able to write off domestic expenses for generating profits abroad. The goal is to reduce the incentive for U.S. companies to base all or part of their operations in other countries.

The president said the government also is hiring nearly 800 new IRS agents to enforce the U.S. tax code.

In addition to the changes to the deferral provisions, separate proposals in Mr. Obama’s plan would raise $95 billion by cracking down on overseas tax havens. Such tax havens became a major topic at the April meeting in London of leaders of the Group of 20 major economies.

In one of the proposals to crack down on tax evasion, the administration would require financial institutions to share information with the IRS about customers in the U.S. Foreign institutions and sign up with the IRS to become “a qualified intermediary” or else face a presumption that they are helping individuals evade taxes.

Some consumer advocates said the changes were long overdue fixes for tax abuses.

Swiss banking giant UBS AG acknowledged in February that it helped U.S. clients conceal assets from their government. It agreed to pay a $780 million fine and has since identified about 320 of its American clients.

But the administration is not seeking to repeal all overseas tax benefits. Mr. Obama called his proposal “a down payment on the larger tax reform we need to make our tax system simpler and fairer and more efficient for individuals and corporations.”

“Nobody likes paying taxes, particularly in times of economic stress,” he said. “But most Americans meet their responsibilities because they understand that it’s an obligation of citizenship, necessary to pay the costs of our common defense and our mutual well-being.”

The president said the current tax code makes it too easy for “a small number of individuals and companies to abuse overseas tax havens to avoid paying any taxes at all.”

He said he was willing to make permanent a research tax credit that was to expire at the end of the year and is popular with businesses. Officials estimate that making the tax credits permanent would cost taxpayers $74.5 billion over the next decade. But administration aides said 75 percent of those tax credits cover the cost of workers’ wages.

Geithner said the proposals would end “indefensible tax breaks and loopholes which allow some companies and some well-off citizens to evade the rules that the rest of America lives by.”

He called them “common-sense changes designed to restore balance to our tax code.”

ABINGDON, Va. – As he was about to be sentenced Monday for federal income tax fraud, those in the courtroom stood up for Larry McClure.

Supporters of the motorsports icon filled the courtroom, which was too small to hold them. Family members, friends, giants of the stock car racing world – around 50 people– spilled into the hallway, sat on benches and stood shoulder to shoulder in solidarity with McClure and his family.

Junior Johnson, the fabled moonshiner-turned-dirt track racer and NASCAR team owner, turned out. Joy Stata, a Florida native, was there to support the man who put her hometown of Bartow on the racing map. Jeff Byrd, president of Bristol Motor Speedway, stood outside, having arrived too late to get a seat.

“How long do these things last?” Byrd wanted to know. He had never been to a federal court hearing.

Inside the courtroom of Judge James P. Jones, McClure made his last public mea culpa.

“I’d like to apologize to you, the court,” he told Jones, chief judge for the Western District of Virginia. “To the opposing counsel, to my family, my God. His will be done, whatever you decide.”

Jones’ decision ushered in a stunned silence, punctuated by sniffles: McClure will serve 18 months in prison, the low end of the sentencing range.

For McClure’s supporters, it was a crushing end to a three-year criminal investigation that has taken a toll on him personally and financially. McClure pleaded guilty in January to five counts of filing a false income tax return, obstructing the federal investigation and lying to Internal Revenue Service investigators.

In addition to the prison time, McClure was fined $40,000, ordered to reimburse the IRS $25,000 for its investigation, and to pay nearly $60,000 in restitution to Eastman-Kodak for filing a false invoice. He was also ordered to refile his personal income tax returns for 2002, 2003 and 2004.

During those years, McClure admitted to accepting $269,000 in cash payments from a friend in exchange for services provided by Morgan-McClure Motorsports, of which McClure is a part owner. He did not report the income to the corporation or on his personal tax returns, and owes the government just over $100,000.

“We all know anyone can have tax problems,” Jones said in delivering the sentence.

But McClure’s failure to pay was not based on a technicality, the judge said.

“It was an elaborate scheme to defraud. He cheated the honest taxpayer.”

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The U.S. Internal Revenue Service (IRS) is preparing to pursue other foreign banks for allegedly facilitating tax evasion by wealthy Americans following its high-profile case against Switzerland’s UBS AG, an IRS official said on Monday.

UBS, Switzerland’s largest bank, in February acknowledged that it helped U.S. clients conceal assets from the U.S. government. It agreed to pay a $780 million fine and identify some of its American clients.

But U.S. authorities are still going after the Swiss bank, seeking to access the data of another 52,000 Americans they say are hiding about $14.8 billion in Swiss bank accounts.

“We are developing John Doe summonses on other banks,” Daniel Reeves, an agent with the IRS’ Offshore Compliance division, told Reuters on the sidelines of a conference in Miami on offshore finance.

He was referring to the kind of subpoena filed by the IRS against UBS seeking to force the bank to turn over the names of clients suspected of evading U.S. taxes.

Reeves declined to say which, or how many, other banks could face cases filed by the IRS, but he confirmed the entities being investigated were foreign-based like UBS.

“We have identified other offshore banks that are engaged in similar activities,” he earlier told the conference.

On April 2, U.S. authorities arrested and charged an accountant in Florida in the first of what they said could be a series of tax evasion prosecutions of American clients of UBS.

Almost two weeks later, a wealthy Florida yacht broker pleaded guilty to using an account with UBS to hide more than $3 million in assets from the U.S. government.

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