Ty Warner, the owner of Beanie Babies, and Ty. Inc., was found guilty of tax evasion. In 1996, Warner deposited $80 million at UBS AG in Switzerland without paying taxes on the funds. He kept it so secret that even his accountants did not know about the deposit. In 2002, UBS had to declare information about U.S. account holders to the IRS under the Foreign Account Tax Compliance Act (FATCA), Warner had to shift his unaccounted money to another bank in Switzerland.
Warner was able to keep his hidden fortune a secret for more than a decade. Over the years, his unaccounted money had grown. He was evading $5.6 million in taxes on $25 million in earnings from the account.
He admitted to evading taxes in 2013 and had to pay $53.5 million in penalties, and $16 million in back taxes and interest. The court gave him two years of probation and 500 hours of community service. Unhappy with the sentence, the U.S. Department of Justice appealed it. However, the sentence was upheld.
Hiding income abroad is punishable by law. However, the Offshore Voluntary Disclosure Program (OVDP) allows taxpayers with hidden income overseas to disclose their unaccounted money without the risk of heavy penalties. Since the OVDP first started in 2009, there have been more than 50,000 disclosures with more than $7 billion recovered in taxes.
It is legal to maintain financial accounts overseas, but there are reporting requirements that need to be met. Additionally, U.S. citizens are required to pay taxes on their worldwide income. Any income received abroad and kept in a foreign financial institution (FFIs) needs to be reported to the IRS and the appropriate amount in taxes paid. Failure to comply with these rules can lead to significant penalties and the possibility of criminal prosecution.
The IRS uses information shared by FFIs and their investigators to pursue taxpayers that have undeclared income overseas. FATCA allows the IRS to gain information about U.S. account holders in FFIs. As a result of the transparency FATCA encourages, many taxpayers use the OVDP to declare their hidden income and assets abroad. The program was closed in 2011, but was again reopened for an indefinite period of time. It is the only way taxpayers evading taxes can reestablish compliance without the risk of severe penalties.