Lawyer up and fess up.

That’s what tax attorneys across the country are advising scores of wealthy Americans who, they say, fear they may be outed in the government’s recent crackdown on offshore banking.

Last month, the U.S. Department of Justice, the Internal Revenue Service and a Senate committee announced that they have launched an investigation to identify the names of potentially thousands of Americans who may have engaged in tax fraud through hidden foreign accounts.

What has clients especially nervous, lawyers note, is that the government has a new investigative weapon: Swiss banking giant UBS A.G., which announced last month that it is working with the U.S. government to identify the names of its clients who may have engaged in tax fraud.

“People are panicking. People are losing sleep,” said Bryan Skarlatos of New York’s Kostelanetz & Fink, who has been “working like a maniac” addressing clients’ offshore-banking concerns. “I think their first concern is: ‘Is the IRS going to get my name? Is UBS going to turn over my name? And what’s the likelihood that I’m going to be caught?’ “


His advice? Come clean with the government, said Skarlatos, who also chairs the American Bar Association Section of Taxation’s civil and criminal tax penalties committee.

“A lot of people are saying, ‘Do you trust the IRS? And do they come down like a ton of bricks as soon as you walk in?’ The answer is you can trust the IRS because they want to get things done,” said Skarlatos, who has 25 clients with offshore accounts who are in the process of coming forward, or considering it.

Scott Michel of Caplin & Drysdale, a Washington tax boutique firm that has seen a “substantial uptick” in calls from offshore account holders, is offering similar advice.

“Come in from the cold,” Michel said, “and you’ll be in better shape than you would be if you get a knock on the door from the IRS.”

Michel said that, by far, most clients are innocent of deliberate tax evasion, many of them acquiring accounts from old money sources. Some are Holocaust survivors, or their descendants. Others are older, retired business owners who once sent money overseas and now want to come clean. In many cases, he said, a great deal of wealth appears to be at stake, with some accounts reaching tens of millions of dollars.

Michel is encouraging clients to take advantage of an IRS voluntary disclosure policy that allows offshore account holders to comes forward, pay their taxes and, if they haven’t engaged in anything illegal, avoid criminal prosecution. They might pay some civil penalties, or have to get an audit, he said, but prosecution isn’t likely.

IRS officials were not available for comment. In response to questions from The National Law Journal, the agency pointed to its guidelines for making voluntary disclosures. “A voluntary disclosure will not automatically guarantee immunity from prosecution; however, a voluntary disclosure may result in prosecution not being recommended. This practice does not apply to taxpayers with illegal source income.”

IRS Commissioner Douglas Shulman has repeatedly warned offshore account holders that the hiding game is over, and is encouraging them to come forward. “Anyone with hidden income and gains would be well-advised to make a prompt and complete disclosure to the IRS,” he said in a statement.

But not without consulting a lawyer first, cautioned Frank C. Razzano, a partner in the Washington office of Philadelphia’s Pepper Hamilton, which recently hosted a Web seminar on the offshore-banking crackdown. He noted that offshore banking isn’t illegal — people just have to report any offshore accounts to the U.S. government.

“Many people might not know that they are supposed to be reporting it,” Razzano said. “But the fact is, that if you look on your income tax return, there’s a question: Do you have an offshore account?”

If the answer is yes, and you haven’t marked it, you should be worried, warned Miami tax attorney Teig Lawrence, who has been posting all the latest offshore-banking developments on his Web site.

His latest alert is titled “Are you worried about the IRS discovering your Offshore Account? You should be.”

“I think it’s certainly something to be concerned about,” said Lawrence, who believes there’s mounting political pressure to go after offshore account holders. “In my opinion, the country is in trouble financially, so they’re trying to plug the leak.”