Billionaire businessman Ty Warner has long been known as the creator of “Beanie Babies,” the small stuffed toys that took the 90s by storm. More recently, however, he has been associated with something far less endearing: tax evasion. Here’s a quick summary of his case, including a few takeaways for us average (i.e., non-billionaire) taxpayers on foreign bank reporting.

How Warner got into trouble

As the Beanie Baby craze reached a fever pitch, Warner sought to conceal a sizeable chunk of his fortune from the IRS. He opened a Swiss bank account with UBS in 1996, and explicitly instructed the bank to refrain from sending account-related mail to the U.S. While the account’s initial balance remains unknown, it had compounded (tax-free, of course) to $93 million in 2002. All the while, Warner continued to check “no” on each year’s tax return when asked if he had foreign accounts.

What happened when the IRS caught up

In 2002, when Warner got wind that the IRS was pressuring UBS to share names of suspect clients, he transferred his balance to Zürcher Kantonalbank. This other Swiss bank continued to keep his foreign account under the radar. But when the Department of Justice and the SEC cracked down on foreign bank accounts in 2008, their first target was UBS. In response, the bank handed over a list of American clients with undeclared accounts. Warner’s name was included.

When Warner learned that another major toy manufacturer, Jeffrey Chernick, was facing prison as a result of his UBS account, he tried to enter the amnesty program. But was denied; the game was up—Warner was indicted.

How Warner’s case played out in court

In 2013, Warner’s plead guilty to hiding what had grown to roughly $107 million in a foreign bank account in his federal criminal court case.  And plead guilty to failing to disclose its existence to the IRS. He was forced to pay a civil penalty of $53 million plus back taxes, complete 500 hours of community service, fork over a $100,000 fine, and spend two years on probation.

At Warner’s sentencing hearing in 2014, he narrowly escaped jail time at the bequest of his legal team. They argued that such a punishment would disrupt his philanthropic activities.

What we can learn

Looking back, Warner’s decision to hide funds overseas seems ridiculous, at best. His deceitful actions resulted in approximately $80 million in civil penalties, interest, and back taxes, yet saved the billionaire only $5 million in income taxes. And when he decided to come forward, it was too late.

Nowadays, there is no such thing as a “secret overseas account.” Warner’s case is one of many, and the IRS isn’t letting up—even for honest mistakes.

Concerned? Here’s what you should do

If you or your business could be liable for a foreign bank account, address the matter as soon as possible. Talk to your tax advisor, and make sure you’re 100 percent in compliance with IRS laws and requirements. Even if, unlike Warner, you’re not trying to scam the system, non-compliance could trigger severe penalties. As experts in tax controversy, we are happy to be a resource for any questions you have, so don’t hesitate to call 952-979-3100.

 

Source: “Behind the Beanie Babies: The Secret Life of Ty Warner” — Chicago Magazine, April 2014