It’s been about 20 years since the U.S. suddenly fell in love with the adorable 5-inch Beanie Baby dolls created by Ty Warner. But in October 2013 billionaire Ty Warner broke down crying in U.S. District Court as he pleaded guilty to one count of tax evasion for hiding $25 million in income in secret Swiss bank accounts.
The Rise And Fall Of Beanie Babies
Ty Warner wasn’t afraid to take risks. Beanie Babies first appeared in 1993, triggering a craze for the plush toys fashioned into bears and other animals. He ignored the naysayers after Beanie Babies flopped during their initial debut, and pressed forward with a product he believed in more than anyone else. One reason why the toys easily supplanted other fads such as Ninja Turtles and Cabbage Patch dolls was partly because of Mr. Warner’s strategy of deliberate scarcity. He rolled out each one—Spot the Dog, Squealer the Pig—in a limited quantity and then retired it.
At the height of the Beanie Babies craze, Mr. Warner was shipping more than 15,000 orders per day to retailers. This explosion of sales made him rich. Forbes recently put his net worth at $2.6 billion. Mr. Warner’s obsession even became an asset. When he would suddenly change product designs, collectors and wannabe entrepreneurs would snap up the $5.00 plushes and resell them on eBay at mark-ups topping 1,000%! Some people would take extreme measures to secure these rare editions. In 1999, Jeffrey White, a career criminal from West Virginia, shot and killed a co-worker at a lumberyard after an argument over Beanie Babies.
Three years into the Beanie Babies craze, Mr. Warner boarded a plane bound for Zurich, where he would make the biggest mistake of his life. In 1996, at UBS, one of Switzerland’s largest banks, he opened a secret account invisible to the IRS. The exact amount he deposited is unknown, but by 2002 it had grown to $93 million. To keep the account’s existence from prying eyes, including those of his own accountants, he signed a “hold mail” form that instructed the bank not to send any mail related to the account to the United States and to destroy any documents in his file when they became five years old.
The money Mr. Warner stashed in Switzerland remained there, compounding tax-free, for the next dozen years. And each time Warner got to the part on his Federal individual income tax return that asks if the taxpayer has any foreign accounts, he checked the box that said no.
As his net worth skyrocketed over the next few years, thanks to his 100% ownership of Ty Inc., Mr. Warner couldn’t help bragging about his success. In 1998, experts questioned his claim to be the world’s top toy seller. (Unlike public companies, private companies are not obliged to release revenue figures.) Miffed, Mr. Warner took out a full-page ad in The Wall Street Journal stating that his company had $700 million in profits in 1997. If true, that would have made it more profitable than his two top competitors at the time, Hasbro and Mattel, which reported $560 million in combined profits that year.
But you know the old saying – “What goes up also goes down”. Prices for Beanie Babies eventually crashed and collections, which some people insured for thousands of dollars, became worthless.
Ty Warner’s Tax Problems
Mr. Warner’s hubris eventually got the best of him, too and in October 2013 he pleaded guilty to tax evasion. The 69-year old billionaire who created Beanie Babies broke down crying in court in October 2013 as he pleaded guilty to one count of tax evasion for hiding $25 million in income in secret Swiss bank accounts.
Mr. Warner (#209 on Forbes 400 list) is not the first Forbes 400 member to draw tax charges. Leandro Rizutto (#296), founder of Conair, had his own run in with tax crimes. And another is Igor M. Olenicoff (#184), a Southern California real estate developer with a net worth of $2.9 billion.
According to the charging document, Mr. Warner opened a secret UBS account in 1996. In late 2002, he moved $93 million to Zürcher Kantonalbank. That account produced over $3 million of income in 2002 alone, which he failed to mention on his Form 1040. He even amended his 2002 return in 2007, but once again omitted the offshore income.
Mr. Warner still paid considerable tax on the nearly $50 million of 2002 income he did report. But he shorted the IRS by about $1.2 million. Including the next ten years, he admitted to the Court in his plea that he evaded paying $5 million in taxes due to the IRS. That’s a painful omission, not only drawing the tax evasion charge but huge FBAR penalties too. Prosecuters contended that he was concealing as much as $107 million in undisclosed foreign bank accounts. In Ty Warner’s case the FBAR penalty will exceed $53 million.
The numbers are staggering. And that ties into criminal penalties. A tax evasion conviction carries up to 5 years in prison and a $250,000 fine. Tax convictions even draw prosecution costs on top of all the back taxes, interest and penalties. And the penalties can be huge. Civil fraud penalties alone can add another 75%.
But when it comes to penalties, FBAR charges and penalties—even civil penalties—are the real gravy train for the government. An annual report of foreign accounts in the law since 1970, FBAR’s target money laundering. They were not widely known—or widely enforced—until the UBS scandal of 2008 and 2009.
But now they are ubiquitous, requiring reporting of foreign accounts even by those with mere signature authority but no beneficial interest. A willful failure to file an annual FBAR can trigger a civil penalty of up to 50% of the amount in the account at the time of the violation.
On January 14, 2014 Ty Warner the mastermind behind Beanie Babies—still considered the most successful toy launch in U.S. history—and is among the richest people in America, was sentenced by U.S. District Court Judge Charles P. Kocoras. On this day, Mr. Warner had nowhere to hide. As he walked to a court lectern in an impeccably tailored dark suit, his ginger-colored hair flaring copper under the stark lights, he looked as tentative as a modern-day Willy Wonka clomping across the plaza of his ruined reclusiveness. Mr. Warner said to Judge Kocoras, “I never realized that the biggest mistake I ever made in life would cost me the respect of those most important to me.”
But once Judge Kocoras began to speak, it became clear that Mr. Warner wouldn’t spend one day behind bars for tax evasion. The judge all but produced a sword, asked the toy man to kneel, and tapped him on each shoulder. “Mr. Warner’s private acts of kindness, generosity, and benevolence are overwhelming,” Judge Kocoras said after reading aloud letters from Warner’s supporters.
He further lauded Warner for already paying a civil penalty of $53 million (which amounts to just 2% of the billionaire’s estimated net worth), plus back taxes. “I believe . . . with all my heart, society will be best served by allowing him to continue his good works,” the judge concluded. In lieu of the four-year-plus prison term recommended by federal guidelines, Judge Kocoras sentenced Ty Warner to two years of probation, 500 hours of community service, and a $100,000.00 fine.
How Does This Effect You?
Although Mr. Warner’s numbers are huge, many more garden-variety taxpayers find themselves facing the awkward combination of failing to report interest on foreign bank accounts and failing to file FBARs. Even if the unreported income is small, the combination of amending tax returns to report it plus quietly filing past-due FBARs is a classic “quiet disclosure”. The IRS advises against them and says it can prosecute taxpayers who do it anyway.
What the IRS wants taxpayers to do is to join the 2014 Offshore Voluntary Disclosure Program. Like the 2009, 2011 and 2012 programs that preceded it, taxpayers must file up to 8 years of amended returns and up to 8 FBARs. Taxes on the unreported income, interest and a 20% penalty on the taxes seem reasonable.
But the sticking point for many is the IRS program’s counterpart to the FBAR penalty. Currently, the program’s penalty is 27.5% of the highest aggregate account balance in the undisclosed offshore accounts. For many, that is a crushing penalty, and for that reason many taxpayers have still refused to come forward taking the gamble that even with the new reporting required by foreign banks under FATCA they can remain undetected. Fortunately, starting with July 1, 2014 the IRS has issued new procedures in its Voluntary Disclosure Program that certain taxpayers could qualify of a 5% FBAR penalty and in some cases all FBAR penalties can be waived.
Crime Doesn’t Pay
The amount Ty Warner saved in income taxes by stashing money overseas was almost laughably small for a billionaire: just $5 million. He wound up having to fork over 16 times that to the feds.
Amount in Swiss account in 2002
Account value in 2008
Civil penalties, interest, and back taxes paid
Beanie Babies are still wonderful toys and, if you’re like most people who have them, yours are in mint condition because you once thought they would make you rich. The good news: Those animals will make a wonderful gift for a local hospital or police station, where they will provide comfort to people too young to remember that there was a time when Beanie Babies drove people to madness and its creator to the IRS.
What Should You Do?
Charges like Mr. Warner’s stratospheric bubble-bursting Beanie Baby tax and FBAR consequences are reminders that your freedom is at stake and the dollars in question can get worse—catastrophically worse—than the reduced FBAR penalty offered by IRS in its Voluntary Disclosure Programs.
Don’t let another deadline slip by. If you have never reported your foreign investments on your U.S. Tax Returns or even if you have already quietly disclosed or you are in the 2012 Offshore Voluntary Disclosure Initiative (“OVDI”), you should seriously consider participating in the IRS’s 2014 Offshore Voluntary Disclosure Program (“OVDP”). Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law. Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.
Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco, San Diego and elsewhere in California qualify you for OVDP.
Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.