The Swiss parliament’s recent rejection of a bill that would have provided a solution to Swiss banks’ stand-off with U.S. tax authorities leaves U.S. taxpayers with a lot of unanswered questions about what will happen next.
The deal provided a mechanism for Swiss banks to bypass secrecy rules and hand over data on U.S. taxpayers, bank employees and external advisers required by U.S. tax authorities under the FATCA rules. The Swiss parliament voted last month to reject the bill (see Swiss Parliament Rejects Tax Deal with U.S.). With the situation unresolved, U.S. account holders and Swiss banks face the risk of prosecution by the IRS, although the Swiss government announced a new approach last week that will allow Swiss banks to apply for individual authorization to hand over data voluntarily to U.S. authorities (see Swiss Enact Plan B to Solve U.S. Dispute over Untaxed Assets). However, client data is not covered by the authorization.
Paul Behling, a partner at the international law firm Withers Bergman who leads a team of lawyers in the U.S., Geneva, Hong Kong and London dedicated to IRS voluntary disclosure issues, talked with me by phone recently to discuss the potential implications of the parliament’s rejection and what it could mean to both banks and taxpayers, before the latest approach was announced by Swiss authorities.
“The IRS is investigating 14 banks in particular that they think had heavy involvement with assisting U.S. taxpayers in hiding the true ownership of their accounts in Switzerland,” he said. “They have basically asked those banks to turn over data. Then there’s Swiss bank secrecy law that basically prevents the banks from doing that without violating the Swiss bank secrecy laws or the data privacy law. Those are two laws in Switzerland that are impacted. The Swiss government and the Swiss Bankers Association would all like this IRS and Department of Justice inquiry to end so they can get back to normal banking business. So they’ve been attempting over the last year-plus to work out some kind of an arrangement which would allow the banks to turn over the data to satisfy the IRS without violating either the banking secrecy laws or the data privacy law.”
The bill that was introduced and passed by upper parliament seemed to satisfy those needs, Behling noted. “It would have allowed the banks to turn over data about the accounts that would be sufficient to allow the IRS to identify the taxpayers with a little additional work and information, but it would actually not turn over the actual names,” he said. “That was viewed as a way to satisfy everybody as a kind of compromise. It would also then allow the banks to negotiate with the IRS on an individual basis, to likely deal with any kind of deferred prosecution agreements such as the one that was reached with UBS, and the imposition of fines. The lower house of Parliament passed it but the upper house rejected it by a pretty substantial vote, like 120 to 60, so it wasn’t even close. The announcement by the lower house as to why they rejected it was they didn’t have sufficient information about the information that was going to be disclosed. They didn’t have information about the penalties that might be imposed. And they didn’t like the idea that it wasn’t going to be a global thing. There might still be banks negotiating and no clear amnesty, if you will, after the negotiations took place and so they rejected it.”
That leaves the IRS impatient for the data, Behling noted. “In terms of penalties, if there’s tax evasion, there’s no statute of limitations,” he pointed out. “It may be difficult to prove that you willfully failed to report your taxes correctly, but the penalty that the IRS has been imposing a lot under the voluntary disclosure programs, as well as the audits, has been the imposition of penalties for failing to file a foreign bank report, the FBAR. If that is determined to be willful on the part of the taxpayer, that they willfully failed to file an FBAR, the penalty can be the greater of $100,000 per year or 50 percent of the account balance each year.”
Behling noted that the FBAR is not a tax filing but falls under a different statute, Title 31. “Title 26 is a rather typical tax statute,” he added. “If you never file a return, there’s never a statute of limitations. It doesn’t begin to run until you file a return. And if it’s fraudulent, even if you file a return, there’s no statute [of limitations]. In the FBAR world, which is Title 31, there’s a six-year statute for the imposition of penalties, so every six years a statute runs. For instance, if you go back to 2004, you would have had to file your 2004 FBAR in 2005. If you add six years to 2005, it’s gone because it expired in 2011. The 2006 is due in 2007, so the 2006 FBAR is expiring. As time marches on, the ability of the IRS to impose penalties is going away, unless the taxpayers are still not compliant, which they may or may not be. So the IRS cannot sit back too long and wait because they’re going to lose the FBAR statute. Although they still may have the ability to collect taxes on fraud, on a bad tax return, they’re not going to have the ability to impose these huge penalties of 50 percent of the account balances, which is very substantial, especially if it’s for a multiyear period. Obviously, 50 percent a year, at anything more than a two-year period, results in a penalty of more than 100 percent of your account. In three years, it would be 150 percent of your account. If they find five years, you could potentially be facing 250 percent of your account balance.”