A new program allowing Swiss banks to cooperate with U.S. tax authorities means that the days of U.S. citizens successfully keeping their numbered Swiss bank accounts hidden from the prying eyes of the IRS could be coming to an end.
The U.S. Justice Department announced the program late last month, making it available only to banks that are not currently under criminal investigation by the Justice Department for their offshore activities (see Swiss Government Encourages Banks to Settle U.S. Tax Disputes). Under the program, banks will be required to agree to pay substantial penalties, make a complete disclosure of their cross-border activities, and provide detailed information on each account in which their U.S. taxpayer customers have a direct or indirect interest. Swiss banks would also be required to cooperate in U.S. treaty requests for account information, as well as provide detailed information on other banks that have transferred funds into secret accounts or that have accepted funds when secret bank accounts were closed. The Swiss banks also must agree to close the accounts of any customers who fail to come into compliance with their U.S. reporting obligations.
Despite the seemingly harsh regime, Paul Behling, a partner at the international law firm Withers Bergman, believes that many Swiss banks will take advantage of the new settlement program in the weeks and months ahead. That means time may be running out for U.S. taxpayers to make a voluntary disclosure under the IRS’s existing voluntary disclosure programs.
“Switzerland and the U.S. have been trying to fashion a manner that would allow banks that want to get out from under any possible criminal investigation to resolve any tax issues, and they’ve tried to do that by passing some legislation, but those attempts have failed in the past,” Behling told me in an interview last week. “In particular, the lower house of Parliament in Switzerland has pretty much rejected a couple of prior attempts. They’ve fashioned something which won’t require participation of the Swiss Parliament.”
He noted that the Swiss government has agreed that under the administrative assistance provisions of the current U.S. and Swiss tax treaty, banks can participate in the new program, so it doesn’t require any legislation. “This will not violate any bank secrecy laws as long as they do it within this program,” he said. “The program breaks banks up into a few classes. The 14 bigger banks in Switzerland that are currently under investigation by the U.S. aren’t eligible for the program, but that leaves about 300 other banks in Switzerland eligible for participation. If they participate, they basically will get a non-prosecution agreement as long as they comply with the terms.”
However, the non-prosecution agreement comes at a fairly substantial price, in terms of a civil penalty, Behling pointed out. “The banks will have to pay a penalty equal to anywhere from 20 to 50 percent of the highest balance that they’ve had in the account for U.S. taxpayers during the period 2008 through 2013,” he said. “The range depends on when the account was open. If the account was open before August of 2008, then the penalty is 20 percent. That date is critical because that’s the date basically when the U.S. and UBS started becoming very public in their criminal prosecutions, and the IRS feels that banks should have known better after August 2008 than to seek to help U.S. taxpayers avoid disclosure. So then accounts that were open before August 2008 will get a 20 percent penalty. After that, between August  and the end of February 2009, if the account was open it jumps to 30 percent. And accounts that were opened after February 2009 are going to be hit with a 50 percent penalty. That’s a pretty substantial penalty for the banks to pay.”
Still, it could be an attractive offer for many Swiss banks, which Behling noted have been struggling over the question of whether or not to open accounts for U.S. taxpayers. “They’re worried about prosecution,” he said. “Bankers are worried about traveling to the United States. People are closing accounts and moving money around, so this will allow the banks that want to participate to sort of remove that cloud. They’ll get a non-prosecution letter. If they disclose information and they never did anything wrong, part of the agreement allows the bank to give a report to the IRS done by an independent examiner that says there were no violations of U.S. law in the bank during this period. Then they will get what’s called a ‘non-target letter,’ which clears them too. One way or the other, either if you have some wrongdoing or you didn’t, by going through the procedures you can get either a non-prosecution agreement or a non-target letter, and you’ll be clear.”
The program could entice U.S. account holders as well as Swiss banks. “U.S. people that want to have deposits at that bank—if the bank still wants them as depositors—will be able to open and close accounts and transfer money without concern,” said Behling. “That’s from the bank’s point of view. From a U.S. person’s point of view, if people have moved money from one bank that was maybe under investigation to one of these smaller banks that were not under investigation because they thought they wouldn’t be caught if they moved the money and the banks haven’t turned over the data yet, now they may well get caught because one of the requirements to participate in the program is that you make these penalty payments. The bank makes a complete disclosure of all of their cross-border activities and they provide the U.S. government with detailed information on an account by account basis for any accounts in which U.S. persons have a direct or indirect interest, and they provide extensive information about moneys that were transferred into the account and moneys that were transferred out of the account, like where the moneys came from and where they went. If somebody is not going to be agreeing to comply with U.S. laws, in future they would have to close that person’s account.”
Indeed, the program may effectively force many U.S. account holders who have not yet made voluntary disclosures to finally come forward. “For U.S. people, if they haven’t made a voluntary disclosure, I think you can anticipate that the banks in the coming weeks and months will come to provide all this information to the U.S. government and disclose,” Behling warned. “And then of course you can only make a voluntary disclosure if the IRS doesn’t have your information. It’s not that they haven’t contacted you yet. The mere fact that they have your information in their data file will prevent you from making a voluntary disclosure, and the IRS has been very aggressive in the last few years of auditing people where it gets information about offshore accounts, in some cases initiating criminal prosecutions, in other cases initiating audits and imposing substantial civil penalties, depending on the facts of each case, of course.”
Behling believes that U.S. taxpayers who have not yet made a voluntary disclosure may have just a short period of time before the information starts flowing from the banks. “I think the Swiss Bankers Association has endorsed the agreement, the Swiss government has endorsed it and a lot of banks say this is good because it’s going to allow us to get back to banking business, to pure banking and not coming up with tax avoidance schemes to assist people,” he said. “Switzerland has been known for decades as a financial capital, and I think there’s been a dark cloud hovering over Swiss banking since 2008 and 2009. This allows a way for the banks to clear and move away from that cloud and get back to serious private banking. But it’s a potential problem for U.S. taxpayers that haven’t made a disclosure because once that information comes through—and it could start coming through in a matter of weeks, once they get into the data bank and with electronic transfer information, those data banks can be built up pretty fast—if you attempt to make a voluntary disclosure after your data has been provided, you’re going to get a letter of declination [from the IRS] saying, ‘Sorry, your request to participate in the voluntary disclosure is untimely.’ Which means they already have your name, thanks.”
The IRS may need to contend with a final rush of people trying to get into the voluntary disclosure program before it’s too late.
“Statistics indicate that there’s been somewhere around 40,000 people who have participated in the voluntary disclosure programs that are out there, and it certainly is projected that there are more than 100,000 U.S. people with accounts in Switzerland, and in other locations as well,” said Behling. “But just in Switzerland it’s at least 100,000, so there are probably 50,000+ people that haven’t gone through the formal disclosure. Now some of them may have attempted quiet disclosures. But there have to be tens of thousands of people that have done nothing, thinking that they’re in a small private Swiss bank someplace that the IRS isn’t going to get any information out of, as they’ve been focusing on the big 14 banks first and they haven’t gotten around to the smaller banks. Now with this agreement, the IRS doesn’t have to get around to the banks. It’s basically an open door to the 300 small banks that it’s not investigating, saying, ‘Come on in before we come after you and all is going to be good.’ You just have to pay a little penalty and give us some information. So I think the time is really running out for the taxpayers with accounts in Switzerland that have not amended the returns and done a voluntary disclosure.”
Behling says his own clients at his law firm are in compliance, but he plans to reach out to intermediaries, such as accountants, private bankers and other people in the finance and investment advice businesses who have clients who may not have complied, and encourage them to talk to their clients. “We’re happy to assist their clients with coming in and making a voluntary disclosure and getting clearance,” he said. “The sooner people do it, the better. There’s a clock, and I’m really not sure how many hours are left on it, but they are numbered.”
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