The U.S. Deal with Switzerland and UBS -- Good Deal or Bad Deal?

As revised 8/20/2009 8:00 am.

Some pundits are already speculating that the deal the U.S. got was not so good. At the surface, it does not look all that good. The U.S. wanted 52,000 names and is getting 4,450 (approximately) in addition to those it already received (perhaps 250). That's less than 10% in of the claimed UBS account universe.

Now let's scratch the surface. The agreements as released do not state the criteria that will be used to identify the 4,450 (approximate) that UBS will disclose. The criteria are set forth in an annex to the agreement that will be release in 90 days, well after the current voluntary disclosure initiative has closed (on September 23, 2009). Without the criteria, UBS' U.S. account holders will not know whether they have drawn the black bean. Each UBS U.S. depositor who has not already joined in the IRS' voluntary disclosure program will not have certainty that his name and account(s) will not be picked. It is true, that the letter UBS is required to use to notify the account holders who draw the black bean will notify the account holders that they can still get in the program. But, the program only lasts through September 23, 2009, and it appears that the picking of names will extend beyond that date. IRS Commissioner Shulman has confirmed that the voluntary disclosure program will be open only for clients who receive UBS letter notices prior to the September deadline.

Moreover, there will be criteria which probably is designed to get the biggest, most blatant abusers. It has been speculated that the criteria will include accounts with entities as an additional layer of secrecy and threshold dollar amounts. But the IRS press release yesterday cautioned that (IR-2009-75)

The IRS will receive information on accounts of various amounts and types, including bank-only accounts, custody accounts in which securities or other investment assets were held and offshore company nominee accounts through which an individual indirectly held beneficial ownership in the accounts.

Still, you can be sure that the IRS will design the criteria to pick up the big abusers, sort of like its DIF sampling techniques for auditing (except probably much more focused). So, perhaps -- and I too speculate here -- on a dollar tax-evaded weighting, perhaps the IRS will pick up well in excess of 50% of the loot on the table simply by careful selection of the criteria. This careful selection is implied by the indication that some $18 billion is involved under the criteria selecting the 4,450 accounts. The average account, therefore, is over $4 million. This does not indicate that there was a single selection criteria of a threshold dollar amount because there are undoubtedly other criteria (use of entities to further obscure the trail). And, besides criteria designed to identify the worst abusers, the IRS may also want to at least hold out the possibility that there will be some random sampling, so that those with direct accounts below whatever the general dollar threshold is (say $2,000,000) cannot rest easy and will still have an incentive to get into the voluntary disclosure program. In this regard, the criteria will not be released for 90 days, well after the voluntary disclosure program has ended.

Also, an essential part of the voluntary disclosure program and the names that get targeted by this round of UBS turnovers will be to learn the identities of the as many of the U.S. taxpayers' enablers that the U.S. can then bring to justice -- at least the most abusive of the lot. There will be lots of tentacles into U.S. lawyers, financial advisors and others who, like ordinary tax shelter promoters, raked off their share of the taxes that should have been paid to the Government. My gut tells me that many of these enablers are probably not resting easy, particularly because there is no voluntary disclosure for them that will negate criminal prosecution or mitigate any civil penalties that might apply. Moreover, if the U.S. gets to these enablers, the Government might sweep up many more U.S. taxpayers who were assisted by these enablers.

Finally, and perhaps most importantly in the long run, there is a breach in the dam because the Swiss Government has decided that its double tax treaty is more flexible than it had imagined before. The strict definition of tax fraud to permit disclosure under the treaties is being relaxed. And, the agreements contemplate that the U.S. will be able to make similar exchange of information requests on the basis of similar criteria against other Swiss banks involved in UBS-type shenanigans (probably all of them to some degree or another). And, as the Swiss feel similar pressures from other organized and powerful countries, its wall of secrecy is likely to erode even more.

So, bottom line, I think these developments are good for the U.S. Large goals often are achieved in increments. And this particular increment is not just incremental -- it is a big jump.