Reports That the Swiss are Relaxing Tax Information Sharing Rules (7/6/11)

There are reports that the Swiss Government in moving / inching toward real exchange of information under its double tax treaties, which are (like the most U.S. tax treaties, based on the OECD Model Treaty). See Swiss Government Adopts OECD Standards On Bank Secrecy, Tax Offenses, Nasdaq (7/6/11) which reports in part as follows:

ZURICH -(Dow Jones)- The Swiss government Wednesday adopted standards on banking secrecy laid out by the Organization for Economic Cooperation and Development, or OECD, which will allow foreign authorities to pursue citizens suspected of using hidden Swiss accounts for tax evasion, and no longer only for outright tax fraud.  

MAIN FACTS:

* * * *

- In spring 2009, the Federal Council took the decision to adopt in future the international standards set out in Article 26 of the OECD Model Convention with respect to administrative assistance in tax matters. According to this, international administrative assistance should be possible not only in the case of tax fraud but also in the case of tax evasion and for tax assessment. The implementation of this decision requires appropriate wording in the double taxation agreements, or DTAs, with other countries. Up to now, over thirty DTAs have been adapted or renegotiated. Execution of administrative assistance must ensue under national law. To this end, the Tax Administrative Assistance Act is to be introduced.

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The State of the John Doe Treaty Request to Switzerland (6/1/11)

U.S. double tax treaties have an exchange of information provision. After the U.S. put the full court press on UBS (John Doe Summons and criminal investigation), the matter was finally resolved with a deferred prosecution agreement for UBS (with a whopping fine) and an agreement with the Swiss government that it would process a John Doe treaty request -- i.e., a request for U.S. taxpayers identified only by characteristics (e.g., size of account and use of non-U.S. entities)). Because, prior to that time, Switzerland interpreted the US - Swiss double tax treaty restrictively, this solution required a treaty protocol. At more or less the same time, efforts at more transparency from tax haven jurisdictions were pursued by OECD and G-20 Ministers of Finance. The result is that Switzerland is trying to give the appearance of opening the kimono. (That is different than actually opening the kimono.)

All of this is laid out (or at least suggested) in the Joint Committee on Taxation, Explanation of Proposed Protocol to the Income Tax Treaty Between the United States and Switzerland (JCX-31-11), May 20, 2011. I recommend this report as an excellent summary of the issues with Switzerland and an historical summary of the developments in this area.
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Swiss Announcement that It will Continue to Drag Its Feet, but Marginally Less So (Perhaps), on Double Tax Treaty Administrative Assistance Requests

The Swiss have announced a relaxed, perhaps, interpretation of their Double Tax Agreement ("DTA") Administrative Assistance provisions. The announcement is here. The action was prompted by OECD peer pressure. Basically, the Swiss signal tax cheats (and other criminals who desire, shall we say, discretion) that the Swiss will generally only respond to administrative requests only when the depositor and the financial institution is named in the request.  Often, as in the UBS / U.S. recent spat, the requesting treaty partner will not know the names of the depositors, so the general requirement that the requesting treaty partner name names -- generally -- means that the Swiss can continue to offer secrecy -- generally.
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Developments on the Swiss Tax Cheat Front

I suppose all readers of this blog probably already know about last Friday's decision by a Swiss court that holds illegal under Swiss law the agreement between the U.S. and Switzerland to turn over account information for a key category of U.S. taxpayers. For those who have not, I just point them to a some articles (see here and here) and make a few comments below.


I find it interesting the hyperbole that is surrounding this topic. For example, this posting on swissinfo.ch says that the president of Switzerland's Federal Administrative Court is looking to Parliament to resovle the issue of "whether tax evasion was a criminal offence." The reference is the interface of the Swiss law with the exchange of information provision in the double tax treaty with the U.S. The interesting quote is:

Bandli stressed that the cabinet was not the proper body to make that decision, which would effectively quash the principle of banking secrecy.

As I read this, the startling claim is that Swiss bank secrecy is all about enabling depositors to evade tax in other countries. I would have thought that there are plenty of rogues and brigands who have nontax reasons to hide assets (people do find other ways than tax to cheat and steal) and that Switzerland would continue to be a safe haven for them. But, of course, enabling depositors to cheat the fiscs of other countries is a major part of Swiss banks business. So, opening the kimono for tax cheats could have a major economic effect on Switzerland's ability to charge more for services than they are worth without the value added service of assisting them to cheat on their taxes.

United States and Swiss Confederation Release Criteria for Disclosing Names

This blog was updated on November 18, 2009

The criteria for the Swiss and UBS to apply in disclosing accounts held by U.S. persons is set forth in a document released yesterday. The criteria document is here; a Swiss Government chart of the Agreement titled "The Annex to the UBS Agreement at a Glance is here. The criteria document is an annex to an agreement makes the IRS request under the double tax treaty and interprets the Swiss obligation under the treaty broader than the Swiss have applied it in the past. That agreement is here. Accordingly, I think it is helpful to first summarize the key points of the agreement that might be relevant to the criteria and then summarize the annex which sets forth the criteria.

The key points of the agreement from my perspective for the present discussion of criteria are:

1. The agreement is the IRS request under the double tax treaty for information and documents from UBS, and the Swiss Confederation is required to process the request under the criteria set forth in the Annex. (Article 1.) However, in a declarations page attached to the agreement, the following is agreed:

Swiss Confederation declares that it will be prepared to review and process additional requests for information by the IRS under Article 26 of the existing Tax Treaty if they are based on a pattern of facts and circumstances that are equivalent to those of the UBS AG case.

I think this means that a similar request can be made with respect to other Swiss banks.

2. The parties agree to signing a new protocol to the existing double tax treaty. (Article 2.) The protocol is here. The following appears to be the key provision (Article 3 amending Article 26 of the double tax treaty):

5. In no case shall the provisions of paragraph 3 be construed to permit a Contracting State to decline to supply information solely because the information is held by a bank, other financial institution, nominee or person acting in an agency or a fiduciary capacity or because it relates to ownership interests in a person. In order to obtain such information, the tax authorities of the requested Contracting State, if necessary to comply with its obligations under this paragraph, shall have the power to enforce the disclosure of information covered by this paragraph, notwithstanding paragraph 3 or any contrary provisions in its domestic laws.

Now, turning to the Criteria Annex, the key criteria are:

1. The IRS does not have to provide the names of the U.S. persons in order to make the request. (Paragraph 1.) This provision is, of course, key, since the IRS does not know the names and seeks to get the names.

2. The request is to identify individuals in the following categories (these are exact quotes from the document):

A. US domiciled clients of UBS who directly held and beneficially owned "undisclosed (non-W-9) custody accounts" and "banking deposit accounts" in excess of CHF 1 million (at any point in time during the period of years 2001 through 2008) with UBS and for which a reasonable suspicion of "tax fraud or the like" can be demonstrated, or

B. US persons (irrespective of their domicile) who beneficially owned "offshore company accounts" that have been established or maintained during the period of years 2001 through 2008 and for which a reasonable suspicion of "tax fraud or the like" can be demonstrated.

Note that there are some quotation marks in the provisions that indicate special definitions later in the agreement.

3. Parsing 2A, the U.S. persons fall into the following categories based on other provisions of the agreement.

a. All accounts for U.S. domiciled persons having CHF 1 million at any point during the period 2001-2008 if there is a reasonable suspicion of tax fraud or the like. This is the basic agreement, but paragraph 2a seems to expand the disclosure to include accounts of U.S. domiciled persons with CHF 250,000 or more during the relevant period where "tax fraud or the like" is present. Of course, the key question is what is "tax fraud or the like." The conduct is a "scheme of lies" which a footnote describes as follows:

n1 Such "scheme of lies" may exist where, based on the Bank's records, beneficial owners (i) used false documents; (ii) engaged in a fact pattern that has been set out in the "hypothetical case studies" in the appendix to the Mutual Agreement concerning Art. 26 of the Tax Treaty (for example, by using related entities or persons as conduits or nominees to repatriate or otherwise transfer funds in the offshore accounts); or (iii) used calling cards to disguise the source of trading. These examples are not exhaustive, and depending on the applicable facts and circumstances, certain further activities may be considered by the SFTA as a "scheme of lies".

In addition, such conduct may be present where the U.S. domiciled person has failed to provide a Form W-9 for a period of at least 3 years (including 1 year covered by the request) and the UBS account generated revenues of CHF 100,000 on average per annum for any 3-year period that includes 1 year in the period 2001-2008.

b. U.S. persons (regardless of domicile) who beneficially owned "offshore company accounts during the period 2001-2008 for which there is a reasonable suspicion of "tax fraud or the like"). However, accounts that were below CHF 250,000 during the entire period are excluded. The "scheme of lies" is included in this group, again with a footnote definition as follows:

n3 Such "scheme of lies" may exist where the Bank's records show that beneficial owners continued to direct and control, in full or in part, the management and disposition of the assets held in the offshore company account or otherwise disregarded the formalities or substance of the purported corporate ownership (i.e., the offshore corporation functioned as nominee, sham entity or alter ego of the US beneficial owner) by: (i) making investment decisions contrary to the representations made in the account documentation or in respect to the tax forms submitted to the IRS and the Bank; (ii) using calling cards / special mobile phones to disguise the source of trading; (iii) using debit or credit cards to enable them to deceptively repatriate or otherwise transfer funds for the payment of personal expenses or for making routine payments of credit card invoices for personal expenses using assets in the offshore company account; (iv) conducting wire transfer activity or other payments from the offshore company's account to accounts in the United States or elsewhere that were held or controlled by the US beneficial owner or a related party with a view to disguising the true source of the person originating such wire transfer payments; (v) using related entities or persons as conduits or nominees to repatriate or otherwise transfer funds in the offshore company's account; or (vi) obtaining "loans" to the US beneficial owner or a related party directly from, secured by, or paid by assets in the offshore company's account. These examples are not exhaustive, and depending on the applicable facts and circumstances, certain further activities may be considered by the SFTA as a "scheme of lies".

Also included is any submission of incorrect or false documents. Finally, included are accounts in which the U.S. person has failed to prove compliance with statutory tax reporting requirements with respect to the offshore company account (requiring the depositor to provide a consent to permit the Swiss tax authority to request a copy of the relevant FBAR from the IRS and failing such consent providing guidelines for disclosure to the IRS).

JAT comment: Of course, in the voluntary disclosure initiative that closed on 10/15, the IRS learned many of these names and, I suspect, most of them that relate to UBS. Certainly UBS depositors that fit the criteria -- which had been anticipated among those who practice in this area -- should have joined the voluntary disclosure program so that the disclosure under the treaty is not particularly important to them. But, I am sure that there will be enough who did not disclose to give the IRS some good targets to make a public deterrence statement via indictments and convictions.

Swiss Release Criteria for Disclosing Names

The reports are coming in that the Swiss have released the criteria for disclosing the approximately 4,450 names related to UBS accounts. I provide links below for some news reports that include reports as to the selection criteria. As I parse these reports, the criteria apply for the period 2001-2008 and are:

1. Accounts in the name of offshore companies controlled by U.S. persons. I presume this includes any type of entities, such as LLCs, trusts, etc.). There seem to be no amount limits to this type of disclosure.

2. Accounts in the names of U.S. persons (any one of the following criteria may result in disclosure)

(a) with more than 1,000,000 Swiss francs (US $ equivalent varies depending upon exchange rate, but for example it is reported that this amount was USD $600,000 in 2001 and USD $900,000 in 2008).

(b) with more than 250,000 Swiss francs if they involve "fraudulent behavior" (such as falsifying documents). It is unclear what showing of fraudulent behavior is required and how the Swiss might know of it, but perhaps the inquiry will be whether there is some indication from the financial institution's files as to fraudulent behavior; in other words, it is not clear whether there is some affirmative requirement to do more than review the files for the indication of the conduct).

(c) with annual earnings of more than 100,000 francs.

The first 400 will be selected by end of the week. I am not sure exactly what selection means. I do know that a number of account owners have already received letters that indicate that their accounts were on the list.

These criteria seem to apply -- at least for now -- only to UBS.

I do plan to update this blog as clarifying information comes to me.

NYT Article

WSJ Article

See also related DOJ Tax Announcement crowing over the release, although not announcing the criteria.

Reports of Switzerland Conversion Experience are an Exaggeration

I have previously here invoked the famous quote of Samuel Clements' dba Mark Twain for claims that are more smoke than substance. I invoke it again to address the notion that Switzerland has seen the light and will join the civilized world -- at least that portion of it that the OECD here influences (which in the tax world is substantial) -- to give more transparency with respect to taxes of other countries. Joann M. Wiener has an interesting and excellent article here titled "Switzerland, No Longer a Tax Haven?" She addresses how Switzerland with a stroke of a pen can give the appearance but not the reality of legitimacy to its continuing, profit driven, need to enable tax evaders. Switzerland has demonstrated over and over that it will protect its premium franchise in the tax haven business, so that it can continue -- perhaps not at the same level -- to enable taxpayers in other countries evade taxes for a fee that includes a healthy share of the taxes evaded for its enablement services.

Get In Line Brother #22 - New IRS FAQ on UBS Accounts

On August 25, 2009, the IRS added a new FAQ to its FAQs on the voluntary disclosure initiative for foreign bank accounts. The FAQs as thus supplemented are here. The new FAQ is short, so I will just quote it verbatim:

Q52. Are UBS account holders eligible to make a voluntary disclosure under the IRS’s offshore Voluntary Disclosure Practice (VDP) announced on March 23, 2009, and set to expire September 23, 2009?
Yes, provided that the UBS account holder is otherwise eligible under the VDP. However, a UBS account holder becomes ineligible to make a voluntary disclosure under the offshore VDP at the time the IRS receives information from any source, including from the Swiss Federal Tax Administration (“SFTA”), UBS, an informant, or otherwise, relating specifically to the account holder's undisclosed foreign accounts or undisclosed foreign entities.
As part of the agreement with Switzerland and UBS announced by the IRS and the Department of Justice on August 19, 2009, UBS will be sending notices to account holders indicating that their information may be provided to the IRS under the agreement. If a UBS account holder gets this notification from UBS before September 23rd, this notification will not by itself disqualify the account holder from making a voluntary disclosure under the offshore VDP by the September 23rd deadline. Although many of these notices will not be sent by UBS to account holders until after September 23rd, the September 23rd offshore VDP deadline applies to all UBS account holders even if they have not received a notice by that date.

UBS account holders are thus well advised to Get In Line Brother.

Persons with foreign bank accounts, particularly Swiss bank accounts in banks other than UBS, should also seriously consider the offer, given the uncertainties of the effects of Switzerland's reinterpretation of its exchange of information obligations under the double tax treaty.

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.

Get in Line Brother #21 - US - Swiss - UBS Agreements

The Agreements -- or at least some of them -- have been made public. The IRS summary announcement is here. I have the documents underlying the announcement and will post some analysis later today. Key summary points for now, however, are:

• The IRS will make the requests pursuant to the double tax treaty between the U.S. and Switzerland.

• Apparently the requests will be by categories that UBS has estimated will produce about 4,450 names over a period of about a year.

• The account holder will be notified of UBS's intent to deliver the information and documents requested and will have the right to pursue relief from the Swiss authorities. Given the nature of the agreements, however, pursuing this relief might be tilting at windmills, but could slow the actual turnover down somewhat.

• The account holders will also be notified that, should they pursue this relief, U.S. law requires that they must notify the United States that they are doing so. So, provided this group follows the law, then they will self-identify themselves to the IRS.

• Finally, and most importantly, U.S. persons whose identities and information are disclosed pursuant to this process (i.e., not previously known to the IRS) still have the opportunity to join the voluntary disclosure program. Here is the pertinent part of the notice to account holders that the IRS and UBS agreed upon:

Under the terms of the voluntary disclosure initiative, as explained by the IRS in subsequent guidance, there is still an opportunity for you to make a voluntary disclosure, but that opportunity will be lost upon the provision of your account data to the IRS in response to the treaty request. Accordingly, if you are considering making a voluntary disclosure, it is important for you to do so now. The IRS has stated that a voluntary disclosure will be considered timely as soon as a taxpayer identifies himself and expresses an intent to disclose, even if the taxpayer has not yet completed amended or delinquent returns. For details and further information on this offshore voluntary disclosure practice or the more general voluntary disclosure practice, please visit the IRS website, including at: http://www.irs.gov/newsroom/article/0,,id=210027,00.html.

Get in Line Brother and Sister.

Note also the links to the right of this blog to other IRS resources on the voluntary disclosure program. Readers should also note that the IRS revises the FAQs relating to the voluntary disclosure program, so it is worth checking back from time to time. The FAQs has a list of the changes made on the periodic revisions at the top of the FAQs.

Get in Line Brother #20 - Other European Banks

The Wall Street Journal has an article this morning here titled More Banks in Europe Identified in Tax Probe. The Swiss banks other than UBS mentioned in the article are: Credit Suisse Group AG, Julius Baer Holding AG, Zürcher Kantonalbank and Union Bancaire Privée, known as UBP.

A few other notable quotes from the article are:

Early on, Justice Department prosecutors viewed UBS as a "stalking horse" case, which they could use to prod other banks to drop their business of helping rich Americans hide income from the IRS, according to people close to the case.

In the process, government officials hoped they could induce alleged tax evaders to come forward to pay their taxes and provide information about bankers, accountants and others who helped them set up their offshore accounts.

Lawyers following the UBS settlement now are watching to see whether the settlement establishes a blueprint for how the IRS can obtain information in the future from Swiss banks.

Read more »

Get in Line Brother #19 - OECD Report on Information Sharing

The influential OECD has issued a report, called a Background Information Brief, titled Overview of the OECD's work on Countering International Tax Evasion, dated 8/14/09. The report can be viewed here. The report chronicles the OECD's continuing efforts to convince member and non-member countries that transparency through sharing tax-related information is in their interests. The data in the report probably is not useful or particularly enlightening for most U.S. taxpayers, even those keenly interested in hiding their assets and income from the IRS. The report, however, should be read by students interested in this area and by advisors to those U.S. taxpayers because the trend is decidedly against those jurisdictions that offer safe and tax-secret repositories of financial resources.

Get in Line Brother #18a - the McCarthy Plea

We have another plea in the UBS mess. One John McCarthy has pled. In this blog and some subsequent blogs, I discuss a few points from the plea that I think are interesting.

1. Most importantly for those with foreign accounts who are considering joining the voluntary disclosure program, in announcing the plea, the IRS CI Chief cautioned that the McCarthy prosecution is "the tip of the iceberg." The IRS already has a number of names from UBS and is about to get many thousands more UBS names. Moreover, as I have previously noted, the Swiss justifications under the Swiss-U.S. double tax treaty would seem to permit similar disclosures by other Swiss banks. And, of course, the problem is not just a Swiss problem. All undeclared foreign bank accounts create great risk. I think it would be imprudent to assume that this is a Switzerland only or UBS only initiative.

2. The plea is in the Central District of California rather than in Florida which has been the center of DOJ's juggernaut against UBS, at least in terms of public activity. I speculate that this is an attempt by the Government to disperse these cases for even greater publicity and perhaps logistical reasons of just processing the number of defendants that will ultimately be involved. The current round of cases all appear to arise from the disclosures UBS made earlier in February. So, with these disclosures, the IRS and DOJ Tax can deliver up to a local U.S. Attorney office a package sufficient to coax an easy and relatively quick plea from the target, soon to be defendant. Indeed, I would not be surprised if DOJ Tax is not wanting to get as many pleas as quickly as possible to bolster the voluntary disclosure initiative and therefore may be making plea deals now that will not be available later.

3. Unlike the earlier pleas which were to tax perjury (§ 7207(1)), this plea is to one count "charging a violation of 31 U. S. C. §§ 5314 and 5322(a) , and 31 C. F. R. § 103. 24 for the year 2004." (Plea ¶ 2.) The elements of the FBAR failure to file crime are (Plea ¶ 2):

(1) defendant must have had a financial interest in, or signature or other authority over, a financial account in a foreign country with an aggregate value of more than $10, 000 at any time during 2004; (2) defendant must have failed to file, with the Department of Treasury, a Report of Foreign Bank and Financial Accounts (Form TD F 90-22. 1 "FBAR") , for the calendar year 2004, on or before June 30, 2005; and, (3) in failing to file the FBAR for 2004, defendant must have acted willfully.

4. In this context involving legal source income, the FBAR serves as a complement to the income tax system by encouraging taxpayers to report income from the foreign accounts. Not surprisingly, McCarthy's conduct implicates several tax crimes (evasion § 7201, tax perjury § 7206(1), probably tax obstruction § 7212(a), and others), as well as FBAR failure to file crimes for other years. McCarthy thus agreed to pay the civil tax fraud penalty on his income understatements (civil tax fraud is the same as tax evasion with a lower clear and convincing burden of proof) and admitted he had willfully failed to file the FBAR for his UBS Swiss bank accounts during the years from 2003 through 2008 (meaning, I think, for the tax years 2002 through 2007). These uncharged crimes will undoubtedly be considered at sentencing, but I will address sentencing in a later blog. I should note, however, at this point that uncharged or dropped counts as a result of a plea bargain often does not affect sentencing at all.

5. The maximum period of incarceration for the count of conviction (FBAR failure to file) is 5 years. The fine can be up to the greater of $250,000 or twice the gross gain or loss resulting from the offense. Id. In the prior pleas that I have discussed in this blog, the plea was to one count of tax perjury (§ 7206(1)) which carried a maximum period of incarceration of 3 years. Facially, therefore, the McCarthy plea carries the risk of a longer sentence (5 years rather than 3). The sentence will actually be governed by the sentencing court using the § 3553(a) factors and considering the Guidelines calculations. I will talk about these sentencing considerations in a subsequent blog, but for now I just want to emphasize that this plea ups the incarceration ante. Whether the potential for a 5 year sentence term as opposed to a 3 year term is material, of course, depends upon the sentencing factors. I shall cover them in the next blog.

To Be Continued . . . .

Get in Line Brother #17 - Thoughts on Swiss/U.S./UBS Settlement

Readers of this blog have surely read the recent barrage of publicity about the settlement between UBS and the U.S., arranged with the involvement of the Swiss Government. The terms of the settlement have not yet been disclosed, but the speculation is that perhaps 10,000 names out of an alleged 52,000 U.S. depositors in UBS accounts will be disclosed. Assuming there will be some method for selecting whatever the number of names, the further speculation is that the names will be those U.S. depositors who used entities to structure the deposits to add an additional layer of "privacy" / secrecy protection. So the simple U.S. tax cheat who just set up a UBS bank account in his or her name will escape disclosure, but the sophisticated tax cheat who interjected further smoke and mirrors by entities of little substance will be disclosed. (There is an interesting story behind all these machinations to obscure the relationship of a U.S. taxpayer to the foreign account, but I won't digress from the focus of this blog.)

I focus on the legal construct that the Swiss will reportedly use to justify the limited disclosures under the exchange of information provision of the U.S. / Switzerland treaty. Switzerland has long distinguished between tax evasion and tax fraud which in U.S. law are synonymous terms. Under Swiss law as interpreted (it's all about interpretation), tax evasion is not criminalized in Switzerland, but tax fraud is. I don't know the precise distinction between the two in Swiss law, but gather that tax fraud (crime) is some egregious form of tax evasion (otherwise civil). The egregious form involves more affirmative steps to hide, evade and deceive. So, looking at the speculated shape of the settlement, if the depositor was an ordinary tax cheat setting up a directly owned UBS account, his name and account will not be disclosed, but if the depositor injected gossamer entity structures to further obscure, his name and account will be disclosed. Apparently, Switzerland will now interpret the latter more egregious conduct as tax fraud, permitting it to disclose at the request of the United States.

If, indeed, this is a reinterpretation of Swiss law and mutual assistance treaties (or provisions of treaties), then the reinterpretation would logically apply not just to UBS but to all Swiss financial institutions. Some other Swiss financial institutions have apparently claimed that they are not like UBS (smaller and did not exploit their enablement activity on U.S. soil) and thus that their U.S. depositors' accounts will not be disclosed. (See the allegations in the Jeff Chernick indictment discussed here.) I am not sure that level of assurance can be given where entities are part of the structuring for the account. And, I expect that the IRS may be licking its chops to make the requests for mutual assistance with respect to other Swiss financial institutions.

From a longer perspective, it seems to me that the dam is breached. It may take a few years, but Switzerland will have to give up its lucrative status as enablers for U.S. and probably other country tax evasion (in the U.S. sense of the word). Tax evasion, of course, is not the only reason that the Swiss find it in their financial interests to assure secrecy for depositors. Secrecy is important for all sorts of rogues and scoundrels even when they are not evading tax. But perhaps this too is now at risk, which means that at least for a time the "smart" money of rogues, scoundrels and tax evades may be to seek other havens and enablers.

Finally, I do not mean to indict figuratively all non-Swiss depositors to Swiss bank accounts. There are undoubtedly many Swiss depositors who are not rogues, scoundrels or tax cheats and simply have or imagine that they have legitimate reasons to establish Swiss financial accounts which, in their minds, justify paying the Swiss the premiums for whatever they imagine the Swiss bank system offers them. But when, piece by piece, the rogues, scoundrels and tax cheats are stripped out of the Swiss financial system, I have no doubt that the Swiss financial system will survive but the heady days of excess profits from premiums for services to rogues, scoundrels and tax cheats may be over.

Get in Line Brother #5

We have previously blogged here the Department of Justice initiative to squeeze UBS for its alleged illegal assistance to U.S. taxpayers' tax evasion. The Wall Street Journal Law Blog reports here that, incident to the new negotiation of a tax treaty with the U.S., the Swiss Government wants relief for past sins (as well as continuing to hide the names of its clients). Specifically, it wants the DOJ John Doe Summons case dropped.

Here are the pertinent parts of a press release:

Meeting between President Merzand
the US Secretary of the Treasury
Timothy Geithner

Bern, 25.04.2009 -- Today President Merz met the US Secretary of the
Treasury Timothy Geithner on the fringes of the Annual Meetings of the Bretton Woods institutions in Washington. Mainly bilateral issues were discussed.


The focus of the discussions was the forthcoming negotiations between Switzerland and the US on a new double taxation agreement. resident Merz outlined to Treasury Secretary Geithner the decision of the Federal Council to extend international cooperation on tax issues and, to this end, to fully adopt the OECD standard. The negotiations on the new double taxation agreement will start in Bern on 28 April.

The situation concerning UBS in the US was also discussed during the meeting. In particular President Merz raised the issue of the pending civil action against UBS, through which the US tax authority, the IRS, is requesting the release of a large amount of data on clients. He expressed his hope to the US Treasury Secretary that a solution can be found for this matter no later than when the new double taxation agreement is to be put before parliament. There was agreement that a solution should be found rapidly which is equitable to both sides.

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Adresse für Rückfragen:
Roland Meier,
FDF Press spokesman,
tel. 079 208 12 87

In addition, independent of the UBS John Doe Summons initiative, Tax Notes Today reports that the IRS claims to already have the names of more than 250 tax evaders using offshore accounts and that there will be further initiatives beyond UBS.

I don't know the likelihood of the relief UBS is seeking. Those potentially at risk for these off-shore adventures with UBS as well as other foreign banks or intermediaries still have to face the very real and pressing question of whether to do a voluntary disclosure while waiting for this manna to fall from heaven (if it ever does or, if it does, it is less tasty than imagined). Taxpayers can get certainty at a significant financial cost via voluntary disclosure. Get in Line Brother.