Due Diligence

by Brian Mahany

It’s a frigid 17 degrees in Minneapolis as I write this story. My weather app says its 38 degrees in St. Gallen, Switzerland (until recently the home of Wegelin bank), although Swiss bankers – and their U.S. customers – are the ones really feeling the chill today. The London based Financial Times ran a story yesterday titled, “Wegelin Aftershock Rattles Swiss Bankers.” In the story, the paper claims that the “U.S. purge shows no signs of easing with the Swiss system of secrecy in its sights.” The FT is completely correct in its analysis.

Until its recent guilty plea to charges of helping Americans evade taxes, Wegelin was the oldest bank in the world. The guilty plea lead to the bank’s immediate demise. A banking history that stretched all the way back to 1741 has been forever extinguished. It’s ironic how two world wars and several European revolutions failed to drive the bank out of business yet a couple prosecutors from Manhattan ultimately forced the bank to close its doors.

Swiss banking giant UBS paid a record breaking fine but managed to survive a criminal prosecution. Wegelin did not. With the IRS and US Department of Justice looking at several other Swiss banks including Credit Suisse, HSBC Private Bank, Zürcher Kantonal Bank and Julius Baer, the Swiss banking community is understandably worried.

So are the U.S. based customers with unreported Swiss accounts.

Owning a Swiss account is completely legal if properly reported. For most taxpayers, that means annual FBAR filings (and FBAR is Report of Foreign Bank and Financial Accounts which must be filed by June 30th each year with the IRS), noting the accounts of Schedule B of one’s income tax return and beginning last year, filing a form 8938 FATCA form. In other words, having a foreign bank or brokerage account just means filing more paperwork.

Some taxpayers are dual nationals or are foreigners simply working in the United States. Often these folks don’t understand the offshore reporting requirements. Other taxpayers, however, have long hid money from Uncle Sam in Swiss and other foreign accounts. Both groups need to worry.

As noted in the Financial Times, the U.S. government shows no sign of letting up in its war against unreported foreign accounts. This is especially true with Swiss accounts although the IRS has also been looking at banks in Israel, China, India, Liechtenstein and other countries.

Many Americans have simply repatriated their money in anticipation of being discovered. That strategy may not work either, however. The IRS has insisted that Swiss banks give records of Americans holding accounts for prior years. Swiss and US authorities have not yet agreed on a framework on how to accomplish that but are close.

Why is this important?

The IRS has said that so called quiet disclosures won’t eliminate penalties. That means that quietly bringing your money back into the US won’t eliminate penalties and maybe even criminal prosecution. Those penalties can be the greater of $100,000 per year or 50% of the highest account balance per each year an account was not reported. A $200,000 account could theoretically rack up $400,000 in penalties since the IRS typically looks back 8 years!

There is an amnesty program available for most taxpayers. Those folks who have small accounts (under $75,000) or can prove that their failure to report was not intentional may get a better deal outside of the traditional amnesty scheme. (For more information about the amnesty program – called the Offshore Voluntary Disclosure Program – use our blog search bar in the upper right corner of Due Diligence and type in “OVDI” or “FBAR.”)

If you have an unreported Swiss or foreign account, time is running out to come into compliance. Although the amnesty program technically has no end date, the IRS has made it clear that amnesty is off the table if they get your name first from a foreign bank or government. The race to come into compliance before the IRS finds everyone’s foreign account has begun.

The tax lawyers at Mahany & Ertl have helped many taxpayers with a wide variety of foreign reporting matters including FBAR filings, tax amnesty applications, FATCA compliance and foreign gift and corporation returns. In most instances, services can be handled for a reasonable flat fee.

For more information, contact attorney Bethany Kroes at bckroes@mahanyertl.com or by telephone at (414) 223-0464. All inquiries are protected by the attorney – client privilege and kept in strict confidence.

Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and our satellite office in San Francisco, California. Services available worldwide.