by Brian Mahany
Tax evasion? Tax Fraud? Are we just talking semantics? The answers to those questions is important for holders of unreported Swiss bank accounts.
The U.S. Bank Secrecy Act makes it a felony to have an unreported foreign account. The definition of “account” these days is pretty broad and includes not only checking and savings accounts in foreign banks but certificates of deposit (CD’s), brokerage accounts and even some insurance products with an investment component.
U.S. taxpayers must file an annual Report of Foreign Bank and Financial Accounts or FBAR form each year with the IRS. Failure to file an FBAR could result in a 5 year prison sentence and severe IRS civil penalties – the greater of $100,000 or 50% of the highest account balance per each year the account was unreported!
Of course, some taxpayers received bad accounting advice or simply did not understand the reporting requirements. For non-willful violations, the penalties are less severe. There is currently an amnesty program for those with unreported accounts – we have plenty of articles on the amnesty program (Offshore Voluntary Disclosure Program), just type “OVDI” into the search engine in the upper right hand corner of our Due Diligence blog.
Swiss law says tax evasion is not a crime. That’s important because under Swiss law because banks can only cooperate with foreign investigations if there is evidence that a crime has been committed and crime is defined by Swiss law, not the IRS.
Swiss and American officials have been in serious discussions since 2008 on how to better cooperate. The Swiss value their history and reputation for bank secrecy. Banking is one of the most important industries in the Swiss economy. The U.S. Department of Justice says, however, that Swiss banks have been actively help Americans commit tax evasion.
When the Swiss refused to cooperate in IRS investigations, the United States began indicting Swiss banks and Swiss bankers. The guilty plea last month by the world’s oldest bank, Swiss bank Wegelin, and a record fine imposed against Swiss banking giant UBS a few years ago has rocked the banking world. The banks are caught in the middle.
Switzerland might have great bank secrecy laws but the long arm of the law stretches pretty far when its Uncle Sam carrying the badge and gun. We previously reported how Swiss bankers can’t even leave Switzerland for fear that they will be arrested by other nations sympathetic to the U.S. Switzerland may not have to honor an arrest warrant for tax evasion but France, Germany, the U.K. and many others will.
Switzerland wants to cooperate and save face at the same time. Although everyone wishes the IRS would just go away, the banks and finance ministry are acutely aware that won’t happen.
Last week IFC News reported that the Swiss chief financial diplomat was given “verbal assurances” by U.S. Justice Department officials that the U.S. would “respect” Swiss law when asking for “bank client data of potential tax dodgers.” The story went on to say that nothing was in writing and the agreement could be “withdrawn at anytime.
That was our reaction. It doesn’t sound like much of an agreement but it does allow the Swiss to save face.
Swiss law now allows banks and government authorities to cooperate if the target of the investigation is under investigation for fraud. While tax evasion doesn’t exist as a crime under Swiss law, fraud is a crime everywhere.
What does this mean for holders of unreported Swiss accounts? We suspect that the IRS and DOJ will pull a page from their existing playbook. When investigating someone with an unreported foreign account, prosecutors and Treasury officials will simply dust off the U.S. criminal code violation for “conspiracy to defraud the United States.”
That sounds ominous but it really is a fancy way of saying tax evasion. Technically, they are two separate crimes but evidence of one is usually evidence of the other. In other words, the Swiss save face and the IRS gets its data.
This same tactic has already been used in investigating Americans with unreported Panamanian accounts and even extraditing Americans from Panama. The little Central American was once a haven for tax defiers (the IRS doesn’t call them protesters anymore) but after stationing a dozen IRS agents in Panama and using the fraud terminology, Panama is no longer the “pirate haven” it once was.
The news isn’t particularly good for Americans with unreported Swiss accounts. It is good news for Swiss bankers and the Swiss government, however. With the new FATCA law kicking in just 11 months from now, Switzerland had to do something. In this case they did nothing but declared victory because the United States had agreed to respect their law.
We have said this many, many times before but it bears repeating. If you have an unreported Swiss account – or an unreported offshore account anywhere – time is running out. The chances of getting caught have increased exponentially in recent years and are getting worse every day. There is the offshore amnesty program that gives you a “get-out-of-jail” card and a substantial break on penalties but the program, and several others, are only available if you come to the IRS first. If they get your name from a Swiss or other bank, its too late.
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and San Francisco, California. Foreign reporting services available worldwide.