Reports are circulating that the governments of the United States and Switzerland are in negotiations toward ending US investigations of numerous Swiss banks for hiding assets from US taxation. Under this agreement, the US will not prosecute the Swiss banks, and the banks will provide information to the US about Americans with non-compliant accounts and pay large penalties. The US will then use the disclosed banking information to investigate and prosecute more Americans with undisclosed Swiss bank accounts.
This is reminiscent of the settlement agreed to by UBS in 2009. Under that agreement, the US dropped civil and criminal charges against UBS, which paid a fine of $780 million and provided once-“secret” banking data on 4,500 Americans with accounts at UBS. The information provided by UBS resulted in criminal charges against numerous US taxpayers who had UBS accounts that were not disclosed to the IRS.
It was the substantial presence of UBS in the United States that made UBS so vulnerable to US prosecution. With UBS branches in the US, employees in the US, substantial assets in the US, and a US banking license, the US Department of Justice (DOJ) had significant leverage over UBS and was able to coerce a settlement with UBS. Credit Suisse and Bank Julius Baer are likewise targets of DOJ investigations for providing similar “secret” bank accounts, and those banks´ similar presence in the US would likewise suggest that they would agree to a settlement under the terms currently being discussed by the Swiss and American governments.
An open issue is whether smaller Swiss banks, especially those without a presence in the US, would agree to these terms. It is possible that this will be a global settlement, since negotiations are at the governmental level and not with individual banks. The IRS might insist that the settlement cover all Swiss banks holding American accounts, including the smaller Kantonal and other banks without US assets or a US presence and would otherwise not be subject to IRS pressure to disclose accounts. This would dramatically increase the number of non-compliant accounts disclosed by the Swiss and would cover the flight of non-compliant accounts from UBS and large Swiss banks to smaller Swiss banks that occurred earlier in the IRS-UBS litigation.
US account holders at these smaller banks, which include the various Kantonal banks, should not consider themselves off the IRS radar. Even if these smaller banks do not avail themselves of the settlement, the American government still has significant tools to discover non-compliant accounts. These tools include a Tax Information Exchange (TIE) Agreement and a Mutual Legal Assistance Treaty (MLAT) between the US and Switzerland. Furthermore, US courts have issued “John Doe” summonses to foreign banks, most recently HSBC. These summonses demand banking information on a large class of unnamed Americans with accounts at the banks. In addition, banking data is also subject to theft by whistle blowers, who share the data with foreign governments. In recent years, theft of banking data occurred at LGT Bank of Liechtenstein, Julius Baer and HSBC. The recently enacted Foreign Account Tax Compliance Act (FATCA) also obligates many foreign banks to report information to the IRS. The cumulative end result is the death of offshore banking secrecy and an ever-wider IRS net exposing undeclared foreign accounts.
An agreement between the US and Switzerland would allow the Swiss banks to end the DOJ investigation and avoid prosecution. It would also free up US governmental resources; for example, the IRS would obtain information about US account holders without asking a court for a John Doe summons, and without proceeding on the diplomatic level with a TIE or MLAT. The banking data would be delivered to the IRS without a formal investigation, and the IRS could then devote increased resources to prosecuting Americans for tax fraud.
The agreement with the Swiss will likely serve as a template for other banks. For instance, HSBC is currently the target of a John Doe summons and IRS investigation for providing the same type of non-compliant banking services as UBS. The IRS is focusing on additional jurisdictions, most notably India, Israel, Panama, Hong Kong, Singapore and others. Such countries have even less banking secrecy than the Swiss, which suggests that banks in these countries would sign on to such an agreement and provide account information even faster than UBS. Similar agreements with other banks and other countries would, again, free IRS resources to focus on even more prosecutions against US persons with non-compliant foreign accounts.
Once these deals are finalized, the IRS will obtain foreign banking data with relative ease. There will thus be little incentive for the IRS to offer additional tax amnesties for US taxpayers with offshore accounts.
The resulting conclusion is that US taxpayers with undeclared foreign accounts, in Switzerland and elsewhere, should move quickly to take advantage of the current amnesty program, before the IRS learns of their accounts from other sources. The current opportunity expires on August 31, 2011. After that date, it is likely that the IRS will proceed against such account holders with relative ease, and with little mercy.