The secret Swiss bank account is the stuff of legend—or at least of TV shows, movies, and novels. A tiny landlocked country with few natural resources, Switzerland made a name for itself in the global banking industry, and one of its native sons, UBS, is among the world’s banking giants. While Switzerland is probably best known to the uninitiated, it is hardly alone either within Europe or worldwide as a place to safely hold undisclosed offshore accounts.
Or at least, it was.
Offshore banking was yanked to the forefront of the public consciousness temporarily during the 2012 U.S. presidential campaign, when challengers attempted to make much of Mitt Romney’s offshore assets. Of course, holding assets in foreign countries is not illegal per se, although as usual the devil is in the details. The first problem arises when those accounts are not disclosed to the IRS, which specifically inquires about foreign bank accounts as part of the federal income tax filing process. For four centuries the inviolability of Swiss banking secrecy was as solidly reliable as…well, as a Swiss watch. But for many U.S. taxpayers, that comfortable tradition has been abruptly consigned to the trash heap of history.
For whatever reason—blame it on the post-9/11 pursuit of terrorist financial networks or a revenue-starved U.S. government—the IRS in concert with the Department of Justice has now leaned heavily on Swiss banks, “urging” them to cooperate in the identification of undisclosed accounts belonging to U.S. taxpayers. That gentle encouragement came in the form of a December 31, 2013 deadline for over 300 Swiss banks to basically turn state’s evidence, throwing themselves on the mercy of the DOJ in the event there was “reason to believe” they might have violated U.S. tax laws and turning over account information and other details in return for non-prosecution agreements.
Banks will help the IRS before they help account holders
A full third—106 banks—have decided to cooperate. Those banks now face a fixed deadline—helpfully not disclosed by the IRS—to turn over information on those undisclosed accounts and pay the requisite fines. The penalties are 20 percent of the account value for accounts established prior to August 2008, rising to 30 percent for those opened between August 2008 and February 2009 and a hefty 50 percent for any opened subsequently.
The IRS has enlisted the help of those banks in another way: by dangling an incentive. Each bank can have its penalties reduced by a certain amount for each U.S. taxpayer that enters the Offshore Voluntary Disclosure Program—as long as the taxpayers in question enter the program before their information is turned over to the IRS. As such, an armada of letters has now been dispatched to certain U.S. holders of Swiss bank accounts by those banks, who are doing some urging of their own. While the suggestion to voluntarily comply with U.S. tax laws is hardly altruistic, it is nevertheless a highly advisable one.
The program is not exactly new. The aforementioned UBS in essence pled no contest to charges of abetting tax evasion and swallowed a $780 million fine in 2009, handing the IRS the names of 4,700 U.S. account holders in the process. Having loosed an impressive warning shot, the IRS then quite accommodatingly introduced the Offshore Voluntary Disclosure Program in three successive iterations. Not surprisingly, some 43,000 U.S. taxpayers applied and were accepted. Not only Switzerland’s largest bank succumbed to the DOJ, but also its oldest, Wegelin Bank, which incurred a $75 million penalty.
Offshore banking worldwide is under siege
The point is that the DOJ, which of course has the full weight of the U.S. government behind it, carries a tremendous amount of weight and flexes some sizeable muscles anywhere in the world. Swiss banking secrecy was not exactly the low-hanging fruit among offshore banks, so the odds that any other havens from the Cayman Islands to Lichtenstein will hold off the IRS are not worth the bet. Fair warning: Taxpayers are not the only ones being prosecuted. Tax advisors and other financial professionals along with bankers have faced charges as well.
The poster child for offshore banking prosecutions is Beanie Babies mogul Ty Warner, who made billions on his menagerie of stuffed animals and stashed tens of millions of dollars in Switzerland. Although he entered a guilty plea to charges of felony tax fraud and was subject to up to five years in a federal prison, Warner was surprisingly lucky and received only community service (accompanied by a substantial fine, of course). Other less fortunate and less well-known defendants have spent their time contemplating the walls of a prison cell rather than cleaning up parks and roadside trash.
Cooperating with the IRS is the key to damage control
The current version of the Offshore Voluntary Disclosure Program (OVDP) requires those accepted to amend their last eight federal tax returns and accompany each one with the Report of Foreign Bank and Financial Accounts (counterintuitively abbreviated as FBAR). The extra paperwork (and any additional tax that may result, plus penalties and interest) is not the end, however. The IRS will also levy a 27-1/2 percent penalty based on the highest balance in each undisclosed account.
Any taxpayer who receives a warning letter from an offshore bank should carefully consider applying to the OVDP, and should do so with dispatch: Once the bank discloses the taxpayer’s identity to the IRS, the opportunity for voluntary disclosure has passed. It is possible to fight the charges, but the odds of success are low. Also, anyone facing this situation should first discuss it with an attorney specializing and experienced in tax law. Non-attorney financial professionals such as an accountant or enrolled agent have no legal equivalent to attorney-client privilege, so anything disclosed to them has the potential to become evidence in criminal proceedings.