Switzerland and the U.S. have agreed on a new Tax Information Exchange Agreement (TIA), which will further erode offshore banking secrecy. The new agreement will allow the U.S. greater access to banking records regarding American taxpayers with accounts in Switzerland. This is the latest in a chain of events that have dramatically threatened offshore bank secrecy, including the I.R.S. legal challenge against UBS , investigations of CreditSuisse and HSBC, and the agreement of many offshore jurisdictions to greater transparency. Domestically, Senators Levin and Baucus and President Obama have proposed wide-ranging anti-tax haven legislation, with significant new disclosure requirements and penalties. Americans who have relied on offshore secrecy to avoid getting caught by the IRS need to re-examine their strategies.
The terms of the new Swiss-U.S. TIA have not been officially released; however, they are said to follow the Model Convention with Respect to Taxes on Income and on Capital, released by the Organization for Economic Cooperation and Development (OECD) in 2008. Under the terms of that Model Convention, Switzerland would have to share banking information for acts that are considered criminal acts under both U.S. and Swiss law. Previously, only affirmative tax fraud was recognized as a criminal act in both countries. Non-disclosure of foreign income was not a serious crime in Switzerland. If the new TIA follows the terms of the Model Convention, Switzerland would now have to change its internal law to criminalize non-reporting of income. This is one ambiguity of the new TIA.
The Swiss have announced that they will only comply with specific requests regarding specific accounts, and not IRS “fishing expeditions” like the current “John Doe” summons the U.S. is seeking to enforce against UBS . This limitation is not, however, contained in the Model Convention. Thus, it is not entirely clear at this point what the reach of the new TIA will be. It is also not known whether the new TIA will only be prospective or whether it will require disclosure of past accounts. It should be noted that the new TIA will be subject to approval of the Swiss Parliament and the Swiss Federal Council, as well as public referendum in Switzerland, where challenges to traditional Swiss banking secrecy have been met with vigorous opposition.
Another open question is whether the new agreement will result in the IRS dropping its litigation against UBS in a Miami federal court. The IRS is demanding that UBS disclose the identity of 52,000 Americans with allegedly non-compliant accounts. Oral argument is scheduled in July. The Swiss have indicated that the new agreement will effectively settle that case, while American officials have stated that the litigation will continue and the IRS will pursue disclosure of the 52,000 Americans with offshore accounts.
In light of these events, Americans with non-compliant offshore accounts should consider voluntary disclosure before the IRS discovers their accounts. The IRS is offering a sort of amnesty to taxpayers who voluntarily come forward before they are discovered. The IRS’ Voluntary Disclosure Program offers reduced penalties and a promise of no criminal prosecution. However, this program expires in less than three months and will not apply to taxpayers once the IRS gets their names.
Such pre-emptive disclosure is best made by qualified legal counsel, experienced in offshore compliance and IRS negotiations. Rubinstein & Rubinstein can approach the IRS on your behalf, demonstrate proper current compliance and negotiate to avoid criminal prosecution and reduce fines and penalties for past non-compliance. Although fines and penalties may be significant, they pale before the consequences of an IRS criminal prosecution.
In addition, Americans with signature authority or other interest in a foreign bank or financial accounts in 2008 are required to file Treasury Form TD F 90-22.1, “Report of Foreign Bank and Financial Accounts”, also known as the “FBAR” , by June 30, 2009. The penalties for failing to file Form TD F 90-22.1 on time can be severe. Therefore, if you held an interest in a foreign bank or financial account in 2008, it is imperative that the IRS receives Form TD F 90-22.1 by June 30, 2009. Participating in the Voluntary Disclosure Program will also remedy FBAR non-filing.
Asher Rubinstein represents many American clients with offshore accounts, in connection with Voluntary Disclosure, FBAR filing and conversion to tax-compliant offshore structures. If you have a non-compliant foreign account, contact us before the IRS contacts you. Given recent events, discovery by the IRS is likely.