In my last post, I discussed the possibility that Bitcoins and other virtual currencies could replace Swiss bank accounts as the tax havens of the future. Recent developments in the government’s war on offshore accounts suggest that taxpayers bent on avoiding detection of their assets will need to find a new vehicle soon.
The government’s aggressive steps to stamp out the use of bank accounts in Switzerland and other tax havens have been well documented, including here and here. To summarize, in 2008, the government initiated a criminal investigation against Swiss banking giant, UBS UBS +0.34%. This investigation ultimately led to a deferred prosecution agreement with UBS pursuant to which the bank paid $780 million and disclosed the identity of approximately 4,500 U.S. accountholders, as well as the criminal prosecution of one Swiss bank (Wegelin & Co.) and numerous taxpayers, bankers and other professionals.
The IRS leveraged the UBS investigation and the announcement of criminal charges against several U.S. accountholders by instituting the Offshore Voluntary Disclosure Program of 2009, followed by the Offshore Voluntary Disclosure Initiative of 2011 and the Offshore Voluntary Disclosure Program of 2012. These programs incentivized taxpayers to disclose their offshore accounts; file amended returns; pay back taxes, interest and penalties; and pay significant (albeit significantly reduced) penalties based on the size of their previously undisclosed account(s). In exchange, participants received both certainty regarding the financial penalties they would incur and assurances that they would not be referred for prosecution. According to a March 2013 GAO study, these programs generated approximately 38,000 disclosures and well over $5 billion in taxes, interest and penalties.
The continued success of the current OVDP depends on the public perception both that there is a significant risk of detection and that the consequences of not disclosing offshore activities will be harsher than those associated with making a voluntary disclosure. Over the past several weeks, the government has taken several steps to enhance the “carrot” offered through the OVDP by flashing the “stick” associated with detection and punishment.
First, on August 29, the U.S. Department of Justice announced a program to entice Swiss banks to cooperate in its ongoing investigations and released a joint statement with the Swiss Federal Department of Finance which encouraged banks to participate in the program. The program allows Swiss banks that are not already under investigation to avoid prosecution by (a) paying substantial penalties based on the maximum values of previously undisclosed accounts and the dates on which they were opened, with higher penalties imposed with respect to accounts opened after the UBS investigation became public; (b) disclosing their cross-border activities; (c) providing detailed information regarding accounts in which U.S. taxpayers have an interest; (d) identifying other banks that transferred funds into undisclosed accounts or accepted funds from accounts that the institution had closed; (e) cooperating with treaty requests; and (f) closing accounts held by taxpayers who fail to comply with their reporting requirements. Banks that comply with these requirements will receive non-prosecution agreements. The program also gives banks that did not engage in misconduct with their U.S. accountholders the ability to obtain “non-target” letters by retaining independent examiners to analyze the extent of their U.S.-related accounts and their compliance programs.
In addition to the groundbreaking program designed to obtain additional information from Swiss banks, the DOJ has followed its more traditional playbook for increasing compliance by publicizing its criminal enforcement efforts. Thus, last week, the DOJ garnered significant publicity for tax evasion charges that it brought against Ty Warner, the founder of Beanie Babies, who agreed to plead guilty, pay a $53.6 million penalty and face prison time in connection with his previously undisclosed offshore account.
Finally, in addition to publicizing the increased risk of detection and the substantial penalties for non-compliance, the IRS has sought to breathe new life into the OVDP by rectifying uncertainty that flowed from its disqualification earlier this year of several Bank Leumi accountholders who had previously been admitted into the program. As I noted here, the IRS’s initial expulsion of those accountholders undermined lawyers and accountants who were encouraging their clients to participate in the OVDP by creating uncertainty regarding the protection from criminal prosecution associated with the program. While Assistant Attorney General Kathryn Keneally sought to reassure the public that the disqualified taxpayers would be treated fairly, the decision to reinstate these program participants will increase enrollment by providing maximum clarity and certainty.
In announcing the Swiss bank program, the DOJ made clear that it was hoping to identify non-compliant taxpayers, asserting that “[t]his program will provide us with additional information to prosecute those who use secret offshore accounts and those . . . who established and facilitated such accounts,” and encouraging “all U.S. taxpayers who hid behind Swiss bank secrecy laws or have undeclared offshore accounts in other foreign countries to come forward and resolve their outstanding tax issues with the United States.” Combined with the continuing implementation of the Foreign Account Tax Compliance Act (FATCA), the announcement of the DOJ program was designed to substantially reduce the options available to taxpayers who wish to move their accounts from financial institutions that are cooperating with the United States, including by imposing higher penalties on banks that sought to increase their “market share” of non-compliant accounts. It remains to be seen whether the government’s latest push will, indeed, lead recalcitrant taxpayers to come forward and disclose their offshore accounts, or whether they will simply go further underground and take more aggressive steps to hide their assets.