A few days ago, it was reported that a full one-third of Swiss banks (some 106) sought to join the Department of Justice (DOJ) program which offers a non-prosecution agreement to the banks that opt in, in exchange for information about the banks’ cross-border business for U.S.-related accounts and the payment of a penalty based on when the U.S.-related accounts were opened and the highest balances in them.1 The clear purpose of the program is to continue the five-year DOJ crackdown on offshore tax evasion and offer incentives to Swiss banks to reduce their exposure to U.S. enforcement efforts in exchange for the U.S.-related account information.  Many participating banks have sent letters to their U.S. customers encouraging them to make voluntary disclosures and/or are closing their accounts.  Stopping offshore tax evasion is also a key component of the Internal Revenue Service’s (IRS’s) ongoing compliance and enforcement efforts according to new IRS Commissioner John Koskinen.  DOJ will use the information it gathers from the Swiss bank disclosure, among other things, to trace money flows to other banks in Switzerland or elsewhere around the world, to open new doors for DOJ enforcement, and to provide new opportunities for the IRS to identify and punish more U.S. taxpayers who have yet to find their way into one of the IRS disclosure programs.

As we have seen already, DOJ has pried open the doors to information from large international banks with Swiss headquarters or affiliates, Swiss cantonal banks and other Swiss banks with no U.S. offices or presence.  It also has gained information and made cases against other foreign banks in jurisdictions outside of Switzerland and pursued records from institutions in other jurisdictions, such as in the Caribbean and India.

Despite the commitment of resources by DOJ and IRS in this multi-year onslaught into offshore evasion and the successes the government has achieved in court, the number of U.S. taxpayers who have come forward under the IRS’s offshore voluntary disclosure programs, although extremely significant, demonstrates that there is a long way to go.  DOJ’s Swiss bank program has the capacity to uncover large numbers of still non-compliant U.S. taxpayers. With these events rapidly unfolding, the remaining non-compliant U.S. taxpayers need to thoroughly evaluate and consider their options.  Those who moved funds from one Swiss bank to another or from a Swiss bank to another offshore bank since August 1, 2008, will be prime candidates for prosecution or civil tax audit, with possibly severe penalties depending on the facts of each case.

In prior GT Alerts,3 we have described the offshore voluntary disclosure programs that were available to avoid criminal prosecution and provide reduced tax penalties.  The 2012 Offshore Voluntary Disclosure Initiative (“OVDI”) remains available today to these non-compliant taxpayers as long as they can satisfy the admission requirements.  One way they can fail these requirements is if DOJ or the IRS has already obtained information about their tax non-compliance from the banks, a third party, a whistleblower, a summons, etc.  Therefore, time is not on the taxpayer’s side in taking the first steps to enter OVDI before the participating Swiss banks start disclosing information about their accounts.  The same is true for information that may be disclosed to the government from other banks outside of Switzerland.  This is a particular peril as the Foreign Account Tax Compliance Act (FATCA) regime comes into effect and more countries enter into Tax Information Exchange Agreements (TIEA’s), Intergovernmental Agreements (IGA’s) and tax treaties with the U.S. that include enhanced information exchange provisions.