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Blake Christian
Blake Christian
Switzerland at War With U.S. Tax Officials

The Obama Administration is aggressively reviewing cross-border relationships and permanent and deferred tax-saving transactions of U.S. taxpayers with all countries. Whatís the impact?

July 30, 2009
by Blake Christian, CPA/MBT

The country best known for its centuries of banking, watch-making and neutrality in times of war has recently been battling the IRS and the Justice Department in order to retain their ultra-confidential banking relationships with the rich and famous. This battle relates to the IRS’ attempt to secure bank records for approximately 52,000 U.S. taxpayers held by Switzerland-based investment bank, UBS. UBS has already admitted criminal wrongdoing with respect to some of these accounts, which has put added pressure on the Swiss authorities to modify their rules.

In an attempt to defer prosecution in February, UBS agreed to pay a $787 million fine and hand over the names of 250 of their clients who have been accused of tax fraud. Despite this move, the Justice Department and the IRS continue to demand all 52,000 names and limit the amount of taxes lost to offshore accounts. It is unknown how the court proceedings will affect the final treaty negotiations.

Earlier this month Swiss officials threatened to intervene in the UBS matter and seize the data from UBS, rather than turn the documents over to U.S. tax and legal authorities. Certainly a bold move during a period when cooperation between the worldwide banking centers is even more important.

As a result of these recent developments, Switzerland’s long history of being THE place to stash your cash away from prying eyes of the tax authorities, business partners, creditors and soon-to-be ex-spouses may be running out of time.

The U.S. Treasury Department announced on June 19th that they reached an agreement with the Swiss government with regards to an increased information exchange of tax and financial data. The new agreement, which still requires it to be memorialized in the form of a Protocol agreement, seeks to increase the amount of information exchanged between the two countries for income tax purposes. It is estimated that the terms agreed to on June 19th will be incorporated in the formal Protocol within the next several months. However, with the tensions between the U.S. and Switzerland, the timeline may get stretched a bit.

The Obama Administration has also made clear that they will be aggressively reviewing cross-border relationships and permanent and deferred tax-saving transactions of U.S. taxpayers with all countries — particularly those with histories of abuse. The Administration hopes to decrease U.S. — Swiss tax fraud and limit the use of off-shore accounts through the signing of the June 19th Protocol agreement. The pending treaty revisions are meant to more fully incorporate Article 26 of the Organisation for Economic Co-operation and Development (OECD) Model Income Tax Convention, a set of international standards for the exchange of tax information, as compared with the terms of the current U.S. — Swiss treaty.

According to Treasury Secretary Tim Geithner, “This Administration is committed to reducing off shore tax evasion to help ensure that all U.S. taxpayers are playing by the same rules. This treaty will increase our ability to enforce our tax laws and will help bring an end to an era of offshore accounts and investments being used for tax evasion,”

This proposed Protocol and the pending treaty revisions have caused concern for individuals and financial institutions in both countries. Swiss law prohibits banks from sharing any of their client’s information, even with foreign governments, unless certain criteria have been met. In the current U.S.-Swiss tax treaty, put into effect in 1998, information exchange was limited to information that was deemed “necessary” in cases of tax fraud and to other cases relating to the enforcement of the treaty.

Conclusion

Unfortunately for the IRS, the Swiss have a much narrower definition of “necessary” for purposes of defining tax fraud, which does not encompass the U.S. definition of tax evasion. While some activities may be considered tax evasion under U.S. rules, they are often not viewed as evasion under Swiss rules. This discrepancy has allowed Swiss banks to legally refuse to exchange client information with the U.S. government, making prosecution very difficult.

The U.S. has also recently completed negotiations with both Gibraltar and Luxembourg to provide greater exchange of tax information. Therefore, the Obama Administration is putting their money where their mouth is with respect to going after the international “Tax Gap.”

Editor Note: In a major break in a massive tax-evasion investigation, UBS AG and the governments of Switzerland and the U.S. have reached a settlement that could force UBS to turn over thousands of identities of account holders, a Justice Department attorney told a U.S. District Court Judge on July 31.

Stuart Gibson, a Justice Department tax division attorney, did not detail the settlement in a conference call with Judge Alan Gold that included lawyers for UBS and the Swiss government. A hearing scheduled for Monday in Miami was postponed until Aug. 7, at which point more details are expected to be released.

The Internal Revenue Service has demanded the identities of 52,000 U.S. account holders at UBS. UBS and the Swiss government have claimed that turning over those names would violate Swiss bank secrecy provisions.

The IRS continues to release guidelines for U.S. taxpayers to file both delinquent and future Foreign Bank And Financial Accounts (FBAR) or risk incurring significant civil and/ or criminal penalties http://www.irs.gov/pub/irs-drop/n-09-62.pdf. The next critical deadline for taxpayers to file delinquent FBAR’s without significant penalties is September 23rd.”

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Blake Christian, CPA/MBT, is a Tax Partner in the Long Beach, California office of HCVT, LLP. Christian is also Co-Founder of National Tax Credit Group, LLC.