The agreement last week between the Swiss and US governments to let UBS hand over client details heralds the likely start of much broader assaults on offshore centres.

Switzerland prevented what it saw as a US fishing expedition but the US Internal Revenue Service still managed to catch a record haul in its settlement agreement with UBS.  The names of almost 4,500 US taxpayers with undeclared accounts at UBS will be handed over to the US Department of Justice as part of a deal announced last week.

The Swiss have sold the agreement as a compromise measure with a basis in Swiss and international law, but the financial world will see the settlement for what it truly is: a major victory for the IRS, another crack in the foundation of bank secrecy and proof that the international financial industry has been permanently altered.

The message for noncompliant taxpayers is clear: time is running out for individuals hiding assets.  Those who continue to run from the IRS and other tax authorities will find such deception increasingly difficult and the potential punishment increasingly punitive.

What the agreement says

Under the agreement, the US will dismiss the judicial enforcement of the John Doe summons and will submit a formal treaty request to the Swiss government in which it describes the types of accounts for which it is seeking information. Under the US-Swiss double tax treaty, the two governments can exchange information to prevent “tax fraud or the like.” By Swiss standards, simple tax evasion is not sufficient to trigger the exchange of information and there must be evidence of fraud, such as altered bank documents, to warrant an exchange.

The Swiss government will establish a special task force to assist the Swiss Federal Tax Administration in rendering decisions on treaty requests on an expedited basis. The first 500 names will be disclosed within the next 90 days with the remainder being turned over within a year. If the treaty request produces significantly fewer accounts than expected, the US can seek judicial remedies, including resuming the enforcement of the John Doe summons.

The agreement does not limit the investigation to UBS, and the Swiss government has agreed to process treaty requests for accounts at other banks to the extent that such requests are based on facts and circumstances equivalent to what the US will provide in the UBS case.

What is next

The IRS understands the value of publicity, and it didn’t take long for the IRS to continue its high profile sabre-rattling. Calling the agreement a “huge victory,” IRS commissioner Douglas Shulman has promised that his agency will pursue other financial institutions and entities that help US citizens hide money offshore.  The day after the settlement was announced, the Justice Department indicted a Swiss banking executive and a Swiss lawyer for selling tax evasion services.

The IRS will be able to use the agreement to flush even more noncompliant US taxpayers out of the international woodwork as concerned taxpayers look to come clean in an attempt to mitigate applicable penalties.

The agreement will also provide the US with a blueprint for targeting bank secrecy jurisdictions worldwide.  IRS officials said earlier this year that additional summonses were being prepared targeting other financial institutions, and the lessons learned from the UBS negotiations will undoubtedly give the IRS leverage in any new proceedings.

Taxpayers from other jurisdictions must also take heed.  The Canada Revenue Agency has announced that it will be meeting with officials from UBS in September with the aim of uncovering unpaid Canadian tax. Both France and Germany have shown interest in the outcome of the US dispute and Italy has already announced an amnesty programme to encourage Italian taxpayers to repatriate assets held secretly in Switzerland.

In the UK, HM Revenue & Customs has obtained court approval to require more than 300 banks to disclose information about an estimated 500,000 individuals with offshore accounts. HMRC also recently announced its own voluntary disclosure programme, known as the New Disclosure Opportunity and entered into a special agreement for taxpayers with Liechtenstein accounts.

Voluntary Disclosure

US clients of UBS with undeclared assets can find one bit of fortune in the settlement – the agreement specifically states that taxpayers can still come forward and receive the protection of the IRS Voluntary Disclosure Programme until their information is actually turned over to the IRS. Even those taxpayers who receive notice from UBS that their accounts fall within the scope of the treaty request can participate in the Programme as long as they come forward quickly (and otherwise qualify for the Programme).

Many commentators expect the IRS to extend the terms of the current Voluntary Disclosure Programme beyond the 23 September deadline, but taxpayers have nothing to gain by waiting and the risk that the IRS will not make an extension poses significant dangers. The IRS has said that after the September deadline, taxpayers who come forward will face much harsher treatment.

Conclusion

The UBS John Doe summons was a major IRS initiative, but it represents just one piece of an international effort to close the tax gap. Taxpayers with undeclared accounts, in Switzerland and elsewhere, will need to strongly consider compliance in the wake of the UBS settlement. This agreement is more than just the promise of several thousand names.  It is the promise of continued pressure by tax authorities to target more banks in other jurisdictions.