Friday, October 24, 2014

Swiss Category 2 Banks Push Back on DOJ's Draft NPA Agreement (10/24/14)

There are media reports that Swiss Category 2 banks are pushing back on the draft of the model NonProsecution Agreement ("NPA") DOJ offered them.  John Letzing, Swiss Banks Want Changes in Justice Dept. Hidden Account Program (WSJ 10/23/14), here; Kristen A. Parillo, Swiss Banks Slam DOJ's Proposed Non-Prosecution Agreement, 2014 TNT 206-1 (10/24/14) (no link available).  The pushback occurred in a letter from a number of attorneys representing the banks to the DOJ tax.  According to the reports,  28 lawyers representing 73 Swiss banks signed the letter.

According to the Parillo article, the draft NPA requires the Category 2 banks to :
  • cooperate fully with the DOJ, the IRS, and any other domestic or foreign law enforcement agency designated by the DOJ regarding all matters related to the conduct described in the NPA;
  • assist the DOJ or any designated domestic or foreign law enforcement agency in any investigation, prosecution, or civil proceeding arising out of or related to the conduct covered by the NPA;
  • provide testimony as needed to enable the U.S. to use the information and evidence provided by the bank under the NPA; and
  • provide the DOJ, upon its request, all information, documents, records, or other tangible evidence not protected by legal privilege or work product regarding matters arising out of or related to the covered conduct.
    The draft NPA also requires the banks to assist the U.S. with the drafting of treaty requests seeking U.S. account information (whether the account is open or closed), and to retain all records relating to its U.S. cross-border business for a period of 10 years from the NPA's termination date. The agreement also describes the circumstances under which the DOJ may determine that a bank has violated the terms of the NPA and may be prosecuted.
I don't have a copy of the letter, but the WSJ reports:
The requested changes included limiting what the Justice Department could do with the information it collected and dropping a requirement that banks also agree to disclose similar information to other foreign authorities.
* * * * 
In the letter, attorneys representing the banks took issue with a number of aspects of the program, including a provision that participants disclose information related to foreign parent companies or affiliates. The banks also panned a stipulation that they also open their books to other, unspecified foreign legal authorities probing hidden accounts.

For prior coverage of the draft NPA Agreement, see Swiss Category 2 Banks Reportedly Get Draft of NPA Agreement (Federal Tax Crimes Blog 10/11/14; 10/14/14), here.

Addendum 10/24/14 4:00pm:


David Voreacos, Giles Broom and Jeffrey Vogeli, Swiss Banks Ask U.S. to Amend Proposed Tax Amnesty Deals (Bloomberg 10/23/14), here.
“This requirement is not found in the program and, indeed, turns a program specifically focused on U.S. tax issues into a global cooperation agreement without any safeguards or guarantees of appropriate consideration of the banks’ cooperation,” according to the letter from 18 law firms obtained by Bloomberg News. 
* * * *  
Parent Companies 
The banks also object to requirements that they disclose information on parent companies and that they share material with governments other than the U.S. And they dispute the scope of provisions on breaches of the agreement. 
“The model agreement goes quite far from the perspective of the banks,” said Philippe Zimmermann, who advises financial firms on compliance matters for Ernst & Young in Zurich. “The banks now have to find a way of negotiating with the Justice Department.”
Switzerland is just one stop in the U.S. crackdown on offshore tax evasion. The Justice Department has also built criminal cases based on offshore accounts in India, Panama, the Cayman Islands, Hong Kong, Liechtenstein, Israel, and Bermuda. Switzerland is already under pressure from India to turn over bank data on tax dodgers, while France, Italy and Germany continue to try to recover back taxes from citizens who used Swiss bank secrecy to hide assets. 
* * * * 
‘Lobby Together’ 
“If the larger banks lobby together over the points they deem unreasonable, the Justice Department may relax some elements of the model agreement,” said Patel, who represents companies and individuals embroiled in the program. “Otherwise, it is either accept it as it is, or withdraw from the program.” 
* * * * 
Banks are wary of dropping out because of the example of Wegelin & Co., the 270-year-old bank forced out of business by a U.S. indictment for helping Americans evade taxes that led to a guilty plea in 2013. The banks need to hold deposits and make transactions in dollars for clients from around the world, as well as to invest their assets in U.S. securities such as Treasuries and in equities traded in New York, and criminal charges would put that at risk. 
“An indictment would be game over for Swiss banks if it ultimately prevented them from doing business in the U.S.,” said Xavier Oberson, a Geneva-based lawyer and academic.

41 comments:

  1. Since we are instrumental in creating the global GATCA dragnet, and demand for USD remains high, I suppose DOJ will continue with its huberistic approach until it eventually loses that leverage. This is strong arm stuff that the Mafia would be proud of. Just my humble opinion.

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  2. CONGRATULATIONS! I am very glad to hear your story. Thanks so much for sharing what you have so far. You are right that fear has many good people stuck and sharing a story like yours can move us It will be so good to hear more when you feel you can. Maybe there is just one question you might answer? How long since you mailed your request till you were approved? Days? Weeks? Please feel free neot to respond. Thanks again.

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  3. Less than a month. But we had been talking all along, so the agent knew I was going to be sending in the request and already knew much more than was in the written request.

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  4. Hey has anyone been given just 10 days to respond to the 906. I ask because I was sent my 1st 906 in July with 10 days to respond .The 906 and it was totally wrong, so the agent agreed to do it over. The second 906 came 25 days later and it was still wrong with 10 days notice. The agent agreed to make further changes and these took until Sept. So on Sept 1st we got a final correct 906 and all the other forms to consider. Again the agent gave 10 days to respond. My lawyer reviewed the IRS opt out guidelines and said we are entitled to 30 days to declare if we accept the 906 or wish to opt out. My lawyer had on going discussions with the agent asking if we could could settle within the program based on the FAQ that a penalty within the program should not be bigger than the maximum outside the penalty. Basically we were prepared to pay the max within the program, because our 5million home was being included in the OVDP 27% calculation. The agent discussed with his manager and said they would get back to us. We knew Oct 1st was the deadline for our response to the 906. On Sept 23rd the agent issued letter 4566, kicking us out of the program. No warning nothing. We were prepared to opt out if the agent said they would not settle within the OVDP and we would notified the agent prior to the 30days required in the opt out guidelines. Now we have been kicked out and have to fight to get back in so we can then opt out. We have 30 days to fight our way back in, but we have to deal with another agent and we have to pay legal fees to start this fight. What a waste of time and money. I think the only winners in this OVDP game are the lawyers. My basic question is have agents been following the opt out guidelines and time schedules? Or have they been making time demands up as they go.?? Do you think we have a shut and dry case to be put back in. We were not removed for being noncooperative, we were removed because we took longer than 10 days to respond to the 906.

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  5. That's great news. It means a lot to me that my story was able to help you. When I fired my lawyer in OVDI to opt out on my own, I was given advice to just consider all the money I had paid for his bad advice as a sunk cost. That has been hard to do. Knowing that my experience has helped just one person to suffer less of the indignity of the OVD programs helps me in moving on, which I hope you will soon do, too.

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  6. Blackseal, it doesn't matter whether you formally gave notice of an intent to opt out, or whether you were removed from OVDP for failure to execute the closing agreement. Your case (i.e., examination) will be handled in the same manner going forward. I don't believe there is any reason for you to fight to get back in the program if you do not intend to accept the terms of the closing agreement.

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  7. Hello Jack/Others,


    I filed my SDOP and IRS cashed my check.


    When do I file my State amended returns for the 3 years? Do I need to wait for a few months or can I file it right away?


    Regards

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  8. I would file them as soon as possible to stop the interest clock

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  9. Now that two bankers have been found not guilty, will the category 2 banks in the US program continue to participate? Consider this in light of the harsh terms proposed by the IRS/DOJ in their recent Model NPA agreement. If Raoul Weil was not found guilty, then it is very unlikely that any of the people from the 100 category 2 banks will be found guilty. After this humiliating court case lose, it is unlikely that bankers will be charged if they threaten to take it to trail. The IRS/DOJ can't afford the publicity of another lose.

    It may be that in the eyes of the Swiss banks, the IRS/DOJ tiger has lost its teeth.

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  10. Yes I agree the IRS/DOJ tiger needs to go quickly to a dentist before everything is lost.

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  11. Jack/Others,


    My transition from OVDI to SDOP has been approved and before I sign the latest 906, not willing to miss anything, I would like to confirm/check the following issues:


    1. There is no way to exclude from the SDOP penalty base those foreign accounts (in my case pension accounts) which, (although have been FBAR non-compliant) have not generated unreported income. Within OVDI, I was able to convince the agent not to include these accounts into the 25% penalty base, because there was no income from these accounts. This made a huge difference in the total OVDI penalty. Before I sign now, I want to make sure there is no way I can exclude these accounts from the SDOP penalty base as well.


    2. I cannot claim refunds for the tax and 20% accuracy penalty paid within OVDI.

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  12. 1. I have not faced this situation, but I thought that the SDOP (either on transition or straight SDOP) had the same penalty base as would apply in OVDI/P. I hope some reader who knows the answer will respond to it.

    2. That is my understanding. On transition from OVDI/P, you get no income tax and income tax penalty relief -- the full bore 8 years even though straight SDOP would require only 3 years with no accuracy related penalties.

    Jack Townsend

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  13. we have 11/2014 and you just received transition approval from the 2011 OVDI (I assume) !?
    I thought me waiting for 2 years was long but you must have been waiting now approx. 3.5 years !! This is insane. Pretty soon I am turning 90 .... I probably should make some arrangements in my will as well

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  14. Yes, it has been a very very long process. Mine took longer because I didn't want to give up too easily and fought to have the pension accounts excluded from the OVDI penalty base. This must have added at least one more year. But I can see two benefits from this long waiting time:
    - one is a subjective "benefit": spreading the huge amount of money spent with professional help (in the first part of the process) over a longer period of time makes it easier to accept the mostly unjustified loss
    - but the real benefit, in my case was that one month after me signing the 906, the rules changed and IRS launched the SDOP program. This came for me at the 12th hour and although still unfair, SDOP was for me a less expensive (health wise) alternative to opting out.

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  15. Thank you Jack,
    I will try to raise this issue (1) with the agent.

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  16. I checked with some other practitioners who indicated that their understanding was that the penalty base was the same. I would press the agent on the matter and perhaps insist on bringing it up the line.

    Jack Townsend

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  17. sorry to say that but to exclude the foreign pension accounts (contribution only and therefore no unreported income) from the OVDI/P penalty base is nothing new and has been practiced successfully many times. It seems to me that your agent was a bit "light in the loafers" and proves that due to shortage of agents they still use the conveyor belt principle to process cases which is obviously very inefficient but hello since when is or was the IRS ever efficient !

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  18. Absolutely. The foreign pension should not be included if you never received a distribution. If did receive distribution, but failed to report the distribution as income the IRS will include it in the penalty base.

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  19. My understanding from reading the FAQs and Transition to Streamline instructions was that the penalty base is different in two ways:
    1) Tax compliant accounts are included under SDOP, and
    2) You do not use highest balance, but use 12/31 balance for each year.
    However my interpretation (and that of the IRS office that processed my transition request) may differ from that of another office. In my situation it didn't make a huge difference.
    You may be right that the penalty base is the same, since I remember words to the effect that under transitional treatment one receives the SDOP "penalty structure" which would imply 5% on the same penalty base.

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  20. In my state unfortunately 1) there is no SOL when a Federal amended return is filed, so additional taxes are due for the same period as for OVDP (since 2003!) AND the state interest rate is a hefty 13% (thirteen!) percent (not compounded) which approximately doubles the back taxes owed. So I would definitely file (and pay) right away.

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  21. In my experience I was given additional time simply by asking. If an agent acts the way you've described, you have the right to ask for his/her manager's name and phone number and speak to the manager.
    Of course, given that your foreign home was included in the penalty base, you may wish to opt out anyway.

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  22. This sounds very encouraging. But my reading of the Transition instructions and the FAQ for SDOP (e.g. FAQ 6) makes me think like Anonymous - and here I hope, for once I'm wrong - that the SDOP penalty base includes tax compliant accounts.
    If this is so, then the only way to exclude my foreign pension accounts (with no contribution, no distribution, no income) from the SDOP penalty base is by showing that they didn't belong in FBAR in the first place. This sounds to me very difficult to show.

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  23. I am not sure where and what the problem is. You have been told to exclude your foreign pension plan (with no contribution, no distribution, no income) If you disagree and are desperate to part with 5% of your money include it , if it would be wrong be sure that your agent will NOT point this out to you. Fait vous jeux.

    Btw. I would like to point out that NOT every foreign pension plan is reportable on an FBAR ! A substantial risk of forfeiture is a standard applied by the IRS to determine whether deferred compensations should be taxed currently to the payee.
    It exists if an employee`s right to deferred compensation is contingent on the performance of substantial services in the future

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  24. I will give the readers an example : The IRS states that in cases where the employee has no control over the plan (mandatory), has no signing authority, and there exists a substantial risk of forfeiture (IE not vested) etc. then it is not a reportable asset and are advising not to report the pension on the FBAR, hence no asset for the penalty base. If no substantial risk of forfeiture would exist and thereby guaranteeing that the employee is guaranteed her benefits in the future the position is to file a safe protective disclosure FBAR. The final regulations are silent as regards this point.
    Look at the Treaty language which typically deals with 3 main elements of the pension: taxation/deduction of contributions; taxation of internal gains; and taxation of distributions. Guidance was provided through revenue rulings on a treaty by treaty basis.
    It’s a very complicated and ill defined area, whether you’re discussing the treaty or the US tax code in particular. Confusion abounds, and no two tax professionals or IRS agents agree 100% of the time so I will leave it at that.

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  25. Anon, I have been told to exclude (i.e. the agent agreed not to include these accounts, based on no contribution, no distribution, no income) from the penalty base within OVDP/I. My fear is that the instructions for transition and for SDOP indicate, as Anonymous pointed below, that under SDOP, even tax compliant accounts are included for penalty. This was the reason for my first question and I still hope things are more like Jack understood (i.e. penalty base is the same in OVDI/P and SDOP).


    If I won't succeed with this request (same penalty base), then the only way to exclude these accounts under SDOP is by showing that they were not reportable on FBAR. And this seems to me a difficult task, given that the FBAR instructions are not clear on foreign pension plans.

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  26. To Jack or any other opt out person that wishes to comment;
    My lawyer is saying that on opt out if the IRS finds me willful I will pay 100,000 or 50% for every account I have. I have 10 accounts mostly savings and checking with my kids. My lawyer says they will assess me 100,000 per account or $1 million. The total June 30th balance combined for all for all 10 accounts is only $145,000. I thought I might have to pay just 100,000 if found willful, which I am not. Is my lawyer correct and has anyone really been assessed with such ridiculous penalties, or is this just IRS fear gesturing.?

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  27. "My lawyer is saying that on opt out if the IRS finds me willful I will pay 100,000 or 50% for every account I have."............ in the real world this statement is totally garbage and again fire your lawyer and get some decent representation !!

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  28. Blackseal please tell your lawyer that this is not April Fools' Day ! I make a bet with you - even if the IRS finds you on opt-out willful (possible since I do not know all the facts and circumstances of your case) I am certain the worst case scenario would be 3x$100K for a total of $300K regardless of your 10 accounts.

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  29. yes 2.5 years and lets not forget a $150K learning curve

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  30. The willful FBAR penalty is in 31 USC 5321(a)(5)(C), here:

    http://www.law.cornell.edu/uscode/text/31/5321

    That penalty is the greater of $100,000 or 50 percent the balance of the account(s) on the date of the violation (i.e., June 30). So, if the high amount in account reportable accounts is $10,000, the statutory penalty could be $100,000 (subject to possible mitigation). If the high amount is $1,000,000, the statutory penalty could be $500,000 (subject to mitigation). In the latter case, it is not $100,000 per account. Keep in mind that this is per year for the open years as to which the IRS would assert the willful penalty.

    You have to have pretty bad facts known to the IRS before it asserts the willful penalty. Your lawyer, if qualified, should be able to assess your facts. That assessment requires a lot of work and then the assessment has some uncertainty (for unknown facts and simply the IRS assessing the facts differently).

    As to whether others have been assessed the maximum penalties, the only way that information generally gets into the public domain is if it is litigated. My sense would be that if and when the IRS asserts multiple year willful penalties, there will be litigation. I infer from the dearth of litigation that the IRS has not asserted to many multiple year willful penalties. Indeed, the only multiple year penalty I have seen is the Zwerner case that I have discussed here. The IRS asserted 4 years of maximum 50% penalties, the IRS won the case for 3 years and then settled for 2 years, thus avoiding an appeal that might have helped taxpayers and practitioners better understand the scope and application of the willful penalties and the possible constitutional prohibitions to such large penalties. But, unless you are as bad an actor as Zwerner, you likely would not face such onerous penalties. But only a lawyer who is thoroughly familiar can help you assess your risks and then the assessment always will have some uncertainty.

    Jack Townsend

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  31. Sorry to step in here but the process should be reverse. You exclude them from your SDOP submission/transition and the IRS has to prove a negative first by showing that they were even reportable on FBAR.

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  32. Thanks so much for the input Jack, UStax and Anon and Global capitalism. Anon I am now at
    170,000 in legal and account costs and still have to go through the audit in opt out. I expect that by the time I am finished it will be 250,000.

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  33. Blackseal ,on the one hand I feel for you and have sympathy that as an immigrant you relied on the expertise of so called "professionals" because you did not know better but on the other I have to say that your case and how you handled it is unfortunately a showcase of how NOT to do it.

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  34. Depending on how much your time is worth, you may consider not having professionals do so much of the routine work. On the audit especially, if you had an accountant do it there should not be too many questions about the accounting itself, more about what is this withdrawal or this deposit, which your accountant would have to ask you about anyway. In my case after spending a lot of money on professionals I relied on them for only occasional questions and did the routine stuff myself.

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  35. Blakseal, nobody can tell you with any certainty what will happen, or will either pay you the willful penalties if found willful, or reimburse you for the OVDP 27.5% penalty if you are nonwillful and should have opted out.
    Lawyers can only give an educated guess, based on very lttle info because most people do not opt out, and he ones that do are the ones with the most clear cut cases (for example someone who has Alzheimer's and lacks the mental capacity to be willful.) But if you've bn in OVDP for years aren't you still eligible for transition to streamline? In spite of Rettig's fearmongering article I feel (and so does one of the lawyers I've dealt with) that as ogn as you tell the truth on your transition application and don't have any smoking gun type facts that would show wilfulness, the worst case scenario is your transition request is denied and you are still in the 27.5% (or opt out) position. Alo, as I recall, you sold a house. Under streamline the penalty is based on 12/31 balances nt highest balances as in OVDP so if the money from the house sale was out of the foreign accounts by 12/31 it would not be part of the penalty base, also under streamline the penalty base is over the past 6 years (08-13) as of late 2014, so earlier year balances don't affect the penalty. This is how transition was done at the IRS office I dealt with; given the lack of guidance different offices may handle transitions differently.

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  36. For those of you who have sent their certification letter to transition from the OVDP program to the streamline program (SDOP/STOP), I was wondering if you had to pay the full 27.5% penalty (which means you will later have to ask for a partial refund if you are accepted) or if you just paid the 5% penalty ? And on a separate note... I am curious if you decided to proactively address the schedule B question in your certification letter (I checked it once over 8 years) or did not talk about it at all ? Thank you for this great blog, this is so helpful to see the experiences from Ron, JustMe, Anon5percent and so many others. And Jack's perspective, of course.

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  37. OnTheFence, I did not paid the initial 27.5% penalty since I was sure there'll discussions on the total amount and I had understood before that there is no interest on the due for the penalty. That said I still paid much more than the interest due, so even with the 5% penalty I still had to ask for a refund, that I am still waiting for. I did not talk about the schedule B question directly.

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  38. I successfully transitioned from OVDI to SDOP.

    The certification form asks for the 5% to be included, so I enclosed a check for that. The form also asks for back taxes, interest and accuracy penalty of 20%; I had already paid that when I sent my OVDI package.

    Previous to applying for streamline I had had numerous long conversations with IRS staff about my case (I was still sitting on the fence as to whether or not to opt out, at the time the streamline program was announced.)

    As to Schedule B, I did not bring it up initially, but was prepared for the question in case the IRS asked it (which they did) so I had my answer prepared, and that was also included in my Streamline certification.

    Included in my certification were source of funds, reason for opening and maintaining the accounts, my foreign background, lack of expertise in tax matters, etc.
    There is a difficult choice as to whether to proactively address something potentially negative, but at the very least it's important to be prepared to answer the question.

    I had initially started with lawyers, but eventually contacted the IRS myself when I got the first (27.5%) 906. I also contacted TAS at that point, though they couldn't do much unless I opted out, they did give me a couple of useful tips in dealing with the IRS (that I could also speak witht he agent's manager, and that I could ask the IRS for extra time to decide.)

    Since by the time I applied for transition I had spoken with the IRSat length, the application for streamline was more of a formality, and I got a response pretty quickly (about a month.)

    Getting back the signed 906 took about 5 months (two agents and a manager sign off on it.) Total time since I sent my preclearance request: just over 3.5 years.

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  39. Correction: Though the certification form asks you to include the 5%, that applies only for those going directly into streamline. Since I transitioned, it was only after my transition request was approved, and I got the new 906 showing 5% penalty, that I sent back the 906 with a check for the 5% penalty.

    Also I was told to calculate the penalty base not under the OVDI method (highest balance in 8 years) but under the streamline method (highest 12/31 balance of past 3 years, and include tax compliant account in the penalty base (an account which earned no interest and had been excluded under OVDI.) Since the most recent two years I had filed an FBAR, I just wrote n/a for the penalty base for those years, footnoted that I had filed a timely FBAR, and therefore my penalty base was the most recent noncompliant year.

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  40. You may get different answers from different agents and managers since the rules aren't all too clear hus subject to interpretation. In my case (transition to SDOP was approved) I used the SDOP penalty base (12/31 figures from the past 3 years, and base included small account that had been excluded from OVDI because it earned no interest.) In my case which penalty base was used made little difference. 2010 was the highest balance year, the highest balance in 2010 was also the 12/31/2010 balance, and the noninterest bearing account that was included under SDOP was very small.

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  41. Oh and my state accepted the extra payments for OVDI years but refused to refund me for the SDOP years for which a refund was due on my amended returns, because of Statute of limitattions. Not fair but the amount was small so I didn't fight it.

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