Eleventh Circuit Sustains IRS Summons Issued For French Tax Investigation (12/18/19)

[This is a cut and paste of a posting on my Federal Tax Procedure Blog]

In Redfern v. United States (11th Cir. Dkt. 19-12649 12/17/19) (unpublished), here, the Court affirmed the IRS’s issuance of summonses to various banks “at the request of the French government, pursuant to the United States–France Income Tax Treaty, to aid an ongoing investigation into Redfern’s [French] tax liability.”

For background on the process, I cut and paste this (footnotes omitted) from a version of the working draft of my Federal Tax Procedure Book (basically same as in my Federal Tax Procedure 2019 editions):

In an increasingly globalized economy, records relevant to tax administration in one country may be possessed by someone in another country. Under many U.S. bilateral tax treaties, one treaty partner is obligated to assist the other in gathering information relevant to the latter's tax administration. For example, the Canadian tax authority (referred to as the “competent authority” in treaty parlance) under the U.S./Canada Double Tax Treaty may request the U.S. tax authority (i.e., the U.S. competent authority) to obtain information in the U.S. for Canadian tax administration. (This is commonly referred to as an “exchange of information” provision.) If the request is within the scope of the treaty, the U.S. competent authority will authorize the IRS to issue an administrative summons. The ultimate taxpayer involved may then bring a motion to quash if the summons is to a third party or, if the summons is to the taxpayer, may invoke any basis for noncompliance and await the IRS's pursuit of a summons enforcement proceeding.  

In United States v. Stuart, 109 S. Ct. 1183 (1989), Canada made such a request to the U.S., the U.S. issued summonses to third parties, and the taxpayer brought a motion to quash. The issue presented was whether the Code's limitation on the use of administrative summonses when a DOJ referral is in effect (§ 7602(d)) applies in the case of a summons issued under the Canadian treaty in relation to the Canadian tax. That Code limitation had been enacted after the U.S./Canadian double tax treaty in question had been negotiated and entered into force. Arguably, even if that limitation were not in the treaty, Congress's subsequent legislation may have created a treaty override. The taxpayer argued that the status of the Canadian tax investigation was the equivalent of a DOJ referral and thus the use of an IRS administrative summons was not proper. The Court held that, notwithstanding the subsequent enactment, the treaty itself controlled and had no such limitation, so that it need not inquire into the status of the Canadian investigation.  

In subsequent cases, courts have held that the propriety of the foreign country’s tax investigation is not relevant to whether the IRS can issue and enforce the summons (or avoid a petition to quash the summons); rather, the issue is whether the IRS has met the Powell requirements for the summons focusing on its actions and not that of the foreign treaty partner requesting the IRS to use its processes to obtain the requested information.  

 Similar processes are available under the OECD Convention on Mutual Assistance in Tax Matters, which is a multilateral treaty, and possibly other treaties as well, although most of the litigated cases appear to involve the bilateral double tax treaties.

The process employed in Redfern for the summons as follows (Slip Op. p. 2):

As required by Internal Revenue Code § 7609(a)(1), the IRS provided Redfern, as the holder of the accounts, with notice of the summons and an explanation of the recipient’s right to bring a proceeding to quash the summons. Specifically, it mailed the required notice to Redfern at (1) the address that appeared on his most recently filed and processed federal tax return and (2) the address identified by France as the address he reported to the government, as well as (3) to Leslie R. Kellogg, an attorney at Hodgson Russ LLP, from whom the IRS had received a power of attorney signed by Redfern authorizing her to receive confidential tax information on Redfern’s behalf.

DOJ Tax Obtains a John Doe Summons for U.S. Bank Information at Treaty Request by Finnish Tax Administration (5/1/19)

DOJ Tax announced that it had obtained a district court order to serve John Doe Summonses (JDS) on Bank of America, Charles Schwab, and TD Bank.  See press announcement here.  The JDS's were sought at the request of the Finnnish Tax Administration pursuant to the tax treaty between Finland and the U.S., which has an exchange of information and commitment to use each country's tax enforcement processes (such a summonses).  The following are key excerpts:

“The Department of Justice and the IRS are committed to working with the United States’ international treaty partners to identify and stop individuals using hidden offshore accounts to evade tax laws,” said Principal Deputy Assistant Attorney General Richard E. Zuckerman of the Justice Department’s Tax Division. “The United States does not tolerate offshore tax evasion, nor does it sanction tax evasion committed through U.S. financial institutions.” 

“Our continued success in combatting offshore tax noncompliance has been helped by the assistance we receive through the network of tax treaties around the globe,” said IRS Commissioner Charles Rettig. “Yesterday’s effort reflects that the U.S. will return this help by working under the law with tax administrators in other nations to help them in their fight against tax evasion and avoidance. A global economy should not be allowed to serve as a possible vehicle for tax evasion in any country.” 

The United States petitioned the United States District Court for the Western District of North Carolina to authorize the summons at the request of the government of Finland under the tax treaty between Finland and the United States. That treaty allows the two countries to cooperate in exchanging information that is necessary for carrying out each country’s tax laws. The IRS summons seeks the identities of Finnish residents who have payment cards linked to bank accounts located outside of Finland so that the Finnish government can determine if those persons have complied with Finnish tax laws. Finland has advised the IRS that, in circumstances where the payment cards are used only at ATMs or in other transactions where authorization is by PIN code, and the cardholder need not identify himself or herself to the merchant, the cardholders cannot be identified from sources in Finland. 

The filing does not allege that Bank of America, Charles Schwab, or TD Bank violated any U.S. or Finnish laws with respect to these accounts. 

As described in the petition and supporting documents filed by the United States, the request is part of a foreign payment project being conducted by the Finnish Tax Administration (FTA), in which information on the use of payment cards issued by foreign financial institutions is used to identify non‑compliant Finnish taxpayers. Earlier FTA investigations of approximately 120 to 150 Finnish taxpayers who used foreign payment cards in a similar manner have yielded extremely high rates of tax non-compliance, as noted in the United States’ memo in support of the petition, which indicates that it is likely that the John Does sought by the summons are Finnish residents who are failing to report these foreign accounts and associated income. 

The court order in this case authorizing this enforcement action is part of ongoing international efforts by the United States and its treaty partners to stop persons from using foreign financial accounts to evade taxes. Courts have previously approved John Doe summonses allowing the IRS to identify individuals using offshore accounts to evade their U.S. obligations, and have also approved John Doe summonses to be used to identify individuals using U.S. financial institutions or accounts to evade foreign tax obligations.

The Ex Parte Petition for Leave to Serve "John Doe" Summonses and Memorandum in Support are linked on the announcement and are here.

The Revenue Rule: Is It Relevant Any More? Should It Be? (2/16/16)

Keith Fogg has this excellent blog today:  Why is the IRS Collecting Taxes for Denmark? (ProceduralyTaxing 2/16/16), here.  As Keith notes in the blog entry, the general rule -- certainly in the U.S. -- is that one country (the U.S. in this case) does not involve itself in the collection of other countries' taxes.  This is a specific application of the so-called so-called "Revenue Rule."  I explain that rule in my Federal Tax Procedure book as follows (footnotes omitted):

Historically, the “Revenue Rule,” has been a barrier to one country seeking to collect taxes in another country.  According to the most recent Supreme Court foray into the rule, the Revenue Rule “at its core * * * prohibited the collection of tax obligations of foreign nations.”  Although described as a common law rule (suggesting some affiliation with Anglo-American jurisprudence), the Revenue Rule in one form or another is the general rule among countries. 

This means that taxpayers desiring to avoid U.S. tax can put their assets in a foreign jurisdiction and thereby avoid the U.S. being able to collect U.S. tax from those assets.  Similarly, persons subject to foreign country tax (including U.S. persons whose operations are subject to tax in a foreign country) can put or keep their money in the U.S. and avoid the foreign country enforcing those tax liabilities in the U.S.

But, cracks in the rule have developed over the years.  Here is my discussion of those cracks (footnotes omitted):

C. Cracks in the Revenue Rule.

1. Treaties.

As noted above, U.S. tax treaties now have exchange of information requirements which obligate one treaty party, upon a proper request from the other, to use their internal processes to obtain information and share it with the other party.  

Some U.S. treaties go beyond merely the exchange of information and provide for use of each other's legal systems for tax collections.  E.g., the Third Protocol (1995) of the U.S.-Canada Treaty of 1980 provides for reciprocal enforcement of some tax debts of the treaty parties.  The majority decision in Attorney General of Canada indicated that there are only 5 U.S. treaties providing for general assistance in collecting some tax debts of the other treaty partner.  The standard treaty provision requires such assistance in collecting only amounts necessary to protect on the Limitations of Benefits clause. 

Of course, the reason Tax Haven jurisdictions have no such treaty provisions (they wouldn’t be Tax Haven jurisdictions if they did) is to avoid such treaty information sharing provisions and tax debt collection provisions.  Tax Havens typically do not have such treaties with the U.S.  But Tax Havens are under heavy attack to change their ways.  Thus, in response to economic incentives, some of these traditional Tax Haven countries have entered into Tax Information Exchange Agreement (also referred to as a “TIEA”).  How effectively they work is another issue.  But the point here is that a taxpayer may get caught in this ever-expanding net as the developed countries continue their assault on Tax Havens and offer them sufficient incentives to move closer to the global mainstream.  At some point, this could mean not only tax information sharing agreements, but also reciprocal tax debt collection as in the U.S.-Canada Treaty. 

2. Pasquantino and Extensions.

U.S. Senate Foreign Relations Commitee Hearing on Tax Treaties and Protocols, Including Swiss (11/8/15)

On October 29, 2015, the Senate Foreign Relations Committee had a hearing on pending amendments to several tax treaties and tax protocols, including one for the Switzerland-U.S. tax treaty.  The hearing can be viewed here.  Two key witnesses testified.  One was Robert Stack, Treasury deputy assistant secretary (international tax affairs).  Stack's prepared opening statement is here.  The other was Thomas Barthold, chief of staff, Joint Committee on Taxation.  Barthold's statement can be downloaded here.

Both statements offer excellent introductions to the U.S. tax treaty system and to the specific treaties and protocols being considered.  I highly recommend them.  Given the focus on Switzerland in this blog, I thought it might be helpful to excerpt the portions of the statements dealing with Switzerland.

From Stark's statement:

[*5 ff] 

Combating Tax Evasion and Improving Transparency through Full Exchange of Information 

As noted above, effective information exchange to combat tax evasion and ensure full and fair enforcement of the tax laws is a top priority for the United States. A key provision found in all modern U.S. tax treaties is a rule that obligates the competent authorities of the two countries to obtain and exchange information that is foreseeably relevant to tax administration in the requesting country. In recent years there has been a global recognition of the need to strive for greater transparency and for full exchange of information between revenue authorities to combat tax evasion. The United States has taken a leading role in this movement. 

The proposed protocols amending the bilateral tax treaties with Switzerland and Luxembourg and the Multilateral Convention that are before the Committee today are intended to ensure full exchange of information to prevent tax evasion and enhance  transparency. These proposed protocols incorporate the modern international standards for exchange of information, which require countries to obtain and exchange information for both civil and criminal matters, and which require the tax authorities to obtain and exchange information held by banks or other financial institutions. 

The international standards on transparency and exchange of information for tax purposes are now virtually universally accepted in the global community. Indeed, all jurisdictions surveyed by the Global Forum on Transparency and Exchange of Information for Tax Purposes (the Global Forum) are now committed to implementing these standards. The Global Forum, now the largest international tax group in the world with 126 member jurisdictions (and fifteen observing members), endorses exchange of information. The Global Forum uses a robust and comprehensive monitoring and peer review process by evaluating the compliance of jurisdictions with the international standards of transparency. Initiated by the Organization for Economic Cooperation and Development (OECD), the Global Forum has been a driving force behind the acceptance and implementation of international standards. The United States actively participates in the Global Forum. Treasury’s Offices of Tax Policy and General Counsel, and IRS’s Office of Chief Counsel and its Large Business and International Division have devoted substantial resources over the past two years both to the peer review of U.S. rules and procedures and to our role as members of the Steering Group and Peer Review Group of the Forum. 

In addition, the G-20 has, for the past several years, stressed the importance of quickly implementing the international standards for transparency and exchange of information. It has also requested proposals to make it easier for developing countries to secure the benefits of the new cooperative tax environment, including a multilateral approach for the exchange of information.  

Against the backdrop of the Global Forum and the G-20 process, the proposed Protocol to the Multilateral Convention was opened for signature on May 27, 2010. The Multilateral Convention is an instrument that permits its signatories to exchange information for tax purposes. However, because it was signed in 1989, its provisions are out-of-date in many respects and do not conform to current international standards for transparency and exchange of information. In addition, prior to its amendment by the proposed protocol, the Multilateral Convention was open for accession only to member countries of either the Council of Europe or the OECD. The proposed protocol to the Multilateral Convention conforms the existing agreement to the current international standards for exchange of information, and opens the agreement for signature by any country, provided that the Parties have provided unanimous consent. This important agreement is therefore a centerpiece to the global effort to improve transparency and foster full exchange of information between tax authorities. 

* * * *

[*21]  

Switzerland 

IRS Grants Automatic Treaty Relief for Canadian RRSPs and RRIFs (10/8/14)

The IRS has adopted a revenue procedure to provide relief for U.S. taxpayers with certain Canadian retirement plans (RRSPs and RRIFs).  Previously, provided an election under the U.S. Canada double tax treaty was made, those plans were exempt from current taxation for contributions and internal build-up, provided that the taxpayer made an election, with taxation deferred until distribution (much like U.S. IRAs).  The IRS was liberal in granting relief for late elections.  The relief is now automatic in most cases without an election provided that the taxpayer has otherwise complied with the U.S. filing requirements.

The press release is IR-2014-97 (10/7/14), here.  Key excerpts (virtually all) of the notice summarizing the new revenue procedure are:

The Internal Revenue Service today made it easier for taxpayers who hold interests in either of two popular Canadian retirement plans to get favorable U.S. tax treatment and took additional steps to simplify procedures for U.S. taxpayers with these plans. 

As part of this, the IRS provided retroactive relief to eligible taxpayers who failed to properly choose this benefit in the past. In addition, the IRS is eliminating a special annual reporting requirement that has long applied to taxpayers with these retirement plans. 

Under this change, many Americans and Canadians with registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs) now automatically qualify for tax deferral similar to that available to participants in U.S. individual retirement accounts (IRAs) and 401(k) plans. In general, U.S. citizens and resident aliens qualify for this special treatment as long as they filed and continue to file U.S. returns for any year they held an interest in an RRSP or RRIF and include any distributions as income on their U.S. returns. 

The change relates to a longstanding provision in the U.S.-Canada tax treaty that enables U.S. citizens and resident aliens to defer tax on income accruing in their RRSP or RRIF until it is distributed. Otherwise, U.S. tax is due each year on this income, even if it is not distributed. 

In the past, however, taxpayers generally would get tax deferral by attaching Form 8891 to their return and choosing this tax treaty benefit, something many eligible taxpayers failed to do. Before today's change, a primary way to correct this omission and retroactively obtain the treaty benefit was to request a private letter ruling from the IRS, a costly and often time-consuming process. 

Many taxpayers also failed to comply with another requirement; namely that they file Form 8891 each year reporting details about each RRSP and RRIF, including contributions made, income earned and distributions made. This requirement applied regardless of whether they chose the special tax treatment. The IRS is eliminating Form 8891, and taxpayers are no longer required to file this form for any year, past or present. 

The revenue procedure does not modify any other U.S. reporting requirements that may apply under the Bank Secrecy Act (BSA) and section 6038D. See FinCEN Form 114 due by June 30 of each year, and Form 8938 attached to a U.S. income tax return for more information about the reporting requirements under the BSA and section 6038D. Different reporting thresholds and special rules apply to each of these forms.

Rev. Proc. 2014-55 is here.

U.S. International Tax Enforcement -- Exchange of Information and Collection (6/28/14)

I often get the question of whether the U.S. can request treaty partner assistance to collect taxes from taxpayers resident in foreign country or against property in a foreign country.  The U.S. can do that by treaty, but that is not a standard provision in the bi-lateral double tax treaties that the U.S. has.  There is a multilateral treaty, called the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, sponsored by the OECD to which the U.S. is a party.  The OECD's resources on this Convention, including the Convention, are here.  The U.S. has made reservations the effect of which is to deny its obligation to collect other countries' taxes and, because reciprocal duties are required, relieve other countries from the obligation collect U.S. taxes.

Now, to the broader subject of U.S. international tax enforcement, I offer the following (footnotes omitted) from a JCT report, titled Joint Committee on Taxation, Explanation of Proposed Protocol to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, (JCX-9-14), February 21, 2014, which may be downloaded here:

The report has a great discussion of the state of the law on international enforcement.  Here are key excepts related to international enforcement mechanisms under Current Law (footnotes omitted; I do not indent because of the length of the material copies; in some cases I have bold-face to draw readers' attention)

I. SUMMARY

* * * *

Ratification of the protocol is not intended to alter the reservation of rights or declarations of understanding that the United States made when it ratified the existing convention in 1991. In its instrument of ratification, the United States reserved the right not to provide (1) assistance for taxes imposed by possessions, political subdivisions, or local authorities of other parties to the convention; (2) tax collection assistance; or (3) assistance in serving documents (except the service of documents by mail). The reservations are reciprocal; to the same extent that the United States will not provide assistance, other parties need not assist the United States. Thus, only the provisions relating to information exchanges and service of documents by mail are in effect for the United States. Those reservations would continue to govern the effect of the treaty with respect to the United States upon ratification of the proposed protocol.

* * * *

II. OVERVIEW OF TAX ADMINISTRATION IN CROSS-BORDER CONTEXT 
A. General Background of OECD 
B. Emerging Consensus on OECD Transparency Standards 
C. Extent of Mutual Assistance Under Present Law

The difficulties one jurisdiction has in piercing the “bank secrecy” of another jurisdiction can be traced to the centuries-long tradition against expecting one jurisdiction to assist another jurisdiction with collection of its taxes. This doctrine, known as the “Revenue Rule,” is rooted in common law and sovereign immunity. It is often referred to as the Lord Mansfield Rule, in recognition of the jurist's statement, “For no country ever takes notice of the revenue laws of another.” Although its vitality and scope have been questioned, most recently in Pasquatino v. United States [544 U.S. 349 (2005), here], the doctrine remains a cornerstone of all common law jurisdictions, as well as many others. To the extent that countries have provided administrative assistance of any sort, including exchange of information, it has been a result of State-to-State negotiations, resulting in a multilateral or bilateral international agreements or treaties, ensuring that any waiver of the principle will be reciprocated.

Liechtenstein Will / May End Its More Blatant Forms of Tax Cheating (11/16/13)

So speaketh this report from Reuters.  Tom Bergin, Liechtenstein to end bank secrecy (Reuters 11/14/13), here.  Here are the excepts.

Liechtenstein, whose banks have been accused by the United States and other countries of facilitating tax evasion, said on Thursday it would end its practice of helping foreigners hide money from their tax authorities. 

The move highlights how Liechtenstein has moved more quickly than neighboring Switzerland, possibly the world's most important offshore financial center, in reacting to international pressure for greater transparency. 

* * * *  

The government of the tiny country of 36,000 inhabitants said in a statement that it would sign up to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, an international forum that allows tax authorities to ask their counterparts in other countries for information on taxpayers. 

The Alpine nation said it would also join up to a system of automatic information exchange being developed by the Organisation for Economic Co-operation and Development (OECD), which is expected to come into force in late 2015 or early 2016. 

Under automatic information exchange, if an individual opens a bank account in a foreign country, that country will automatically inform the tax authority in the individual's country of origin. 

Tax advisers say the automatic exchange of information will make the most common forms of tax evasion difficult, if not impossible, in those countries that agree to it.

Rosenbloom Essay on Failure of Discourse between U.S. & Switzerland (6/20/12)

David Rosenbloom, here, of Caplin and Drysdale has published an interesting article in Tax Notes.  H. David Rosenbloom, Switzerland and the U.S.:  What We Have Here is a Failure to Communicate, 135 Tax Notes 1389 (June 11, 2012), here (published here with the permission of Tax Analysts).   Rosenbloom's point of departure is an apologia for Swiss banker's actions published by a Swiss law professor.   Peter Viktor Kunz, Roger Federer, Swiss Banking Will Both Come Back, (Bloomberg 4/30/12), here.  Professor Kunz's article begins with the statement (or complaint):  "Why is it, many Swiss are asking today, that the whole world seems to be out to get us?"  (Conjures in my mind the saying "I may be paranoid but that does not mean that they are not out to get me.")

Rosenbloom's essay is written in the context of the U.S. juggernaut first against UBS and then on an ongoing basis against U.S. taxpayers and persons, including Swiss banks and financial institutions, who enabled U.S. persons to evade or avoid U.S. tax by using Swiss financial accounts.  Rosenbloom directs the essay at "the apparently unyielding level of misunderstanding between the United States and Switzerland about the objectives and motivations of each country."  Rosenbloom notes his experience in the international tax area which gives him unique perspective to assess the dynamics of the U.S. and Swiss interactions.

Rosenbloom states the Swiss case as follows:

Switzerland's position is pretty clear -- or, to be fair, the position of a substantial portion of the Swiss population is pretty clear. On this view, the United States takes a moralistic view of taxation and sees Switzerland as a facilitator of tax fraud and evasion. The United States fails to appreciate the deeply felt Swiss respect for privacy. 

Further, Switzerland sees the United States as a bully and a law-breaker. Given the existence of the treaty, Switzerland cannot understand how or why the United States could bring criminal proceedings against UBS or resort to a summons enforcement action in U.S. district court, legal procedures wholly independent of the treaty's exchange of information provisions.

Rosenbloom states the U.S. case as follows:

GAO Report On Exchange of Information Between U.S. and Its Treaty Partners (10/12/11)

GAO recently issued a report, titled IRS's Information Exchanges with Other Countries Could Be Improved through Better Performance Information (GAO-11-730 September 2011), here, describing the U.S. treaty system for sharing information between treaty partners (the treaties involved are bilateral negotiated treaties involving only two countries (or states in treaty speak). Readers of this blog will recall that, pursuant to pressure on UBS and indirectly the Swiss system of banking secrecy, the United States obtained information about UBS' U.S. clients by treaty request pursuant to the Exchange of Information provision in the U.S. / Swiss Double Tax Treaty.  I call the type of request where the name of the taxpayer is not known a John Doe Treaty Request. Readers will also remember that the U.S. continues to put pressure to obtain this type of information from other Swiss banks. Negotiations regarding that access are ongoing.

The GAO report is a worthwhile read for those interested in the use of treaties to obtain information regarding U.S. persons' offshore accounts. The report is broader than that, of course, but is useful for those interested in offshore accounts. I excerpt below some parts that I think are particularly useful for readers of this blog. I focus only on the concepts involved and not on the specific procedures and implementations (which are summarized in the Report). I also omit footnotes.

Reports That the Swiss are Relaxing Tax Information Sharing Rules (7/6/11)

There are reports that the Swiss Government in moving / inching toward real exchange of information under its double tax treaties, which are (like the most U.S. tax treaties, based on the OECD Model Treaty). See Swiss Government Adopts OECD Standards On Bank Secrecy, Tax Offenses, Nasdaq (7/6/11) which reports in part as follows:

ZURICH -(Dow Jones)- The Swiss government Wednesday adopted standards on banking secrecy laid out by the Organization for Economic Cooperation and Development, or OECD, which will allow foreign authorities to pursue citizens suspected of using hidden Swiss accounts for tax evasion, and no longer only for outright tax fraud.  

MAIN FACTS:

* * * *

- In spring 2009, the Federal Council took the decision to adopt in future the international standards set out in Article 26 of the OECD Model Convention with respect to administrative assistance in tax matters. According to this, international administrative assistance should be possible not only in the case of tax fraud but also in the case of tax evasion and for tax assessment. The implementation of this decision requires appropriate wording in the double taxation agreements, or DTAs, with other countries. Up to now, over thirty DTAs have been adapted or renegotiated. Execution of administrative assistance must ensue under national law. To this end, the Tax Administrative Assistance Act is to be introduced.

The State of the John Doe Treaty Request to Switzerland (6/1/11)

U.S. double tax treaties have an exchange of information provision. After the U.S. put the full court press on UBS (John Doe Summons and criminal investigation), the matter was finally resolved with a deferred prosecution agreement for UBS (with a whopping fine) and an agreement with the Swiss government that it would process a John Doe treaty request -- i.e., a request for U.S. taxpayers identified only by characteristics (e.g., size of account and use of non-U.S. entities)). Because, prior to that time, Switzerland interpreted the US - Swiss double tax treaty restrictively, this solution required a treaty protocol. At more or less the same time, efforts at more transparency from tax haven jurisdictions were pursued by OECD and G-20 Ministers of Finance. The result is that Switzerland is trying to give the appearance of opening the kimono. (That is different than actually opening the kimono.)

All of this is laid out (or at least suggested) in the Joint Committee on Taxation, Explanation of Proposed Protocol to the Income Tax Treaty Between the United States and Switzerland (JCX-31-11), May 20, 2011. I recommend this report as an excellent summary of the issues with Switzerland and an historical summary of the developments in this area.

Swiss Announcement that It will Continue to Drag Its Feet, but Marginally Less So (Perhaps), on Double Tax Treaty Administrative Assistance Requests

The Swiss have announced a relaxed, perhaps, interpretation of their Double Tax Agreement ("DTA") Administrative Assistance provisions. The announcement is here. The action was prompted by OECD peer pressure. Basically, the Swiss signal tax cheats (and other criminals who desire, shall we say, discretion) that the Swiss will generally only respond to administrative requests only when the depositor and the financial institution is named in the request.  Often, as in the UBS / U.S. recent spat, the requesting treaty partner will not know the names of the depositors, so the general requirement that the requesting treaty partner name names -- generally -- means that the Swiss can continue to offer secrecy -- generally.

Developments on the Swiss Tax Cheat Front

I suppose all readers of this blog probably already know about last Friday's decision by a Swiss court that holds illegal under Swiss law the agreement between the U.S. and Switzerland to turn over account information for a key category of U.S. taxpayers. For those who have not, I just point them to a some articles (see here and here) and make a few comments below.


I find it interesting the hyperbole that is surrounding this topic. For example, this posting on swissinfo.ch says that the president of Switzerland's Federal Administrative Court is looking to Parliament to resovle the issue of "whether tax evasion was a criminal offence." The reference is the interface of the Swiss law with the exchange of information provision in the double tax treaty with the U.S. The interesting quote is:

Bandli stressed that the cabinet was not the proper body to make that decision, which would effectively quash the principle of banking secrecy.

As I read this, the startling claim is that Swiss bank secrecy is all about enabling depositors to evade tax in other countries. I would have thought that there are plenty of rogues and brigands who have nontax reasons to hide assets (people do find other ways than tax to cheat and steal) and that Switzerland would continue to be a safe haven for them. But, of course, enabling depositors to cheat the fiscs of other countries is a major part of Swiss banks business. So, opening the kimono for tax cheats could have a major economic effect on Switzerland's ability to charge more for services than they are worth without the value added service of assisting them to cheat on their taxes.

United States and Swiss Confederation Release Criteria for Disclosing Names (11/18/09)

This blog was updated on November 18, 2009

The criteria for the Swiss and UBS to apply in disclosing accounts held by U.S. persons is set forth in a document released yesterday. The criteria document is here; a Swiss Government chart of the Agreement titled "The Annex to the UBS Agreement at a Glance is here. The criteria document is an annex to an agreement makes the IRS request under the double tax treaty and interprets the Swiss obligation under the treaty broader than the Swiss have applied it in the past. That agreement is here. Accordingly, I think it is helpful to first summarize the key points of the agreement that might be relevant to the criteria and then summarize the annex which sets forth the criteria.

The key points of the agreement from my perspective for the present discussion of criteria are:

1. The agreement is the IRS request under the double tax treaty for information and documents from UBS, and the Swiss Confederation is required to process the request under the criteria set forth in the Annex. (Article 1.) However, in a declarations page attached to the agreement, the following is agreed:

Swiss Confederation declares that it will be prepared to review and process additional requests for information by the IRS under Article 26 of the existing Tax Treaty if they are based on a pattern of facts and circumstances that are equivalent to those of the UBS AG case.

I think this means that a similar request can be made with respect to other Swiss banks.

2. The parties agree to signing a new protocol to the existing double tax treaty. (Article 2.) The protocol is here. The following appears to be the key provision (Article 3 amending Article 26 of the double tax treaty):

5. In no case shall the provisions of paragraph 3 be construed to permit a Contracting State to decline to supply information solely because the information is held by a bank, other financial institution, nominee or person acting in an agency or a fiduciary capacity or because it relates to ownership interests in a person. In order to obtain such information, the tax authorities of the requested Contracting State, if necessary to comply with its obligations under this paragraph, shall have the power to enforce the disclosure of information covered by this paragraph, notwithstanding paragraph 3 or any contrary provisions in its domestic laws.

Swiss Release Criteria for Disclosing Names

The reports are coming in that the Swiss have released the criteria for disclosing the approximately 4,450 names related to UBS accounts. I provide links below for some news reports that include reports as to the selection criteria. As I parse these reports, the criteria apply for the period 2001-2008 and are:

1. Accounts in the name of offshore companies controlled by U.S. persons. I presume this includes any type of entities, such as LLCs, trusts, etc.). There seem to be no amount limits to this type of disclosure.

2. Accounts in the names of U.S. persons (any one of the following criteria may result in disclosure)

(a) with more than 1,000,000 Swiss francs (US $ equivalent varies depending upon exchange rate, but for example it is reported that this amount was USD $600,000 in 2001 and USD $900,000 in 2008).

(b) with more than 250,000 Swiss francs if they involve "fraudulent behavior" (such as falsifying documents). It is unclear what showing of fraudulent behavior is required and how the Swiss might know of it, but perhaps the inquiry will be whether there is some indication from the financial institution's files as to fraudulent behavior; in other words, it is not clear whether there is some affirmative requirement to do more than review the files for the indication of the conduct).

(c) with annual earnings of more than 100,000 francs.

The first 400 will be selected by end of the week. I am not sure exactly what selection means. I do know that a number of account owners have already received letters that indicate that their accounts were on the list.

These criteria seem to apply -- at least for now -- only to UBS.

I do plan to update this blog as clarifying information comes to me.

NYT Article

WSJ Article

See also related DOJ Tax Announcement crowing over the release, although not announcing the criteria.

Reports of Switzerland Conversion Experience are an Exaggeration

I have previously here invoked the famous quote of Samuel Clements' dba Mark Twain for claims that are more smoke than substance. I invoke it again to address the notion that Switzerland has seen the light and will join the civilized world -- at least that portion of it that the OECD here influences (which in the tax world is substantial) -- to give more transparency with respect to taxes of other countries. Joann M. Wiener has an interesting and excellent article here titled "Switzerland, No Longer a Tax Haven?" She addresses how Switzerland with a stroke of a pen can give the appearance but not the reality of legitimacy to its continuing, profit driven, need to enable tax evaders. Switzerland has demonstrated over and over that it will protect its premium franchise in the tax haven business, so that it can continue -- perhaps not at the same level -- to enable taxpayers in other countries evade taxes for a fee that includes a healthy share of the taxes evaded for its enablement services.

Get In Line Brother #22 - New IRS FAQ on UBS Accounts

On August 25, 2009, the IRS added a new FAQ to its FAQs on the voluntary disclosure initiative for foreign bank accounts. The FAQs as thus supplemented are here. The new FAQ is short, so I will just quote it verbatim:

Q52. Are UBS account holders eligible to make a voluntary disclosure under the IRS’s offshore Voluntary Disclosure Practice (VDP) announced on March 23, 2009, and set to expire September 23, 2009?
Yes, provided that the UBS account holder is otherwise eligible under the VDP. However, a UBS account holder becomes ineligible to make a voluntary disclosure under the offshore VDP at the time the IRS receives information from any source, including from the Swiss Federal Tax Administration (“SFTA”), UBS, an informant, or otherwise, relating specifically to the account holder's undisclosed foreign accounts or undisclosed foreign entities.
As part of the agreement with Switzerland and UBS announced by the IRS and the Department of Justice on August 19, 2009, UBS will be sending notices to account holders indicating that their information may be provided to the IRS under the agreement. If a UBS account holder gets this notification from UBS before September 23rd, this notification will not by itself disqualify the account holder from making a voluntary disclosure under the offshore VDP by the September 23rd deadline. Although many of these notices will not be sent by UBS to account holders until after September 23rd, the September 23rd offshore VDP deadline applies to all UBS account holders even if they have not received a notice by that date.

UBS account holders are thus well advised to Get In Line Brother.

Persons with foreign bank accounts, particularly Swiss bank accounts in banks other than UBS, should also seriously consider the offer, given the uncertainties of the effects of Switzerland's reinterpretation of its exchange of information obligations under the double tax treaty.

The U.S. Deal with Switzerland and UBS -- Good Deal or Bad Deal? (8/19/09)

As revised 8/20/2009 8:00 am. and 8/25/12 (to Include the Annex at the end)

Some pundits are already speculating that the deal the U.S. got was not so good. At the surface, it does not look all that good. The U.S. wanted 52,000 names and is getting 4,450 (approximately) in addition to those it already received (perhaps 250). That's less than 10% in of the claimed UBS account universe.

Now let's scratch the surface. The agreements as released do not state the criteria that will be used to identify the 4,450 (approximate) that UBS will disclose. The criteria are set forth in an annex to the agreement that will be release in 90 days, well after the current voluntary disclosure initiative has closed (on September 23, 2009). Without the criteria, UBS' U.S. account holders will not know whether they have drawn the black bean. Each UBS U.S. depositor who has not already joined in the IRS' voluntary disclosure program will not have certainty that his name and account(s) will not be picked. It is true, that the letter UBS is required to use to notify the account holders who draw the black bean will notify the account holders that they can still get in the program. But, the program only lasts through September 23, 2009, and it appears that the picking of names will extend beyond that date. IRS Commissioner Shulman has confirmed that the voluntary disclosure program will be open only for clients who receive UBS letter notices prior to the September deadline.

Moreover, there will be criteria which probably is designed to get the biggest, most blatant abusers. It has been speculated that the criteria will include accounts with entities as an additional layer of secrecy and threshold dollar amounts. But the IRS press release yesterday cautioned that (IR-2009-75)

The IRS will receive information on accounts of various amounts and types, including bank-only accounts, custody accounts in which securities or other investment assets were held and offshore company nominee accounts through which an individual indirectly held beneficial ownership in the accounts.

Still, you can be sure that the IRS will design the criteria to pick up the big abusers, sort of like its DIF sampling techniques for auditing (except probably much more focused). So, perhaps -- and I too speculate here -- on a dollar tax-evaded weighting, perhaps the IRS will pick up well in excess of 50% of the loot on the table simply by careful selection of the criteria. This careful selection is implied by the indication that some $18 billion is involved under the criteria selecting the 4,450 accounts. The average account, therefore, is over $4 million. This does not indicate that there was a single selection criteria of a threshold dollar amount because there are undoubtedly other criteria (use of entities to further obscure the trail). And, besides criteria designed to identify the worst abusers, the IRS may also want to at least hold out the possibility that there will be some random sampling, so that those with direct accounts below whatever the general dollar threshold is (say $2,000,000) cannot rest easy and will still have an incentive to get into the voluntary disclosure program. In this regard, the criteria will not be released for 90 days, well after the voluntary disclosure program has ended.

Also, an essential part of the voluntary disclosure program and the names that get targeted by this round of UBS turnovers will be to learn the identities of the as many of the U.S. taxpayers' enablers that the U.S. can then bring to justice -- at least the most abusive of the lot. There will be lots of tentacles into U.S. lawyers, financial advisors and others who, like ordinary tax shelter promoters, raked off their share of the taxes that should have been paid to the Government. My gut tells me that many of these enablers are probably not resting easy, particularly because there is no voluntary disclosure for them that will negate criminal prosecution or mitigate any civil penalties that might apply. Moreover, if the U.S. gets to these enablers, the Government might sweep up many more U.S. taxpayers who were assisted by these enablers.

Finally, and perhaps most importantly in the long run, there is a breach in the dam because the Swiss Government has decided that its double tax treaty is more flexible than it had imagined before. The strict definition of tax fraud to permit disclosure under the treaties is being relaxed. And, the agreements contemplate that the U.S. will be able to make similar exchange of information requests on the basis of similar criteria against other Swiss banks involved in UBS-type shenanigans (probably all of them to some degree or another). And, as the Swiss feel similar pressures from other organized and powerful countries, its wall of secrecy is likely to erode even more.

So, bottom line, I think these developments are good for the U.S. Large goals often are achieved in increments. And this particular increment is not just incremental -- it is a big jump.

Addendum:  As mentioned, the criteria for the request are in the annex.  The Annex may be viewed in an official pdf here or in html here.  The entire document is relatively short and a good read, but here are some key excerpts:

2. The agreed-upon criteria for determining “tax fraud or the like” for this request pursuant to the existing Tax Treaty are set forth as follows:

A. For “undisclosed (non-W-9) custody accounts” and “banking deposit accounts” (as described in paragraph 1.A of this Annex) where there is a reasonable suspicion that the US domiciled taxpayers engaged in the following: 

a. Activities presumed to be fraudulent conduct (as described in paragraph 10, subparagraph 2, first sentence of the Protocol) including such activities that led to a concealment of assets and underreporting of income based on a “scheme of lies”[i] or submission of incorrect and false documents.  Where such conduct has been established, persons with accounts of less than CHF 1 million in assets (except those accounts holding assets below CHF 250,000) during the relevant period would also be included in the group of US persons subject to this request; or 

b. Acts of continued and serious tax offense for which the Swiss Confederation may obtain information under its laws and practices (as described in paragraph 10, subparagraph 2, third sentence of the Protocol), which based on the legal interpretation of the Contracting Parties includes cases where (i) the US-domiciled taxpayer has failed to provide a Form W-9[ii] for a period of at least 3 years (including at least 1 year covered by the request) and (ii) the UBS account generated revenues of more than CHF 100,000 on average per annum for any 3-year period that includes at least 1 year covered by the request. For the purpose of this analysis, revenues are defined as gross income (interest and dividends) and capital gains (which for the purpose of assessing the merits of this administrative information request are calculated as 50% of the gross sales proceeds generated by the accounts during the relevant period). 

B. For “offshore company accounts” (as described in paragraph 1.B of this Annex) where there is a reasonable suspicion that the US beneficial owners engaged in the following: 

a. Activities presumed to be fraudulent conduct (as described in paragraph 10, subparagraph 2, first sentence of the Protocol) including such activities that led to a concealment of assets and underreporting of income based on a “scheme of lies”[iii] or submission of incorrect or false documents, other than US beneficial owners of offshore company accounts holding assets below CHF 250,000 during the relevant period; or 

b. Acts of continued and serious tax offense for which the Swiss Confederation may obtain information under its laws and practices (as described in paragraph 10, subparagraph 2, third sentence of the Protocol), which based on the legal interpretation of the Contracting Parties includes cases where the US person failed to prove upon notification by the Swiss Federal Tax Administration that the person has met his or her statutory tax reporting requirements in respect of their interests in such offshore company accounts (i.e., by providing consent to the SFTA to request copies of the taxpayer’s FBAR returns from the IRS for the relevant years).  Absent such confirmation, the Swiss Federal Tax Administration would grant information exchange where (i) the offshore company account has been in existence over a prolonged period of time (i.e., at least 3 years including one year covered by the request), and (ii) generated revenues of more than CHF 100’000 on average per annum for any 3-year period that includes at least 1 year covered by the request. For the purpose of this analysis, revenues are defined as gross income (interest and dividends) and capital gains (which for the purpose of assessing the merits of this administrative information request are calculated as 50% of the gross sales proceeds generated by the accounts during the relevant period). 

[i] Such “scheme of lies” may exist where, based on the Bank’s records, beneficial owners (i) used false documents; (ii) engaged in a fact pattern that has been set out in the “hypothetical case studies” in the appendix to the Mutual Agreement concerning Art. 26 of the Tax Treaty (for example, by using related entities or persons as conduits or nominees to repatriate or otherwise transfer funds in the offshore accounts); or (iii) used calling cards to disguise the source of trading. These examples are not exhaustive, and depending on the applicable facts and circumstances, certain further activities may be considered by the SFTA as a “scheme of lies”. 

[ii] For “banking deposit accounts” based on the Contracting Parties’ legal interpretation a reasonable suspicion for such tax offence would be met if the US persons failed to prove upon notification by the Swiss Federal Tax Administration that they have met their statutory tax reporting requirements in respect of their interests in such accounts (i.e., by providing consent to the SFTA to request copies of the taxpayer’s FBAR returns from the IRS for the relevant years). 

[iii] Such “scheme of lies“ may exist where the Bank’s records show that beneficial owners continued to direct and control, in full or in part, the management and disposition of the assets held in the offshore company account or otherwise disregarded the formalities or substance of the purported corporate ownership (i.e., the offshore corporation functioned  as nominee, sham entity or alter ego of the US beneficial owner) by: (i) making investment decisions contrary to the representations made in the account documentation or in respect to the tax forms submitted to the IRS and the Bank; (ii) using calling cards / special mobile phones to disguise the source of trading; (iii) using debit or credit cards to enable them to deceptively repatriate or otherwise transfer funds for the payment of personal expenses or for making routine payments of credit card invoices for personal expenses using assets in the offshore company account; (iv) conducting wire transfer activity or other payments from the offshore company’s account to accounts in the United States or elsewhere that were held or controlled by the US beneficial owner or a related  party with a view to disguising the true source of the person originating such wire transfer payments; (v) using related entities or persons as conduits or nominees to repatriate or otherwise transfer funds in the offshore company’s account; or (vi) obtaining “loans” to the US beneficial owner or a related party directly from, secured by, or paid by assets in the offshore company’s account. These examples are not exhaustive, and depending on the applicable facts and circumstances, certain further activities may be considered by the SFTA as a “scheme of lies”.

Get in Line Brother #21 - US - Swiss - UBS Agreements

The Agreements -- or at least some of them -- have been made public. The IRS summary announcement is here. I have the documents underlying the announcement and will post some analysis later today. Key summary points for now, however, are:

• The IRS will make the requests pursuant to the double tax treaty between the U.S. and Switzerland.

• Apparently the requests will be by categories that UBS has estimated will produce about 4,450 names over a period of about a year.

• The account holder will be notified of UBS's intent to deliver the information and documents requested and will have the right to pursue relief from the Swiss authorities. Given the nature of the agreements, however, pursuing this relief might be tilting at windmills, but could slow the actual turnover down somewhat.

• The account holders will also be notified that, should they pursue this relief, U.S. law requires that they must notify the United States that they are doing so. So, provided this group follows the law, then they will self-identify themselves to the IRS.

• Finally, and most importantly, U.S. persons whose identities and information are disclosed pursuant to this process (i.e., not previously known to the IRS) still have the opportunity to join the voluntary disclosure program. Here is the pertinent part of the notice to account holders that the IRS and UBS agreed upon:

Under the terms of the voluntary disclosure initiative, as explained by the IRS in subsequent guidance, there is still an opportunity for you to make a voluntary disclosure, but that opportunity will be lost upon the provision of your account data to the IRS in response to the treaty request. Accordingly, if you are considering making a voluntary disclosure, it is important for you to do so now. The IRS has stated that a voluntary disclosure will be considered timely as soon as a taxpayer identifies himself and expresses an intent to disclose, even if the taxpayer has not yet completed amended or delinquent returns. For details and further information on this offshore voluntary disclosure practice or the more general voluntary disclosure practice, please visit the IRS website, including at: http://www.irs.gov/newsroom/article/0,,id=210027,00.html.

Get in Line Brother and Sister.

Note also the links to the right of this blog to other IRS resources on the voluntary disclosure program. Readers should also note that the IRS revises the FAQs relating to the voluntary disclosure program, so it is worth checking back from time to time. The FAQs has a list of the changes made on the periodic revisions at the top of the FAQs.

Get in Line Brother #20 - Other European Banks

The Wall Street Journal has an article this morning here titled More Banks in Europe Identified in Tax Probe. The Swiss banks other than UBS mentioned in the article are: Credit Suisse Group AG, Julius Baer Holding AG, Zürcher Kantonalbank and Union Bancaire Privée, known as UBP.

A few other notable quotes from the article are:

Early on, Justice Department prosecutors viewed UBS as a "stalking horse" case, which they could use to prod other banks to drop their business of helping rich Americans hide income from the IRS, according to people close to the case.

In the process, government officials hoped they could induce alleged tax evaders to come forward to pay their taxes and provide information about bankers, accountants and others who helped them set up their offshore accounts.

Lawyers following the UBS settlement now are watching to see whether the settlement establishes a blueprint for how the IRS can obtain information in the future from Swiss banks.