Ms. Sheppard's Article on the UBS Mess and its Permutations (8/29/09)

Today's Tax Notes Today has an article by Lee Sheppard, a noted commentator on the tax law and fashions and movies and other esoterica as segues into her tax law discussions surrounding the foreign bank account mess. In the article, titled, Now What? Dealing with UBS Account Disclosures, 124 Tax Notes 847 (Aug. 31, 2009) , Ms. Sheppard makes a number of points that I thought I would pass on here. Most of the following points probably of most interest to students of Federal Tax Crimes and not to seasoned practitioners.

1. Ms. Sheppard joins what from my perspective is the mainstream in thinking that the U.S. got the short end of the deal in the bargain with the devil (or as I would call it, with the pirates) -- referring to the Swiss Government and its representative pirate, UBS. (Ms. Sheppard graphically refers to Switzerland as the "whorehouse on the edge of town;" her point, is that Switzerland is still out there earning a living with tax evasion still among the services it offers.) While the U.S. certainly got less than it wanted, I disagree that it was all bad or even a defeat for the U.S. See my prior blog here. In typical hyperbolic fashion, Ms. Sheppard calls the deal a "Grubby Deal."

2. Ms. Sheppard's conclusion as to that bargain is tempered by some of her comments. Consider the following:

This deal does not do anything to help other rich countries deal with their own citizens' tax evasion by means of secret foreign accounts. In typically American unilateral fashion, the agreement would serve to scare American customers away from secret bank accounts while allowing the Swiss to continue selling tax evasion services to rich citizens residing in the rest of the world.

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Should the agreement be counted as a success if it scares potential customers and destroys the Swiss banking business in the United States? It may have done just that.

Ms. Sheppard says that there are two key factors to success for the IRS. First, this particular deal involving UBS must produce a representative number of cases that the U.S. can and will prosecute for maximum publicity / deterrence effect. Second, Switzerland must cooperate similarly (or appear to do so) with respect to other Swiss banks. In this regard, Ms. Sheppard notes that UBS was not the only Swiss bank offering "tax evasion services." Nothing particularly new here. Pirates do have to do something to earn a living. The recent indictments of the two Swiss enablers (I blogged that here) involve another bank.

3. Ms. Sheppard distrusts the Swiss:

It remains to be seen whether the Swiss will give up the business of selling tax evasion services to Americans.

Large outflows from UBS are being reported in the wake of the UBS investigation. Some smaller Swiss banks are declining U.S. customers, but others, including Credit Suisse, appear to be picking up the slack. There is a view that customers are fleeing UBS but not fleeing Switzerland.

4. Recognizing that many U.S. taxpayers preferred Switzerland because of the perception of security for their assets, Ms. Sheppard observes:

Swiss banks may be more secure than other tax haven banks, but it is unlikely that American tax dodgers would continue to pay their steep fees for mere security. It would be a good outcome for U.S. tax enforcement if the Swiss got out of the American market, because then tax evaders would have to put their assets at risk elsewhere.

5. My main point in the prior blog here was the deal with the Swiss Government represented an historic breach in the dam that is likely to grow. Ms. Sheppard addresses the point by asking the following question:

How is it possible that the agreement between the United States and Switzerland to settle the summons enforcement action to obtain the names of U.S. resident holders of UBS accounts is a historic breach of Swiss bank secrecy and a disappointment at the same time?

6. In response to that question, Ms. Sheppard cites two undisclosed documents. The first is a protocol to the U.S.-Swiss double tax treaty the contents of which are not yet disclosed or approved. Presumably the protocol will relax the historic Swiss interpretation of what is required in order to permit Switzerland to disclose to the U.S. The second is the criteria that will be used by UBS and Switzerland in turning over the agreed approximately 4,500 names and accounts. On this latter point, Ms. Sheppard says:

The Swiss government is thought to have agreed to expand its narrow view of the treaty term "tax fraud and the like," allowing disclosure of some account information. The Swiss government also agreed to provide account information without the United States having first provided the name of the taxpayer. The thinking is that the cases tendered by UBS will survive the treaty request process and be disclosed to the U.S. government.

All of this is dependent upon the Swiss Government, which values its tax evasion franchise, in doing right under the agreement. Ms. Sheppard is skeptical.

Those with experience fighting tax evasion are calling the agreement a baby step. They're not wrong. "While the agreement is a reasonable resolution of a particularly egregious case, it will not put Switzerland and its banks out of the cross-border tax evasion business for good," said the Tax Justice Network.

7. Ms. Sheppard notes that, given the sheer number U.S. taxpayers using offshore accounts for U.S. tax evasion, the Government will only be able to prosecute a relative few for the plethora of tax crimes that could be charged. The U.S. just does not have enough systemic resources for investigation, prosecution and incarceration to do attack the problem in large numbers.

8. As a result of factoring in the likelihood of being discovered by the IRS and the likelihood that, if discovered, the IRS would want to focus (i) its limited criminal prosecution resources on them and (ii) its investigation resources to even get the maximum penalties, many taxpayers are just walking away from the current voluntary disclosure initiative. JAT Note: These taxpayers have to be judgmentally impaired or be high risk takers who just prefer not to pay the penalties involved to avoid any risk of criminal prosecution.

9. The Government will prosecute a representative number of the sitting ducks -- at least at first the ones delivered up by UBS -- with a goal of making their cases tight and offering such a sweet deal that the defendant will be forced to plea, and do so quickly. (Nothing new here, because the overwhelming bulk of tax cases (as well as most of types of federal prosecutions) result in a plea.)

10. In picking the sitting ducks, the Government will be looking for a number of highly publicizable convictions by plea. (Those who are in the Government's cross-hairs might find this a particularly good time to strike a quick plea deal.)

If Justice prosecuted 50 UBS cases and 20 cases from other banks, that would create enough of a public impression of likelihood of being caught to qualify as a success. It is important that a fairly large number of UBS cases be brought. It is equally important that cases from other banks be brought, since some tough-minded customers figure that they will escape if UBS is not their Swiss bank. It would be good if some cases could be brought involving customers of banks in other bank secrecy jurisdictions, but that appears unlikely.

11. Notably for a tax article, Ms. Sheppard does give some sense of how the Sentencing Guidelines work in tax cases. She discusses ever so lightly the concept of tax loss (the first step in determining the Base Offense Level) and the Specific Offense Characteristic upward adjustment for "sophisticated means" of which the quintessential example is evasion related to a foreign bank account.