Foreign Account Holders Face Off Against IRS

Introduction

IRS’s quest to identify 51,000 suspected tax cheats from Swiss banking giant UBS has ended in a settlement. Rumor has it that the Swiss will reveal the names of 5,000 U.S. taxpayers in an unprecedented reversal of its vaunted secrecy laws.

U.S. taxpayers with secret Swiss holdings must either fess up and pay hefty fines, or play Russian roulette with IRS criminal investigators. If caught, they will face lengthy jail time and monstrous penalties.

UBS Settlement

UBS assisted U.S. taxpayers in hiding billions in Swiss bank accounts, assuring them that Swiss secrecy laws would prevent IRS disclosure. The scheme collapsed when UBS plead guilty to several tax felonies and was forced to cooperate with IRS.

Although the Swiss government initially balked, it capitulated in settlement and will now identify thousands of tax evaders.

Disclosure

IRS has a limited amnesty program in effect until September 23, 2009. To avoid criminal prosecution, taxpayers must disclose their foreign bank accounts and pay all taxes due on unreported income, plus additional penalties.

See my March, 2009 Newsletter, Limited Amnesty for Offshore Accounts.

IRS Limitations

IRS has a limited capacity to prosecute tax crimes. During fiscal year 2009, there were slightly under 2,000 criminal referrals.

Assuming there are 51,000 potential tax criminals with Swiss accounts and IRS receives the names of 5,000, the chances of being caught is about 10% and the probability of being prosecuted drops to 4% (1 in 25).

Russian Roulette

Do the tax cheats comply with the amnesty and potentially lose up to 50% of foreign holdings, or play the odds, hoping to escape detection? The chances of being identified greatly increase if IRS nabs a promoter, a bank, investment advisor, accountant or attorney, who was actively involved with UBS.

In contrast, if an individual taxpayer travelled to Switzerland and dealt with UBS directly without an intermediary, the likelihood of being caught should be greatly diminished

Conclusion

Tax cheats with Swiss accounts face a high stakes, bet-your-life decision. Given their proclivity to commit tax fraud in the first place, I doubt many will divulge their holdings.

Those who were not actively engaged in tax fraud are the most likely candidates for limited amnesty offered by IRS.

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