The fallout from years of investigations into Swiss banking practices yielded another win for the Department of Justice: Credit Suisse AG was sentenced today for conspiring to aid and assist U.S. taxpayers in filing false income tax returns and other documents with the Internal Revenue Service (IRS). The punishment? U.S. District Chief Judge Rebecca Beach Smith ordered the bank to pay approximately $1.8 billion dollars to the United States by November 28 in accordance with the plea agreement.
The plea agreement, reached in May of 2014, called for Credit Suisse to pay out a total of $2.6 billion. Of that, $1.8 billion will be paid to the Department of Justice for the U.S. Treasury, $100 million to the Federal Reserve, and $715 million to the New York State Department of Financial Services. Credit Suisse has already paid $196 million to the Securities and Exchange Commission (SEC) for violating federal securities laws.
At the time of the plea, then Attorney General Eric Holder Jr., remarked in response to ramped up prosecutions, that no bank “is too big to jail.” In addition to the plea, investigations into Credit Suisse’s practices have resulted in indictments of seven Credit Suisse employees, the owner of a trust company and a number of the bank’s U.S. clients.
Today’s announcement was made by Deputy Attorney General James M. Cole, Acting Deputy Assistant Attorney General Larry J. Wszalek for the Justice Department’s Tax Division, U.S. Attorney Dana J. Boente for the Eastern District of Virginia and IRS Commissioner John Koskinen. Commissioner Koskinen said, about the sentencing,

Today’s sentencing is yet another striking example of what happens to those who help offshore tax evaders. We owe it to the vast majority of honest U.S. taxpayers to tirelessly search for and prosecute those who dodge paying their fair share and the unprincipled professionals who assist them.

It certainly appears that the U.S. isn’t slowing down its investigations. As part of the plea agreement, Credit Suisse has agreed to make a complete disclosure of its cross-border activities, cooperate in treaty requests for account information, provide detailed information as to other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed and to close accounts of account holders who fail to come into compliance with U.S. reporting obligations. That could mean unhappy disclosures for U.S. taxpayers who have not yet come forward – despite a number of programs in recent years which have afforded them the opportunity to do so.
It could also get worse for the bank. Under the agreement, Credit Suisse may not challenge the restitution amount, which can also provide a basis for an IRS civil tax assessment (read: there may still be more to come).
Earlier this year, Credit Suisse claimed that it was business as usual but it has to be rethinking how it markets to and conducts business with U.S. taxpayers. In 2009, Wegelin & Co., Switzerland’s then oldest bank remained defiant in the face of investigations into its business practices, instead recommending that clients” exit from all direct investments in US securities…” Four years later, however, the bank sang a different tune: after the bank was indicted, it was eventually forced out of business.
Credit Suisse, like UBS, has so far survived the crackdowns and the new Foreign Account Tax Compliance Act (FATCA) requirements. That doesn’t mean, however, that things aren’t changing. The much-touted Swiss banking privacy laws are showing cracks and investigations into Swiss banks and their U.S. clients are ongoing.

Yesterday was a pretty busy day in the media. There was a lot of thought and commentary about the election and what it meant for the country. You might not have noticed, then, that the 47th Commissioner of the the IRS was saying his goodbyes before the American Institute of Certified Public Accountants (AICPA) in Washington, DC in preparation for slipping out the door. Commissioner Shulman’s last day is slated to be November 11, as previously announced.

The speech was, as you’d expect, a retrospective of Shulman’s career. He highlighted what viewed as his achievements and the challenges still ahead.

Shulman hit first on offshore tax evasion. Those of us who have practiced during Shulman’s five year tenure understand that this has been a major priority in his administration. Shulman is clearly particularly proud of victories associated with UBS and other Swiss financial institutions; I once referred to the changes in banking secrecy laws under his watch as “The Biggest Story in Banking, Thanks to IRS.” He also highlighted the nearly 38,000 voluntary disclosures under offshore account related amnesty programs, resulting in more than $5.5 billion in collections so far.

With respect to domestic compliance efforts, Shulman made a nod towards increased cooperation (a characterization of which I’m sure many of my colleagues will disagree). And he’ll probably get quoted out of context for the rest of eternity for giving a nod to our “system of voluntary compliance.” Tax evaders love this kind of stuff because they take it to mean, literally, that you only pay if you want. Instead, it is, as Shulman pointed out, a system where taxpayers are responsible for completing their own records, are expected to do so honestly and rather than review every return for accuracy (as is the system in many countries), the IRS makes “judgments about issues to pursue, and returns to audit.”

Technology, fraud and processing were also key issues under a Shulman administration. He noted that it was “enormously gratifying that the IRS successfully migrated from a weekly processing cycle to daily processing this year” – something that had been in the pipeline for nearly 30 years. He almost sounded like the CEO of a private sector company for a bit during his speech, touting “real-time analytics and compliance” as well as “the importance of continuing to invest in the technology infrastructure supporting the IRS.” Using data analysis and technology has, he said, resulting in stopping approximately $19 billion in fraudulent payments this year, compared to $12.5 billion over the same period last year and a measly $2.4 billion in 2009.

Shulman also talked about the advances in regulating tax preparers. I can’t imagine how well that went over at AICPA (feedback from anyone who was there?) as this has been a controversial topic in the tax world. He did mention that the IRS is planning to launch a public database so taxpayers can ensure that they are using a registered tax return preparer. Interesting.

With respect to customer service, Shulman crowed about the recent results of the American Customer Satisfaction Index which measures customer satisfaction across various industries and government agencies. In 1998, IRS bottomed out with a 32% approval rating. In 2011, the IRS received a 73% approval rating, their highest score ever. I guess it was his Sally Field moment to taxpayers: You like us, You really like us.

Shulman wrapped up by asking Congress to “keep a keen eye on tax legislation that adds to complexity and is difficult for taxpayers to comprehend and for us to administer.” In layman’s terms: knock it off with the politicking already. We need consistency.

And with that, Shulman delivered his last public speech as IRS Commissioner.

I don’t know if there was cake. Or balloons. There was, however, applause.

It will be interesting to see who fills Shulman’s shoes. Starting next week, Deputy Commissioner for Services and Enforcement Steven T. Miller will serve as Acting IRS Commissioner until there’s a new appointee. Since 1862, there have only been a handful of female IRS Commissioners: Shirley Peterson, Margaret Milner Richardson and Linda Stiff (technically she was an Acting Commissioner). Just saying. And that actually gives me an idea. I mean, he hasn’t met me. And this is crazy. But President Obama, call me maybe?

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Sometimes, what seems like a little story is actually quite extraordinary.

That’s what happened earlier this month, when what seemed like business as usual thousands of miles away came and went without a lot of attention. That business, with the bang of a gavel, was the Swiss parliament amending their tax treaty with the United States.

You might not have heard much about it. It didn’t have the sexiness of a Peyton/Tebow trade or the shiny appeal of an Apple dividend. But in one fell swoop, it completely changed the international banking climate.

It’s been no secret for years and years that if you wanted to hide money, the best way to do it was a Swiss bank account. It was the stuff of international thrillers and blockbuster movies. And the Swiss were not only complacent in such a scheme, they openly welcomed it. The secrecy of Swiss bank accounts dated back to the Middle Ages but was made law in the early 20th century with the passage of the Banking Law of 1934. That law not only confirmed Switzerland’s commitment to banking secrecy but made it a crime to violate those secrecy laws.

That commitment to secrecy has been a thorn in the side of many countries, including fellow Europeans like Germany and the UK, who have been constantly thwarted in their attempts to identify those who were evading tax by opening accounts in Swiss banks. Frustrations hit a boiling point in 2008 when those countries stopped playing nice and started pointing fingers. Germany, in particular, came out swinging, with Peer Steinbrück, the German finance minister, out and out accusing the Swiss of trolling for tax evaders, saying:

Switzerland offers conditions that invite the German taxpayer to evade taxes.

Steinbrück went so far as saying that Switzerland should be added to an international blacklist of tax havens as reported by the the Organisation for Economic Co-operation and Development (OECD).

Initially, Switzerland stuck to its guns, refusing to budge on its privacy policy.

A year later, however, Switzerland, reacting to international pressure, agreed that it would “move towards transparency” – whatever that meant.

And then three letters changed the whole game: UBS.

UBS is the largest bank in Switzerland and is considered the world’s second largest manager of private wealth assets. The bank came under fire in 2008 when the U.S. publicly stated that it believed that private bankers at UBS may have helped American clients hide as much as $20 billion in offshore accounts to avoid paying tax. The U.S. demanded that the bank named names but the Swiss government said that they would seize financial records themselves from UBS rather than allow them to be turned over to the U.S. And the battle lines were drawn.

In the end, after a number of false alarms, UBS settled with the U.S. government, and agreed to turn over the names of some U.S. account holders accused of tax avoidance.

Throughout the scandal, the Swiss maintained that the U.S. did not have the authority to serve a so-called “John Doe” summons on Swiss banks without specific taxpayer information. That position made finding and prosecuting those who were hiding assets difficult.

The tax treaty changes all of that. Scott Michel, a tax attorney and president of Washington DC-based law firm Caplin & Drysdale, called the change “a big deal.”

Under the new tax treaty, the IRS can ask the Swiss to disclose names of U.S. taxpayers at a bank with evidence of “behavioral patterns” that might point to tax evasion. And where might the IRS get that evidence? A prime source could be the IRS’ own offshore voluntary disclosure initiative (OVDI) and subsequent amnesty programs.

Under the OVDI, taxpayers who had previously not reported foreign assets had the opportunity to do so. Now, according to Michel, that information may prove useful to the IRS under the treaty terms. In the past, the IRS had to name names. Now, however, if they have evidence that, say, seven taxpayers who had been hiding assets used a particular banker, they can ask the Swiss to identify every American who did business with that banker. And it doesn’t stop at bankers. It could include advisors such as attorneys and brokers. The IRS need only make a valid request to the Swiss federal tax authority who will then serve process on the bank. If the request has enough evidence, Michel believes that the turnaround on information disclosure will be fairly speedy, noting that, under these terms, “the Swiss are not going to drag their feet.”

Also noteworthy? Under the terms of the treaty, the U.S. won’t be limited to chasing the big banks like UBS and Credit Suisse who do business inside the U.S. Now, the U.S. will be able to request information from small banks that don’t even do business in the U.S. That is significant.

So is this just about some wealthy taxpayers getting their comeuppance? Not at all. It’s much bigger than that.

All of the sudden, it’s not such a good idea for foreign banks to try to woo U.S. taxpayers with promises of banking secrecy. If the U.S. can make Switzerland turn over those names, many other countries aren’t so sure that they can hold out either. And the U.S. is emboldened by this success. Michel notes that “where the U.S. believes there are tax havens, they may seek to include the same kinds of provisions” in those treaties as in Switzerland. It’s all part of a new U.S. attitude – and one that most countries appear to respect.

And that makes some banks think twice about even hosting U.S. account holders. I’ve seen it in my own practice; many of our clients have received the equivalent of “Dear John” letters where the banks advise that, really, they’re just not that into them anymore. Michel agrees, noting that they have “many clients who were kicked out of their banks.”

Of course, with Foreign Account Tax Compliance Act (FATCA) looming, there will be a mandatory information exchange in place for banks all over the world. It will be, says Michel “a rare bank that doesn’t comply with FATCA.”

What does all of this mean? Switzerland has changed the game. Nobody wants to be “that guy” who doesn’t comply. Countries want to get off the blacklist. And, Michel adds, there is a “consensus growing that information exchange for tax and fiscal purposes alone is something to be promoted.” It’s not just about fighting terrorism or money laundering anymore. There appears to be a new understanding that information exchange is good for the global economy (Greece, anyone?).

Of course, whether you buy into that logic or not doesn’t matter. What’s done is done and with a couple of pen strokes, the U.S. government – largely acting in response to concerns from IRS – has succeeded in doing what even the Nazis could not do in terms of breaking down the walls of Swiss banking secrecy. That’s huge. And the consequences of that remain to be seen.

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You knew that it would be just a matter of time before the IRS set its sights on a new bank. Fresh off of victories involving UBS and Deutsche Bank related to tax fraud/tax evasion, the IRS has now targeted an “unknown British bank” for its role in a tax evasion scheme.

As before, the Justice Department isn’t naming names in the beginning. But the signs (including allusions to the size and location of branches) point to British based HSBC.

Vaibhav Dahake, of Somerset, New Jersey, is the individual taxpayer targeted in the investigation. He is thought to have conspired with a number of bankers at the as yet unnamed bank to hide assets in India from the IRS. If convicted, he could spend up to five years in prison. Whether the conviction will also affect his immigration status is unclear: Dahake became a U.S. citizen in 2006. One of the criteria for becoming a citizen is truthfully and regularly filing U.S. tax returns: Dahake allegedly filed false tax returns that failed to report his foreign accounts.

Here’s where the bank is said to be involved: when Dahake was shopping around his offshore accounts, he was advised by a New York banker that opening an account in India would mean that the income would not be reported to the IRS by the bank. No forms 1099 would be filed; when Dahake specifically asked again about the forms, he was allegedly told by another banker not to discuss them over the phone. At least five bankers are said to be involved in the scheme to divert funds to secret accounts. According to the indictment, as long as Dahake was smart about the transfers, he was told that he would “stay below the radar.”

This is the second time that HSBC has been fingered in an IRS international investigation. Last summer, HSBC was the target of an investigation into whether its clients violated banking secrecy laws; HSBC has vigorously denied the charges. Other cases involving HSBC clients have also made news.

With respect to this latest round of news, while HSBC hasn’t been publicly identified as the bank in question, it has made a statement:

HSBC does not condone tax evasion and fully supports the U.S. efforts to promote appropriate payment of taxes by U.S. taxpayers.

Of course, don’t think this is all a big coincidence. It’s not at all surprising that these cases are making news right now. The IRS is continuing to ramp up efforts to identify offshore accounts (look for more news on this in an upcoming post) and I think, at least publicly, they want taxpayers to understand that this is not just about Switzerland. And it’s not just about über-millionaires. Expect to see the IRS to use the “F” word (foreign) a lot in the weeks and months to come.

So maybe it is a kindler, gentler IRS after all… The IRS has announced that it will drop its civil suit against the Swiss-based UBS, despite the fact that the bank is not technically in compliance with an existing agreement. In a show of not-so-totally surprising deference to the Swiss government, the IRS indicated that it was confident that the bank would follow through on its promise to deliver about 4,500 names to the IRS. So far, the bank has turned over about half of those names.

The IRS isn’t going *too* soft on us, though. It’s clear that while they are expecting UBS to honor the terms of the agreement, it is willing to take additional legal steps if the bank chooses not to follow through. But for now, there’s no longer a civil suit on the books. I’m guessing that banking officials at UBS may be having a little extra Eichhof tonight…

So, I don’t say that on the blog very often (though my brothers would likely tell a different story from our years at home). But I’m sooo saying it now.

When the IRS won its prominent battle with UBS, I said (as did many tax and finance bloggers) that a win would only lead to more investigations. In terms of timing, the end of the Voluntary Disclosure Program last year was kind of a line in the sand. I predicted more vigorous prosecutions would follow.

Cut to today. Sure enough, another high profile tax evasion case has been announced. The US Department of Justice has launched a criminal investigation into whether clients of the international bank, HSBC, have violated banking secrecy laws. Notifications letters received by those clients are said to resemble those sent to UBS clients.

For its part, HSBC is declining comment. However, the bank has made it known that it does not assist clients in the commission of a crime. In contrast, UBS has admitted wrongdoing for assisting its clients in hiding assets from the IRS; as penance, the bank paid a hefty fine and agreed to turn over the account information for a number of its clients.

HSBC is headquartered in the UK. The UK was at the forefront of criticisms of Switzerland’s UBS and the Swiss banking secrecy laws. This could get interesting…

A special panel of the Swiss Parliament has concluded its 15 month investigation into the government’s handling of what has been referred to as a “tax crisis”: the UBS collapse amid allegations of tax evasion. The panel has heavily criticized the government for its response to the crisis, saving its harshest rebukes for Finance Minister Hans-Rudolf Merz.

The panel slammed Merz’ handling of the situation, faulting him for not understanding the scope of the crisis. They claim that had Merz involved other members of Parliament, rather than trying to fix the situation himself, UBS might have avoided having to turn over banking data to the US government. The turnover is part of a deal reached by the US government, the Swiss government and the banking giant following allegations that UBS was assisting US taxpayers in tax avoidance schemes (for its part, UBS admitted fault and paid a hefty fine).

Merz has admitted that he did not brief the Cabinet about the scandal – but claims he had good reason. He felt that leaking too much information would jitter financial markets. So, crisis avoided there, huh?

UBS is set to turn over an additional 4,500 names of US taxpayers with accounts at UBS that meet certain criteria this year. Interestingly, UBS is anxious to take part in the turn over; apparently, as part of the deal, the bank will be shielded from some additional civil lawsuits. But the Swiss government is still unhappy about the whole thing: in January of this year, the country’s highest administrative court ruled that the turnover was illegal.

Realistically, I don’t expect any dramatic last minute departures from the agreement. It was hard fought (the IRS originally wanted 52,000 names) and the US will not back down since it’s so high profile. Additionally, UBS just wants to move on (and, oh, not get sued). So really the only impediment would be Parliament. And despite the fact that Parliament is screaming about the turnover, there’s really only one party, the Social Democrats, willing to fight it. That won’t be enough to make the Swiss change directions.

A federal judge has declined Bradley Birkenfeld’s request for leniency. Birkenfeld must report to prison on Friday, January 8, as scheduled, to serve his 40-month prison term.

Birkenfeld pleaded guilty last year to helping many of his clients, including billionaire Igor Olenicoff, evade taxes. Olenicoff pleaded guilty in 2007 to filing a false tax return; he got two years probation and paid $52 million in back taxes, fines, and penalties. Olenicoff is said to be worth a whopping $1.6 billion.

Birkenfeld claims that the IRS would have never gotten Birkenfeld – or any other UBS clients – without him. On Sunday, he appeared on CBS’ 60 Minutes, claiming, “I gave them the biggest tax fraud case in the world. I exposed 19,000 international criminals. And I’m going to jail for that?”

Well, maybe he did a little more than that. Here’s a bit of his interview:

For his trouble, he’s looking for 30% of the take from the IRS. Who says that crime doesn’t pay?

What would it take for you to turn in your clients? Would 30% of the take do it? What if it meant jail time?

These are all things that Bradley Birkenfeld must have considered before approaching the IRS two years ago to turn in tax cheats at UBS. And he did it anyway.

Now, Birkenfeld isn’t quite so thrilled with the consequences. Over the weekend, he filed a motion to push back his prison start date (currently January 8) and reduce his sentence (currently 40 months in prison and a $30,000 fine).

Brace yourself: I think he might get something here. The government had initially recommended a lighter sentence based on the amount of cooperation that Birkenfeld offered in the government’s investigation. Birkenfeld further indicated that he would continue to cooperate with the government if they give him a little bit more time outside of prison. I’m not sure how much information he still has to disclose but, depending, that could be appealing to the feds.

But that’s probably where any sympathy from the feds ends. When Birkenfeld initially approached the IRS with information about the activities at UBS, he said he could not disclose the identities of his own clients without violating Swiss law. The feds claim that they later learned the identities of some of those clients without him and that Birkenfeld merely assisted them after the fact. Birkenfeld says that he disclosed some names, including that of his biggest client, Igor Olenicoff, before being charged.

The timing here matters. Under the whistleblower program, a tax whistleblower can receive of between 15% and 30% of the amount the IRS collects as a result of their information if the information provided is substantial. The IRS collected $780 million in penalty from UBS and $53 million from Olenicoff. If Birkenfeld is able to collect a percentage of any of that, it might make his sentence a little more palatable – something I’m sure that he considered before cooperating.

But the government sees it differently. They claim that Birkenfeld did not initially name names – and have gone so far to say that if he had, they would have recommended no jail time at all. They also point to Birkenfeld’s own bad acts: he was reportedly assisting Olenicoff as late as May 2008.

Birkenfeld pleaded guilty to tax conspiracy a month later. He was arrested at the airport on the way to his high school reunion. (Imagine that awkward conversation: So, where’s Bradley, guys?)

Whistleblower groups are urging the government to tread lightly. They claim that meting out harsh sentences for those who cooperate with investigations might lead to fewer folks willing to help out. The opposition claims that you can’t reward bad behavior because it might encourage others to do the wrong thing initially and then hold out hope that it will all be worth it later.

What do you think? Should whistleblowers do time – or should they be exempt? And should whistleblowers with so-called “dirty hands” be allowed to collect money for turning in tax evaders?

Today, the IRS published the “Prepared Remarks of Commissioner Douglas Shulman before the 22nd Annual George Washington University International Tax Conference.” You can read the whole speech here.

But for those of you who don’t have the time to read the 2703 word speech, here’s a summary:

Shulman started out with an update on three facets of international tax that he discussed last year: transfer pricing, hybrid structures and withholding taxes.

Okay, I know what you’re thinking: what the heck is transfer pricing? Transfer pricing is a complicated area of tax law involving international transactions among multinational corporations. Basically, what concerns the IRS is when these multinational taxpayers make inconsistent tax claims with respect to the same transactions.

Shulman agreed that the IRS often took too long to resolve transfer pricing issues and that the IRS was (gasp) inconsistent with respect to these issues. As a result, he announced that the IRS has established a Transfer Pricing Practice within their large and mid-sized business operating division to help out with communications and consistency.

A second important focus for the IRS was the use of hybrid structures in international tax planning. Hybrid structures allow taxpayers to take advantage of losses incurred in foreign affiliates and still claim certain US benefits – in other words, the best of both worlds. All of the losses, none of the tax. To achieve these results, these structures can be set up in many different forms and have a number of tiers. Shulman believes that with respect to these structures, the “underlying purpose is to either exclude income from taxation or obtain double deductions/credits in various jurisdictions.” He stressed that the IRS is in the process of litigating several cases on this very issue.

The final issue that Shulman discussed was withholding taxes for compliance by commercial banks, hedge funds, and other taxpayers. Quite frankly, it didn’t sound like the IRS had a lot to add here. They are “developing tools” to help their examiners identify transactions in which withholding applies. Um, so, they’re working on it.

He went on to discuss the current administration’s commitment to enforcing US tax laws with respect to international transactions. This meant a quick mention of the Foreign Account Tax Compliance Act of 2009; a modified version of FACTA was passed in the House yesterday as part of the Tax Extenders Act of 2009. It also meant a lengthy congratulatory chat about the IRS’ success with UBS and more “hurrahs” over the unexpected level of response from the voluntary disclosure program.

Shulman was pleased to note that there is evidence of increased due diligence by tax professionals to report offshore accounts and income generated abroad. That, of course, led to a discussion about the Global High Wealth Industry Group.

The Commish ended with a few remarks on corporate governance, risk and transparency.