Swiss Account Holders – Losing The Right To Be Informed About IRS Disclosure

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The Swiss continue to cave in and erode any bastion of bank secrecy within its picture perfect borders. The Swiss Parliament voted on March 6, 2014 to turn over information to foreign governments on certain account holders with undeclared accounts in Swiss financial institutions without providing the holders any advance notice of the disclosure. The move was in reaction to the 2011 admonishment to Switzerland by the Global Forum on Transparency and Exchange of Information for Tax Purposes to take measures to increase its tax transparency. If Switzerland took no action, it risked being placed on a global blacklist. The Global Forum is a division of the Organization of Economic Co-operation and Development (commonly referred to as “OECD”). We understand that the amendment must be finally approved at the end of the current Swiss legislative session in order to become effective law. This is understood to be a formality, and the amendment is expected to pass with little or no opposition.

No Notice to Suspected Tax Evaders

Under the amended law, information about those suspected of tax evasion can be sent to another country without prior notification to the account holder, provided the country to which the information will be sent can prove that giving such advance notice would hinder the investigation. It remains to be seen precisely what type of proof of hindrance of the investigation must be demonstrated by the country requesting the information. Given Switzerland’s recent track record in kow-towing to the United States, it is possible that the proof demanded will not be set at a high standard. Is it possible that the flimsiest of excuses will do?

Under Swiss law prior to the Parliament’s vote, account holders were to receive notice in advance of any disclosure of their account information. How did this help the account holder? Well, this notice permitted the account holder an opportunity to file a lawsuit in Switzerland blocking that disclosure.

Blocking Disclosure of Information to IRS

Of course, the United States found a way to circumvent such action by enacting a law in 1984. The US government’s weapon to counteract such lawsuits is contained in Title 18 of the US Code at Section 3506.

Generally, Section 3506 mandates that any US person who submits a pleading or other document to a court or other authority in a foreign country in opposition to an official request by the US for evidence of an offense must provide the US Attorney General (specifically the Department of Justice in Washington DC) with notice of that pleading at the time of his submission to the foreign court. The legislative history of Section 3506 shows that the law was passed specifically to assist US prosecutors dealing with accounts in tax haven countries, notably Switzerland.

The failure to serve the required notice does not result in a direct sanction under the terms of Section 3506. The sanction can be an indirect one, however. If a court order is obtained mandating compliance with Section 3506, and it is ignored, such noncompliance results in contempt of court. Contempt actions can be punished by imprisonment. In addition, if the required notice was not given and the IRS were to otherwise learn of an individual’s attempt to block the disclosure of information, it is possible the IRS might be inclined to more aggressively pursue the case. Perhaps it might look toward a recommendation of criminal charges rather than bringing only civil charges against the individual. In other words, failing to give notice under Section 3506 could mean taking a leap from the frying pan into the fire.

Failure to Give Notice and its Effect on Entry Into OVDP

Currently, it is unclear when notice must be given under Section 3506. The area is ripe with many legal uncertainties. What we do know with certainty however, is that entry into the IRS Offshore Voluntary Disclosure Program will be denied if the notice is not given. See FAQ 21 which provides in relevant part:

“[i]f a taxpayer appeals a foreign tax administrator’s decision authorizing the providing of account information to the IRS and fails to serve the notice as required under existing law, see 18 U.S.C. 3506, of any such appeal and/or other documents relating to the appeal on the Attorney General of the United States at the time such notice of appeal or other document is submitted, the taxpayer will be ineligible to participate [in the OVDP].”

The other thing we know with certainty is that if the IRS learns of an individual’s noncompliance from other sources, the individual will also be ineligible to enter the OVDP. The Swiss have just given the IRS another formidable weapon in its arsenal. Many persons who were on the fence about entering into OVDP may now become more anxious to do so, knowing they may not be advised in advance of a disclosure action.

In accordance with Circular 230 Disclosure

Virginia La Torre Jeker J.D., has been a member of the New York Bar since 1984 and is also admitted to practice before the United States Tax Court. She has 30 years of experience specializing in US and international tax planning as well as international commercial transactions. She has been based in Dubai since 2001; prior to that time she worked in Hong Kong for 15 years as a US tax consultant for international law firms, major banks (including HSBC) international accounting firms (Deloitte) and trust companies. Early in her career she worked in New York with the top-tier international law firm, Willkie Farr & Gallagher.

Virginia is regularly asked to speak at numerous conferences and seminars for various institutes and commercial organizations; publishes a vast array of scholarly works in her area of expertise, been interviewed by CNN and is regularly quoted (or has her articles featured) in local and international publications. She was recently appointed to the Professional Tax Advisory Council, American Citizens Abroad, Geneva, Switzerland. She was a guest lecturer at the University of Hong Kong, LL.M Program (Law Department) and served as an adjunct Business Law professor at the American University of Dubai and at the American University of Sharjah where she also taught the legal / ethical aspects of internet law and internet based transactions.


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