What to Do if UBS Is Outing Your Secret Account
By PAUL SULLIVAN
Published: January 9, 2009
Swiss banking has a tradition of secrecy and service that dates back 250 years. But for one group of very rich Americans, that haven is at an end, with consequences for all United States citizens who have relied on secretive offshore accounts to keep their financial means private and their tax bill artificially low.
Americans holding such accounts at UBS, the world’s largest wealth manager, are about to have their funds returned to them — an estimated $18 billion — under pressure from the Justice Department. Prosecutors say the bank has about 19,000 accounts that have enabled United States citizens to evade at least $300 million a year in taxes — not including interest and penalties for delinquency.
UBS has been under investigation ever since Bradley C. Birkenfeld, a Boston-born former director in the bank’s Geneva office, began turning over information about the firm’s offshore accounts after leaving the firm in 2006. His decision — arising from a bonus dispute — put UBS in a bind. One result is that the bank closed the division that catered to Americans with Swiss-based accounts that the Internal Revenue Service did not know about.
After tracking them down, UBS is poised to move their money into accounts the I.R.S. will see — into a new account at the bank, over to another bank or to them directly as a check in the mail. As my colleague Lynnley Browning pointed out Friday in her article reporting the UBS plan, these methods all raise the possibility of paper trails that will make it easer for the I.R.S. to track down the tax evaders.
So what should these and all the other Americans with undeclared accounts in Switzerland do? Here are a few things to consider.
REPENT The best strategy is to come clean. No one at the I.R.S. is likely to believe you have a legitimate reason for having an undeclared, offshore account in Switzerland. (There are many reasons for having offshore accounts, like business interests in Europe, but those are declared and taxed.)
Right now, the I.R.S. wants your money; it’s not out to ruin your reputation. In the most likely way for the I.R.S. to seek taxes owed, the person’s name is not released because the case is treated as a civil matter. If you have a good excuse for having millions of dollars in an undisclosed account — you inherited it from a parent who set it up after World War II, you opened it during your days as a medical student in Geneva and forgot about it — the I.R.S. may seek only back taxes, interest and penalties, though the penalties can be upwards of 50 percent of what you originally owed.
If you were trying to skirt taxes, you should hire a good lawyer. One group in particular is in for a rude awakening: those who held non-United States securities in their undeclared accounts under the belief that doing so complied with an arcane and poorly written I.R.S. provision called the qualified intermediary agreement, or Q.I. The guidelines for the agreement say that banks serving American citizens who hold United States securities in undeclared offshore accounts can ask the account holders to fill out a form to be taxed, or the bank can pay an estimated tax from their accounts and allow them to remain anonymous. One way around doing either, some concluded, was for the clients to hold only non-United States securities. Not so.
“The Q.I. is between the bank and the I.R.S.; the tax obligation is between the individual and the I.R.S.,” said Jack Blum, a lawyer and expert on offshore taxation. “You owe U.S. tax on the income wherever it was earned.”
This is the rub: the United States is one of the few countries (along with the Philippines and Eritrea) that tax worldwide income, so the money made off French telecom stock is taxable.
BEG FORGIVENESS Chances are the Justice Department is not going to put you in jail. In the two courses of action above, your bank account will take a hit, as long as you’re the one coming forward, and you’ll move on.
There is one situation, however, that may draw criminal charges: if you created sham entities to hide your wealth, like a fake company in the Cayman Islands that receives payments from your Swiss bank account through Lagos and Copenhagen.
At the beginning of its investigation into UBS, the Justice Department made an example of Igor Olenicoff, a California property developer and philanthropist. Mr. Olenicoff had not paid taxes in quite some time on $200 million that was stashed offshore. He avoided a jail term because he had wise counsel, but it cost him $52 million, seven times what he would have owed had he paid taxes when he should have.
People are more likely to risk jail if they ignore the current opportunity to come forward and the I.R.S. eventually tracks them down, Mr. Blum and other lawyers who handle offshore taxation said. And in criminal cases, the person’s name is made public.
BE REALISTIC The mortgage mess and the Ponzi scheme attributed to Bernard Madoff have shown that things that seem too good to be true often are. Getting away with not paying taxes, though, is something no one should think realistic. It may seem that UBS’s clients were just unlucky, that they were simply victims of Mr. Birkenfeld’s desire to get back at his former employer. But as Mr. Blum points out, the bigger risk is the low-paid back-office worker who has access to a bank’s account information.
He knows this firsthand. He is one of the lawyers representing Heinrich Kieber, a former data worker at LGT Group, a private bank run by the royal family of Liechtenstein, who stole confidential data on thousand of clients and turned it over to a dozen governments. The United States was one recipient, and under I.R.S. code, a whistle-blower like Mr. Kieber will receive 30 percent of what is recovered. (Mr. Birkenfeld, as a convicted felon who was complicit in the offshore scam, is not eligible for the reward.)
CONSIDER THE ALTERNATIVE Moving funds to another country with banking secrecy (like Singapore, or even Belize or Andorra) in the hope of keeping the tax-free sham alive will only worsen the penalties if you’re caught, and it isn’t really worth it any more. The capital gains rates is only 15 percent, and even if President-elect Barack Obama and Congress eventually raise it to 20 percent, that is the level Ronald Reagan lowered it to in 1981 — and a far cry from the nearly 50 percent rate in the 1970s.
Then consider the clients at one Swiss private bank, the ultra-exclusive Union Bancaire Privée. They thought their money was getting the utmost care, only to find out it had been passed on to a fund manager who shuffled it on to Mr. Madoff. On top of the $700 million loss were layers of fees to each person who touched their money.
“When you put your money in the hands of these gnomes of Zurich, you may be putting your money in the hands of God-knows-whom doing God-knows-what with it,” Mr. Blum said. “The question is, do you really want to be out in that world?”