If you never got around to opening that Swiss bank account, you might want to wait a bit longer—at least until after Sept. 23. That is the date the IRS has set for any tax-evading American to come forward regarding 52,000 accounts held at Swiss banking giant UBS under a Voluntary Disclosure program.
Switzerland has bank secrecy laws that make it a felony to improperly disclose client identities, a feature some wealthy people find appealing. Unmoved to comply with IRS demands, Swiss authorities had threatened to seize the UBS client data and withhold it from the U.S. tax agency. That is until last week, when UBS, the Swiss government and the IRS reached a pact that will reveal the identities of an estimated 10,000 or so account holders.
The threat of disclosure has some tax evaders scrambling to come clean. In one week, 400 applicants sought Foreign Bank Account Reporting forms, more than four times the number requested all last year. By complying, violators face lower civil charges as opposed to criminal charges and heavy fines.
The Wall Street Journal reported that a Swiss account holder who voluntarily comes forward with a $1 million account earning $50,000 in unreported income annually from 2003 to 2008 might result in taxes and penalties that total $386,000, according to IRS estimates. By comparison, the IRS estimates that a similar account—discovered after the deadline—might result in $2.3 million in taxes and penalties, and the possibility of criminal prosecution.
The disclosure form also asks for explanations of where the funds came from and who helped set up the account, providing the IRS with leads on outside consultants who helped arrange the tax-evasion structures.
While UBS was targeted due to a few high-profile guilty pleas, this is just the tip of the tax-haven iceberg. It has been estimated that, worldwide, more than $5 trillion in assets are held in offshore accounts. In recent months, France, Germany and the United Kingdom have been waging battle against tax havens. In April, a group of 20 industrial and developing nations agreed to end an “era of banking secrecy” by releasing a list that categorized financial centers according to their degree of cooperation with the Organization for Economic Co-operation and Development tax standards.
One small tax haven, the Isle of Man, has already conformed to OECD rules, which may pressure others to comply. Authorities there say that, by mid-2011, all savings income will be automatically reported. The four countries the G-20 listed as the worst offenders were Costa Rica, Malaysia, the Philippines and Uruguay. Another 38 countries and territories—including Switzerland, the Cayman Islands, Bahamas and Liechtenstein—were “gray listed” as committed to meet international tax standards, but as not having implemented them.
The United States has signaled a desire to support reform of tax havens. Hedge funds are estimated to hold $500 billion of U.S. assets in offshore accounts, with about half belonging to tax-exempt foundations, endowments and pension funds.
Reform of the tax havens is just another step needed to cleanse the financial system following years of abuse. And it is quite likely we will find there is a lot of untaxed income overseas.
Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, amoney management firm. His column appears every other week. Views expressedare his own. He can be reached at 818-7827 or email@example.com.