U.S. Turns Up Pressure Worldwide on Banks Hiding Tax Dodgers

A $780 million settlement between UBS AG (NYSE: UBS) and U.S. authorities that established a Sept. 23 deadline for tax cheats to declare they own Swiss accounts has tax dodgers on the run.

U.S. citizens with offshore accounts are scrambling to avoid prosecution as the "drop dead" date for an Internal Revenue Service (IRS) amnesty program approaches.

In a settlement reached on Feb. 18, UBS, the largest Swiss bank, admitted that it assisted Americans trying to evade U.S. taxes, and disclosed secret data on 250 clients, paying $780 million in fines.  That deal was followed by another settlement in August, where UBS agreed to reveal another 4,450 clients to avoid further prosecution.

The latest agreement appears to have emboldened the IRS to widen its pursuit of tax cheats to a broad spectrum of wealth managers around the world as part of an intensifying crackdown on tax evaders.

Tax attorneys report counseling customers who are disclosing foreign accounts at such banks as Zurich-based Credit Suisse Group AG (ADR NYSE: CS), Julius Baer Holding AG (VTX: BAER), LGT Group in Liechtenstein, London-based HSBC Holding Plc (ADR NYSE: HSBC), and Bank Leumi Le-Israel Ltd (TLV: LUMI), Bloomberg News reported Friday.

"It is very possible that the IRS will be able to get strangleholds over the other banks because they'll have specific information which will permit them to bring specific allegations of wrongdoing before the U.S. courts," said Robert Fink, an attorney at Kostelanetz & Fink in New York. "This thing may spread like wildfire."

Fink said an undisclosed number of his clients came clean about 250 accounts at a dozen Swiss banks, as well as banks in Germany, England, Italy, Belgium, Singapore and Hong Kong. Other attorneys reported clients disclosed accounts to the IRS in Israel as well as the Bahamas, Granada and the Cayman Islands.

"I feel like I work in a bakery where I ask people to take numbers," Fink said. "I have never seen such a deluge. I was thinking of getting folding chairs in our reception area."

The crack down could spell big trouble for banks in traditional tax havens as panicked clients rush to beat the deadline.

The heat got turned up Friday when American clients of UBS AG were issued a letter formally warning them that their undeclared income in Switzerland may be revealed to U.S. tax authorities, Reuters reported.

The letter, dated Sept. 10, warned clients they have 20 days to appoint a lawyer in Switzerland, or be assigned one by the Swiss authorities.

The process may "ultimately result in the submission of your account documents.... to the IRS (U.S. Internal Revenue Service) and the loss of the opportunity to participate in the IRS Voluntary Disclosure program," the letter said.

Taxpayers who come forward are compelled to reveal names of bankers, financial advisers and others who helped hide assets from the IRS, Scott Michel, a lawyer at Caplin & Drysdale in Washington told Bloomberg.  By coming clean voluntarily, most taxpayers can usually avoid criminal charges, he added.

When the settlement was announced in August, the IRS in essence declared war on tax cheats regardless of where they are trying to shield income subject to U.S taxes.

"The agreement we reached today sends an unmistakable message to people hiding income and assets offshore. The IRS will vigorously pursue tax cheats around the world, no matter how remote or secret the location," U.S. Internal Revenue Service Commissioner Doug Shulman said when he announced details of the UBS settlement in August.

The crackdown has unsettled some governments who had previously thumbed their noses at any intrusions by the U.S. government to track down tax scofflaws.

Some governments in the Caribbean - which in the past have cultivated a modern-day reputation as impenetrable fortresses for ill-gotten funds and fugitive financiers - have been petitioning to get off an Organization for Economic Cooperation and Development (OECD) "grey list" of countries out of compliance with transparency accords.

Last month, the British Virgin Islands and the Cayman Islands were placed on the OECD "white list" of countries using internationally recognized tax standards by signing at least 12 bilateral tax agreements that meet OECD standards, Reuters reported.

It's a trend that's likely to spread to other hideaways that have established reputations with tax dodgers as safe houses for hiding income.  Most tax experts believe the high-profile crack down will cause financial centers around the world to bow to U.S. pressure regarding tax transparency.

"The tax haven window is closing down. People do not want to take on the U.S. government," William Sharp, an attorney with Sharp Kemm PA in Tampa, Florida, who represents American clients of UBS told Reuters.

News and Related Story Links: