IRS Plays Hardball with Swiss

A few years ago at a legal conference in Miami I heard a U.S. Assistant Attorney General state that, as a matter of internal policy, the United States Department of Justice considered any American engaged in offshore financial activity as suspect of tax evasion or other wrongdoing.

The U.S. Internal Revenue Service (IRS) has loudly and repeatedly adopted this perverse theory as their own. The IRS regularly issues scaremonger press releases citing offshore bank accounts, trusts and investing as part of a phony "Dirty Dozen" list of alleged tax frauds. (When pressed, the IRS admits that offshore financial activity for Americans is fully legal, as long as you report).

The latest example of this "guilty-until-you-prove-you're-innocent" approach came in Miami U.S. District Court yesterday.

In an unprecedented move against a foreign bank, the Department of Justice is seeking a broad "John Doe subpoena" to force UBS AG, the major Swiss bank, to turn over ostensibly all the names of thousands of wealthy U.S. clients. The IRS says it is looking for those who allegedly used the giant Swiss bank to avoid U.S. taxes.

Easier Ways

This dramatic, publicity seeking IRS ploy ignores the fact that the Swiss-American Tax Treaty has more than sufficient procedures to obtain just such information. But that wouldn't make big headlines for the IRS. It has been reported that UBS officials suggested the possibility that the U.S. could obtain the names through a request to Swiss bank regulators, as indeed they probably could, using the treaty.

The court action also ignores an agreement between UBS and the U.S. Federal Reserve in 1999. At that time the merger of Swiss Bank Corp. and Union Bank of Switzerland creating UBS AG was approved by the Fed -- but only after UBS agreed to provide the U.S. government with all information "necessary to determine and enforce compliance with . . . [U.S.] federal laws." This surrender went far beyond the financial information required to be exchanged under the existing U.S.-Swiss Tax Treaty and it also nullified Swiss bank secrecy laws that usually require a Swiss court order to release private banking information.

Here Come da Judge

To salvage some of his own skin an accused Bradley Birkenfeld, a former UBS banker, pleaded guilty June 20. He alleged that he and his UBS colleagues helped wealthy Americans hide money using UBS offshore bank accounts set up in the names of others.

In the Miami court filings yesterday, an IRS agent said that the trustworthy Mr. Birkenfeld claimed he was one of 40 to 50 UBS private bankers who made quarterly trips to the United States to manage customers, the implication being UBS-sponsored mass tax evasion. Birkenfeld told U.S. prosecutors that UBS holds an estimated $20 billion in assets for U.S. clients in undeclared accounts. And so?

Make the IRS Prove It

Let's get one thing straight -- if the DOJ and IRS have probable cause to believe any individual American has illegally avoided taxes, that person should be investigated and prosecuted if the evidence warrants it. Swiss law allows cooperation with the U.S. in cases of tax fraud, although tax evasion per se is not a crime in Switzerland.

But the IRS has no right to assume that every American with a UBS bank account is ipso facto guilty of tax evasion, nor do they have the right to access the banking information of thousands of innocent persons. IRS fostered media reports have suggested that up to 20,000 US citizens may be involved.

Replay of an IRS Ploy

This extraordinary DOJ demand means that the U.S. government takes the preposterous position that any U.S. person with a UBS account is automatically a potential tax evader.

As I have said before, this is an alarming replay of the same high handed IRS position taken in 2002 when the IRS made a phony issue of Americans using credit cards issued by offshore banks. Then the IRS attacked all Americans with offshore bank, investment or other accounts that issued credit cards accusing them of presumed tax evasion. Yes, the IRS conceded offshore-based credit cards were legal, but they insisted some people "might" use offshore credit cards to hide unreported income.

On that 2002 paper thin presumption, the IRS got the same Miami U.S. District Court to issue a "John Doe summons" that forced American Express and MasterCard to turn over records of 230,000 U.S. persons with offshore credit cards issued by banks in The Bahamas, the Cayman Islands and Antigua.

It also got a U.S. court to order VISA to turn over the records of hundreds of thousands of US persons with credit cards issued in any IRS-designated "tax haven" nations from Luxembourg to Singapore. (The court had jurisdiction because the major credit card companies had collection operations within the United States).

Numbers Game

When considering the UBS numbers, remember that in 2002 at first the IRS claimed that $70 billion a year was being lost by credit card evasion. Later they said they had identified 82,100 taxpayers who they claimed used offshore accounts to evade taxes, with an estimated annual tax loss at $447 million. When it was all over in 2003 a deflated IRS admitted that only about 1,300 taxpayers had been caught and paid $170 million in back taxes.

For this paltry return, information on hundreds of thousands of Americans with offshore credit cards had been turned over to the IRS to fuel their scare campaign. At the time Cato Institute Fiscal Policy Analyst, Veronique de Rugy, termed the IRS conduct as "flagrant attacks on the Fourth Amendment and gross abuse."

Dear readers, please recognize this UBS matter for what it is -- yet another phase in the IRS anti-offshore scare campaign. Their professed goal is to intimidate U.S. persons from exercising their right to invest, bank and enjoy true financial privacy in the only place such luxuries still can be found -- offshore.

It Is Legal

We repeat; pay your taxes due, file all IRS reports required, and protect your assets -- by going offshore. The Sovereign Society will be pleased to help you.

Now take a deep breath and repeat after me (IRS please note):

* It is legal to have and use an offshore bank account.

* It is legal to create and donate assets to an offshore asset protection trust or family foundation.

* It is legal to form and operate an international business corporation (IBC).

* It is legal to live abroad and to acquire dual citizenship and a second passport.

* It is legal to end U.S. citizenship and thereby remove yourself from the U.S. tax system.

* It is legal to purchase offshore life insurance and annuities that allowed deferred taxes.

* It is legal to invest in offshore mutual and hedge funds, precious metals and real estate.

* While you still can, discover the legal ways to bank and save taxes offshore; I tell you Where To Stash Your Cash. Click here.

* If you’re interested in Switzerland, click here for Swiss Money Secrets.