The recent guilty plea by Credit Suisse was the result of a government crackdown on overseas tax evasion, particularly in Switzerland. Credit Suisse was a Category 1 bank, meaning it was currently under criminal investigation. Category 2 banks, those that have reason to believe they may have committed criminal tax offenses, were invited to participate in a U.S. Department of Justice (DOJ) program in 2013.
The Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks (the “Program”) had 106 Swiss banks sign up by the December 31, 2013 deadline. Under this Program, Swiss banks are able to voluntarily disclose what may have been illegal services provided to U.S. taxpayers. In doing so, they will avoid criminal prosecution but will still have to pay penalties. The penalty for a bank will be up to 20% of the maximum aggregate dollar value of all U.S. related accounts (typically calculated on the day of the year when the aggregate value of all U.S. related accounts is highest).
The DOJ issued a June 5, 2014 notice that extended the due date for some disclosures from June 30, 2014 to July 31, 2014. The following requirements’ deadlines have been extended until July 31st:
- An Independent Examiner must verify information provided by Swiss banks regarding relevant bank employees who managed U.S. accounts as well as account transfers
- The Bank must demonstrate which if any U.S. accounts were not undeclared or were timely disclosed in order to mitigate any penalties
The reason for the extension is the difficulty Swiss banks have been having in meeting these requirements, particularly the second one. Obtaining proof that an account had been declared by a taxpayer is no small feat if the bank has no record of what a U.S. taxpayer reported on her own tax return. It would be easier to prove that the bank itself disclosed the account to the IRS, but it is possible that while the bank did not report the account, the taxpayer did. Proving declared or disclosed accounts can result in a significant mitigation in the penalties if there were many (or even just a few high-value) accounts.
Swiss banks are under high scrutiny by the DOJ, and these Category 2 banks should consider themselves lucky that they have the option to come clean and avoid criminal prosecution. The remaining Category 1 banks that are under criminal investigation will likely suffer a similar fate to that of Credit Suisse, which entered into an over $2.5 billion plea bargain for assisting U.S. taxpayers in tax evasion.