Voluntary Disclosure and Frozen Swiss Bank Accounts

by Phil Hodgen on December 9, 2013

I have been long silent on this topic but for those of you who need the information, here it is.

Folding

The Swiss government and banks are folding like a bunch of cheap patio chairs. Banks have started and will continue to hand over over information about their U.S. customers to the IRS. Expect this to continue, and expect the contagion to spread to other countries.

That’s not news.

Freezing

Some Swiss banks are now freezing 50% of the account balance of their American customers until the customers give proof that they have solved their U.S. tax problems.

I don’t see people talking about this too much. You need to know this is happening.

Let it roll around in your brain for a moment. Swiss banks are arbitrarily freezing half of their customers’ accounts, leaving the customers with a tough choice: enter the voluntary disclosure program or kiss their money goodbye. This tilts the legal strategy calculus dramatically.

Suggestion

My professional advice to you is “Don’t f___ around.” Make a decision on what to do. Make the decision fast. If you get to the point where your Swiss banker tells you that half the account is frozen, you have probably waited too long.

This more or less forces you into the voluntary disclosure program. That might be the right move for you or it might not. But your options are narrowing.

Why I Have Been Silent on OVDI

I have been silent because our office burned out on voluntary disclosure program cases. We no longer do them. We have one case lingering from the 2009 program, and that’s it. That one should be finished pretty soon.

So I’m not looking for new business here. If you want help, let me know and I will be happy to help you make a connection to someone. Ping me an email. I want you to be able to sleep well at night.

It’s Not Rocket Science

But really, a voluntary disclosure case is commodity legal work and takes relatively little skill. There are very few moving parts, and you can buy this service almost anywhere. (Well, don’t turn off your brain when you do this, but the basic idea still stands. You don’t need a rocket scientist tax lawyer.)

When I turn off Adblock I see that lawyers are buying advertising from Google, FFS. When a legal service is sold through Google AdWords, that’s when you know it is a commodity.

Except When It Is

Some of you out there do have tough facts. It’s hard to make a decision about what to do. Well, I should say it is easy to make the reflexive decision to use the voluntary disclosure program.

But if you are at all thoughtful and if you refuse to take government PR as the gospel, there is a judgment call to be made: use the voluntary disclosure program or find another method to solve the problem.

Criminal Prosecution

Frankly, in the vast, vast majority of situations the likelihood of criminal prosecution is nil. If you are talking to a lawyer about your situation and you are getting a steady diet of “Prison!” and “Fear!” you should ask for damned good reasons. And expect a couple of decades of experience in criminal tax defense to back up those reasons.

I am not saying there is a zero risk. Each case is different. I’m just saying that unless you are Dr. Evil Incarnate and big money is involved, you should assess your risks dispassionately and with the help of an experienced professional.

Tax cases are either money problems, or money + prison problems. I am telling you that very few tax cases are prison problems.

It’s a Money Problem

Most of these cases come down to money–minimizing the penalty risks and doing the tax returns right to minimize tax. Analyze your situation by looking at every possible strategy–even the dumb ones. What is the expected economic outcome of each alternative strategy? Assuming that prison risks are off the table, you are making a “minimize my expense” decision.

Well, that’s not strictly true. You have a money problem and an emotional problem. Some strategies for cleaning up your messes will have uncertainty built into them. If you can’t stomach the uncertainties, you should throw more money at the situation until you have certainty. And that usually means the voluntary disclosure program–this is the only way to buy immediate closure.

What We Do Now

As I said, we don’t do voluntary disclosure program cases anymore. We got sick of putting grandmothers on the government’s conveyor belt to oblivion.

But we haven’t walked away entirely from helping people who find themselves in a jackpot. We have taken a slightly different role in the process: we are the back office team.

Now we work with criminal tax defense lawyers on messy, problematic, high-stakes cases. You hire a criminal tax defense lawyer (I know who you should call) to deal head-on with the government. You want someone who is in semi-constant contact with the Department of Justice. Strategies are decided here.

We do the hard technical tax analysis and prepare the tax returns. Your tax returns will get looked at. The best thing you can do for yourself is to have those tax returns get a hostile audit and come back with a “no change” result. That gives your defense lawyer the best leverage for negotiating a favorable result.

That’s what we do now. It is the combination of experienced international tax lawyers and three in-house CPAs that makes the difference. We can (and do) have three, four or five of our people at projects for months at a time. They have had experience in dozens of cases just like yours. That’s power.

Tax returns are how you talk to the government about money. I don’t know anywhere else that combines the skill-sets of forensic accounting, tax accounting, tax return preparation, and hard-core international tax expertise to make those tax returns deliver the right message.

And you know what? We’re having fun with it.

Reader comments (16)

  • Phil,

    I have clients whose Swiss (and Israeli, and . . .) accounts are frozen by the banks, pending the clients signing W-9 forms and/or certifying that they are in IRS compliance. Obviously, clients are scrambling and calling me to un-freeze their accounts. These clients, of course, have two issues: access to their money, and the larger issue of IRS compliance. And, by the way, my experience is that the foreign banks freeze 100% of the account, not half.

    I know exactly what you mean regarding the disproportionality of the Offshore Voluntary Disclosure Program in cases with no tax fraud. In such cases, there may be a way for clients with fact patterns containing no tax fraud to come into compliance without a formal voluntary disclosure and its attendant penalty. In such cases, it may be possible to come into compliance and satisfy the foreign bank and unfreeze the account. But this avenue is very fact specific, and not available for all cases. Not everyone with foreign assets should avoid the OVDP, but not everyone with foreign assets should enter the OVDP.

  • SwissTechie says Dec 10, 2013 1:31 pm

    So, if the local account of a little fish gets frozen and they are thus forced into OVDP to get their taxed savings needed to pay the rent, can they do all of the OVDP annoyances on their own without paying for a lawyer with money that they don’t have?

  • It’s going to be interesting if the Anti-FATCA campaign get’s the 50,000 signatures for a Swiss referendum by next month.

    What is the US going to do if the Swiss people say NO?

  • Phil Hodgen says Dec 11, 2013 4:32 pm

    I hope the Swiss voters do say no to Uncle Sam. :-)

  • bubblebustin says Dec 12, 2013 5:08 am

    btw. a little observation : since 1/2013 it has been a strong trend in CH that many expats have taken out up to 9,900 CHF/month cash and the money has not returned.

  • Phil Hodgen says Dec 12, 2013 8:54 am

    Interesting trend. Expats are probably a small percentage of resident Swiss bank deposits, yet I suspect the banks do not like the drain from the deposit base. This is classically safe money for banks. This is their bread and butter customer.

    Nonresident deposits are fleeing Switzerland, too, and not just American money. Switzerland was once the banking equivalent of hiding money in your mattress for safety. I know that many people fleeing the Iranian revolution in the late 1970s stuck money in Switzerland — just in case. They knew what could happen because they experienced it. One wonders where “ultimate safety” money goes now. . . .

  • bubblebustin says Dec 12, 2013 10:22 am

    Phil, the Swiss and the economy are doing great – it is one of the richest per capita country in the world – the standard of living is very high. Since Basel II and III the capital base has slowly increased but as the SNB has put it today there is more room to the upside,
    nevertheless the swiss incl. the expats are a very cautious bunch of people hence the cash piles have increased in 2013 but it stays in the country which is imo. the right move with regards to Bernake`s QE and POMO.

    Just saw some more swiss bashing at http://federaltaxcrimes.blogspot.ch/2013/12/judge-rakoff-wegelin-judge-is.html#disqus_thread

  • Someone says Dec 13, 2013 12:37 pm

    I am someone who was scared into OVDI. Would like an opinion as to whether I should opt out from someone other than my lawyer whose experience is almost nil on optouts. Will contact you for a referral. Also wish I could buy an hour or two of your time on whether or not I should opt out, but I respect your decision to not want to have anything more to do with OVDI.

  • Phil Hodgen says Dec 13, 2013 1:32 pm

    @Someone,

    We are ridiculously busy until the end of the year. We did a TON of opt-outs and the message to you (and others in your position) is that you can look at the law and the Internal Revenue Manual and pretty much figure out what your result should look like. The IRS follows its own rules. By all means call the office. Tax professionals should not use fear as a sales technique. The OVDI is a useful tool but it is not the correct tool for everyone.

  • Michael J. Miller says Dec 13, 2013 5:34 pm

    Phil,

    Very interesting to hear you’ve done so many opt outs. If you don’t mind my asking, have you found that the IRS follows the mitigation guidelines from the Manual?

    Happy Holidays to you and yours!

  • Phil Hodgen says Dec 13, 2013 5:35 pm

    They have followed the mitigation guidelines to the letter.

  • Phil, a couple of comments

    First, I question the legality of what the Swiss banks are doing under Swiss law. In Canada, Ontario to be exact there was a case called Van DeMark back in the 1980s which basically says as a matter of common law a Canadian bank cannot freeze someone’s account on behalf of a foreign country. Given the common law origins of the case it is largely believed to be relevant to all common law jurisdictions including the US. Van DeMark is a smaller portion of a trilogy of cases under Canadian law where the IRS has been largely unsuccessful in enforcing tax claims in Canada(The IRS was the “foreign” country in the Van DeMark case).

    Now of course Switzerland is a civil law country not a common law country so everything I said previously could be totally inaccurate however, civil law countries tend to mirror common law countries on issues relating the revenue rule. One Swiss specific suggestion for someone who has a frozen account(and this is specific to expats/Swiss residents) is to contact a Swiss lawyer named Douglas Hornung of Geneva who specializes in US tax and banking issues but from a Swiss law perspective. If the last name sounds familiar that is because it is. I actually think you Phil may have met him or at least met his wife once.

    The other thing I have heard second hand relating to some of these recent stories is some Swiss banks want people with CLN’s issued after the 2004 law to provide proof the entered OVDI also.

  • Phil Hodgen says Dec 16, 2013 7:27 am

    Thanks for the comments. Yes I have met Mr. Hornung and his wife.

    I’m not sure what to say about freezing funds. Incredulous, I am. Said Yoda. :-)

  • Swiss law does cover the blocking/freezing of accounts. There are protections for the client. I am not familiar with specifics but Swiss legal counsel should know.

  • Immigrant says Dec 16, 2013 10:58 am

    Mr hodgen,

    You say that tax cases are either money problems, or money + prison problems.
    Could it be a money + deportation problem as well for immigrants?
    Not looking for legal advice here, but would you mind chiming in on this issue from the perpective of immigrants to the US?
    You can find many articles online saying that you can be deported for not having filed FBAR, and that OVDI is the only solution for immigrants. The answer is probably as always “it’s on a case by case basis”. But have you worked with immigration lawyers on the issue. Guidelines for immigrants would be great. Or are they in the same situation as the Swiss customers whose accounts are frozen?
    My immigration lawyer told me the same thing as the Swiss banks are telling some of their customers: “Enter the recommended IRS program or I won’t help you”. I dumped her. Didn’t make sense for me to spend a fortune on OVDI in my case. But the fear of deportation if I am audited has been keeping me awake at night.

  • Phil,

    Thanks for the info regarding the IRS following the mitigation guidelines. Obviously, there’s no guarantee, but it’s useful information indeed.

    As an aside, I’ve worked with Douglas Hornung as well, and my impression of him is positive.