February 8, 2010 - Phil Hodgen

German tax authorities and stolen data – report from John Nolan in Frankfurt

I received this email from John Nolan, an attorney in Frankfurt, and reproduce it with permission:


A quick update from the weekend German press:

  1. The CD with an estimated 1,500 names that has been offered to (and sampled by) the tax authorities of the German state of Nordrhein-Westphalen (administration of German federal taxes is conducted at the state level) has now been confirmed to come from Credit Suisse.
  2. The German tax authorities of the state of Baden-Württemberg (B-W) have been offered data involving an estimated 1,700 names that is rumored to be from good ol’ UBS. The B-W coalition government is showing signs of mounting some political resistance to purchasing this CD but right now the odds are that the pressure from an aroused citizenry will cause them to cave.
  3. The German tax authorities in Munich are said to be evaluating a similar data dump from yet another (smaller) Swiss bank and an as yet unnamed bank in Luxembourg.
  4. In Sunday’s FAZ there was an article about a guy who set up a commercial website (registered as such) for people to anonymously rat out their friends, relatives, co-workers and neighbors for tax evasion of all kinds. Under the business model he would shop the offered info anonymously to the relevant tax authorities and keep 15% of whatever they would pay for it. The public response was nearly immediate and huge. People were reporting illegal income of all kinds. Unfortunately for his business model, the tax authorities were less than thrilled and made him no cash offers. (Germany, too, has relatively few Carbon-Based Units, i.e. people, to pursue penny ante tax cheats. Consequently, like the IRS they save their staff and cash for the low-effort, high-reward targets.) The guy who did it was a writer who was really less interested in tax evasion than investigating German social mores. Ultimately, he closed down the site without forwarding any of the information but with a wealth of material on what makes his fellow citizens tick.

And, speaking of ticking, is the UBS-IRS deal about to blow up in everyone’s face?

Apocalyptic scenario: UBS doesn’t deliver as promised because the Swiss courts put the kibosh on doing so. Rather than engage in unmanly negotiatiations, an unsympathetic DoJ “forecloses” on its threat to put the habeus grabus on UBS’s US operations. UBS goes belly up. Financial markets already on edge due to fears of sovereign debt default by PIGS (Portugal Italy/Ireland Greece and Spain) plunge in response. World-wide depression, heartbreak of psoriasis, defenestrations, miscellaneous pathos, etc. follow.



John T. Nolan
Attorney at Law
Feuerbachstraße 5
60325 Frankfurt am Main
Tel: +49 (0)69 9720 4194
Fax: +49 (0)69 9720 4195
(email address removed to save John from spam; contact me if you want it)

In the followup email in which John said OK to posting, he provided yet more great perspective from outside of the U.S.:

You are free to post it any way you like.

I’m not trolling for business so attribution is of no great interest to me. (I get queasy just at the thought of having another client darken my door.) [Phil’s opinion: take this with a grain of salt. 🙂 This comment is true of most highly skilled lawyers I know. There’s a lawyer in Riyadh I know who says the same thing in his own way. But there’s always room for someone new/interesting, because people who are highly skilled are also intellectually curious, focused, and work really hard. Don’t be dissuaded from contacting John.]

The really interesting topic, by the way, is not the CD’s that rogue bank employees offer to the German tax authorities it is the CD, or rather CD’s that the IRS sends out free of charge in unknown quantities at unknown intervals to certain “treaty countries” (almost all in Europe). These CD’s contain the income reported on Form 1042-S by US banks and payors and paid to persons with an address in the respective treaty country.

The ugly truth about the IRS’s “automatic data exchange” with certain foreign “treaty partners” is that there is no real “exchange” involved because, to my knowledge, no treaty partner actually reciprocates with info about US citizen accounts in their countries. Whether the lack of reciprocity is due to inability (e.g. Germany is prohibited by its bank secrecy laws from collecting similar data from its financial institutions) or unwillingness (e.g. Germany’s bank secrecy laws are actually very flimsy, statutorily speaking, and could be easily disposed of were it not for domestic political concerns) the fact is that the US is getting nada, zip, zero in exchange for its data.

That data, however, when it is finally digested by the respective countries Carbon-Based-Units frequently leads to some nasty surprises on the part of the local citizenry who always regarded the US as a safe tax haven for their investments. As knowledge of these IRS CDs spreads through the local tax advisory community, the US will gradually lose its attractiveness as a safe haven for flight capital from Europe.

Maintaining domestic bank secrecy/privacy remains a goal of Switzerland’s neighbors even as they loudly denounce the Swiss for the same reason. For all their political posturing none of the so-called “victims” of Swiss perfidy in Europe would even dare suggest an automatic data exchange on the scale of what the IRS is already offering them.

The IRS’s “automatic data exchange” program was an IRS initiative during the Clinton administration. The resulting howls from the South Florida banking community could be heard all the way to D.C.. Since the IRS was proposing this as an act of completely spontaneous largess on its part, they finally pulled in their horns and restricted the release to certain treaty countries in Europe.

Whether and when we will ever demand reciprocity is a mystery to me. The IRS keeps this program under strict lock and key publicity-wise. And for good reason: we are voluntarily punishing our banks to the advantage of their competitors and gettin’ bupkis for our trouble. During a post-prandial Q&A at the 22d Annual Institute on Current Issues in International Taxation held in Washington, DC in December I asked the luncheon speaker (Mr. Michael F. Mundaca, Acting Assistant Treasury Secretary for Tax Policy) about what he could tell us of the specifics of automatic data exchanges. He said he was delighted at the question but then proceeded to use up the entire Q&A period talking around it without divulging any specifics. My guess he was probably taking a risk even publicly acknowledging the existence of the program even though the IRS has been at it now for the last 10 years.

Now there’s something that could use a little publicity.

US Real Estate Investments Voluntary Disclosure