It isn’t checkmate. It’s just “check.”

As the wheels turn slowly in Switzerland we have the newest case to come out of the Swiss courts.

Tax evasion vs. tax fraud

Swiss law distinguishes between tax evasion and tax fraud. If tax fraud exists, bank secrecy may be breached. If tax evasion exists, bank secrecy may stand.

This is the basic concept that has applied up to now, and continues to apply to the agreement between UBS and the IRS to turn over 4,450 names of U.S. customers of UBS. The basic laws for bank secrecy are unchanged. This is critical to understand.

What’s the difference? This is not an easy line to draw. Yet someone’s fortune and liberty may depend on understanding this.

Court ruling

The court considered a case of a UBS customer whose bank account was in individual name. The customer did not give UBS a Form W-9. (This is the U.S. tax form that identifies the individual and provides the taxpayer identification number.) Was this “tax fraud” so that the individual’s name could be turned over to the U.S. government?


According to the court, Swiss law prohibits breach of bank secrecy where these elements exist:

  • The individual’s name is on the account (not corporations, trusts, foundations, etc.); and
  • The income is not reported in the United States for income tax purposes; and
  • The account is not reported in the United States (as required on Form TD F 90-22.1); and
  • Form W-9 is not provided to UBS by the U.S. account owner.

Effect on UBS settlement with IRS for people who are still hiding

This seems to basically blow a ship-sinking hole into the settlement last year between the IRS and UBS for disclosure of 4,450 names.

If the Swiss court ruling is upheld in the Swiss judicial system, it would seem to me that people with directly-owned bank accounts should feel safer from having their names involuntarily handed over to the U.S. government.

That’s not the end of the road for you, if you’re in that position. I’m seeing banks in Switzerland and elsewhere pre-emptively push U.S. customers out the door. If you find yourself standing on Bahnhoffstrasse with a massive bank check in hand, you’ll have to declare that check as you fly into the U.S. If you go to another bank and open an account, I think you’ve upped the ante on your willful evasion of U.S. tax obligations from the perspective of the U.S. government. In short, you may have won a temporary reprieve but your problems aren’t over.

In other words, don’t expect your risk to go away, and your basic obligation to clean up your messes with the U.S. government continues.

Effect on people who disclosed to the IRS

For people who are already in the system with the IRS, this Swiss court decision has no impact. You’re in the system in the U.S., the IRS knows who you are, and the wheels will grind slowly to an eventual Closing Agreement. Money will change hands, and you’ll be in the clear, but considerably poorer.

What’s likely to happen next?

Here’s what I expect next:

  • Short term, you will hear an equivocal announcements from the IRS and the Department of Justice (they have to say something, but it will be nonsubstantive);
  • Intense behind-the-scenes pushing and shoving at a diplomatic level;
  • It is likely that this gets delegated to full parliamentary action in Switzerland.

Long term, I think the court’s ruling is a correct interpretation of current Swiss law, and the only way we’ll see a different outcome is if the Swiss government–at a parliamentary level–makes a retroactive change to bank secrecy law.

Psychological analysis from Dr. Phil

Meaning me, not the bald Texan dude on TV. πŸ™‚

Here’s my amateur-hour psychological analysis of the situation.

  • The Swiss are playing the passive-aggressive game well.
  • The IRS and the Department of Justice know they have been skunked and have known that for some time.
  • The IRS’s frustration will seek to vent somewhere, on someone.

I’m just sayin’.