Obama's war on tax cheats gains ground

Obama's war on tax cheats gains ground
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The Obama administration is gaining ground in its war against tax cheats, racking up victories in a global crackdown that has made it harder to escape the Internal Revenue Service.

President Obama’s battle against offshore tax evaders hasn’t gotten the publicity of some of his other priorities but under his tenure the IRS has amassed a string of victories — perhaps none larger than undercutting the Swiss banking sector’s status as the gold standard for secrecy.

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Just last week, the Swiss bank BSI agreed to pay a $211 million penalty to the United States, becoming the first financial institution to reach an agreement under a Justice Department program targeting the clandestine sector. Swiss banks have now paid nearly $4 billion for assisting tax evasion.

On top of those law enforcement efforts, Obama signed a 2010 law, the Foreign Account Tax Compliance Act (FATCA), to compel foreign banks to help deter U.S. taxpayers from hiding income offshore.

The IRS, meanwhile, is administering a voluntary disclosure program for Americans with offshore accounts that has so far brought in more than 50,000 taxpayers and recovered $7 billion in taxes, penalties and interest.

Taken altogether, the crackdown appears to be having an impact, according to experts.

“The risk calculus for an American to hide money somewhere has changed dramatically from where it was 10 years ago. Dramatically,” said Scott Michel, an expert on offshore tax issues with Caplin & Drysdale.

Expats themselves know that better than anybody, added one financial industry lobbyist.

“Talk to any of them and they will tell you that there is a changed environment,” the lobbyist said. “Americans really can’t easily or casually park their money outside the U.S.”

Senior Justice Department officials have long said their efforts have forced changes in how Swiss banks operate, in addition to banks in other countries known for helping taxpayers remain in the shadows.

Still, even administration officials acknowledge that, despite their best efforts, there will always be avenues for taxpayers seeking to skirt their taxes. 

“Greed has always been a significant motivator for too many individuals and entities, and fraudsters will always seek new ways to evade the law and line their pockets,” a Justice spokeswoman told The Hill.

Tax and banking experts add that beyond anecdotal evidence, it’s tough to quantify how successful the government’s initiatives have been in stopping offshore evasion, because it’s impossible to know how many people have secret accounts in other countries.

“I think, honestly, it’s hard to come up with a good objective measure for something like this,” said John Harrington, a former international tax counsel at Treasury.

Lawyers and other experts in the field say the White House has built on the work of previous administrations by establishing the voluntary disclosure program for taxpayers and the Swiss bank program, which allows institutions to come forward, detail offshore activity with Americans and avoid criminal prosecution.

The effort to curb offshore tax cheats started to accelerate when whistleblowers in Switzerland and Liechtenstein came forward during the George W. Bush administration, and has led to a host of federal investigations, congressional probes and high-dollar settlements with some of the biggest names in finance.

UBS and Credit Suisse, the two largest banks in Switzerland, have been hit the hardest by the administration’s crackdown, with Credit Suisse entering a guilty plea last year and agreeing to pay a $2.6 billion penalty. Five years earlier, UBS agreed to a $780 million settlement in which it would turn over the names of roughly 4,400 American account holders — one of the first cracks in the reputation for secrecy that the Swiss had cultivated for decades.

On top of that, the Justice Department touts more than 100 guilty pleas or convictions from account holders or those who helped facilitate their attempts to stiff the IRS.

Treasury officials say FATCA will only add to the amount of revenue that the government collects from former tax cheats, with a spokeswoman calling it “the global standard” in battling tax evasion. Roughly 110 other countries and 160,000 financial institutions have agreed to comply with the law, which requires foreign banks to report on U.S. accounts.

But critics of FATCA and even those who support its intentions wonder how successful the law will be. The banking sector has long insisted that the statue creates a huge burden by casting far too wide a net in the search for tax evaders.

Reuven Avi-Yonah, a professor at the University of Michigan, said that the administration’s efforts to ease the concerns of banking interests by striking agreements with other countries could easily reduce the amount of information gathered under the law.

Still, Avi-Yonah said just the amount of effort that the Obama administration was putting into the law would wear down would-be tax evaders. “FATCA has been a success from a deterrence and PR perspective,” he said.

But the banking lobbyist wondered whether the administration had only won with small-stakes tax cheats.

“People who are determined to evade taxes will continue to find ways to do it,” said the lobbyist, who mentioned Panama, Russia and China as potential tax havens for those seeking a Swiss replacement. China and Panama have signed FATCA agreements with the U.S.

But both Michel and Harrington, now a partner at Dentons, were quick to note that while other options exist, the safety and security that came with the secret Swiss accounts of old may be long gone.

“Swiss bank account almost sounds like a brand,” Harrington said. “It has a certain reputation where people feel very comfortable, very secure.”

Michel said “there may be some governments that want to thumb their nose at the U.S., but my guess is that the correlation between that list of countries and the place you want to put your life savings is pretty small.”

He added that other novel approaches to escaping U.S. taxes could carry their own significant burdens, like handing over control of your finances to a foreign party or investing funds in non-reportable, but hard-to-access, assets like land.

“Having money overseas is a bit of an albatross around your neck,” he said. “How do you use it and what happens when you want to sell it? What happens when you die? Do you turn your children into tax felons?”