Thank you, Mr. Chairman.
I am honoured to be a guest of your committee to share my thoughts about issues concerning offshore banking, tax enforcement, and voluntary disclosure.
I intend to very briefly shed some light on the American experience in this area over the last three years in the hope that it will assist you in considering what constitutes effective and efficient tax policy regarding this matter.
The requirements for Americans to report their foreign accounts on their tax returns and other filings have been on the books for many years, but in my 30 years of practice or so we may have seen a few cases from time to time, infrequent criminal prosecutions, occasional audits, and every now and then a voluntary disclosure, largely from an elderly American who had a foreign account and wanted to clean up his affairs before he died so his family didn't have to deal with it.
Beginning in 2007 our Internal Revenue Service and our Department of Justice's tax division began to undertake some very high-profile enforcement activity aimed at Swiss banks--for the most part, at the time, UBS--and at American taxpayers who had failed to report their accounts.
During 2008 and 2009, the U.S. government penetrated the long-standing wall of bank secrecy in Switzerland and sought indictments of Swiss bankers, American taxpayers, and others perceived by our government to have wilfully violated the reporting requirements for foreign accounts or to have assisted Americans in doing so. The media in the United States covered these events aggressively.
What happened was a substantial uptick in the number of American taxpayers who wanted to come forward and make a voluntary disclosure.
For decades the Internal Revenue Service has had on its books a voluntary disclosure policy aimed at giving non-compliant taxpayers a way to come back into the system and avoid criminal prosecution. The policy did not cover civil money penalties—financial penalties that might be imposed on such a taxpayer—but under American law, these penalties theoretically were so high that American taxpayers were discouraged from coming forward.
So a small group of practitioners—I was part of this group—approached the IRS in 2008 and urged them to adopt a settlement initiative that would provide Americans with a clear path to come back into the system and give them a reasonable degree of certainty over what financial consequences they would face for doing so. The program was announced in March 2009, it was updated with procedural and other guidance, and at its conclusion in October 2009, some 15,000 Americans had come forward to acknowledge their previously undeclared foreign accounts.
The program worked reasonably well, especially in the criminal intake phase, when the person would initiate the voluntary disclosure through the criminal investigation division of the IRS. As the cases have moved to the civil side, the program has broken down, and there have been a number of issues that the IRS has had to grapple with in administering the program and processing the cases.
Included in my material is an article that a colleague of mine and I wrote to catalogue some of these problems. We could be here all day to discuss them.
But from these events, I have developed a few thoughts over what would constitute, at least to me, an effective voluntary disclosure policy.
Number one: the policy should provide a clear path without any degree of trickery or risk for somebody to come back into the system and be reasonably assured that they will not be prosecuted for criminal tax violations. If the program does not provide for this type of risk-free approach, it will fail.
Secondly, obviously a taxpayer coming forward must pay tax, must pay interest. The significant issue is what will the penalty liability be for such a taxpayer. In my judgment, there ought to be a balance between a one-size-fits-all penalty, which is clearly very efficient to administer, and a penalty that recognizes that these cases fall across a panoply of conduct. Not everybody is a real tax cheat. There are some people who inherited accounts, who have managed them very passively, who have not benefited from their funds, and who would like an opportunity to attempt to argue for leniency when it comes to a civil penalty.
Third, there is also, at least in the United States, a class of taxpayers who live outside the country. For these people, tax compliance has not been very high. They're not criminals; they generally don't owe tax, because of applicable foreign tax credits. But in my judgment, a policy ought to take into account that there are “foot faults” in compliance that should not be penalized in the same way as real tax cheating.
Fourth, any policy ought to process these cases efficiently and rapidly. One of the things that broke down in the United States was that the IRS sought to audit every amended tax return that came in at the beginning of the program. The system quickly broke down. There was simply not enough time and not enough resources for this to happen.
In my judgment, a program can simply announce that it will spot-check amended returns. Practitioners and clients will then know that this would not be a good time for them to cheat again by filing false amended returns—this would be a foolish thing to do. The returns can be processed quickly; the cheques cashed; and the agents can move on to the next case.
Finally, and what I think to be most important, any successful voluntary disclosure policy should be accompanied by effective and public tax enforcement. I call it the velvet glove and the iron fist.
The IRS and the justice department in the United States have prosecuted maybe 25 UBS account holders; they've prosecuted people holding accounts at other banks; they have prosecuted bankers, lawyers, and investment advisers. Every time they did so, my telephone and the telephones of many of my colleagues would ring off the hook. People would come forward to make voluntary disclosures in response to this public enforcement action.
People who are considering whether to come forward should sense a real risk of what might happen if they don't. In an era where bank secrecy around the world, in my judgment, is fading away, this effective and public prosecution will continue to encourage people to come forward.
Thank you for your attention. I'm prepared to answer any questions you may have.