Cracking Down On Tax Shelters, Swiss Bank Pays $74M In Fines

By @MMichaelsMPN |
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    The Central Bank Wegelin & Co in St. Gallen, Switzerland is shown on Jan. 27, 2012. (Photo Ennio Leanza / Keystone / File)

    The Central Bank Wegelin & Co in St. Gallen, Switzerland is shown on Jan. 27, 2012. (Photo Ennio Leanza / Keystone / File)

    (MintPress) – Wegelin & Company, the oldest bank in Switzerland, admitted Thursday to helping wealthy Americans shelter more than $1.2 billion in one of the largest known cases of tax fraud in U.S. history. As part of the plea deal, representatives from the Swiss bank agreed to pay $74 million in fines — significant but largely a symbolic sum for the large financial institution.

    The money recovered is a small fraction of the estimated $5 trillion that Americans and corporations are thought to be hiding in offshore accounts, according to a 2008 Senate report. The settlement, while important, is a means for Swiss banks to placate critics and save face in what should be a much larger crackdown on tax shelters abroad.


    Admitting fault

    Representatives from Wegelin & Company, a Swiss bank founded in 1741, appeared in a Manhattan Federal Court this week, acknowledging that from 2002-2010, bank employees helped wealthy American account holders hide some $1.2 billion at the Swiss bank.

    Switzerland, Luxembourg and the Cayman Islands have historically been tax shelters for the wealthy elite to stash their fortunes, outside the purview of the Internal Revenue Service (IRS).

    Otto Bruderer, a Wegelin partner, commented on the widespread misconduct in court, saying, “From about 2002 through 2010, Wegelin agreed with certain U.S. taxpayers to evade the tax obligations of these U.S. taxpayer clients, who filed false tax returns with the IRS. Wegelin was aware the conduct was wrong.”

    It would be naive to believe that account holders or banks will voluntarily come forward with information regarding financial misconduct. With few resources to police transactions in the U.S. or abroad, the IRS has turned to a reward system for whistleblowers in an effort to incentivize the sharing of information by those working on the inside, with knowledge of tax sheltering.


    Catching tax evaders

    Although the program has been in place for years, the IRS has relied increasingly upon their whistleblower program in an effort to catch tax evaders by rewarding those who turn them in. Individuals presenting information leading to the recovery of offshore money or fraudulent tax schemes are eligible to receive a fraction of the fines paid by financial institutions and individuals found guilty of tax crimes.

    One of the more prominent cases occurred in September when Bradley C. Birkenfeld, a former employee at UBS AG bank, was awarded a $104 million “whistleblower award” for reporting widespread tax fraud committed by his former employer.

    During his career at the financial services firm, Birkenfeld helped thousands of wealthy Americans move their money to Swiss banks in order to avoid taxation by the IRS. After serving a 40-month sentence for his involvement in the UBS crimes, Birkenfeld was rewarded after his release from prison.

    Birkenfeld’s testimony was part of a larger 2009 case in which UBS was found to have helped 19,000 clients move more than $20 billion to Swiss bank accounts. After closing the division responsible for the mass tax evasion, the bank paid $780 million in fines and agreed to hand over account information for 4,500 individuals.

    Following the crackdown, an additional 33,000 tax evaders chose to report offshore accounts when faced with prosecution, generating an additional $5 billion in tax revenues.

    While the whistleblower program and occasional investigations have been somewhat successful in bringing in lost tax revenue, these are stopgap measures in place of broader systemic reform to a broken tax code.

    “It’s clearly a part of the piece of the puzzle. We know that because of this whistleblower program, citizens acting as attorney generals has been somewhat effective. We need to do more in terms of revising our tax code. We vastly under-fund the IRS in terms of collecting taxes,” said Professor David Schultz, an expert on government, nonprofit and business ethics, in a recent MintPress News statement.


    Extending long arm tax jurisdiction

    “Among the different ways we think about a tax system, it should be relatively simple in terms of enforcement. One of the problems that we have had in the international banking system is the fact that for many years Switzerland along with a few countries have created shelters where money can’t be detected,” added Schultz.

    The fundamental problem is one of international sovereignty, where the IRS can only investigate tax evasion insofar as foreign governments will cooperate. However, as Schultz notes, there is much that Washington lawmakers can do to simplify the tax code, empower the IRS and crackdown on fraud.

    “The other part of the problem is the tax code in the U.S makes it difficult to detect sources of income for wealthy individuals and doesn’t always require sources to report that income to the IRS,” continued Schultz.

    Indeed, talk of taxes has become a headache not just for the average American who dreads paying them, but also for legislators who have little knowledge of the overly complicated tax code in the U.S.

    As Schultz points out, “There are few members of Congress with a mastery of the tax code.” Although there are other, more pressing problems, the issue remains of paramount importance for collecting revenue and financing the repair of infrastructure and the maintenance of critical social programs, like Medicare, Medicaid and public education.

    Public support for a simpler, more progressive tax code is clear. A Pew Opinion poll conducted in August found that 58 percent of Americans believe that the rich pay too little in taxes. This reflects a growing public disdain for the radical supply side “trickle down” economic theory informing Reaganomics, the tax policy in America for the past 30 years.

    However, even those limited taxes paid by the highest income earners is reduced further as the wealthy can move their money, illegally, to tax shelters with little risk of a crackdown by the feeble IRS.

    The problem is one that extends to corporations as well, offshoring operations or cleverly skirting loopholes in the tax code as to avoid taxation. Currently, the IRS can tax any entity doing business, headquartered in or making income in the U.S.

    However, when it comes to taxing a U.S. company earning profit overseas, or its subsidiary companies, the legal reach of the IRS remains limited at best.

    The more comprehensive approach to closing tax loopholes and prosecuting violators, be they individuals or corporations, would require a legislative overhaul of the U.S. tax code and changing the methods of enforcement.

    “Tax Amnesties” a popular proposal by conservative lawmakers have been moderately successful in bringing in revenue from consistent tax violators by offering them the opportunity to pay outstanding taxes without fear of legal retribution.

    In 2009, Louisiana Gov. Bobby Jindal instituted a tax amnesty, bringing in $450 million in lost state taxes. While this is an impressive figure, an occasional amnesty doesn’t provide the long-term legislative teeth necessary to prevent future tax evasion.

    The long-term solution, promoted by Dr. Schultz and others, is to create a “long arm tax jurisdiction” capable of monitoring movement of capital and, if necessary, cracking down on violators who break tax laws.

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