‘Chaotic’ US tax stampede overwhelms specialists

Expats are angry at the heavy-handed tactics employed by the IRS to flush out tax cheats Reuters

Business has never been so good for American tax specialists in Switzerland. A previously niche calling has suddenly become a booming cottage industry struggling to keep up with demand for its services.

A steady trickle of clients became a torrent in 2009 when the United States punished UBS bank for assisting tax evaders. But the sluice gates were opened in August last year when Swiss banks were given the chance to turn in their US customers in return for immunity against criminal prosecution.

Since then, thousands of letters have been sent out to Swiss-based US citizens demanding proof that they have played straight with the Internal Revenue Service (IRS). The message is clear: tell us everything about your financial status or go bank elsewhere.

The sheer weight and complexity of some paperwork, coupled with the fear of getting something wrong, has driven many people into the arms of professional advisors.

“Tax preparers and accountants are being deluged with non-stop requests from US citizens to help them,” Jacqueline Bugnion, Director of the Swiss chapter of the American Citizens Abroad (ACA) organisation, told swissinfo.ch.

Where Americans hide accounts

Switzerland was by far and away the most popular destination of undeclared US assets, according to analysis of a 2009 IRS tax amnesty.

Of the 12,889 people who admitted they held hidden offshore accounts, 5,427 were located in Switzerland.

Another 1,058 were held in Britain and 556 in Canada.

France, Israel, Germany, Hong Kong, China, Taiwan and India were the other offshore locations uncovered by the probe.

One dual US-Swiss citizen, who only wants to be identified by her initials CW, was contacted by her bank in January giving her 18 days to come up with US tax paperwork backdated to 2008. “For years they thought I was British, but when I told bank staff I was American they went as white as a sheet,” she told swissinfo.ch.

Although CW says she had nothing to hide, she had allowed her US tax filings to lapse, believing she owed nothing in the country of her birth.

According to a 2009 IRS report, some 93.4% of her compatriots living abroad had done the same thing.

“When I started my business in Switzerland I had no idea I had to declare this to the US tax authorities,” CW said. Whilst recognizing her own error, CW is nevertheless angry at the heavy-handed tactics employed by the IRS to flush out tax cheats.

“I feel like cannon fodder,” she added. “Wealthy people will always find ways of hiding money, but we [honest US citizens living abroad] are being painted with the same brush. One of the most frustrating things is that I don’t have a voice. And if I did, nobody would be listening anyway.”

As a result, CW will be joining the 2,999 US citizens around the world who tore up their US passports last year – a leap of 221% on 2012. It is not a decision she has taken lightly, but having noted the ease at which people can open opaque, ‘no questions asked’ shell companies in the US state of Delaware, CW feels the victim of discrimination.

“I do not relish telling my great-uncle, who fought in World War II, that I am giving up my American citizenship,” she said. There are an estimated 35,000 to 45,000 US citizens living in Switzerland, but there are no records of how many have given up their passports.

Legal cash cow

Banks are being faced with massive bills to resolve their problems in the US following the August 29 Swiss-US tax evasion accord.

By the end of last year, 106 Swiss banks had signed up to the programme in order to escape criminal prosecution in the US.

This process alone has cost banks millions of francs in fees to check client data in the hunt for US customers.

According to Le Temps newspaper, lawyers are charging some CHF1,000 an hour for their services.

Online financial services firm Swissquote said it had incurred charges of CHF1.5 million to make the necessary checks.

A dozen Swiss banks, who were not permitted to take part in the US-Swiss programme because they were already under criminal investigation, are busy setting aside cash to cover anticipated legal costs.

The Basel Cantonal Bank announced in February that it had put aside CHF109 million to cover potential costs, more than halving its 2013 profits.

Credit Suisse profits were also dented by legal provisions last year as the bank set aside CHF175 million to settle US tax evasion claims.

“Shaking trees”

Tax advisors referred to the sudden stampede of panicked people as “chaotic”. One Swiss-based specialist, Steven Kraft, said he received several calls a day despite having no website or overt marketing operation.

“The IRS is shaking trees, and it is not coconuts that are falling out, but Americans,” he told swissinfo.ch. “Some of these people may have been born in the US, but moved to Switzerland as infants. They have no US passport, no social security number and no idea that they should have been filing tax returns to the IRS.”

“I have been practising in Switzerland for 35 years, but in the last five it has been a whole new ball game,” Kraft said. “It has become an extremely nervous situation for some people, more or less panic time.”

A streamlined service that cleans up clients’ standard tax returns since 2008 costs around CHF7,500 ($8,365), according to companies surveyed by swissinfo.ch. But sorting out more complex investments, such as funds or securities accounts, is charged by the hour.

And clients have had little choice but to seek professional help since August’s political agreement between the US and Switzerland that allows Swiss banks to give up their US customers to the IRS, according to Gregory Dean, head of US Tax & Financial Services in Geneva.

“What used to happen is that bankers would call up and say they had referred a client to me,” he said. “Now the banker brings the client to my office and doesn’t leave until they have regularized their tax affairs.”

Big demand

Some Swiss banks have simply restricted services to US clients or ejected them altogether, and among those that still choose to do business with such high risk clients, some have made some strange decisions.

“One of my clients had his French passport issued by the French embassy in Washington. That was enough for his Swiss bank to block his account,” Dean said.

ACA Switzerland is busy putting together a list of US tax specialists to help members find the services they need. But this is not proving easy.

“There are not enough tax preparers in Switzerland to cope with this sudden increase in demand, and that means costs are going to increase,” Bugnion warned.

In the meantime, overwhelmed professionals are also hard pushed to meet the rapidly mounting demand for their skills.

“It has not been easy finding new qualified people who can offer competent help in such a short period of time,” Kraft said.