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Countries in Europe and Asia Agree to Modify Treaty Provisions: Profound Implications for Noncompliant U.S. Taxpayers With Foreign Accounts

March 13, 2009, Caplin & Drysdale

March 13, 2009

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Washington, D.C. – March 13, 2009 – At least seven countries and territories have announced that they will change longstanding positions on international information exchange in tax cases, which will have profound implications in the context of U.S. Internal Revenue Service civil and criminal investigations. Liechtenstein, Switzerland, Luxembourg, Austria, Andorra, Hong Kong and Singapore have indicated that bank information may be provided in accordance with model treaty and informational exchange agreements. "Previously, these countries and territories would honor an information request from the U.S. only if U.S. authorities could provide specific evidence of serious tax offenses," said Jim Mastracchio a member of Caplin & Drysdale. Under the modified provisions, a lower standard will apply. The respective governing bodies will have to enact legislation, and its treaties or governing international exchange laws will require revision, but the recent announcements start that process in motion.

With the change in policy, the release of bank account information to U.S. authorities becomes more likely. Now, "unlike the past, any American with an undeclared account, even if it is simply a private numbered account, is at risk of having information disclosed and shared among a large number of taxing jurisdictions in response to a properly framed request from the Internal Revenue Service," said Scott Michel, also a member of Caplin & Drysdale.

Taxpayers who have foreign accounts and are not in compliance with U.S. tax laws may want to consider the IRS Voluntary Disclosure Policy. Cono Namorato, another member of Caplin & Drysdale, and formerly with both the I.R.S. and the Justice Department's Tax Division, said, "The IRS will generally not seek criminal prosecution for tax crimes if the taxpayer meets the conditions of the IRS Voluntary Disclosure Policy." Given the broad changes in exchange policy, taxpayers should take action to ascertain whether a voluntary disclosure is appropriate.

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