Michael J. DeBlis III, Esq. recently posted the following regarding Requests for Consent received from your swiss bank.

Picture this. You have an offshore account with a Swiss Bank that, for whatever reason, you haven’t gotten around to reporting on your U.S. tax return or on a FBAR. One morning, as you are sipping your coffee and checking your email inbox, you come across an ominous email from your Swiss Bank.

The subject line of the email immediately grabs your attention. It reads: “Important Information for U.S. Persons.” You open up the email and read the first three paragraphs:

1. “We have identified you as the beneficial owner of an account that is subject to FATCA. Participating foreign financial institutions such as ours are required to identify and report information on U.S. Persons to U.S. government agencies.
2. In this regard, we have the legal obligation to obtain your consent to provide this information. We would appreciate receiving the attached waiver signed by you no later than __________, 2014.
3. Please note that under FATCA, any U.S. Person who does not consent to his/her identity being reported will be identified as recalcitrant. Swiss Banks must close the accounts of recalcitrant account holders, resulting in them showing up on the leaver list of the Program. This disclosure will be made on a no-name basis. However, the identity of the beneficial owner(s) can be pursued through a U.S. treaty request for further information.”

You skip to the authorization form on the last page. If you sign the form, you discover that you would be waiving any protection under Swiss bank-client confidentiality laws and authorizing the bank to do the following:

• Report all required information regarding your account(s) to U.S. government agencies, including the United States Internal Revenue Service, the United States Department of Justice, and the United States Department of Justice Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks. 
• All required information includes virtually all information that the bank has on record. For example, it includes: 
• (1) your name and address; 
• (2) the data contained in IRS Form W-9;
• (3) the identity of holders of power of attorney for the account; 
• (4) details of any account transactions; 
• (5) the nature, balance, and composition of assets held in the account; and 
• (6) any other information pertaining to the account which may be requested or required.

• The information disclosed can be used for law enforcement purposes, including criminal proceedings and tax proceedings.

Your heart skips a beat. “Did I read that correctly? The information could be used by law enforcement to prosecute me?” As all this begins to sink in, you begin to ask yourself the following questions,

1. “What is this form?” 
2. “Must I sign it?” 
3. “If I don’t sign it, can the bank still report my account information directly to the IRS?”

The form that you received and have been asked to sign is called a “Declaration of Consent.” To understand its genesis and whether you have an obligation to sign it, it is necessary to take a slight digression in order to develop a basic understanding the FATCA Agreement between Switzerland and the United States.

I. Background Information: The FATCA Agreement Between Switzerland and the United States

On February 14, 2013, the Swiss Government and the United States signed an agreement for the implementation of the Foreign Account Tax Compliance Act of March 18, 2010 (“FATCA”) in Switzerland (“FATCA Agreement”). The purpose of the FATCA Agreement is to simplify the implementation of FATCA for Swiss financial institutions and, at the same time, give them permission to comply with the requirements of FATCA without breaching the bank secrecy inherent in the Swiss legal system.

Domestic banking secrecy laws prevent the disclosure of account information by Swiss financial institutions to the tax authorities. The FATCA Agreement provides a carve-out from Swiss law that would otherwise prohibit Swiss financial institutions from reporting directly to the IRS.

a. The Model 2 Intergovernmental Agreement
In order to simplify the implementation of FATCA, the IRS has released two models of an intergovernmental agreement: Model 1 and Model 2. Model 1 provides for an automatic exchange of information between the tax authorities of the contracting states. Model 2 requires foreign financial institutions to report account information to the IRS based on a declaration of consent of the account holder.

Additionally, pursuant to Model 2, foreign financial institutions must report:

1. the number of accounts they hold for which the account holders have not given their consent, 
2. as well as the total value of such accounts, 
3. without disclosing the names of the account holders. 
4. This aggregate reporting procedure is complemented by an exchange of information upon request based on the Swiss-U.S. double taxation treaty (The ratification of which is still being blocked in the Senate by Rand Paul - See our post U.S. Senator Rand Paul Continues To Block 5 Important Tax Treaties.)

In other words, to the extent that the IRS submits a group request to the Swiss Federal Tax Administration (“FTA”), it may obtain information about non-consenting U.S. accounts that have been reported by means of the aggregate reporting procedure.

Switzerland has concluded a Model 2 intergovernmental agreement with the United States. That agreement dictates which Swiss financial institutions are excluded from the scope of FATCA, which Swiss financial institutions are deemed FATCA-compliant, and which Swiss financial institutions are obligated to register with the IRS and to enter into a FFI Agreement with the IRS.

b. Basis of Obligations

Under the FATCA Agreement, Swiss financial institutions had until January 1, 2014 to register with the IRS and to enter into a FFI Agreement, the terms of which govern most of the reporting and withholding obligations of the Swiss financial institutions. The FATCA Agreement contains an enabling clause that specifically authorizes Swiss financial institutions to enter into FFI Agreements without incurring a penalty under the Swiss Criminal Code.

II. Consent of Account Holders and Reporting Requirements

The relevant section of the Swiss-U.S. FATCA agreement appears in Article 3: Switzerland shall direct all “Reporting Swiss Financial Institutions” to:

1. register with the IRS by July 1, 2014, and agree to comply with the requirements of an FFI Agreement, including with respect to due diligence, reporting, and withholding;
2. with respect to Preexisting Accounts identified as U.S. Accounts,
3. request from each Account Holder the Account Holder’s U.S. TIN and a consent, covering irrevocably the current calendar year and automatically renewed for each successive calendar year … to report and simultaneously inform the Account Holder through a letter of the Swiss Federal Tax Administrator (FTA) that, if the U.S. TIN and such consent are not given …

It is this section of the FATCA Agreement that authorizes the bank to seek your consent to disclose your account information to the IRS directly.

Must you sign the declaration of consent form?

The short answer is, “no.” In other words, even if your account passes the “duck test” for being a reportable U.S. account (i.e., If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck), you can still refuse to sign the declaration of consent. Absent your consent, the bank cannot report your account directly to the IRS.

However, as is the case with virtually everything when it comes to intergovernmental agreements, the consequences of refusing to consent can be severe. For this reason, a person should only refuse consent if his account is not considered to be a reportable U.S. Account under the Swiss-U.S. FATCA Agreement.

“Non-Consenting U.S. account holders” are subject to the following parade of horribles:

• • Under the FATCA agreement, Dreyfus must close the accounts of all recalcitrant account holders.
• Aggregate reporting by Dreyfus. Pursuant to the FATCA agreement, Dreyfus is legally obligated to report the aggregate number of accounts and the total value of all “Non-Consenting U.S. Accounts” by the end of January 2015, without mentioning the identity of the respective clients.
• Pursuant to Article 5 of the FATCA Agreement, the IRS may issue a group request to the Swiss Federal Tax Administration (FTA). A group request is a request made by the IRS for specific information pertaining to a non-consenting U.S. account. The information typically sought includes accountholder information, specifically the identity of the beneficial owner(s) of the account. Such requests are based on Article 26 of the Convention for the Avoidance of Double Taxation (the “Convention”) between Switzerland and the United States, as amended through the Protocol of September 23, 2009.
• A group request does not automatically mean that the FTA will release your account information to the IRS. Instead, it begins what can best be described as a review process.

III. Exempt Accounts

How do you know if your account is considered to be exempt from reporting? Annex II of the FATCA identifies certain categories of entities and products that are exempt or deemed FATCA compliant, because they are considered to present a low risk of being used by U.S. persons to evade U.S. taxes. Therefore, no reporting obligations exist under FATCA for these accounts and products.
The following categories of accounts and products are excluded from the definition of “Financial Account.” Therefore, they are not considered to be reportable U.S. Accounts under the Swiss-U.S. FATCA Agreement:

i. Vested benefits insurances under Swiss law;
ii. Restricted pension plan insurances (pillar 3a); and
iii. The following retirement accounts or products, provided they were (1) established in Switzerland and (2) maintained by (i) financial institutions incorporated in Switzerland or (ii) a Swiss branch of a financial institution incorporated outside Switzerland:
1. Retirement accounts held by one or more exempt beneficial owners;
2. Pension institutions or other retirement arrangements established in Switzerland under certain Swiss laws;
3. Vested benefits institutions;
4. Substitute occupational pension fund;
5. Guarantee fund;
6. Certain institutions for recognized forms of pension provision (pillar 3a);
7. Certain employer-funded welfare funds; and
8. Certain investment foundations.

The issue becomes whether your account can be “shoe-horned” into one of the aforementioned exceptions to the definition of “Financial Account.” Assuming that it can — i.e., perhaps it satisfies the definition of being a retirement account held by an exempt beneficial owner — then it would not qualify as a reportable “U.S. Account” for purposes of the Swiss-U.S. FATCA agreement. And if it does not qualify as a reportable U.S. Account, then the Swiss Bank has no right insisting that you execute a Declaration of Consent.

On the other hand, if your account cannot fit into any of the narrowly-carved exceptions to the definition of “Financial Account,” then it would be considered a reportable U.S. Account. And if it is considered a reportable U.S. Account, then the Swiss Bank has a legal duty to obtain your consent.
Some of the pitfalls to avoid are the following. First, don’t try to fit a square peg into a round hole. If your account is clearly a wealth management account, then no matter how hard you try to classify it otherwise, it is still going to be a U.S. Account, subject to reporting.

Second, do not overlook two critical conditions that must exist before the accounts or products listed above can be exempt from reporting. These conditions are as follows:

1. The account or product must be established in Switzerland; and
2. The account or product must be maintained by 

• i) a financial institution incorporated in Switzerland or 
• (ii) a Swiss branch of a financial institution incorporated outside Switzerland.

Because there is no greater trap for the unwary, let’s consider an example. Beth is the beneficial owner of an IRA that was purchased from a company called “AdvantaIRA Trust,” based in Florida. The IRA is funded by currency cash notes, which are stored inside a vault at a Swiss bank. Thus, the funds are held offshore, but the IRA itself is located in the United States.

While Beth’s IRA clearly satisfies the definition of being a retirement account held by an exempt beneficial owner, it would still be considered a reportable U.S. Account under the Swiss-U.S. FATCA Agreement. Why? Because it was established in the United States, and not in Switzerland. The fact that the source of funding for the IRA is cash notes stored in an offshore bank vault is meaningless. Therefore, the bank has a legal duty to obtain Beth’s consent.
III. Withholding Obligations

A “Reporting Swiss Financial Institution” is exempt from withholding tax with respect to an account of a non-consenting account holder if the following conditions exist:

1. The “Reporting Swiss Financial Institution” complies with its reporting obligations; and
2. The FTA exchanges the information requested by the IRS as part of a group request within eight months from the date of receipt of the group request.

If the FTA does not exchange the account information, the account will be treated as held by a recalcitrant account holder and withholding will be required. In that case, the “Reporting Swiss Financial Institution” must withhold tax on the income generated by the account and forward it to the IRS. “Reporting Swiss Financial Institutions” have at least until completion of the group request procedure before withholding is required.

The Swiss-U.S. FATCA Agreement is complicated. Be sure to seek legal advice before responding to a declaration of consent.