J.H. Huebert had an excellent article about the US attempts to force the Swiss bank, UBS, to divulge information about US account holders to the IRS. These efforts are nothing less than an attack on Switzerland’s sovereignty in the form of its ability to establish and maintain its own banking laws.

This is the kind of arcane financial news that is easy to disregard. When people hear “Swiss bank accounts,” they may brush off the attacks as the problems of the ultra rich. If only we were so “unfortunate” to have this kind of problem to worry about, right? Unfortunately, however, I think we do. I believe that there is far more to this than a temporary, one-time money grab by the IRS from tax evaders. I believe this is also very bad news even for us “wage slaves.”

The day Mr. Huebert’s article appeared, the Justice Department announced that the US and Switzerland had reached an agreement in principle to settle the US lawsuit against UBS AG seeking the names of 52,000 account holders. No details of the agreement were released but, given the amount of leverage that the US can bring to bear on UBS’s operations in the United States, it would be astounding if UBS had not agreed to some major accommodation to US demands.

Let’s go back and supply a little context about how we get to this issue in the first place.

Like most countries, the US taxes its residents on income that they earn outside of the US. Unlike most countries, the US also taxes its nonresident citizens on their worldwide income. Solely by virtue of being born here, the US claims lifelong rights to your earning stream even if you take up permanent residency in another country. As a result, the US is constantly seeking ways, through treaties, laws or, now we see, international strong arm measures, to track the international financial transactions of its citizens, whether in the name of preventing drug trafficking, money laundering, tax evasion or other crimes.

US taxpayers are required to report, and pay taxes, on interest or other earnings derived from foreign accounts. Unlike US banks, which will send you and the IRS a Form 1099 each year, foreign banks do not have an obligation to report your earnings to the IRS. Accordingly, the IRS is keenly interested in finding out from you whether or not you have any such foreign accounts.

Schedule B to Form 1040 (used for reporting interest and dividends) asks, “At any time during (the previous year), did you have an interest in or a signatory or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account?” As described by the law firm of Bove & Langa in an on-line article about this matter, the answer to this question has serious potential consequences:

The question calls for nothing more than checking a “yes” or “no” box in response, but most taxpayers (and many tax preparers) just ignore it. The yes box or the no box, that’s it. There are no boxes that say, “maybe” or “I don’t understand the question,” or “I decline to answer on the grounds that an answer may incriminate me.” Maybe there should be such choices, since there are many who do not fully understand the serious implications of ignoring the question when such an account exists, or worse, of intentionally providing an incorrect answer, which, surprisingly, may include no answer at all. That is to say, intentionally leaving both boxes blank could be deemed a false answer by the IRS or a court.”

In addition to this reporting obligation on Form 1040, a U.S. citizen, resident alien and even certain persons who are not resident but are doing business in the US with no other connection are also required, by the Bank Secrecy Act, to report the existence of a foreign account to the IRS on Treasury Department Form 90-22.1 if the combined total value of all such accounts exceeds $10,000 at any time during the year. The definition of the type of accounts that must be reported is very broad and includes even prepaid credit card and debit card accounts. The report must be filed even if the accounts generate no interest or other taxable income. As described by Bove & Langa, the penalties for a willful failure are quite severe:

“[t]he civil penalties for failing to report the account on the prescribed form . . . can range from up to $10,000 for a “non-willful” failure, and for a willful failure the greater of $100,000 or half the balance in the foreign account. [emphasis supplied.] If criminal activities are involved, the monetary penalties are increased and may be accompanied by possible imprisonment for up to ten years.[footnote omitted] . . . [F]ailure to maintain adequate records of the foreign account may result in additional civil and criminal penalties. The IRS states that records should be kept for five years.”

As Mr. Huebert pointed out, while the IRS is seeking information about approximately some $20 billion in UBS accounts, because of the possibility that most people with these accounts may have been accurately reporting all earnings and paying all applicable income taxes on those earnings, it is possible that the IRS will not obtain all that much money, especially when judged against the current federal deficit. However, since the intentional failure to report an account can result in loss of one-half of the entire account, the IRS does indeed have a very strong financial motivation to obtain the UBS information, because even a relatively small number of noncompliant taxpayers with very large foreign accounts could generate sizable revenues. The threat of this penalty alone will give the IRS considerable leverage for nonreporting taxpayers to settle somewhere between the penalties for unintentional and intentional failure, likely resulting in considerable tax revenues from persons who honestly didn’t know they were violating the law.

More importantly, the IRS’s highly visible targeting of the “establishment” Swiss banking system will likely garner much greater future compliance with these reporting obligations, so that the IRS and US government will likely obtain detailed information about many more foreign accounts from people who have either intentionally hidden these accounts or who just want to “play it safe.” In this regard, please note that TDF-90-22.1 requires the reporting individual to provide the account number of the account itself, as well as the names of the account holders and name and address of the financial institution, thus providing all the information necessary to enable the governmental to file tax liens, seek the freezing of accounts or other enforcement actions available to it under tax treaties or applicable foreign laws.

Still, it is very likely that these consequences will fall predominantly upon very high-income taxpayers. Unfortunately, the US strong arm tactics to compel foreign banks to disclose US account holders’ information are having an additional, and more disturbing effect on a far greater number of people, and one that is quite possibly also intended by our lords and masters. And that is this: to make it extremely difficult for Americans to have accounts abroad, and therefore to prevent both the safeguarding of wealth outside the United States and living outside of the United States.

According to this Forbes article, Americans are fast becoming pariahs of foreign banks. Because of US demands and pressures, foreign banks in countries around the world are deciding to close Americans’ accounts, or are not permitting Americans to open new ones. In some cases, the banks are not terminating or rejecting new applications for just securities or investment accounts, but also current accounts, i.e., the standard checking accounts people use for their living expenses. In other words, the US is making it more difficult for you to live in another country, by creating international difficulties that, in the end, will seriously obstruct your ability to conduct everyday financial transactions in a foreign country. By creating high costs for foreign banks to permit US citizens to open and maintain even checking and savings accounts in foreign countries, US citizens will be unable to have the normal banking services they need to live in a foreign country, and will not be able to do things like pay rent, utilities, travel on public transportation and buy groceries.

Possibly the most unequivocal sign that distinguishes a totalitarian system from a relatively free society is the simple right to leave. In totalitarian societies, the “iron curtain” falls, and “citizens” are not free to leave. The people and their assets are effectively property of the state. They, and everything they produce, are “human resources” that belong to the government. The “citizens” are more accurately described as prisoners confined within their national borders.

The US government’s attacks on foreign financial institutions are one more means by which the US is slowly establishing controls that will prevent the populace from escaping their indentured servant status here, or just escaping, period. One of the effects of these attacks will be, to some extent, to lock American assets into American banks and keep funds here, onshore, where they are readily controllable, seizable and debasable. These attacks are a way of closing the borders, are the makings of a banking “Berlin Wall.”

Slowly and methodically, we are being locked in.

This post was origionally published on http://www.lewrockwell.com/