Bank secrecy "is what the Swiss trade in; this and watches and chocolate," says Christopher Bergen, president and publisher of Tax Analysts.

Despite its famed privacy laws, "there are always provisions under which Switzerland would break bank secrecy," says Andrew Pike, a professor of tax law at American University. For example, if funds in a Swiss bank account were used to pay a contract killer, "that's enough of a crime that Switzerland would say we are not going to protect contract killers. Tax fraud has not been viewed as a real enough crime that would justify that."

What distinguishes last week's agreement "is that you have (a Swiss bank) disclosing thousands of accounts to a tax authority in another country. It's not a particular person or handful of cases," says Ken Scott, a Stanford University professor of business and law. "It has moved to a different level. It makes a lot of people think, this may reach me."

IRS Commissioner Doug Shulman said in a TV interview that the agreement "blows a big hole in bank secrecy. As long as there's been an income tax, we've had no access to secret bank accounts in Switzerland, and because of our focused and concentrated efforts, we're now changing that whole dynamic."

Whether the agreement deals a blow to the Swiss banking industry remains to be seen.

"It would be nice if the Swiss said, 'Here's what we did and why we are doing it.' They didn't do that. There's a fair amount of tea leaf reading going on," Pike says. The Swiss government might have seen it as the best way to deal "with one frightfully embarrassing situation."

The whistle-blower

In 2006, a former UBS private banker, Bradley Birkenfeld, disclosed that UBS - Switzerland's largest bank by assets - had been soliciting Americans to dodge income taxes by setting up offshore accounts. Despite his whistle-blowing, Birkenfeld was sentenced to 40 months in prison Friday.

UBS, which also has a big presence on Wall Street, pleaded guilty in federal court, agreed to pay $780 million in fines and disclosed the names of 300 U.S. clients. The IRS had been trying to force UBS to disclose thousands of additional names through the courts but abandoned that effort after the Swiss government agreed Wednesday to facilitate the disclosure through a treaty request.

"It enables them to say, 'Look, there has always been a treaty, we are obligated in certain circumstances to exchange information. That's what we are doing here. Nothing more and nothing less,' " Pike says.

On Thursday, the Swiss government sold its 9 percent stake in UBS, which it had purchased to bolster the bank during the financial crisis. That sale could have played some role in the UBS tax agreement.

The larger question, for U.S. taxpayers, is whether the deal will discourage tax evasion.

All U.S. citizens and permanent residents are required to disclose and pay taxes on their worldwide income, regardless of the source. The IRS usually gives a credit for taxes paid to a foreign government.

The IRS says UBS holds about 52,000 accounts with a U.S. connection outside the United States. The 4,450 it is seeking access to are the ones most likely to involve tax evasion.

Under the deal, UBS will gradually hand over names to the IRS through a review panel set up by the Swiss tax authority. UBS plans to notify account holders that their names are being turned over.

The IRS has set up an amnesty program for taxpayers who have not paid taxes on foreign accounts. Under the program, taxpayers who contact the IRS by Sept. 23 could avoid criminal prosecution but will still be liable for back taxes, interest and penalties.

"They require you to go back six years and pay taxes, a penalty on the tax, interest and an additional penalty equal to 20 percent of your highest balance in the past six years," says Paul DiSangro, a tax lawyer with Nixon Peabody. The penalty is reduced to 5 percent in rare cases, such as if you inherited the account and made no deposits, withdrawals or other transactions.

The IRS has said that people who receive letters from UBS will not be disqualified for amnesty, as long as they come forward by Sept. 23.

That infuriates Pike. "It seems that when a taxpayer is told he is about to be 'given up,' the leniency of the amnesty is no longer warranted," he wrote in a letter to Shulman, co-signed by two other American University professors.

More names expected

The IRS expects that the voluntary and involuntary disclosure program will yield far more than 5,000 names as the investigation leads to other banks and countries.

"This is a classic white-collar investigation," Pike says. "The IRS will sit down with people who are disclosing and say, 'Who are your advisers, your accountants' " and other institutions where you hold accounts.

DiSangro says the Swiss deal will deter but won't end tax evasion. "There will always be people who will try to hide money. Countries in the Caribbean might try to help," he says. "But I think this will be a real deterrent because (the government) will use this information to leapfrog from one data source to another."

Bergen says he agrees with Sen. Carl Levin, D-Mich., who called last week's settlement "a modest advance in the effort to end bank secrecy abuses, tax haven misconduct and the tax haven drain on the U.S. Treasury."

The tax system requires the voluntary compliance of taxpayers, and if too many of us "feel like chumps, that's going to take the system down," Bergen says. "The IRS needs the resources and support of Congress to send some people to jail. They need to go after the professionals who facilitate this."

Net Worth runs Tuesdays, Thursdays and Sundays. E-mail Kathleen Pender at kpender@sfchronicle.com. Read her blog at sfgate.com/blogs/pender.

This article appeared on page D - 1 of the San Francisco Chronicle