Under an agreement negotiated by the governments of Switzerland and the U.S., the IRS will get access to less than one-fourth of the accounts held by Americans at Swiss banking giant UBS AG that the bank itself previously acknowledged were kept secret from U.S. tax authorities.
It’s a deal the Swiss and outside banking analysts say will preserve Switzerland’s centuries-old reputation for secrecy and security, but also gives U.S. authorities a start in pursuing wealthy tax scofflaws.
The U.S. agreed to drop a lawsuit demanding that UBS turn over information on an estimated 52,000 American citizens’ accounts — 19,000 of which the bank previously told Congress were “not disclosed” to the IRS. In exchange, the U.S. will get information about an estimated 4,450 UBS accounts that the Swiss government says will meet its requirements for release if evidence of “tax fraud and the like” are shown.
“The UBS settlement is at most a modest advance in the effort to end bank secrecy abuses, tax haven bank misconduct, and the tax haven drain on the U.S. Treasury,” said Sen. Carl Levin, a Michigan Democrat and the chairman of a subcommittee that investigated UBS.
“It will take a long time before we know whether this settlement will produce meaningful gains due to treaty procedures which are complex, depend upon the Swiss government to carry out, and open the door to potentially lengthy appeals,” Mr. Levin said.
The IRS, however, called the settlement “historic,” noting that the accounts it expects to receive once contained a total of $18 billion.
“This is no mere keyhole into the hidden world of bank secrecy,” IRS Commissioner Doug Shulman said in a conference call with reporters Wednesday morning. “This agreement represents a major step forward with the IRS’ efforts to pierce the veil of bank secrecy and combat offshore tax evasion.”
Daniel M. Berman, a tax law professor at Boston University Law School, said the agreement with the Swiss should put an end to the expectation that an American citizen can avoid paying taxes simply by putting money in an account overseas.
He said the agreement also shows the Swiss government could be willing to release this kind of information in the future and could put pressure on other tax havens to scale back their protections of U.S. tax cheats.
“I think the Justice Department would have rather had twice as many names as they’ll get, but they still get a lot,” he said. “I think this is enough names that it indicates a sea change, it’s enough names that it indicates ‘you can’t just get away with it.’ ”
But George Clarke, a Washington tax attorney, said the agreement will have little effect on Swiss banking secrecy, an opinion that was also shared by the Swiss government, UBS and the Swiss Bankers Association.
“The Swiss pushed back pretty hard and I think that was effective,” Mr. Clarke told The Washington Times. “If you’re a person who really wants to roll the dice, and fly money over to Switzerland in suitcases, I don’t know how the U.S. gets that information from this treaty process.”
Earlier this year, UBS and the U.S. reached a $780 million settlement to resolve accusations that UBS helped Americans hide money from the IRS. As part of the agreement, UBS turned over information from 250 accounts held by Americans that the Swiss government had linked to tax fraud, which meant releasing them didn’t violate that country’s banking secrecy laws.
But the U.S. wanted more — information from as many as 52,000 accounts.
The IRS sought a court order from a U.S. judge to force UBS to turn over the information; the agreement effectively ends those legal issues, though the IRS now stands to receive information from fewer than 10 percent of all accounts held by Americans.
Mr. Shulman, the IRS commissioner, downplayed the significance of the 52,000 accounts.
“This is a number reported by UBS as all of their accounts with any U.S. connection,” he said Wednesday. “Many of these accounts were held by U.S. people who had complied with the law and paid their taxes. Said another way, we were never interested in pursuing 52,000 accounts and this was never an IRS number.”
That seemed to be contradict statements about the case made in February by John A. DiCicco, acting assistant attorney general for the Justice Department’s Tax Division.
“At a time when millions of Americans are losing their jobs, their homes and their health care, it is appalling that more than 50,000 of the wealthiest among us have actively sought to evade their civic and legal duty to pay taxes,” he said at the time. “It is time for those who are trying to hide from the IRS to rethink their actions.”
Even without the disputed significance of the 52,000 accounts, UBS said itself that 19,000 accounts held by Americans were “not disclosed” to the IRS. A 2008 report on tax havens by the Senate’s permanent subcommittee on investigations said UBS told investigators that Americans had 19,000 accounts containing $18 billion in “undeclared assets.”
The IRS declined to comment beyond Mr. Shulman’s comments, which did not address the discrepancy between the information from the 4,450 accounts the IRS expects to receive and the holders of 19,000 accounts UBS said may have evaded taxes.
Mr. Shulman said he would not disclose what criteria the IRS used in choosing the 4,450 accounts it targeted. Those account holders will receive notice from UBS in the coming months that the IRS is seeking information about their accounts.
The account holders have the option of appealing the IRS request to the Swiss courts. However, those who do so may be required to inform the U.S. government of the appeal. Even after the U.S. government gets it, the information will remain privileged, as U.S. bank accounts are unless they become evidence in a criminal or civil case.
The IRS is also giving those who have failed to pay taxes on UBS accounts until Sept. 23 to come forward, pay what they owe and face limited civil penalties. The IRS noted that many people will not receive notice from UBS until after the Sept. 23 deadline, and scofflaws who do not come forward face increased civil penalties and possible criminal prosecution.
Seth Entin, a tax lawyer, said he’s had dozens of clients who are taking advantage of this “carrot-and-the-stick approach.” The IRS said many people have come forward, but declined to say exactly how many.
“We’ve had many, many cases,” Mr. Entin said. “I’ve been very, very busy with that.”
Richard Boggs, the CEO of the tax resolution firm Nationwide Tax Relief, said many wealthy Americans who enjoyed the comfort of offshore banking accounts for decades are angry about the recent developments regarding UBS. In discussing the situation with some of them, Mr. Boggs said he’s “been hung up on more than I can remember.”
“We always recommend taking advantage of an opportunity … get to the IRS before they get to you,” he said, adding he tells clients: “Get ready to pay the piper and bite the bullet, and you’re going to be glad you did because this is as good as it gets.”