The U.S. and Swiss governments have signed an agreement to settle the UBS John Doe summons enforcement case in an arrangement that is expected to produce the identities of the holders of 4,450 UBS accounts, in addition to the 250 accounts turned over when UBS made a deferred prosecution agreement with the Justice Department.
The agreement, signed in Washington on August 19, calls for information disclosures to be made through a treaty request under the Switzerland-U.S. income tax treaty. (For the treaty, see Doc 96-27017 or 96 TNT 194-31.) The Swiss government will establish a special task force to expedite decisions on the request. The condition that disclosures be handled through the treaty process has been the Swiss government's position since the John Doe summons litigation began.
What began as a dispute between Justice and UBS morphed into a dispute between the U.S. and Swiss governments, as UBS became a spectator and the Swiss government acted to preserve bank secrecy. The Swiss had insisted that the United States should have access to account information only through a request under the information sharing article of the Switzerland-U.S. income tax treaty, and the United States accommodated that position.
"I am very pleased that we have successfully concluded negotiations that will result in our receiving what we wanted all along from the beginning of our investigation into UBS," IRS Commissioner Douglas Shulman said at an August 19 press briefing. "We will be receiving an unprecedented amount of information on taxpayers who have evaded their tax obligation by hiding money offshore at UBS."
The Swiss government has also agreed to process similar treaty requests related to other banks if they are based on similar circumstances. The agreement expands the IRS's ability to seek information through a declaration by the Swiss government that it is willing to apply the treaty request process to accounts at banks other than UBS.
"The Swiss Confederation declares that it will be prepared to review and process additional requests for information by the IRS under Article 26 of the existing Tax Treaty if they are based on a pattern of facts and circumstances that are equivalent to those of the UBS AG case," the Swiss government said in a separate document also signed August 19.
The U.S. government has agreed to the dismissal of the DOJ's summons enforcement action. (For the DOJ petition, see Doc 2008-14508 or 2008 TNT 128-20 .) The agreement, however, sets a timeline for the full withdrawal of the summons with prejudice. According to the agreement, the IRS will withdraw the summons on or after January 1, 2010, once it has received information on 10,000 UBS accounts through the treaty request, voluntary disclosure, the deferred prosecution agreement, or the waiver of bank secrecy by a UBS client.
The Swiss government has promised to process 500 cases within 90 days and the remainder within 360 days. Switzerland named Hans-Jörg Müllhaupt to head the task force on the U.S. treaty request and announced that it expects the body -- which will consist of 30 audit firm specialists and 40 lawyers and tax specialists from within the Swiss government -- to be operational in two to three weeks.
An annex to the agreement, which will be disclosed after 90 days, contains the criteria for case selection. The Swiss government is thought to have agreed to expand its narrow view of the treaty term "tax fraud and the like," allowing disclosure of some account information. The Swiss government also agreed to provide account information without the United States having first provided the name of the taxpayer.
UBS has told officials that the accounts meeting the criteria hold or have held assets totaling approximately $18 billion at some point during the past eight years.
Under its agreement, UBS will begin notifying clients whose accounts meet the annex criteria that their account information is subject to the IRS request. The first 500 notices are to be sent within 15 days. The notice informs clients of their right to appeal the disclosure of their account information, as required by Swiss law.
When the account holder is notified of the right to appeal disclosure, he may choose between consenting to disclosure or appealing the decision. The U.S. government believes that any appeals will probably fail, that is, that the cases have been selected so that Swiss law would not prevent disclosure. The Swiss court will decide whether the account information of holders who appeal may be disclosed.
"I have every reason to trust the Swiss government and expect that we will get these accounts," Shulman told reporters.
U.S. law requires the client to file a notice of an appeal with the U.S. attorney general under 18 U.S.C. section 3506. It is not clear what the sanction for failure to notify the U.S. government would be or how Justice would enforce that requirement.
Encouraging Voluntary Disclosure
Meanwhile, the IRS is trying to keep the pressure on U.S. resident individual holders of undisclosed foreign bank accounts to submit to the voluntary compliance program by the September 23 deadline for clemency on foreign bank account report penalties.
According to Shulman, clients who receive notices from UBS before the September 23 deadline will remain eligible for the program. They will no longer be able to benefit from the program, however, once their information has been provided by the Swiss government.
Calling the agreement a "major step" toward "piercing the veil of bank secrecy," Shulman urged individuals with offshore accounts to come forward.
"For anyone with hidden offshore assets, whether at UBS or elsewhere, the IRS wants to send a clear message: There is still time -- although the clock is ticking -- there is still time for you to get right with your government," Shulman said. "People with unreported offshore income should immediately contact their tax professional."
Although he would not provide specifics about the number of taxpayers who have come forward to date, Shulman said there have been "unprecedented numbers coming through the door."
Responding to a reporter's question about an August 19 Wall Street Journal report that the voluntary disclosure process has resulted in the identification of other Swiss banks facilitating tax evasion, Shulman declined to provide details but confirmed that the voluntary disclosure process has produced information on intermediaries.
Addressing the number of accounts to be turned over in accordance with the settlement with UBS, Shulman said the commonly reported number -- 52,000 -- is too high and includes all the accounts with U.S. clients regardless of whether the account was properly disclosed.
"We were never interested in pursuing 52,000 accounts and this was never an IRS number," he said.
Shulman said the agreed criteria will identify "account holders most likely to have been involved in offshore tax evasion."
Reaction to the Agreement
Tax practitioners agreed that the UBS settlement would likely lead to an increase in the use of the IRS's voluntary disclosure program.
Bryan Skarlatos, a partner with the New York tax controversy firm Kostelanetz & Fink LLP, praised the U.S. government's handling of the agreement, calling it a success for the IRS. "This should be the finest day for the IRS and its voluntary disclosure program," he said. "I can't imagine any other time when the IRS has collected so much information through the voluntary disclosure program."
Skarlatos reported that within two hours of the settlement announcement, he had heard from four prospective clients he described as "eager to come forward" regarding their offshore accounts. "The IRS will be bringing many taxpayers in from out of the cold," he added.
The IRS's remarks regarding the settlement show that the government continues to "bend over backwards" to persuade noncompliant taxpayers to use the voluntary disclosure program, Josh Ungerman of Meadows, Collier, Reed, Cousins & Blau LLP told Tax Analysts. He suggested that by sticking with the September 23 deadline while holding back a good portion of the names that will be identified by UBS, "the IRS will definitely have a significantly higher number of people participate in the program."
According to Ungerman, the most remarkable provision of the announced settlement is that the U.S. government can use existing tax treaty provisions to make additional requests to Swiss banks other than UBS if the IRS has evidence of taxpayer noncompliance. He cautioned, however, that "the Service's glee over this 'historic development' should be tempered by the reality that the IRS has settled for less than the entire list of names from UBS" that it initially promised to obtain.
Ungerman said the long-term effects of the settlement on tax administration are uncertain. Failure to go after all noncompliant taxpayers could hurt the IRS's credibility, he said, but taxpayers participating in the voluntary compliance program are pretty much ensured to be compliant in the future. "This future compliance may be worth the settlement, but only time will tell," he said.
George Clarke, a member of the white-collar and tax litigation practice at Miller & Chevalier Chartered, said the agreement can be seen as a win for UBS and its clients. The bank has been able to extricate itself from the situation and has avoided new monetary penalties that would have been in addition to the $780 million it paid under the February 18 deferred prosecution agreement. And the agreement permits UBS clients to use the current voluntary disclosure program until the September 23 deadline even if their account is subject to disclosure under the agreement. News that the voluntary disclosure route will remain open has alleviated a level of panic among some of his clients, Clarke said.
He also suggested that the agreement demonstrates the limits of unilateral action on the part of the U.S. government. "We have to be a player in the system and not just try and get our own way," Clarke said.
Reaction to the agreement from Capitol Hill was more muted, with Sen. Carl Levin, D-Mich., calling the agreement 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."
"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," Levin warned.
Lee A. Sheppard and Jeremiah Coder contributed to this article.
The following documents are available from Tax Analysts:
- Switzerland-U.S. agreement. Doc 2009-18731
- UBS-U.S. agreement. Doc 2009-18732
- IRS release on the agreement. Doc 2009-18697
- Remarks by IRS Commissioner Douglas Shulman. Doc 2009-18740
- Release from the Swiss government on the agreement. Doc 2009-18723
- Release from the Swiss government on the creation of a task force. Doc 2009-18722
- UBS release on the agreement. Doc 2009-18745
- Release from Sen. Carl Levin, D-Mich. Doc 2009-18733
- Release from House Ways and Means Committee member Richard E. Neal, D-Mass. Doc 2009-18767