UBS settlement

August 29, 2009 by: The Tax Man

High-level negotiations between the U.S. and Switzerland have resulted in an out-of-court settlement in the IRS’s dispute with Swiss banking giant UBS AG over the identities of U.S. account holders. The U.S. and Switzerland agreed to resolve the dispute under the framework of their existing tax treaty. The Swiss Federal Tax Administration (SFTA) will expeditiously process requests for information on the bank’s U.S. account holders. At the same time, the IRS is reminding taxpayers of the short window to take advantage of its voluntary offshore disclosure initiative.

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Contrary to some reports, UBS is not turning over account information directly to the IRS. The SFTA, the Swiss equivalent of the IRS, will vet the requests and decide if the account should be disclosed. The U.S.-Swiss agreement calls for the IRS to submit a treaty request to the SFTA for information on certain UBS accounts. The IRS, UBS and the SFTA estimate that 4,450 accounts will be within the scope of the treaty request. The Swiss Ministry of Justice explained that the requests will draw on criteria in a framework that allows cases of tax fraud and the like to be identified within the confines of Swiss law and judicial practice. This reflects Article 26 of the U.S.-Switzerland tax treaty, which provides for the exchange of information as is necessary for the prevention of tax fraud and the like. “The term tax fraud or the like is not restricted to conventional forms of fraud involving falsified documents or schemes of lies. Information may also be obtained with regard to serious tax offenses, specifically the continued evasion of large sums of tax,” the Swiss Justice Ministry explained. “Account information may also be released, through treaty request channels, even if the IRS does not yet know the name of the bank client concerned when it submits its request.” IRS Commissioner Douglas Shulman acknowledged that the agency can only estimate the total value of funds in the 4,450 accounts. Some accounts have already been closed. “These accounts held over $18 billion at one time,” Shulman said. Shulman also sought to downplay reports that the IRS had sought information on 52,000 UBS accounts. “This is a number reported by UBS as all of their accounts with any U.S. connection. Many of these accounts were held by U.S. taxpayers who had complied with the law.” The SFTA will create a special task force to process the requests for account information. The agreement gives the SFTA 360 days to make a final decision on whether the requested information may be issued in each of the 4,450 cases. The SFTA will issue final decisions on the first 500 cases within 90 days of the request being received. Account holders may contest the SFTA’s final decisions in the Swiss courts. Account holders who appeal to the Swiss courts must serve notice of the appeal on the U.S. Attorney General. The IRS has declined to reveal if it intends to request information on accounts at other Swiss banks. “The Swiss government is prepared to work with us regarding similar U.S. requests, if any, involving other financial institutions,” Shulman said. Switzerland has agreed to review and process additional treaty requests from the IRS under Article 26 if the requests are based on a pattern of facts and circumstances that are equivalent to those of the UBS AG case.