Only hours before a hearing in federal court between U.S. Department of Justice and Swiss bank UBS AG, both sides have announced that they will seek a settlement in the case to force the bank to release the account details of tens of thousands of U.S. clients.

The threat of the court ruling against the bank has encouraged thousands of offshore account-holders to comply with an IRS voluntary disclosure program. The amnesty is set to expire on September 23, 2009.

The IRS succeeded earlier in the year in a more limited legal action, forcing UBS to pay a £780 million fine and disclose the details of around 300 U.S. account-holders. A settlement in this case is likely to be more far-reaching. According to an Associated Press report, the IRS and the U.S. Government are not likely to want to relieve the pressure the case has brought on UBS and Swiss banking secrecy in general.

NEWS-FEDERAL, 2009 TAXDAY, (Mar. 27, 2009), Item #I.3

IRS Announces New Voluntary Disclosure Terms for Offshore Account Holders, Sets Six-Month Deadlines
The IRS has announced new steps to coax U.S. taxpayers with undisclosed foreign bank accounts to come forward. In return for paying back taxes for the past six years, plus interest and a set of stiff penalties, the IRS will promise not to bring criminal charges or the 75-percent fraud penalty. IRS Commissioner Douglas H. Shulman announced this policy shift and clarification at a press briefing from his Washington, D.C. offices on March 26, at which he also released internal IRS documents that put the plan into motion.

"We believe the guidance represents a firm, but fair, resolution of these cases and will provide consistent treatment for taxpayers," Shulman explained. "The goal is to have a predictable set of outcomes to encourage people to come forward and take advantage of our voluntary disclosure practice while they still can." He set a deadline of six months for disclosures under the terms of the guidance, at which time the program will be re-evaluated.

The IRS has issued a series of three memoranda, and has revised the Internal Revenue Manual (IRM), to reflect updated policies concerning voluntary disclosure, primarily in connection with offshore transactions. Voluntary disclosure occurs when a taxpayer timely discloses information necessary to determine or correct the taxpayer's liability. The IRM continues to provide that its voluntary disclosure practices do not create any substantive or procedural rights for taxpayers, but are a matter of internal IRS practice.

Voluntary Disclosure Terms
Shulman emphasized that the terms being offered for the disclosure of offshore accounts are an outgrowth of current policy and carry penalties at a level consistent with voluntary disclosure programs in the past. Within this framework, Shulman enumerated the amounts that would need to be paid by taxpayers with heretofore undisclosed offshore accounts who "come clean" under the program:

--Back taxes due on newly disclosed assets for the last six years;

--Interest due on these back taxes for the last six years;

--A 20-percent accuracy-related under Code Sec. 6662 or a 25-percent delinquency penalty under Code Sec. 6651 for each tax year at issue; and

Looking to the past six years, a 20-percent penalty on the total balance of all the taxpayer's foreign bank accounts or assets during the year among the past six in which the accounts had their highest aggregate value.

CCH Comment. This latter penalty is reduced to 5 percent for passive investors in certain transactions.

While Shulman observed that the penalties demanded under the program are not insubstantial, he pointed to several advantages to participating taxpayers regarding what the IRS will not do:

--The IRS will not pursue charges of criminal tax evasion against taxpayers who voluntarily disclose their offshore assets under this new policy; and

--The IRS will not pursue other penalties against participating taxpayers, such as the Code Sec. 6663 fraud penalties (75-percent of the unpaid tax) or the statutory penalty for willful failure to file a TD F 90-22.1, Report of Foreign Bank and Financial Accounts Report, (FBAR) (the greater of $100,000 or 50-percent of the foreign account balance) that both annually apply to undisclosed accounts and assets during the relevant tax years.

Shulman also touted the advantage to offshore account holders of "getting the matter behind them" and giving them certainty as to their tax liability.

In a follow-up comment, an IRS spokesman emphasized that "it is too late for any taxpayer who is under criminal investigation to make a voluntary disclosure. The IRS cannot discuss specific situations, but the voluntary disclosure process does not apply when the IRS has information related to a specific taxpayer from a criminal enforcement action."

CCH Comment. The issue apparently remains unclear as to whether taxpayers recently disclosed by the Swiss Bank, UBS, as holding undisclosed bank accounts in Switzerland may successfully participate in this initiative. The IRS provided reporters during the March 26 briefing a copy of Section 9.5.11.9 of the Internal Revenue Manual that holds taxpayers to have timely participated in the voluntary disclosure program if they disclose before the IRS has initiated a civil or criminal examination or notified the taxpayer of such an investigation. Their failure to disclose their accounts/assets before the IRS received notice under the UBS deferred prosecution agreement may, therefore, be irrelevant.

Other Documents Provided
In addition to the announcement of its penalty framework for voluntary disclosures of offshore accounts, the IRS also provided reporters with the following documents:

Offshore Case Development. An SBSE memorandum provides that field personnel should give priority treatment to offshore transactions and entities during examinations, with a special emphasis on detecting unreported income. Examiners are instructed to use all tools, including interviewing taxpayers, making third party contacts, and timely issuing summonses in order to gather information and make determinations about applicable penalties. Managers are asked to ensure that income and penalty considerations are fully developed and documented. The memorandum also advises that as of March 23, 2009, taxpayers will no longer be permitted to minimize penalties through the Last Chance Compliance Initiative (LCCI). Relevant portions of the IRM addressing the LCCI are in the process of being obsoleted. Taxpayers in open examinations where LCCI terms have been offered will be able to resolve their cases under LCCI if they respond to the examiner within 15 days of their prior notification.

Voluntary Disclosure. Another SBSE memorandum addresses a change in the processing of voluntary disclosure requests containing offshore issues. Such requests will continue to be initially screened by Criminal Investigation (CI) to determine eligibility for voluntary disclosure and, if involving only domestic issues, will be forwarded to Area Planning and Special Programs for civil processing. Voluntary disclosure eligibility for offshore issues, including those in current inventory, will be initially screened by CI, and forwarded to the Philadelphia Offshore Identification Unit (POIU) for processing.

For submitted, but as yet unresolved, disclosure requests forwarded to the POIU, an internal LMSB memorandum sets forth a liability and penalty framework to be used for processing such cases during the next six months. POIU is authorized to assess all taxes and interest going back six years, or the period of existence of an account/entity if shorter, require the taxpayer to file or amend all returns, and impose an applicable penalty as set forth in the memorandum.

Finally, the Internal Revenue Manual (IRM) has been updated to reflect the initial evaluation of voluntary disclosure requests by CI. Minor revisions to the examples of what constitutes voluntary and not voluntary disclosures have also been made.

By Torie Cole and Sherri Morris, CCH News Staff

By MARCY GORDON
Published: March 4, 2009

WASHINGTON (AP) — An official from UBS AG said Wednesday that Switzerland's biggest bank won't provide the names of any more American clients to the U.S government in a fight over secrecy and tax avoidance.

UBS has accepted responsibility for helping tens of thousands of Americans hide assets from the U.S. government and turned over the names of about 300 U.S. clients, but is not giving the Internal Revenue Service the names of all U.S. citizens who maintain secret accounts with the bank.

In testimony prepared for a Senate subcommittee hearing, UBS official Mark Branson said the bank "has now done all that it can do to cooperate" with the IRS request.

"UBS cannot disclose information to the IRS that would put its employees at serious risk of criminal prosecution under Swiss law," said Branson, who is the chief financial officer of the bank's global wealth management and Swiss bank division in Zurich.

Sen. Carl Levin, D-Mich., chairman of a Senate investigative subcommittee, said that despite UBS "being caught red-handed," the Swiss government is fighting the IRS request and defending the country's banking secrecy.

The conduct that UBS engaged in, including tricks to thwart the IRS from tracing Americans' funds in Switzerland, "actively facilitates tax evasion (and) amounts to a declaration of war by offshore secrecy jurisdictions against honest, hardworking taxpayers," Levin said at the hearing by the panel of the Senate Homeland Security and Governmental Affairs Committee.

"We cannot allow an environment to develop where wealthy individuals can go offshore and avoid paying taxes with impunity," said IRS Commissioner Douglas Shulman.

The Obama administration is "committed to taking aggressive action on offshore tax abuse," Shulman testified.

In a cross-border battle, the IRS is trying to pry from UBS the names of as many as 52,000 wealthy Americans who maintain secret accounts with UBS. The bank maintains that turning over the account names would violate Swiss privacy law and jeopardize UBS' license to stay in business.

The Swiss government — which is providing financial support to UBS as it struggles with massive losses stemming from the U.S. subprime mortgage crisis — refused to send a representative to Wednesday's subcommittee hearing in protest of the IRS lawsuit against the bank.

Cloak-and-dagger tactics the U.S. government said were employed by UBS — coded language in internal e-mails and memos, foreign shell companies and phony charitable trusts, use of pay phones and foreign area codes and credit cards — were on display at Wednesday's hearing.

UBS allegedly staged training sessions so that "client advisers" could travel frequently to the U.S. — on average 30 days a year each — to consult with secret U.S. customers without attracting the attention of tax agents or law enforcement officials. The advisers were told to rotate the hotels they stayed in and to "protect the banking secrecy" if they were questioned by any authorities, according to excerpts of UBS internal documents filed in the IRS suit and provided by the subcommittee.

The dispute has prompted heated debate in Switzerland over the country's cherished banking secrecy, a tradition that has helped transform the nation into one of the world's richest.

UBS on Feb. 18 agreed to pay $780 million in fines and restitution for conspiring to help American citizens violate their country's tax laws by hiding assets — estimated to be worth at least $14.8 billion — from the U.S. government. In the deal struck in federal court in Fort Lauderdale, Fla., the Justice Department agreed to defer criminal prosecution of UBS in exchange for the payment of fines and restitution, and the names of up to 300 U.S. clients.

The bank says it has shut down the improper foreign-account business, and taken corrective measures to tighten its compliance and internal control systems.

The agreement didn't cover the much broader list of as many as 52,000 customer names now sought by the IRS, but both sides knew the U.S. government would ask for them.

In its civil suit against UBS, the IRS has asked a federal judge to enforce so-called "John Doe summonses" seeking information about the Americans' accounts. Another federal judge approved the summonses in July 2008, but UBS never complied.

By providing the 300 or so names, Branson said in his testimony that UBS has complied with the summonses as fully as it can without violating Swiss law.

The hearing was the latest in an extensive series by the Senate panel examining offshore tax abuse, which is estimated to cost the U.S. $100 billion a year in lost tax revenue.

Recovering tax revenue has taken on amplified urgency amid the economic crisis, when the federal deficit is expected to balloon to about $1.7 trillion, or nearly four times the highest level in history as hundreds of billions of dollars are spent on the bailout for financial institutions and the economic stimulus plan.

On Tuesday, Treasury Secretary Timothy Geithner said President Obama supported legislation authored by Levin that would tighten U.S. tax laws and close loopholes to fight offshore tax-haven abuses.

Los Angeles Times, Business

By LISA JUCCA
Published: Nov. 11, 2008

ZURICH (Reuters) – UBS, the world's biggest bank to the rich, said Tuesday it had given details to the United States of U.S. onshore bank accounts as part of a tax probe that is testing Swiss bank secrecy and UBS's reputation.

No data has been transferred from offshore or undeclared bank accounts located in Switzerland that are key to the country's long-standing tradition of bank confidentiality, UBS and the Swiss Finance Ministry told Reuters.

The probe focuses on whether Swiss bank UBS illegally helped wealthy Americans to dodge taxes through its offering of offshore services from 2000 to 2007. The bank was singled out by U.S. President-elect Barack Obama as one of those which helped "tax cheats."

"U.S. authorities have requested data from UBS on U.S. onshore clients," a UBS spokesman said. "UBS must comply with that request for information located in the United States."

The spokesman said the request was made in the third quarter of this year. He would not say how many U.S. onshore or declared bank accounts were involved.

The Swiss are still assessing a request by U.S. authorities for information about offshore bank accounts held by U.S. clients of UBS in Switzerland.

Switzerland does not consider tax evasion a crime and the Swiss Finance Ministry is the only authority in the country that could authorize the transfer of Swiss-based client data to the United States.

"Swiss authorities have not released any such data," Swiss Finance Ministry spokesman Roland Meier told Reuters. "There is an administrative assistance procedure ongoing."

The U.S. tax probe against UBS could result in indictments of senior and mid-level executives at the Swiss bank, the New York Times reported Tuesday. UBS declined to comment.

UBS, whose credit woes already led to the departure of its former chairman and other top executives earlier this year, decided in July to stop offering offshore Swiss bank accounts to U.S. citizens.

THREAT TO SWISS BANK SECRECY?

Switzerland is also facing increasing pressure from neighboring Germany and other EU countries to give up on its tradition of closely guarding details of its bank clients.

Swiss bank-client confidentiality goes back centuries but was codified in the early 1930s as pressure mounted on the Alpine country to exchange client details, partly from Nazi Germany pursuing assets of fleeing Jews. But it subsequently became closely associated with tax evasion.

Switzerland is the world's biggest offshore center and holds $2 trillion or about 27 percent of estimated global undeclared assets, according to the Boston Consulting Group.

Under an agreement between Berne and Washington, the U.S. can ask Switzerland for help in obtaining information on Swiss bank accounts in the case of tax fraud, but not tax evasion.

Once a request is made to the Swiss authorities, a domestic investigation takes place and data handed over only if and when Swiss tax authorities have evidence fraud did occur.

A Swiss bank account holder has the right to appeal against such a decision.

The U.S. Internal Revenue Service (IRS) has asked Swiss tax authorities for assistance in obtaining information relating to U.S. clients of UBS, the bank said in its third-quarter report.

The IRS has also issued a civil summons and the District Attorney for the County of New York has issued a request for information located in the United States concerning the Swiss bank's cross-border business, to which UBS is complying.

The IRS and the U.S. Justice Department were not immediately available to comment.

(Additonal reporting by Ajay Kamalakaran; Editing by David Cowell and Elaine Hardcastle)

By BERNIE BECKER
Published: July 18, 2008

WASHINGTON - Faced with a federal investigation into its private banking practices, the Swiss banking giant UBS said on Thursday that it would stop offering offshore banking services to clients in the United States.

Mark Branson, chief financial officer of the UBS global wealth management group, told a Senate subcommittee that the company would provide banking or securities services to United States residents only through companies licensed in this country and that it would help the federal government identify American citizens engaging in tax fraud. On Wednesday, a Senate permanent subcommittee on investigations released a report saying that UBS's offshore practices helped American citizens hide an estimated $18 billion in 19,000 accounts from the Internal Revenue Service.

In his testimony, Mr. Branson apologized for any compliance failures that might have happened and said the decision to close its Switzerland-based cross-border business was intended to ensure that such failures did not happen again.

Clients in the United States will still be able to access UBS's services through wealth management units that are regulated by the Securities and Exchange Commission. But advisers based in Switzerland will not be allowed to come to the United States to meet with American clients.

UBS's decision came as a surprise even to Senator Carl Levin, Democrat of Michigan, the subcommittee chairman, who said in his opening statement that UBS operated "behind a wall of secrecy" that needed to be torn down.

"I thought we were ready for any possibility," Mr. Levin said after the hearing. "It turns out we weren't."

The committee also heard taped testimony from Heinrich Kieber, a former employee of LGT, a bank owned by the royal family of Liechtenstein. Mr. Kieber supplied details about LGT account holders to the I.R.S. and other countries.

The subcommittee's report said that both LGT and UBS helped Americans avoid taxes by setting up convoluted foreign-owned offshore accounts whose assets did not have to be reported to the I.R.S. That practice by LGT, UBS and other offshore companies costs the Treasury Department $100 billion annually in lost taxes, Mr. Levin said.

Both LGT and UBS have what are known as qualified intermediary agreements with the I.R.S., which were established in 2001 to allow the revenue service to collect taxes with the help of foreign banks. But those agreements do not mandate the reporting of accounts held by non-American citizens or companies, a loophole that Senator Norm Coleman, Republican of Minnesota and the ranking subcommittee member, said that LGT and UBS had exploited.

Douglas H. Shulman, the I.R.S. commissioner, testified that his agency was strengthening the qualified intermediary program. He asked Congress for more time to audit offshore accounts that might have been used for tax evasion.

But Mr. Levin and Mr. Coleman indicated that they would most likely seek legislative solutions.

The federal tax investigation initially focused on Bradley C. Birkenfeld, an American and a former top UBS executive, who pleaded guilty in June to a single fraud charge of helping an American citizen conceal $200 million in assets from the I.R.S.

In May, federal authorities detained Martin Liechti, a Swiss citizen and senior UBS official, in Miami in connection with the investigation. Mr. Liechti appeared before the subcommittee Thursday, but declined to testify, citing his Fifth Amendment rights.

Mr. Levin commended UBS for changing its business practices. "We can't reach all the banks," he said. "We have reached yours. That represents progress."

LGT declined a request to testify before the subcommittee, though a senior official from the company did meet with subcommittee staff members last Friday.

This week, the company sent a letter to the subcommittee refusing to testify, saying it had complied with its qualified intermediary agreement. The letter also said that company representatives would be severely limited in what they could say because of the principality's strict disclosure laws.

Mr. Kieber, who is in a witness protection program, is accused of breaking those laws.

With his face disguised on the videotape, Mr. Kieber told the subcommittee that LGT had used sophisticated methods to avoid detection by American tax authorities. LGT customers were advised to use only public phones to contact the bank, and the company mailed correspondence from nearby Austria or Switzerland, he said.

Michael Robinson, a spokesman for LGT, said in an e-mail statement to a reporter that the documents Mr. Kieber supplied dated "back to a time when the regulatory environment was completely different."

Shannon Marsh of Fort Lauderdale, Fla., and William Wu of Forest Hills in Queens, whose LGT accounts were examined in the subcommittee report, declined to answer the subcommittee's questions, invoking their Fifth Amendment rights. According to the subcommittee report, Mr. Marsh hid millions of dollars in four foundations in Liechtenstein, while LGT helped Mr. Wu orchestrate a fake sale of his house to his own offshore company.

Steven Greenfield of New York refused to appear after being subpoenaed. Peter S. Lowy of Beverly Hills, Calif., will testify before the committee next Friday.

Julia Werdigier contributed reporting from London.

By ROBERT E. McKENZIE
Department of Justice Press Release dated 6/19/08
ROBERT E. McKENZIE, J.D., is a partner in the Chicago, Illinois, office of Arnstein & Lehr LLP. He is also the author of Representation Before the Collection Division of the IRS (Thomson West, 2008), and coauthor of Representing the Audited Taxpayer Before the IRS (Thomson West, 2008) and Representation Before the United States Tax Court (Thomson West, 2007).

On 7/1/08, a federal judge in Miami issued an order authorizing the IRS to request information from Zurich, Switzerland-based UBS AG about U.S. taxpayers who may be using Swiss bank accounts to evade federal income taxes.¹ The order authorizes the IRS to serve what is known as a "John Doe" summons on the bank. The IRS uses a John Doe summons to obtain information about possible tax fraud by people whose identities are unknown. The John Doe summons approved by the court directs UBS to produce records identifying U.S. taxpayers with accounts at UBS in Switzerland who elected to have their accounts remain hidden from the IRS. It is highly likely that the IRS will be successful in its efforts to secure the account information from UBS.

Based on a statement submitted to the court by former UBS banker Bradley Birkenfeld, UBS employees assisted wealthy U.S. clients in concealing their ownership of assets held offshore by creating sham entities and then filing IRS forms falsely claiming that the entities were the owners of the accounts. According to Birkenfeld's court statement, UBS had approximately $20 billion of assets under management in "undeclared" accounts for U.S. taxpayers.

Statutory requirement. The law requires a U.S. taxpayer to report all financial accounts in a foreign country if the total value of the accounts exceeds $10,000 at any time during the calendar year. A willful failure to report a foreign account can result in a penalty of up to 50% of the account balance at the time of the violation or prosecution. The penalty applies to all U.S. persons.²

Underlying facts. On June 19 Birkenfeld pleaded guilty to conspiring with an American billionaire real estate developer, Igor Olenicoff, Swiss bankers and his co-defendant, Mario Staggl, to help Olenicoff evade paying $7.2 million in taxes by assisting in concealing $200 million of assets in Switzerland and Liechtenstein.³

During the plea, Birkenfeld admitted that between 2001 and 2006, while he was employed as a director of UBS, he routinely traveled to and had contacts within the United States to help wealthy Americans conceal their ownership in assets held offshore and evade the payment of taxes on the income generated from those assets.

According to statements and documents filed with the court, Birkenfeld's services to American clients violated a 2001 agreement that UBS entered into with the U.S. to identify and document any customers who received reportable U.S.-source income or would withhold and anonymously pay a 28% withholding tax. This agreement was a major departure from historical Swiss bank secrecy laws under which Swiss banks concealed bank information from the IRS.

In evidence provided by Birkenfeld to the court, managers and bankers at the firm, including Birkenfeld, assisted the U.S. clients in concealing their ownership of the assets held offshore by helping these wealthy customers create nominee and sham entities. This was done to prevent the risk of losing the approximately $20 billion of assets under management in the U.S. undeclared business.

Birkenfeld admitted that he and additional private bankers at UBS advised U.S. clients to place cash and valuables in Swiss safety deposit boxes, and to purchase jewels, artwork and luxury items using the funds in their Swiss bank account while overseas. Additionally, they advised the clients to:

• Misrepresent the receipt of funds from UBS in the U.S. as loans from the bank.
• Destroy all off-shore banking records existing in the U.S.
• Use Swiss bank credit cards that they claimed could not be discovered by U.S. authorities.
• File false U.S. individual income tax returns that omitted income earned by the clients and fraudulently misrepresented that the clients did not have an interest in and signature authority over accounts held offshore.

Practice tip. The court order could lead to the disclosure of thousands of U.S. residents who have failed to report UBS accounts. U.S. taxpayers who have banked with UBS should immediately seek the advice of a competent tax attorney. The IRS has a voluntary disclosure policy that may allow UBS clients to avoid harsh penalties and prosecution. The central concept of the voluntary disclosure policy is that the taxpayer must come forward and self identify before the IRS opens an investigation of that person.

Before approaching the IRS for a voluntary disclosure, a tax attorney should review all appropriate facts and circumstances with the client to assure that the client qualifies for the program. After a review of the facts, in most matters the tax attorney will then approach the IRS to negotiate anonymously on behalf of the client. Only after an agreement is reached will the client's identity be disclosed to the IRS.

Given its success in this case, it is inevitable that the IRS will step up its efforts to find Americans who use tax-haven banks. Since 9/11/01, the U. S. Financial Crimes Enforcement Network has developed a coordinated program to find money laundering, foreign banking activity, and tax evasion. In most white collar crime cases, the Justice Department offers plea bargains to individuals like Birkenfeld in return for cooperation in charging others involved in illegal activity. Therefore, with increased resources being allocated to seeking out foreign bank activities by Americans, we can anticipate that many bankers will cooperate to reduce their potential jail time.

As an indicator of the importance of this case, IRS Commissioner Douglas Shulman said on 6/19/08, "I believe this case will send a strong signal to anyone hiding money in offshore bank accounts to avoid paying the taxes they should. The IRS will pursue people using offshore accounts in this manner as well as financial advisers and others who orchestrate these tax fraud schemes."⁴

Conclusion. U.S. taxpayers who may have dealings with UBS should immediately seek the advice of competent tax counsel to determine their best options before the IRS successfully finds the taxpayers by other means.

¹ In the Matter of the Tax Liabilities of John Does, United States Taxpayers, S.D. Fla., No. 08-21864-MC-LENARD/GARBER, order entered 7/1/08.
² Negligent violation 31 U.S.C. section 5321(a)(6)(A), 31 C.F.R. 103.57(h); Non-willful violation, 31 U.S.C. section 5321(a)(5)(B); Willful failure to file FBAR or retain records of account, 31 U.S.C. section 5321(a)(5)(C); 31 U.S.C. section 5322(a), and 31 C.F.R. section 103.59(b) for criminal.
³ United States v. Birkenfeld, S.D. Fla., No. 08-CR-60099-ZLOCH, plea entered 6/19/08.
⁴ Department of Justice Press Release dated 6/19/08.

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