IRS Releases Results of UBS Settlement

On Tuesday, November 17, 2009, the Internal Revenue Service (IRS) and U.S. Department of Justice (DOJ) released information on the highly-publicized Settlement reached with Swiss banking giant UBS AG (UBS). According to recently released information, over 14,700 U.S. taxpayers agreed to participate in the Offshore Settlement Initiative Voluntary Disclosure Program, instituted as a way for taxpayers to disclose and avoid the harshest penalties.  Further, the IRS has disclosed the criteria set forth in the “John Does” Settlement that has led UBS to turnover thousands of U.S. taxpayer clients.  The criteria serves as a guide to future investigations as the IRS and DOJ continue to investigate and prosecute U.S. taxpayers who fail to disclose their offshore assets to the U.S. government.

UBS Investigation

In June 2007, the U.S. Department of Justice (“DOJ”) and the IRS launched a highly-publicized civil and criminal investigation into Swiss banking giant UBS AG (“UBS”) and its U.S. accountholders who failed to disclose their interests in offshore accounts.  U.S. taxpayers are required to disclose their offshore assets on their individual tax returns as well as file a Foreign Bank Account Report or FBAR.  Failure to do so can result in severe civil penalties—often in excess of the account value—and criminal penalties.   Federal authorities suspect that approximately 19,000 U.S. taxpayers have used 52,000 UBS accounts to hide $18 billion in assets—or $300 million in tax liabilities. 

In February 2009, UBS and the DOJ entered into a deferred prosecution agreement (“the Agreement”) whereby UBS agreed to cooperate with the DOJ in its ongoing investigation and DOJ, in return, agreed not to prosecute UBS if certain conditions are met.  In August 2009, as part of a so-called “John Does” Summons action, the IRS, DOJ, UBS and Swiss government reached a settlement agreement (“the Settlement”) whereby UBS agreed to disclose detailed account information on U.S. taxpayers who used UBS offshore accounts to conceal assets and failed to report income related to those assets for the purpose of evading U.S. tax law—thousands of accountholder names.  However, until recently the criteria for selecting which UBS accountholders would be turned over to U.S. authorities was unknown.

Criteria for Disclosing UBS Clients

According to recently released documents, under the Settlement agreement, the threshold for UBS to disclose U.S.-held offshore accounts is low—CHF 250,000 (Swiss Francs) in account value at any point from 2001 to 2008 or income in excess of CHF 100,000 on average over the course of any three year period from 2001 to 2008.      

Further, UBS accountholders are divided into two categories of clients.  The first category includes U.S. domiciled UBS clients who held and beneficially owned “undisclosed (non-W-9) custody accounts” and “banking deposit accounts” in excess of $985,300 USD—or CHF 1,000,000—at any point from 2001 to 2008 and for which there is a reasonable suspicion of “tax fraud or the like.”  The second category includes U.S. citizens, irrespective of domicile, who beneficially owned “offshore company accounts” established or maintained at any point from 2001 to 2008 and for which there is a reasonable suspicion of “tax fraud or the like.”

UBS has contacted the second category of U.S. accountholders, providing them with account closure information and a “John Does” Summons form to release their information.  A U.S. accountholders response to this UBS request can carry significant consequences.  For example, situations where a U.S. UBS accountholder did not agree to provide UBS with proof of FBAR compliance in the event UBS asked for proof constitutes an “act of continued and serious tax offense.”  If so, by not granting permission for UBS to request proof of FBAR compliance, those accountholders names are automatically qualified for disclosure to U.S. authorities subject to a CHF 100,000 annual income threshold under the Settlement.    

What’s Next After UBS?

It is clear with yesterday’s announcement that the UBS investigation is the tip of the iceberg.  According to IRS Commissioner Doug Shulman, the U.S. government has information on banks in over seventy countries—not just Switzerland.  The release of the UBS Settlement provides a roadmap on how the IRS and DOJ will proceed against other foreign bank accountholders in the United Arab Emirates, Israel, the Bahamas, etc.  It is clear that offshore tax evasion remains and will continue to remain a top enforcement priority for the IRS and DOJ for years to come—beyond UBS.

It is clear with yesterday’s announcement that the UBS investigation is the tip of the iceberg.  According to IRS Commissioner Doug Shulman, the U.S. government has information on banks in over seventy countries—not just Switzerland.  The release of the UBS Settlement provides a roadmap on how the IRS and DOJ will proceed against other foreign bank accountholders in the United Arab Emirates, Israel, the Bahamas, etc.  It is clear that offshore tax evasion remains and will continue to remain a top enforcement priority for the IRS and DOJ for years to come—beyond UBS.