The Agreement

On August 19, 2009, the Internal Revenue Service (IRS) and the Justice Department announced that they had reached an agreement with UBS AG (UBS) regarding the IRS John Doe summons to obtain approximately 4,450 names of U.S. taxpayers with accounts in UBS. The Justice Department had filed a petition in February 2009 seeking enforcement of the John Doe summons served on UBS in July 2008 that had asked for the names of as many as 52,000 U.S. taxpayers with undeclared accounts at the bank. The principal terms of the settlement agreement are as follows:

  • The agreement does not call for any payment by UBS.
  • The parties will file a stipulation with the court dismissing the enforcement action relating to the John Doe summons.
  • The IRS will submit (and has already submitted) a request for administrative assistance pursuant to the existing U.S.-Switzerland Double Taxation Treaty.
  • Approximately 4,450 accounts will be provided to the Swiss Federal Tax Administration in response to this treaty request.
  • UBS will send notices to affected U.S. persons encouraging them to participate in the IRS’s voluntary disclosure practice.
  • The agreement also resolves all issues relating to the alleged breaches of the Qualified Intermediary Agreement by UBS.

The agreement comes in two interrelated parts. First, the agreement broadly involves an accord with UBS in which U.S. taxing authorities will file a stipulation of dismissal that will stop the enforcement of the John Doe summons in return for access to information on UBS account holders. However, if the IRS does not get the information it is seeking, the U.S. government retains the right to resume the summons enforcement. The agreement requires no payment by UBS to U.S. tax authorities and solves all issues related to the alleged breaches of UBS’s qualified intermediary agreement.

Second, the agreement contains a new treaty mechanism between the United States and Switzerland to facilitate the release of names. The IRS will submit (and has already submitted) a treaty request to the Swiss government describing the accounts for which it is requesting information, and the Swiss government will then direct UBS to initiate procedures to turn over the information to the IRS. The first round of taxpayers will begin receiving notices from UBS that their account information is going to be provided to U.S. authorities within a matter of weeks from the August 19 announcement. These notices will be sent on a rolling basis, with some being sent over the coming weeks and months. A range of accounts will be covered, including bank accounts, securities accounts, custody accounts, offshore nominee accounts and sham trusts of varying sizes and dollar amounts. Many of the notices will go out after the IRS Voluntary Disclosure September 23, 2009, deadline, so bank customers who do not receive these notices before that date should not think they are safe from the IRS (the voluntary disclosure program, unveiled March 26, 2009, created a penalty structure intended to encourage taxpayers to reveal U.S. assets held offshore by offering those who comply the chance to avoid criminal prosecution and multiple additional penalties). The letter taxpayers receive from UBS will not disqualify them from the voluntary disclosure program, although once the Swiss government sends the IRS a name, there is no guarantee that a taxpayer will be accepted into the program. Therefore, any bank customer with unreported offshore income or accounts should come forward before the September 23 deadline or face stiffer civil penalties and possible criminal prosecution later, since there is no guarantee that the IRS will extend the deadline for the voluntary disclosure program.

UBS Web site

UBS has established a Web page for clients who want to turn over account information to the IRS following the new agreement between the United States and Switzerland to hand over approximately 4,450 names of U.S. taxpayers with accounts in the bank. The Web page offers a form letter that customers can use to instruct UBS to turn over their information, as well as guidelines on how to fill out the letter. The letter includes language stating that the taxpayer is willing to cooperate with the IRS, and to disclose to the IRS, to the extent requested by the IRS, all relevant information relating to the account(s) held by UBS AG. In the letter, taxpayers also confirm that they have consulted with specialized counsel and are aware of the consequences that the instructions could have. The letter instructs and authorizes UBS to disclose to the IRS all account records. Individuals who sign the letter also must agree to waive protections provided under bank secrecy laws of Switzerland. UBS said on its Web site, however, that even if account holders use the provided forms to instruct the bank to turn over information, it does not express any views as to whether providing such account information would be treated by the IRS as a voluntary disclosure.

Potential Impact on Offshore Banking The agreement likely will have major ramifications for those maintaining accounts at overseas financial institutions and raises questions about whether financial institutions might in the future have heightened duties to detect and report tax evasion.