On July 1, 2008, a federal judge in Miami authorized the United States Department of Justice (the "Justice Department") and the Internal Revenue Service to serve a summons on UBS to turn over confidential information relating to its wealthy American clients. This investigation into UBS clients is part of a broader investigation into the bank’s practice of helping its clients avoid taxes by opening secret bank accounts, destroying documents, using Swiss credit cards and filing false tax returns. Recently, one such client of UBS, a wealthy American real-estate developer, pleaded guilty to filing a false tax return and has since been cooperating with government officials.
Although previously unknown and shrouded by Swiss-secrecy laws, some 20,000 American UBS clients may now find themselves a potential target of a criminal investigation as a result of the judge's approval of a "John Doe" summons. Whether those clients, and other individuals who relied upon foreign bank secrecy laws, will face criminal charges, however, is largely within their control.
What is a "John Doe" summons?
A "John Doe" summons allows the Justice Department and the IRS to obtain information about unidentified individuals who may not be in compliance with tax laws and who are otherwise unknown to the IRS.
Whom does this summons affect?
This summons forces UBS to turn over the names of all American clients who, from December 2002 through December 2007, had accounts at the Swiss-based offices of UBS, its subsidiaries or affiliates, and for which UBS did not have a tax form known as a W-9.
What can be done to prevent criminal charges?
A taxpayer who has not reported all of his income or paid all of his taxes can increase the likelihood that he will not be prosecuted by making a "voluntary disclosure" to the IRS. A voluntary disclosure is the process of voluntarily reporting previously undisclosed income or false deductions through an amended return or the filing of a delinquent return. A taxpayer's timely, voluntary disclosure of a significant unreported tax liability is an important factor to both the IRS and the Justice Department in deciding whether to prosecute a taxpayer.
How does a taxpayer make a voluntary disclosure?
Once a taxpayer has decided to make a voluntary disclosure, it is important to act quickly and consult an attorney. An attorney will be able to initiate contact with the IRS; and, while the ultimate disclosure cannot be anonymous, in initial conversations and negotiations with the IRS, the taxpayer's attorney need not disclose the taxpayer's name.
Another reason to retain an attorney, as opposed to an accountant, is to preserve the attorney-client privilege. While an accountant-client privilege exists in limited circumstances, it does not cover tax crimes, including tax fraud and tax evasion. This means that a taxpayer who may not have properly reported all of his income or paid all his taxes must retain an attorney to protect the complete attorney-client privilege that covers legal matters, tax matters, and other crimes. The lawyer, however, can then retain the services of an accountant in order to preserve the statements and communications by and to the accountant, pursuant to the attorney-client privilege.
When is a voluntary disclosure considered timely?
According to the IRS, a disclosure is considered timely if it is received before:
(a) The IRS has initiated a civil examination or a criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation;
(b) The IRS has received information from a third party (e.g., informant, other governmental agency, or the media) alerting the IRS to the specific taxpayer's noncompliance;
(c) The IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer; or
(d) The IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena).
A "John Doe" summons alone will not make an otherwise voluntary disclosure untimely, so long as the IRS is contacted before they have begun an investigation into the specific taxpayer's noncompliance. In the UBS case, taxpayers must work quickly — both the IRS and the Justice Department have made tax evasion by UBS clients a priority. The longer a taxpayer waits before making a voluntary disclosure may jeopardize the taxpayer's chances of avoiding criminal prosecution.