With military precision, at 9:30 a.m. on August 19, the US Internal Revenue Service (IRS) announced that it is getting what it wanted from Switzerland: details of secret bank accounts at UBS Bank, with others to follow.
This followed earlier action against UBS in the US and a broad "John Doe summons" submitted by the IRS to the United States District Court for the Southern District of Florida, Miami Division.
Now, the US government has just entered into two unprecedented agreements: one with the Swiss government, the other with UBS.
They potentially apply to US persons, including US citizens and green-card holders living in Israel.
Under the agreements, the IRS will submit a request to the Swiss government describing the accounts for which it is requesting information, pursuant to the US-Swiss Tax Treaty. The Swiss government will then direct UBS to initiate procedures to turn over information on thousands of accounts to the IRS.
How do you know if you are affected?
Upon receiving an IRS treaty request, the Swiss government will direct UBS to notify account holders that their information is included in the treaty request. It is expected that these notices will be sent on a rolling basis, with some being sent over the coming weeks and others over the coming months.
Time to disclose voluntarily?
Receipt of an IRS treaty notice will not by itself preclude the affected UBS account holder from coming into the IRS under the Voluntary Disclosure Program (i.e. amnesty). Making voluntary disclosure may enable US taxpayers to become compliant, avoid substantial civil penalties and generally eliminates the risk of criminal prosecution. As part of this voluntary disclosure program, on March 23, 2009, the IRS announced a special penalty framework applicable to voluntary disclosure requests regarding unreported offshore accounts and entities.
This voluntary disclosure program will be in place for six months, ending on September 23, 2009. Generally, a US taxpayer must make a voluntary disclosure to the IRS: (1) before the IRS identifies the taxpayer's potential noncompliance with US tax laws through a civil examination, criminal investigation or other means; (2) before September 23, 2009; and (3) before the provision of account data to the IRS in response to the treaty request.
The IRS has indicated that a voluntary disclosure will be considered timely as soon as a taxpayer identifies himself and expresses an intent to disclose, even if the taxpayer has not yet completed amended or delinquent returns.
What is the IRS after?
The IRS expects to receive from UBS information on accounts of various amounts and types, including bank-only accounts, custody accounts in which securities or other investment assets were held and offshore company-nominee accounts through which an individual indirectly held beneficial ownership in the accounts.
How many people are affected?
Based on the criteria set forth in a secret annex, the two governments estimate and expect that the number of open or closed accounts falling under the treaty request is approximately 4,450. The annex will not be published for at least 90 days.
But the IRS will not stop there. It will only withdraw the John Doe summons "with prejudice" when it has received all relevant account information, concerning 10,000 open or closed undisclosed UBS AG accounts from any source.
In addition, the IRS says the Swiss government has agreed to review and process additional requests for information for other banks regarding their account holders, to the extent that such a request is based on a pattern of facts and circumstances equivalent to those of the UBS case.
What will the IRS do with information it gets?
Information provided to the IRS through the above process will be examined for potential civil and criminal tax violations. The IRS will assess any additional tax, interest and a number of applicable penalties. This includes the penalty for the willful failure to file a Report of Foreign Bank and Financial Accounts (FBAR) with the US Treasury. This penalty can be up to 50 percent of the value of the account for each year an FBAR was not filed. Various other reporting requirements, penalties and sanctions also exist.
The IRS says it will recommend criminal prosecution in those cases where the facts warrant such an action. To date, the IRS and the US Department of Justice have "successfully" prosecuted four US customers of UBS whose information was provided to the IRS by UBS as part of an earlier Deferred Prosecution Agreement.
The agreement between the US and Swiss governments requires the Swiss government to set up a special task force to deal with treaty requests and imposes strict deadlines for doing so. To avoid any foot-dragging, if the actual results after 370 days differ significantly from the results that can be reasonably expected, either country may take "proportionate rebalancing measures to remedy the imbalance."
To sum up
US persons who have not reported their bank and financial accounts in Switzerland, Israel or elsewhere should rethink their strategy and take immediate advice in each country.
As always, consult experienced tax and legal advisers in each country at an early stage in specific cases.
Leon Harris is an international tax specialist.