The government has announced the successful negotiation of an agreement that will result in the IRS's receiving an unprecedented amount of information on U.S. holders of accounts at the Swiss bank UBS.
 
The deal not only involved a settlement agreement with UBS but also included an agreement between the U.S. and Switzerland. The Swiss agreed "to review and process additional requests for information by the IRS...if they are based on a pattern of facts and circumstances that are equivalent to those of the UBS AG case." While this particular deal involves only the disclosure of UBS accounts, it opens the door to disclosure of accounts at other Swiss banks.
 
How the agreements work. Under the various agreements, IRS will submit a treaty request to the Swiss government describing the accounts for which it is requesting information. The Swiss government will then direct UBS to initiate procedures to turn over information on the accounts to IRS. As result, IRS will obtain 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.
 
What IRS will do with the information. IRS says it will thoroughly examine the information for all potential civil and criminal tax violations. It will assess any additional tax, interest and a number of applicable penalties. This includes the penalty for the willful failure to file a Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts (FBAR), which can be up to 50% of the value of the account for each year an FBAR was not filed. Also, IRS will recommend criminal prosecution in those cases where the facts warrant such an action.
 
Voluntary Disclosure. Under the arrangement, UBS will notify account holders that their information is included in the treaty request. IRS says that receipt of this notice will not by itself preclude the account holder from coming clean to IRS under the Voluntary Disclosure Program. Under that program, the tax liabilities related to offshore issues of taxpayers that make "voluntary disclosure requests" will be settled as follows:

• Taxes and interest due going back 6 years (2003 through 2008) will be assessed. The taxpayer must file or amend all returns, including information returns, and FBARs.
• IRS will assess either an accuracy or delinquency penalty for all years (no reasonable cause exception will be applied).
• In lieu of all other penalties that may apply (including FBAR and information return penalties), IRS will assess a penalty equal to 20% of the amount in a foreign bank account or entity in the year with the highest aggregate account or asset value. The penalty is reduced to 5% if, with respect to the accounts or entities formed: (a) the taxpayer did not open them or cause them to be opened or formed; (b) there has been no activity during the period the accounts/entities were controlled by the taxpayer; and (c) all applicable U.S. taxes have been paid on the funds in the accounts/entities (where only the earnings have escaped U.S. taxes).

Now that IRS's hand is strengthened with the impending release of information concerning thousands of accounts, affected taxpayers who haven't already done so may want to take a close look at the settlement offer. The cost of settling may be far lower than if IRS pursues enforcement actions on its own after getting the information from UBS or other Swiss banks under any future requests that IRS may put forth.
 
This particular action relates only to a few thousand UBS customers.  However, it shows the IRS is very serious about pursuing offshore sources to track unreported income.

 

About the Writer

Desmond G. Sheridan is a partner in the Greensboro law firm of Isaacson Isaacson Sheridan & Fountain, LLP and is a certified public accountant.  His practice areas are business transactions, tax, corporations, limited liability companies, commercial real estate and estate planning.  Sheridan has served on the Board of Directors of the North Carolina Association of Certified Public Accountants and has been recognized as a "Best Lawyer in America," a North Carolina "Super Lawyer" and a member of the "Legal Elite" by Business North Carolina.  He has given numerous continuing education presentations to CPAs and attorneys.