Advice for Americans With Undisclosed Accounts at UBS and Other Foreign Banks as IRS Lifts Cloak of Swiss Bank Secrecy

            At present, many American taxpayers who have or had undeclared UBS Swiss bank accounts, as well as undisclosed accounts in other foreign banks, run a risk of criminal prosecution or heavy civil tax penalties.  In writing this article we hope to supply some guidance which will substantially reduce these risks.

            For decades, Swiss banks and Swiss bank secrecy laws have permitted Colombian drug dealers, African dictators and other international crooks, as well as legitimate United States taxpayers, to maintain numbered Swiss bank accounts whose disclosure is a crime under Swiss law.

            For American taxpayers (many of whom established the Swiss bank accounts to evade United States taxes), if they have undeclared accounts at Union Bank of Switzerland ("UBS"), times are changing.  On June 30, 2008, the IRS requested that a Federal Judge in Miami issue a "John Doe" summons to UBS requiring it to identify all United States taxpayers who had UBS Swiss bank accounts from 2002 - 2007, and for whom UBS did not file with the IRS the mandatory Form 1099 (listing income earned in the account).  In an affidavit in support of this request, IRS agent and offshore compliance officer Dan Reeves painted a disturbing picture of hundreds of millions of dollars of taxes being evaded by U. S. citizens by their failure to provide UBS with Form W-9 so it could submit to the IRS Form 1099 listing reportable income of American taxpayers' Swiss bank accounts.

            According to Reeves, this tax evasion scheme was accomplished, often with the help of UBS personnel, by American taxpayers who prepared false and misleading IRS Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for U.S. Tax Withholding) falsely claiming that sham offshore entities owned the Swiss bank accounts: 

Because it was made to appear as though non-United States taxpayers owned the accounts, UBS would not submit Form 1099 reporting income earned on the offshore accounts.  By concealing the United States taxpayers' ownership and control over the assets in the offshore accounts, UBS assisted these United States taxpayers evade the reporting and payment of their income taxes.[1]

            In his affidavit, Reeves explained how Bradley Birkenfeld, a former UBS banker who pleaded guilty (and was sentenced in August, 2009 to 40 months in prison) to conspiring to defraud the IRS, assisted Igor Olenicoff, a billionaire U.S. real estate developer, in evading paying $7.2 million in taxes by helping Olenicoff illegally conceal offshore $200 million of assets:

According to Birkenfeld, Olenicoff, with UBS's assistance, formed a Bahamian corporation and fraudulently completed an IRS Form W-8BEN to make it appear as though the corporation was the beneficial owner of an offshore account that he had with UBS.  To this and other bogus entities, Olenicoff transferred $60 million, as well as a 147-foot yacht.  Because it was in the name of a foreign entity, UBS did not report to the Internal Revenue Service any payments made to the account, and Olenicoff was able to refrain from reporting the income secure in the knowledge that UBS would maintain the traditional secrecy of Swiss accounts.  In December 2007, Olenicoff pleaded guilty to a criminal count of filing a false 2002 tax return for omitting income earned from the offshore assets...[2]

Based on what I have learned from Birkenfeld and from UBS's website, it appears that UBS offered, throughout the years addressed by the "John Doe" summons, undeclared offshore accounts to United States taxpayers.  In a document found on its own website, UBS suggested putting a "structure in place" between the beneficial owner and the bank in order to avoid disclosure of their beneficial ownership of the account to the Internal Revenue Service.  In short, UBS, in plain language, suggests using a nominee entity as a means of avoiding the reporting requirements of the U.S. tax laws.[3]

            On July 1, 2008, the U.S. District Court in Miami approved the IRS request for the summons to UBS for the list of its American account holders.  On February 18, 2009, UBS essentially agreed, in a document filed in the U.S. District Court, to the allegations contained in the Reeves affidavit in support of the IRS's June 30, 2008, request for a "Joe Dee" summons.  On February 18^th, the United States filed a criminal information against UBS in Miami Federal Court, and also filed a deferred prosecution agreement against UBS whereby UBS will pay a $780 million fine, and disclose to the IRS, with the consent of the Swiss bank regulator, FINMA, the names of approximately 250 Americans with undisclosed UBS Swiss bank accounts

            On February 19^th, the United Sates filed additional documents in Miami Federal Court asking the Court to now order UBS to turn over the names of the rest of the 52,000 Americans with undeclared UBS Swiss bank accounts.  In August, 2009, the U.S. UBS and the Swiss government entered into "an historic agreement that has put a large chink in the armor of Swiss bank secrecy."[4]  Under the settlement, by August, 2010, the IRS is to receive account information for approximately 4,450 Americans with previously undisclosed Swiss UBS accounts. 

            It is important to note that it is not illegal for an American to have a Swiss bank account.  It is a crime, however for an American taxpayer to fail to check "yes" in a box on Schedule B of Form 1040 indicating the taxpayer has foreign bank accounts in excess of $10,000.  Schedule B also requires taxpayers with foreign bank accounts to annually file Form TDF 90-22.1. (Foreign Bank Account Report ("FBAR")).  The FBAR form is due on or before June 30^th of the calendar year following the year in which the taxpayer had the foreign bank account.  A willful failure to file an FBAR form is a felony under 31 U.S.C. §5322.  Additionally, willful failure to file an FBAR form can also subject a taxpayer to a draconian civil sanction, i.e., up to fifty percent (50%) of the amount in the account for each statutory year. 

            American taxpayers who set up Swiss or other undisclosed foreign bank accounts would be well advised to make a timely "voluntary disclosure" to the IRS, file amended tax returns reflecting income earned in Swiss bank accounts, and also file the appropriate FBARs.  Under the current IRS Voluntary Disclosure Practice (Internal Revenue Manual Section 9.5.3.1.2.1), a "voluntary disclosure" will be considered timely if it is received (i) before the IRS starts an investigation of the taxpayer concerning the specific liability of the taxpayer; and (ii) before the IRS receives information relating to the taxpayers' non-compliance from a third party or from another criminal enforcement action.  Also, the taxpayer's "voluntary disclosure" has to be truthful, and the proceeds of any unreported income cannot be from criminal activity.  The taxpayer must also agree to pay all taxes, interest and penalties.  Based on our professional experience, we believe that if a taxpayer satisfies the IRS "voluntary disclosure" provisions, he or she will not be criminally prosecuted for evading taxes on Swiss bank income not reported on the tax return. 

            To eliminate the risk of criminal prosecution and reduce the severe civil penalties relating to undisclosed Swiss or other foreign bank account income, we strongly urge taxpayers who set up foreign bank accounts with legally earned income, to immediately hire competent counsel to approach the IRS Criminal Investigation Division ("CID") and with the assistance of a competent certified public accountant (hired by the lawyer to extend the attorney client privilege to the accountant's work in preparing amended returns) make a "voluntary disclosure" before the chance to avoid criminal prosecution is eliminated by the IRS first contacting the taxpayer. 

            If the Client has been notified by UBS that his name has already been turned over to the IRS, he does not qualify for the IRS's "voluntary disclosure" program.  In that case, however, it still makes sense to quickly, quietly, file amended returns reflecting Swiss bank income.  It's always better to be at the front of a parade than at the rear.

In our view, the UBS case is just the tip of the iceberg in the IRS's attempt to force American taxpayers to disclose their foreign accounts in not only Switzerland but other countries, and bring these taxpayers back into compliance regarding their offshore holdings.  According, we believe that American taxpayers with non-UBS undisclosed Swiss accounts and non-Swiss undisclosed foreign bank accounts would also be well advised to attempt to participate in the IRS's voluntary disclosure program.