By David Voreacos, Carlyn Kolker and Ryan J. Donmoyer Jan. 25 (Bloomberg) — A Swiss court ruling that impedes the Internal Revenue Service’s ability to collect data on 4,450 UBS AG accounts may prompt the U.S. to revive a lawsuit that shaped the IRS crackdown on offshore tax evasion. The case involves an Aug. 19 agreement by UBS, the biggest Swiss bank, to settle a U.S. suit seeking data on clients suspected of dodging U.S. taxes. UBS ended the U.S. case by agreeing to hand over 4,450 accounts involving “tax fraud or the like.” That accord violated Swiss law by defining fraud too broadly, Switzerland’s Federal Administrative Court ruled in an opinion released Jan. 22. The ruling may force the U.S. back into federal court in Miami to challenge UBS, said New York tax lawyer Bryan Skarlatos . “The Swiss court may have just put UBS in the awkward position of not being able to fulfill the settlement terms,” said Skarlatos of Kostelanetz & Fink LLP. “In that case, the IRS may consider reopening the settlement to force UBS to give at least 4,450 names.” Switzerland’s government, which sought to preserve Swiss bank secrecy, negotiated the accord on behalf of UBS. The deal resolved a lawsuit that the U.S. filed Feb. 19, one day after UBS avoided prosecution by paying $780 million, handing over data on 255 accounts and admitting it aided tax evasion. With the settlement, the U.S. could say it got the data it sought and Switzerland could say it preserved Swiss bank secrecy, said Thomas Zehnle of Bryan Cave LLP in Washington. The ruling imperils that balance, he said. The U.S. may now be “back to Square One” and have to return to court, Zehnle said. ‘Water Under the Bridge’ “With so much water under the bridge now, I can’t imagine the Justice Department and the IRS backing off at this point,” he said. The U.S. could ask a federal judge in Miami to find UBS in contempt of court for not producing the names, said Scott Michel , an attorney at Caplin & Drysdale in Washington. The U.S. requested the data pursuant to a Swiss-U.S. tax treaty. UBS gave the data to the Swiss government, which must review it and hand it over to the IRS. “The UBS defense against a contempt charge is that it’s impossible for them to comply,” Michel said. “They turned the information over to the Swiss government, and it’s the Swiss government, through the courts, that is blocking their production.” The accord required UBS to hand over data on clients engaged in “tax fraud and the like.” It defined tax fraud in two ways. One way identified clients who hid their ownership through trusts, corporations or other structures. W-9 Form The other way required disclosure of accounts exceeding 1 million Swiss francs ($985,000) held by clients who didn’t give a required W-9 tax form to UBS. This method is considered tax evasion under Swiss law, a civil offense, compared with tax fraud, which is a crime, the court ruled. “Provided the taxpayer did nothing more than not declare income, an account or return the form W-9, consequently committing tax evasion under Swiss law, he hasn’t acted fraudulently,” five judges wrote in a ruling on a test case. In a statement after the ruling, the IRS said it has “every expectation that the Swiss government will continue to honor the terms of the agreement.” Switzerland hasn’t yet transferred UBS client data to the U.S. since it reached the accord in August, Minister Hans-Rudolf Merz told Sonntag in an interview. The Swiss tax office made decisions on about 600 cases so far, Merz told the newspaper. Bank Secrecy The Swiss court ruled earlier this month that the nation’s financial regulator broke Swiss law protecting bank secrecy last February when it turned over the 255 UBS accounts. U.S. prosecutors are combing that data and have said they opened 150 criminal tax investigations of UBS clients. Six UBS clients pleaded guilty in the past year, and several European financial professionals were indicted in the U.S. The IRS and Justice Department also are examining offshore accounts from banks around the world that 14,700 U.S. taxpayers voluntarily disclosed last year through a partial amnesty program. Under the August accord, UBS will fulfill its legal obligations when it discloses data on 10,000 accounts. The IRS hasn’t said how many of the 14,700 voluntary disclosures involved UBS accounts. For clients who disclosed their accounts to the IRS, the ruling last week will not matter, said tax attorney George M. Clarke III of Miller & Chevalier in Washington. “If you’ve already voluntarily disclosed, the government already has your name,” said Clarke. Tax attorney Kenneth Rubinstein said the publicity of the prosecutions and the lawsuit leading to the August accord helped drive the voluntary disclosure program. He said the U.S. will not reopen the Miami lawsuit given the program’s success. “This whole thing was a strategy, a PR strategy,” said Rubinstein, of Rubinstein and Rubinstein LLP in New York. “It was designed to get names — some from UBS, some from other banks, other countries.” To contact the reporter on this story: David Voreacos in Newark, New Jersey, at dvoreacos@bloomberg.net ; Carlyn Kolker in New York at ckolker@bloomberg.net ; Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net .
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UBS Tax Fraud Decision by Swiss Court May Prompt U.S. to Revive Complaint
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