IRS Goes After UBS AG

by | Jul 8, 2008

Following the indictment of several UBS AG (Switzerland) employees, the Justice Department requested permission from federal court to have the Internal Revenue Service issue John Doe summons to UBS AG (the Swiss parent of UBS). The John Doe summons will instruct the Swiss bank to provide to the IRS information on all U.S. taxpayer who may have bank accounts with the bank in Switzerland.

The Justice Department has alleged that UBS has helped hundreds of American taxpayers evade payment of U.S. taxes by setting up sham foreign entities as the beneficial owners of Swiss accounts. UBS has chosen to comply with the summons (they didn?t have to, as they are not subject to the jurisdiction of U.S. courts), and now hundreds of American taxpayers with accounts at UBS have a large bulls-eye painted on them by the IRS.

Failure to disclose a foreign bank account and failure to pay taxes on income generated in such an account are subject to not only civil penalties, but also criminal penalties, which may mean jail time.

We have always advised our clients of two things: (i) disclose to the extent you are legally required to disclose, and (ii) do not bank with foreign banks that have business operations in the U.S.

Many Swiss private banks have no business activities in the U.S. and would simply ignore the summons from the IRS. A bank like UBS, with significant U.S. operations, is in a different position. Although the U.S. courts have no jurisdiction over UBS AG, they do have jurisdiction over the U.S. subsidiary, giving the courts and the IRS tremendous leverage over UBS.

It is likely that the IRS will roll out some sort of a voluntary compliance program, waiving criminal penalties in exchange for full payment of taxes and civil penalties. In the meantime, if you have an account with UBS AG in Switzerland that you never disclosed, hire a good lawyer and set money aside for defense.

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