Tax Lawyer's Blog

Last week I wrote about the cross-border woes of Swiss banking conglomerate, UBS AG - U.S. Indicts Swiss Executive for Foreign Bank Account Tax Evasion. 

This is from Lynnley Browning of the International Herald Tribune:

Under pressure from the authorities, UBS is considering whether to divulge the names of 20,000 of its well-heeled U.S. clients, according to people close to the probe, a step that would have once been unthinkable to Swiss bankers, whose practice of secrecy dates back to the Middle Ages.

U.S. investigators believe some of these clients may have used offshore accounts at UBS to illegally hide as much as $20 billion from the Internal Revenue Service. Doing so may have enabled these people to dodge $300 million or more in U.S. taxes, according to a government official connected with the investigation.

In August the U.S. District Court for the Southern District of Florida issued an order approving the Department of Justice’s issuance of a John Doe summons that would force UBS to close the foreign accounts of its clients and disclose their names to the IRS.

As a result of the issuance of the summons, several tax bloggers have raised the issue of whether and to what extent the IRS’s voluntary disclosure program will help insulate UBS clients from criminal prosecution.

The IRS Internal Revenue Manual (IRM) contains the following language under the category Tax Crimes – General:

Voluntary Disclosure Practice

(1)  It is currently the practice of the IRS that a voluntary disclosure will be considered along with all other factors in the investigation in determining whether criminal prosecution will be recommended.  This voluntary disclosure practice creates no substantive or procedural rights for taxpayers, but rather is a matter of internal IRS practice, provided solely for guidance to IRS personnel.  Taxpayers cannot rely on the fact that other similarly situated taxpayers may not have been recommended for criminal prosecution.

Taxpayers who voluntarily disclose their wrongful acts decrease the chances that the IRS will recommend criminal prosecution; however, voluntary disclosure does not automatically guarantee immunity.

Authors Advice: If you are considering making a voluntary disclosure to the IRS you should not do so without first consulting an experienced tax lawyer.

The IRM defines when a voluntary disclosure will be deemed to have been made:

(3)  A voluntary disclosure occurs when the communication is truthful, timely, complete, and when: 

a.  the taxpayer shows a willingness to cooperate (and  does in fact cooperate) with the IRS in determining his or her correct tax liability; and

b.   the taxpayer makes good faith arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable.

The big issue for UBS clients is going to be whether or not their voluntary disclosure is “timely.” Here’s how the IRM defines “timely”: 

(4) A disclosure is timely if it is received before:

a.  the IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation;

b.  the IRS has received information from a third party (e.g., informant, other governmental agency, or the media) alerting the IRS to the specific taxpayer’s noncompliance;

c.  the IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer; or

d.  the IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena).

(The emphasis is mine.)

Based on sub-paragraph “b”, above, it would appear that should UBS disclose the names of its clients before those clients make voluntary disclosure, those voluntary disclosures will be considered “untimely” and no relief from criminal prosecution will be available under the voluntary disclosure rules. 

Query: Does the fact that a summons has been issued to UBS requiring it to divulge the names of those clients constitute “alerting the IRS to the specific taxpayer’s noncompliance?”  If so, it is too late for UBS clients to “voluntarily disclose” their wrongdoing.

On November 10, 2008, William M. Sharp and Larry R. Kemm wrote an article for Tax Analysts’ Practioners’ Corner titled Voluntary Disclosure Update for U.S. UBS Clients. In it they state,

[W]e understand that UBS will suspend the account termination pending resolution of a U.S. voluntary disclosure proceeding (as discussed below). This policy approach gives U.S. taxpayers (who notify UBS of their intention to undergo a voluntary disclosure) the opportunity to become U.S. tax law compliant before terminating their accounts.

Sharp and Kemm conclude,

In view of the UBS policy to “suspend” the completion of account closure under the impending termination letters, affected U.S. taxpayers clearly have a window of opportunity to use the IRS voluntary disclosure process to minimize if not contractually eliminate the criminal liability exposure and commensurately to reduce overall penalty exposure, as well as resolve all open prior tax years.

Related Articles, Blogs and Sites: 

Revised IRS Voluntary Disclosure Practice - IRS

UBS Cheats Can Still Come Clean- Janet Novack, Forbes

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