Swiss Court Puts UBS/IRS Deal in Doubt, but IRS Is Already a Winner

Swiss bank UBS (UBS) may not have to turn over the names of 4,450 of its accountholders to the IRS because a Swiss court ruled Tuesday that simply failing to file an American W-9 does not constitute "tax fraud and the like." This puts the treaty negotiated by the Swiss and U.S. governments in doubt. The Swiss cabinet met Wednesday to review the court's decision and decided that it will go back into negotiations with the U.S. government.But even if the settlement falls apart, the IRS may have gotten most of what it needs from the thousands of delinquent taxpayers who came forward voluntarily during the tax amnesty that ended in October. In fact, during a speech at the New York State Bar Association Taxation Section Annual Meeting on Tuesday, IRS Commissioner Doug Shulman talked about the success of the amnesty program and how the IRS is using the information it collected. "Mining for information from the more than 14,700 disclosures that came in during our recent voluntary disclosure program is a way to identify financial institutions, advisors, and others who promoted or otherwise facilitated U.S. persons hiding assets and income offshore and attempted to shirk their tax responsibilities at home," Shulman said.

He added that the value of the data goes "far beyond the billions of dollars in revenues we will be collecting from these taxpayers. It will change the conversations that practitioners and tax return preparers will be having with many of their clients this coming tax filing season." He added that, "the real watershed will come over the next 10, 20 and 30 years. Those who came in under the voluntary disclosure program will be in our tax system going forward, and the risk calculus of people thinking about hiding assets overseas to avoid paying taxes has changed dramatically."

The treaty negotiated in August 2009 that encouraged those taxpayers to voluntarily report the funds they were hiding in offshore banks was misunderstood by many. The treaty required the Swiss government to review the 4,450 UBS bank clients' records for possible tax fraud, but it never guaranteed that the names would be turned over to the U.S.

UBS Chairman Kaspar Villiger, a former member of the Swiss government, told Swiss newspaper Tagesanzeiger that the court ruling complicated the matter, and said it will be up to the two governments to resolve the court ruling. Four options are being weighed to resolve the UBS case:
  • The governments could change the date upon which the treaty for double taxation between Switzerland and the U.S. goes into force. The treaty allows the U.S. to request judicial assistance in pursuing lesser tax infractions.
  • The Swiss Parliament could pass the August 2009 agreement into law, giving it similar status to the 1996 tax agreement. The U.S. Congress would have to reciprocate. But this would not apply retroactively to the case now under debate.
  • The two nations could negotiate a fresh agreement.
  • The Swiss government could invoke emergency measures.
The court ruling that complicated the August 2009 agreement was based on Switzerland's 1996 tax treaty with the U.S. The August 2009 treaty, which is not Swiss law, could not supersede the 1996 law in the courts. Even if the government finds a way around the court ruling, the August 2009 agreement gives Switzerland 360 days to make a final decision on whether the information in each of the 4,450 cases should be turned over to the U.S.

A key issue that must be decided by the Swiss is whether tax evasion should be recategorized as the more serious crime of tax fraud. If that were to happen it would simplify the case, but it is unclear whether the Swiss population would support this change. The tax filing system in Switzerland is far simpler than that of the U.S. because Switzerland lacks our complex system of tax deductions.
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