Lawsuits and allegations are flying back and forth across the Atlantic Ocean as the IRS tries to find unpaid taxes and UBS (UBS) hides behind Swiss secrecy laws that refuse to help. But, UBS is part of the IRS Qualified Intermediary program, which requires UBS to withhold taxes. Under that program, for American clients who do not sign W-9 disclosure forms, UBS generally must withhold 31% of interest income and 16% of dividend income.
In answer to the first successful shot fired by the IRS, UBS volunteered to pay $780 million to settle a claim involving criminal fraud and failure to collect taxes on 17,000 accounts. Now the IRS wants to see 52,000 undeclared accounts of Americans and has filed a lawsuit in Miami federal court. The IRS estimates that $15 billion in assets is kept in those accounts.
The IRS said in its suit that it's seeking the names as part of an investigation "to determine the identity of U.S. taxpayers who have violated the Internal Revenue Code by failing to report the existence of, and income earned in, undeclared Swiss accounts with UBS." IRS Commission Douglas Shulman told Reuters, "We have been steadily increasing pressure on offshore financial institutions that facilitate concealment of taxable income in the U.S. That pressure will continue under my watch."
UBS customers fired back with a lawsuit of their own to protect their identities under the Swiss bank secrecy laws. The lawsuit charges UBS and the Swiss Financial Market Supervisory Authority with violating Swiss bank secrecy laws. Peter Kurer, chairman of UBS and Egen Haltiner, chairman of Finma, were also named as defendants. UBS issued a statement saying it will "vigorously contest" the enforcement of the IRS' "John Doe" summons seeking the names of accounts, citing Switzerland's financial-privacy laws. It also said the lawsuit filed by its clients in Switzerland was "without merit."
Britain sounds like it's ready to get into the fight too. UK tax official David Hartnett told Reuters that Britain also was determined to end secrecy on offshore accounts. He said, "In my meetings with leaders of secrecy countries, the clear message today is we're not going away, we're going to become more and more determined, as the U.S. showed in relation to UBS." He went on to say, "Many of these countries are actually dependent on countries like the United States and the UK and others in various different ways, and so there are levers." He did not expand about what those levers were.
Clearly, as the economic crisis widens and governments around the world are trying to find cash, tax evaders will face stronger and stronger scrutiny. These dueling lawsuits are probably just the start of what will probably become a bloody fight.
Lita Epstein has written more than 25 books including "Reading Financial Reports for Dummies."