IRS In Discussions With Swiss Bank UBS Over Identification of Bank Clients Suspected of Tax Evasion

On July 13, a federal judge in Miami granted a joint motion to stay an evidentiary hearing that was to be held as a result of a petition from the United States that the Swiss bank UBS be compelled to disclose the names of 52,000 American clients who were suspected of tax evasion.  The case has raised concerns about the effects of privacy laws in other nations on the ability of the federal government to enforce its own laws and created tension between the Justice Department, which had said it might fine, or even indict, UBS if the judge ordered it to disclose the names and it continued to refuse to do so, and the Swiss government, which has said it would not allow UBS to disclose any names.

The case began on February 19, 2009, when the United States filed a petition (.pdf) in the U.S. District Court for the Southern District of Florida, asking the court to enforce an IRS "John Doe" summons to UBS.  The IRS served the summons in furtherance of an investigation it was conducting to determine the identities of U.S. taxpayers who had allegedly failed to report the existence of, and income earned in, undeclared Swiss accounts with UBS.  On February 20, UBS filed a document containing what it termed "background information for the court’s consideration" (.pdf).  In this filing, UBS argued that the IRS was essentially asking it to violate Swiss privacy laws, thereby exposing its employees and the bank to criminal and civil penalties.  UBS argued that the petition raised serious issues of international comity due to Swiss financial privacy laws, violated treaties between the United States and Switzerland and violated a prior agreement between the United States and UBS.  That same day, the United States filed a response (.pdf) that disputed the arguments made by UBS.

On April 30, UBS then filed a brief (.pdf) that expounded on its arguments against disclosure.  In support of UBS, the Swiss government filed an amicus brief (.pdf).  On June 30, the United States then filed its response (.pdf).  The federal judge had scheduled a hearing for July 13, 2009, to hear arguments on the petition.  On July 12, 2009, however, the parties filed a joint motion to stay the hearing, so they could continue to discuss settlement.  The judge granted the motion and re-set the hearing to August 3, in the event the parties could not reach a resolution.

The dispute between the IRS and UBS is also having effects on third parties.  The Wall Street Journal reported on Monday that Swiss banks are curbing or eliminating business with U.S. customers for fear of future action by U.S. authorities.  While it is probable that the U.S. and UBS will reach some sort of settlement (likely involving a payment by UBS to the U.S.), if the case goes forward it will interesting to see what future effects the outcome could have, not just on financial transactions between American citizens and Swiss banks, but on transactions between American citizens and any other international bank, as well as on the federal government’s ability to enforce tax laws beyond its borders.



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