Cracks in Switzerland’s Agreement to Release UBS Client Data to IRS

In August (2009), Switzerland seemed to have reached an agreement with the American Internal Revenue Service (I.R.S.) regarding the disclosure of banking information on well over 4,000 American clients of UBS. It seemed a major win for the U.S. government, who had filed suit against UBS in February 2009 to reveal the names of some 52,000 American customers of the bank.

As part of the August agreement, the U.S. suspended civil proceedings against the Swiss bank.

The names of the UBS clients, many of whom were accused of failing to submit proper tax information or declare income, would be handed over to Swiss authorities, who would then provide the information to the I.R.S.

That was the agreement.

However, the plan appears to have changed – and in the favor of those UBS clients to be revealed under the agreement.

This January, one of the UBS AG account holders won a case in Swiss court, seeking to prevent his information from being turned over to U.S. authorities. In the court’s ruling, it concluded that a “failure to complete certain tax forms or declare income” did not amount to tax fraud.

Under Swiss Law, tax fraud involves dealings such as intentional falsification of documents and activities like money laundering. Someone who simply did not report income or pay taxes would not be considered to have committed tax fraud in Switzerland.

This being the case, the Swiss government would have no obligation, under Swiss law, to turn over UBS client information to the I.R.S.

While the ruling only pertained to a single UBS AG account holder, it may already be setting a precedent for many more. At the time of the ruling, there were at least 20 other, similar, cases pending and, in the end, the ruling could affect many more than that.

As of now, the Swiss government is still grappling with how this decision will affect the agreement it made in August with the United States. Both sides are expressing optimism, albeit strained in some cases, that the agreement will be maintained.

If an accord cannot be reached, the Swiss are concerned that the U.S. may decide to reopen the civil case against UBS. To learn more about the UBS case and any impact it may have on your situation, please speak with a tax attorney, knowledgeable in tax controversies, in your area.