A federal judge has directed the Internal Revenue Service to issue a summons requiring the Swiss bank UBS to produce information about U.S. taxpayers who were trying to evade U.S. income taxes by holding accounts at other Swiss banks that did business with UBS.
U.S. District Judge William H. Pauley III entered an order Monday authorizing the IRS to require UBS to produce records on U.S. taxpayers with accounts at the Swiss bank Wegelin & Co. and other Swiss banks that used Wegelin’s United States correspondent account at UBS. The judge’s order would enable U.S. authorities to determine the identity of the U.S. taxpayers who hold or held interests in financial accounts at Wegelin and other Swiss financial institutions that used Wegelin’s UBS account.
Wegelin, which is Switzerland’s oldest bank, pleaded guilty in Manhattan federal court on January 3 to conspiring with U.S. taxpayers and others to hide more than $1.2 billion in secret Swiss bank accounts and to conceal the income they generated from the IRS (see Swiss Bank Wegelin to Pay $74M to Settle IRS Charges). As part of its guilty plea, Wegelin agreed to pay approximately $20 million in restitution to the IRS and an additional $22.05 million criminal fine.
In addition, Wegelin also agreed to a civil forfeiture of $32 million, $16.2 million of which was seized and forfeited by the government from Wegelin’s correspondent account with UBS in Stamford, Conn. in April 2012.
“This summons is the latest step in our efforts to identify and prosecute U.S. taxpayers who think they can evade their legal responsibility to pay taxes by secreting their money away in anonymous off-shore accounts at Wegelin and other banks, and to recover the hundreds of millions of dollars that is owed to the IRS,” Manhattan U.S. Attorney Preet Bharara said in a statement. “Wegelin’s recent guilty plea for facilitating this conduct—the first such plea by a Swiss financial institution - made it possible for us to take this step and our work continues in earnest.”
The Justice Department and the IRS are using a “John Doe summons” to compel UBS to produce the bank account records of U.S. taxpayers, similar to the summonses that were used in the past to force the bank to disclose information on its U.S. depositors (see U.S., Swiss Reach Accord on Secret UBS Accounts). In 2009, UBS agreed to pay $787 million as part of a deferred prosecution agreement, and later agreed to provide the identities of up to 4,450 U.S.-based clients with undeclared bank accounts.
The court granted the IRS permission to serve a new John Doe summons on UBS. The IRS uses John Doe summonses to obtain information about possible tax fraud by individuals whose identities are unknown. This John Doe summons directs UBS to produce records identifying U.S. taxpayers with accounts at Wegelin and other Swiss banks that used Wegelin’s Correspondent Account. Wegelin has admitted that certain of its U.S. taxpayer clients were maintaining accounts at Wegelin in order to evade their U.S. tax obligations.
“The summons provides an important tool to help with international tax enforcement efforts and detect U.S. taxpayers hiding offshore accounts to evade taxes,” said IRS Acting Commissioner Steven T. Miller. “This effort reflects a long-term strategy by the IRS and Justice Department to break through international bank secrecy and protect our nation's taxpayers.”
According to the government’s indictment and forfeiture complaint, Wegelin and at least two other Swiss banks used Wegelin’s correspondent account to covertly launder U.S. taxpayers’ funds from their undeclared accounts in Switzerland. The IRS believes the funds were transferred in a way designed to reduce the risk of detection by U.S. authorities, so the account holders could continue to avoid paying taxes owed to the IRS.
Federal tax law requires U.S. taxpayers to pay taxes on all income earned worldwide. U.S. taxpayers must also report foreign financial accounts if the total value of the accounts exceeds $10,000 at any time during the calendar year. A deliberate failure to report a foreign account can result in a penalty of up to 50 percent of the amount in the account at the time of the violation.
The IRS has offered a series of voluntary disclosure programs to encourage taxpayers with undeclared foreign bank accounts to come forward. More recently, the Treasury Department has been signing intergovernmental agreements with other countries such as Switzerland allowing the tax authorities to share information, as part of the implementation of the Foreign Account Tax Compliance Act, or FATCA (see Treasury Releases Final FATCA Regulations to Fight Offshore Tax Evasion).