Accounting firm Marks Paneth & Shron has assembled a team to help clients with holdings in Swiss bank accounts comply with the IRS’s stepped-up enforcement efforts.

The MP&S foreign disclosure team includes about half a dozen members, including CPA and attorney Solomon Packer, a senior consultant with the firm. Clients are worried about the IRS’s efforts to force Swiss banks like UBS to provide more information about their U.S. clients, he noted. “The client base is increasing,” said Packer. MP&S works with a U.S. law firm that has associates with Switzerland. “The way we’re set up is that there’s an attorney we’re working with who is tied in with people overseas, especially in Switzerland, and they are making referrals for our assistance in this area," said Packer.

UBS recently agreed to pay $780 million in fines, penalties, interest and restitution, and reveal the identities of approximately 300 U.S.-based clients who were using secret numbered Swiss bank accounts to hide their assets from the Internal Revenue Service (see UBS Agrees to Reveal U.S. Tax Shelter Clients).

However, the IRS has issued a series of  “John Doe” summonses in an effort to force UBS to divulge the identities of another 52,000 U.S.-based clients, but UBS claimed that revealing such information would put it in violation of Swiss banking secrecy laws. In April, Switzerland agreed to begin sharing more tax information with the U.S., giving UBS a potential opening for working out a deal.

However, UBS, the Swiss government and banking interests have warned the U.S. not to push too hard. In a brief filed last Friday by five U.S., Swiss and international banking trade associations with the Miami federal court hearing the IRS’s John Doe summons case, the groups argued that the case risked violating the existing tax agreement between the U.S. and Swiss governments.

"Enforcing the John Doe summons in derogation of the U.S.-Swiss taxation treaty undermines a core purpose of that treaty by imposing conflicting legal obligations on international institutions, and threatening a treaty framework that furthers cross-border commerce worldwide," they wrote.

Despite the tug of war with the IRS on behalf of the Swiss banks, Packer said that most of his firm’s clients are interested in complying and are trying to come forward on a voluntary basis. So far, the IRS has been cooperative.

“Up to now the IRS has been rather agreeable,” he said. “They’re not out to put people in jail. They’re out to collect the tax revenues. Except for cases of complete fraud, they want taxpayers to come forward and pay their penalties and interest and start afresh for the future.”

With many of the team’s clients, the funds have been inherited from foreign parents, and were left overseas to be overseen by money managers. Many of the clients have accounts with UBS, but some have accounts with other Swiss banks. Eventually, MP&S hopes to expand the team with other staff members who will work with clients who have funds they wish to disclose in other foreign countries. The Treasury Department announced Wednesday, for example, that the government of Luxembourg has signed a protocol updating its tax treaty with the U.S. to incorporate international standards on the exchange of information for tax purposes. As a result, the Treasury Department will be able to obtain information from Luxembourg to enforce U.S. tax laws. 

“The real key is that taxpayers have to understand that foreign earnings of U.S. citizens are subject to U.S. tax and need to be reported on a current basis,” said Packer.

MP&S works with attorneys under so-called “Kovel letters,” named after the case of U.S. v. Kovel, which helps protect the firm to some extent under attorney-client privilege rules.

“We are producing the attorney work product and it’s subject to the attorney-client privilege,” said Packer. “To the extent that there is confidentiality, it would exist.” The Swiss attorneys are working with U.S. attorneys, so the privilege should extend to that work as well.

A related issue that MP&S deals with is the requirement for foreign bank reporting. Some clients need to file a report of foreign bank and financial accounts, also known as an FBAR. The report is due June 30, with no extensions, Packer noted. He expects the IRS to step up its enforcement efforts in this area as well.

“With respect to voluntary disclosure, the IRS has not been assessing penalties, but in the future we believe they will begin assessing penalties for failure to file these reports,” he said. “If the aggregate amounts in the foreign bank or securities accounts exceed $10,000, they need to file this report, and if not there are severe penalties for noncompliance.”

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