IRS cracks open 4,450 Swiss bank accounts

Swiss banking giant UBS said Wednesday it had agreed to give to American authorities the names of up to 4,450 US account holders who the Internal Revenue Service suspects of using Switzerland's vaunted banking secrecy rules to avoid paying billions of dollars in US taxes.

The announcement ends an eight-month legal battle that strained Swiss-US diplomatic ties, saw UBS agree to pay $780 million in fines, and had Swiss bankers worrying that the secrecy laws that made Zurich synonymous with wealth were under siege.

IRS Commissioner Douglas Shulman declared "the world of international taxes has drastically changed" in a conference call with reporters. In a Bloomberg TV interview, Mr. Shulman said this case shows that the IRS can and will expand its global reach to catch American tax evaders.

"We're going to have our targets set on all categories of folks," Shulman said.

He also said the US will be given access to 5,000 Swiss accounts which at one point had $18 billion in assets.

No fishing expeditions

But the agreement makes it clear that the days of the numbered Swiss account aren't over and the disclosures required by the deal aren't nearly as broad as originally expected.

In a nutshell, the Swiss have said that they will disclose names where there's strong evidence of tax evasion, but not allow fishing expeditions by the US or other foreign governments. The US had at one point said it wanted the names of 52,000 UBS clients.

UBS said in a statement that it would provide the identities of "approximately" 4,450 account holders to the Swiss tax authorities, who will then determine which of those names should be passed on to the IRS. The Swiss tax authorities' decision will also be subject to "judicial review." There are no additional fines for UBS and the deal does not require Swiss banking laws to be changed. The announcement said the disclosures are legal under the terms of a 1996 double taxation treaty between the two states.

"This agreement helps resolve one of UBS's most pressing issues,'' UBS Chairman Kaspar Villiger said in a statement. "The agreement will allow the bank to continue moving forward to rebuild its reputation through solid performance and client service. UBS welcomes the fact that the information-exchange objectives of the settlement can be achieved in a lawful manner under the existing treaty framework between Switzerland and the United States."

Two Swiss newspapers reported last weekend that the targeted UBS clients face up to $3.7 billion in back taxes and penalties.

But while Mr. Villiger put on a brave face, some are wondering if the Swiss banking industry will suffer after the disclosures.

Tarnished reputation

Bruce Zagaris, a tax lawyer who represents several UBS clients, said the Swiss reputation for secrecy has "absolutely" been tarnished. Mr. Zagaris said that the Swiss prize their ability to protect customers from the prying eyes of other governments but that this situation has shown that, when faced with legal action, the Swiss, will give up select information.

"There are a number of public policy issues having to do with the role of different financial service jurisdictions," he said. "The Swiss have to balance their policy of confidentiality on the one hand with law enforcement cooperation" with foreign governments attempting to enforce their tax laws.

Zagaris added that, because of the IRS and Justice Department's aggressive and successful handling of UBS, all Swiss banks are likely to face greater scrutiny.

This is not the first time that Switzerland has pulled back the secrecy veil. In the 1990s, the Swiss passed laws on money laundering that exposed the dictators and criminals who relied on Swiss banks to avoid scrutiny.

The decision also poses problems for Americans living in Switzerland. According to American expatriates there, Swiss banks are shying away from US clients because of the scrutiny they attract.

"There are a lot of normal Americans with investment and checking accounts," in Switzerland, says Mary Louise Serrato, an American living in Zurich, who serves as executive director of American Citizens Abroad. "Not everyone is a tax evader (but) banks in Switzerland don't want to touch any Americans anymore because they don't want to be investigated. Its causing havoc."

Americans need not apply

Ellen Wallace, an American in Switzerland who runs the English language information site GenevaLunch.com, said the IRS has been increasing pressure on Swiss banks to disclose information about American clients for years. In response, Swiss banks have made even the most basic transactions, like opening a checking account, paying a mortgage, or buying a security, onerous for Americans, Ms. Wallace says.

"You get into remarkably complicated situations in which [US expatriates] can't make those transactions happen in a straightforward way," she says.

Migros Bank and Raiffeisen Bank, both based in Switzerland, recently adopted rules that make it nearly impossible for US citizens based in the United States to open an account and very difficult for US citizens based in Switzerland to do so.

Wallace acknowledged that some US citizens living in Switzerland owe back taxes to the IRS. However, she said that many who do follow both US and Swiss laws are now suffering because of the perception that every US citizen is hiding assets.

"It's easy to distort the picture and say the 52,000 names that are wanted by the IRS are 52,000 crooks," Wallace said, referring to reports last week that 52,000 names would be handed over by UBS. "They're not all evil people trying to hide their money. It's somewhere in between."

Related column: A tougher stance on tax havens

Backgrounder: UBS deal cracks door on banking secrecy worldwide