The Internal Revenue Service and United Bank Switzerland - Case Study Example

IRS Vs. UBS. Overview of the case: UBS, which is known in the world of private banking as the largest private wealth manager with over 9 trillion in clients assets, was issued a ‘John Doe’ summons by the IRS which had been authorized by a Federal District Judge in Miami in July of 2008 .The company was asked to disclose the identities of U.S taxpayers who failed to report income on undeclared foreign accounts. In August of 2009, Swiss banking giant UBS and IRS agreed on a settlement according to which UBS disclosed information about roughly 5000 account holders and in return IRS promised to back off of the demand of obtaining information about the remaining 42,000 accounts that were allegedly involved in illegal tax evasion activity. This settlement came following a case that was filed in the Southern Florida District court in America where the U.S government accused the United Bank Switzerland of aiding American citizens in illegal tax frauds. This case was filed by The Internal Revenue Service that claimed that UBS was helping its clients, an alleged 52,000 American citizens to escape from having to pay duly owed tax revenue to the IRS. This tax evasion probe let to a whirlwind case that was followed closely by a large number of people all over the world and brought to light the murky world of off-shore banking which has long been rumored to be a business which lets wealthy and the ultra-rich stash off their money in unknown overseas locations where they are virtually untraceable by tax-collectors and other government agencies. Legal Principles and aspects: According to the United States law, a taxpayer who has a foreign account with more than $10,000 must file a Foreign Bank & Financial Account Report (FBAR) with the treasury by the 30th of June annually.(Gary S. Wolf Law Offices, 2009).These FBAR rules were established in 1970 as a part of the Bank Secrecy Act and since 2003, the Internal Revenue Service has been enforcing these laws. The IRS – a part of the Department of Treasury- received 322,000 FBAR’s in the year of 2007 and it still estimated that there were nearly 1 million overseas accounts held by American citizens out of which nearly 700,000 were undisclosed. The criminal penalties that can be issued for an undeclared foreign account and/or unreported income can be up to 24 years in jail. Filing false income tax returns and committing perjury in this case can result in a count of 1 felony and 3 misdemeanors against a person and can result in up to 14 years in jail and willful non-disclosure of a foreign account worth more than $10,000 can result in up to 10 years in jail and an annual fine of 50% of the account balance. (Gary S. Wolf Law Offices, 2009) Plaintiff and defendant claims, arguments and tactics: Immediately following the issuance of the John Doe summons against them, UBS AG filed a brief in opposition of the issuance of this summons in the court arguing that it was against the Swiss law to provide the American government any sort of information about its account holders (Brief of UBS AG in the opposition to the petition to enforce The John Doe summons) As an answer to the ‘John Doe’ summons issued to UBS, the Swiss government also filed a brief on 30th April 2009 with the United States District court in Miami. This brief explained the Governments legal position on the case and shed light on the Swiss legal system emphasizing that the sovereignty of Switzerland’s legal system must be respected. By doing so, the Swiss government took opportunity of the U.S law to define its position in a case where the Swiss government was not a party. This is known as an ‘amicus curiae’ brief. (The federal office of justice website) The Swiss government also made clear that their law prohibits the handing over of client information and asked the United States government to make sure that the Swiss laws were up-held. On July 12th, the United States government and UBS with the support of the Swiss government filed a joint motion asking for a stay in the civil litigation pending in the District Court in Miami. The parties asked for a 15 day stay so that they could reach a settlement agreement out of court. The court also issued a stay two times after this first request and eventually on the 12th of August 2009, the US and Swiss government informed the judge that they had reached an out of court settlement. The head of the Swiss Federal Department of Justice and Police, Eveline Widmer-Schlumpf, said in a statement following the press release of the news that “I am pleased to say that it has been possible to resolve the matter in the form of a compromise between two sovereign – that is in the interests of both states.”(The Federal Office of Justice website). The agreement, after it was signed by the representatives of both the governments, was entered into force on the 19th of August 2009. According to it, In the UBS case, the United states government was to submit a new treaty request to Switzerland asking for information about the top-priority 4,450 accounts and also had to withdraw the John Doe summons that demnded that the banking giant disclose the identity of 52,000 American USB account holders. In return, Switzerland was to process the treaty request and provide the American government with the asked information within an year. Ethical Issues and Stake-holders positions: In the case that IRS filed against UBS, there were certain issues that were of extreme concern to both parties. For the U.S government the issue of tax evasion is of extreme importance and something that could no be over looked that easily. The people involved in these activities had to be cornered but it was also important to make sure that the American who made honest money and who were paying their taxes due on the money in these off-shore accounts were in no way implicated in this inquiry. For the Swiss Bank and the Swiss government , the dilemma was a double-fold .Although there was evidence indicating that the UBS bankers had been involved in coaching wealthy Amertican citizens on ways that they could get out of having to pay their taxes, -the conviction of Bradley Birkenfield a case that everyone knew about- there was still the matter of statutes in the Swiss law that prohibited the release of information about anyone holding a private account in one of the Swiss banks. The countries government was concerned about the laws of its country being up-held and wanted no harm to come to those individuals who wanted to remain in anonimity and were committing no crimes whatsoever. There were also other ethical issues that were sorrounding this case. To obtain personal and financial privacy is a right that is given to each free person and it is not the governments perogative to control each and every aspect of a citizen’s life. Having said that, it was important to let the people who had serious reasons for availing off-shore banking facilities, have the privacy they dsired if they were not actively participating in any tax evasion activity. The demand that IRS made of UBS was effectively going to ruin more than a few people had it been allowed to be fulfilled completely. Origins, history and root causes of the case: Off-shore banking has been a subject of conspiracy for a long time. From movies to thriller novels, the idea of a multi-millionaire thug who has secret bank accounts in Switzerland with millions of dollars worth of cash and jewelry stashed in it has been copied many times. According to reports, the US government loses approximately $100 Billion annually in lieu of off-shore tax evasions. UBS AG and Liechtensteins LGT Group are the two banks that have been formerly associated with aiding people in tax- evasion strategies. In 2008, a grand jury in the United Staes District Court of the Southern District of Florida found Bradley Birkenfield an employee of UBS AG and another man Mario Staggl guilty of helping their clients in falsifying and making up information and failing to comply with the agreement that was carried out between IRS and UBS in the year 2001. According to this agreement, known as the Qualified Intermediary agreement, UBS agreed to identify and document any customers who received reportable United States source income. According to this agreement, the Swiss bank agreed to have its customers fill out IRS forms W-8BEN and W-9, which required these account owners to be identified (United States of America vs. Birkenfield & Staggl, 2008) This was a huge leap forward for IRS as formerly the people who had accounts in Swiss banks were not documented and no record was available with IRS about the identity of these US citizens. Birkenfield was found guilty of devising tax evasion schemes and was indicted of participating in schemes to defraud the IRS by falsifying the IRS forms, by setting up nominee entities and by failing to comply with the QI agreement in order to conceal from the IRS United States source income paid into Swiss bank accounts beneficially owned by United Staetes tax payers.(United States of Americs vs. Birkenfield & Staggl, 2008) This indictment was a sort of gateway that brought on the case filed by IRS agianst UBS accusing the banking corporation of helping the US citizens in performing illegitimate tax evasion. The amount of revenue that IRS was losing at the hands of these illegal schemes was a huge driving factor that prompted the government to take this harsh but necessary step. Public Reactions: As a result of the pending civil litigation, the UBS was under a lot of pressure to achieve an out of court settlement with the United States government. This was imperative if the bank wanted to remain true to the original Swiss bank promise of absolute safety and privacy. Of the hundreds of thousands of account holders with UBS, not all were guilty of tax evasion activities and it was impertaive that the identity of these account holders was kept under cover. The country and its bank had always had a history of non-compliance with the governmnets and authorities of other countries and it was the end of a tradition when UBS reached the settlement with IRS. When the bank announced that it was to enter an agreement with IRS and was going to give the US government information on 4,450 account holders who were U.S citizens and tax payers, there was a lot of fear and speculation among the Americans who had undisclosed accounts with the Swiss banks. The general public reaction however, was one of acceptance and even appreciation. A zurich paper showed the headline “The best of all the bad solutions- with a catch” when the news of the settlement broke out and most people in Switzerland were praising the negotiators for being able to keep most of the Swiss laws intact and preserving the client’s right to appeal. How the case ended: The case ended with an out of court settlement where IRS agreed to back off of its demand for obtaining information about the 52,000 U.S account holders with the Swiss bank. In return for this, UBS entered into an agreement with the United States government to provide the identity of and information about 4,450 account holders of U.S origin. Managerial Impacts and lessons learned: According to most critics, UBS tarnished not only its own reputation but also of its country and its people. Tax evasion is hardly a new concept, it has been going on since decades and the rich and wealthy have been looking for ways to dodge around the governmental agencies. Banks like UBS also have had a colorful history of doing similar un-lawful deeds, apologizing and then returning to their same old modus operandi. For most parts, the biggest lesson learned through this case was that the United States government had to ensure better ways of ensuring that it collected the tax that due by its citizens earning a sizable income (James S. Henry, 2008). In 2006, an act named as the ‘Stop Haven Abuses Act’ was passed by Senators Levi, Coleman and Obama which was also a step forward in helping the government secure itself against these tax fraud schemes. Another lesson learned is that the government agencies should hold more investigations like these so that private banks are given an incentive to do the right thing. According to James S. Henry (2008), there should be more exposes, more probes into the workings of the CEO’s and bankers of these banks so that they realize that their wrong-doings are going to get them jail time and that just saying plain sorry is not going to be enough any more. Personal Observations and Opinions: UBS with a name and presence all over the world was implicated in a fraud scheme that was highly debilitating to its name. Although the bank has had a history of previous scenarios where it has been linked with harboring the loots of criminals and political fugitives of different countries, never before had a claim been out up so strongly and boldly accusing the Swiss bank with defrauding the U.S government. In my opinion the people who make decisions at UBS should devise a particular strategy that ensures that no person within the organization makes the mistake of trying to aid its customers in any sort of illegal activities. This should be done to ensure that ethics are followed more diligently at the workplace and a new awareness and regard for the law is introduced into the cold-blooded world of private banking. According to the assistant U.S Attorney general of the Tax division, John DiCicco (2009), bringing to light this matter had a positive effect at the larger level and he said of the Department of Justice’s role in bringing the world of off-shore banking to light in a statement saying: “Thanks to your efforts, taxpayers have a greater understanding of their obligations and the consequences of non-compliance. You have also put tax professionals and financial advisors on notice that their efforts to design, market and facilitate tax evasion strategies will not be tolerated.” And one has to certainly agree to that. References Brief of UBS AG in the opposition to the petition to enforce The John Doe summons, Filed in The District court of the Southern District of Florida. Retrieved from: http://www.ubs.com/1/ShowMedia/index/crossborder/johndoesettlement/key_developments?contentId=166528&name=UBSBrief.pdf on 28th March 2010. Gary S. Wolfe Law Offices,(2009) The IRS & UBS case. Retrieved from http://www.scribd.com/doc/16085011/The-IRS-The-UBS-Case. On 28th march 2010. Henry, James. S. (2008), Attack of the Global Pirate Bankers, Submerging Markets. Retrieved from www.submergingmarkets.com On 28th march 2010. Statement of Acting Asst. Attorney general Tax Division, United States Department of Justice, before the Subcommittee on investigations Committee on Homeland security and Governmental Affairs. (2009). Department of Justice. Swissinfo.ch.(2009) UBS deal seen as the best of all solutions. Retrieved from http://www.swissinfo.ch/eng/front/UBS_deal_seen_as_best_of_all_bad_solutions.html?siteSect=105&sid=11100344&cKey=1250759080000&ty=st on 28th March 2010. United States of America vs. Bradley Birkenfield & Mario Staggl, (2008). Case number CR-ZLOCH 18 U.S.C 371. United States District court of South Florida District. Read More