IRS unlocks UBS vault hiding Americans evading taxes

— -- One is a U.S. business owner who hid a tax-evasion scheme "well into the seven figures."

Another is an elderly American who kept money in an offshore account over fear for the security of the U.S. banking system.

And then there are the children of parents who survived the Holocaust and established a foreign trust account on their behalf.

Their attorney says all had undeclared bank accounts at UBS, ubsthe Swiss banking giant sued Thursday by U.S. authorities in an escalated demand for the identities of owners of approximately 52,000 such accounts in which Americans secretly held at least $14.8 billion.

They're also among a recent rush of American UBS customers who contacted the IRS about their accounts, hoping to gain leniency for their failure to pay years of federal taxes on the secret holdings.

"The rush is on," says Robert McKenzie, a Chicago attorney who's representing the three UBS account holders plus 14 others seeking similar tax settlements regarding accounts at the Swiss bank.

The IRS' message is clear: "You better come in now before your name comes out," said McKenzie, who declined to identify his clients but agreed to discuss general outlines of their cases.

The developments are part of a historic legal struggle that has cracked Switzerland's renowned reputation for banking secrecy and cast a spotlight on what a 2008 Senate hearing identified as $100 billion in annual tax evasion by American owners of foreign accounts.

U.S. authorities filed the civil lawsuit in Miami, one day after reaching a deferred-prosecution deal in which UBS agreed to a $780 million settlement of criminal charges it helped American customers evade federal taxes. The agreement required the bank to turn over identities of some of those clients.

Thursday's civil lawsuit asked a federal court to enforce so-called John Doe summonses served on UBS last year for the names of the undeclared account owners, along with details of their holdings.

The court demand also cited roughly 52,000 suspect accounts, up from 19,000 federal authorities alleged last year.

Federal authorities upped the legal ante after UBS' criminal case acknowledgement of a 2000-2008 scheme in which its bankers used encrypted laptop computers and counter-surveillance tactics during trips to the U.S. in which they helped American clients evade taxes.

Former executive aiding prosecutors

The investigation was keyed in part by Bradley Birkenfeld, a U.S. citizen who previously worked in UBS' private banking division and pleaded guilty to conspiracy last year. Birkenfeld agreed to give federal authorities inside details of the scheme in exchange for potential leniency.

Despite the criminal case settlement and the challenge of the latest civil lawsuit, UBS — with Swiss government support — is using all legal means to avoid being forced into naming names.

The Associated Press reported that Swiss President Hans-Rudolf Merz declared his country's banking secrecy "remains intact" in a statement hours before the federal lawsuit was filed. Switzerland law permits release of information about bank account holders when deliberate fraud is involved, but not when an owner has simply not declared all assets.

UBS said it "intends to vigorously contest the enforcement of the summons in the civil proceeding," as specifically permitted under the criminal non-enforcement agreement.

In a declaration filed with Thursday's civil lawsuit, Barry Shott, an IRS deputy commissioner, said UBS had decided to turn over records only for owners of an estimated 300 accounts that had indications of "affirmative acts of fraud or deception."

As of Jan. 21, the bank had reached a final determination to disclose information for just 12 of those accounts, Shott said in the filing. But that wouldn't happen, he said, until the owners have an opportunity to litigate the issue in Switzerland's court system.

"In sum, the Swiss government has not provided any records sought … and it is not clear when, if ever, it will," Shott concluded.

However, the Associated Press reported that Merz said Swiss authorities had given U.S. counterparts files for as many as 300 UBS clients suspected of tax fraud. UBS spokesmen could not immediately be reached Thursday to confirm such a handover.

Dialing the IRS

Despite a potentially protracted court struggle, some of UBS' secret American clients already are contacting the IRS.

The federal tax agency doesn't disclose information about individual taxpayers. However, spokesman Bruce Friedland said Thursday "the IRS has been receiving calls on a daily basis from taxpayers and their representatives about the voluntary disclosure process. A majority of these cases involve taxpayers with undisclosed foreign accounts."

McKenzie, a partner and tax specialist at the Chicago law firm of Arnstein & Lehr, said he began negotiations with the IRS after telling his clients they could face harsh penalties if they unsuccessfully gambled they'd never be identified as secret UBS account beneficiaries.

Those penalties include criminal prosecution and a penalty as high as 50% of the amount in a secret foreign account for each year it wasn't disclosed in federal tax returns.

By contacting the IRS, says McKenzie, they can potentially qualify for the agency's voluntary disclosure process. That requires filing amended federal tax returns for the previous six years, paying all the taxes and interest owed for those years, plus negotiated penalties for the years of non-filing.

Though such settlements are still costly, at least clients won't be "the lucky winner of a sentence in a U.S. prison," McKenzie says.

That could have been a real possibility for a U.S. business owner client he said instructed a Chinese supplier to issue invoices "for double the price" of supplies. Half the money went to the supplier, who charged a commission to deposit the rest of the money in a UBS account the business owner secretly controlled.

"It was an income tax skim," said McKenzie, adding that the undeclared total involved "is well into the seven figures. … It would be an amount you would not forget."

He declined to speculate on how much the businessman could end up paying, but said the client "will not go to prison." Some of his other clients are "more sympathetic," McKenzie said.

One is an 86-year-old man he says became fearful for the stability of the U.S. banking system during the high interest rates of the late 1970s. The man placed a few hundred thousand dollars in a never-declared UBS account, "figuring it would give him security — if the U.S. collapsed he'd still have some money," the attorney said.

"I don't think the IRS is ever going to put an 86-year-old man in prison," said McKenzie, who described the case as in active negotiations.

As for the children of the Holocaust survivors, they were required to pay back taxes. But they avoided IRS penalties, McKenzie said, because they "were unaware they were required to file" disclosures about a foreign account established by parents who live outside the U.S.

Other American owners of UBS accounts might not be as fortunate, said Charles Rettig, a Hochman, Salkin, Rettig, Toscher & Perez partner in Beverly Hills. His law firm represents more than 100 clients who either have or are in the process of disclosing their holdings to the IRS, Rettig said.

"Now is the time for all taxpayers, and those who ought to be taxpayers … to come forward in order to hopefully preserve their future freedom," Rettig said. "Those who ignore this window of opportunity may well find themselves in prison for tax evasion."

For any who might question advice like that offered by Rettig, John DiCicco, acting assistant attorney general for the Justice Department's tax division, offered a warning Thursday.

"At a time when millions of Americans are losing their jobs, their homes and their health care, it is appalling that more than 50,000 of the wealthiest among us have actively sought to evade their civic and legal duty to pay taxes," DiCicco said. "It is time for those who are trying to hide from the IRS to rethink their actions."