Article 26 to the Rescue: Tax Treaty Provides Basis for U.S. -- UBS Settlement

On August 19, 2009, the United States, Internal Revenue Service and UBS AG resolved their year long dispute over the summons which was served upon UBS by the Internal Revenue Service on July 21, 2008. The IRS announced (IR-2009-84) on September 21, 2009 a one-time extension of the deadline for special voluntary disclosures by taxpayers with unreported income from offshore accounts. Taxpayers have until October 15, 2009 to come forward.

Author Michael J. Rinaldi writes: On August 19, 2009, the United States, Internal Revenue Service and UBS AG resolved their year long dispute over the "John Doe" summons which was served upon UBS by the Internal Revenue Service on July 21, 2008.

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The settlement agreement provides for an information exchange mechanism through a treaty request in accord with Article 26 of the U.S.-Switzerland income tax treaty. The IRS delivery to the Swiss Federal Tax Administrator of a request for administrative assistance is made pursuant to Article 26, seeking information with regard to accounts of certain U.S. persons maintained at UBS in Switzerland. The information exchange agreement is intended to meet the U.S. tax compliance goals of the UBS summons while respecting Swiss sovereignty.

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The U.S and Swiss Confederation estimated that the number of open or closed accounts at UBS falling under the Treaty Request approximates 4,450. For these accounts UBS has agreed to provide a notice to account holders pursuant to the Treaty Request.

The settlement requires the U.S. to withdraw the summons with prejudice, on or after January 1, 2010, once it has received information on 10,000 open or closed undisclosed UBS accounts from any source. These sources include the Treaty Request, the Deferred Prosecution Agreement entered into by UBS on February 18, 2009, voluntary disclosures by U.S. persons, or through a waiver of bank secrecy by a UBS client.

The agreement between the U.S. and UBS encourages voluntary disclosure by U.S. persons. The settlement agreement requires UBS to provide a notice to US persons "to consult with a qualified U.S. tax advisor regarding their account with UBS and, if appropriate, to take advantage of the IRS's Voluntary Disclosure Practice."

The IRS announced on March 23, 2009 its offshore Voluntary Disclosure Practice. UBS account holders eligible to make a voluntary disclosure were initially required to do so by September 23, 2009. Details regarding the Voluntary Disclosure are available at the IRS website.

The IRS announced (IR-2009-84) on September 21, 2009 a one-time extension of the deadline for special voluntary disclosures by those taxpayers with unreported income from offshore accounts. Taxpayers now have until October 15, 2009 to come forward. The announcement provides that those taxpayers who do not voluntarily disclose their hidden accounts by the new deadline face much harsher civil penalties and, where applicable, possible criminal prosecution.

The one-time extension will allow those taxpayers who intended to come forward the opportunity to obtain advice from tax preparers and attorneys, as well as prepare the paperwork necessary to qualify for the special penalty provisions.

As discussed, UBS notices to account holders indicate that information may be provided to the IRS pursuant to the settlement agreement. Where the U.S. person receives this notice prior to October 15th, the notice does not by itself disqualify the account holder from making a voluntary disclosure by the October 15th deadline. Further, the voluntary disclosure deadline applies to all UBS account holders, even if they have not received a notification by such date.

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Lastly, a new protocol will be signed no later than September 30, 2009 allowing such exchange of information to the extent as provided by Article 26 of the Organization for Economic Development (OECD) Model tax convention.

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