IRS Voluntary Disclosure Practice Update

Events impacting U.S. persons with undisclosed foreign financial accounts continue unabated. The U.S.-Swiss agreement regarding disclosures of foreign accounts has been temporarily sidetracked, criminal prosecutions continue, the U.S. Internal Revenue Service (IRS) has clarified certain procedures for taxpayers in the recently ended voluntary disclosure program, new rules for reporting foreign accounts have been announced and proposed, and the IRS has turned a spotlight on examinations of global high-wealth individuals.

United States-Switzerland Treaty Request Developments DOJ Continues and Expands Prosecutions of Holders of Undisclosed Foreign Accounts Updated IRS Voluntary Disclosure Program FAQs IRS Updates Certain FBAR Filing Requirements Proposed Changes to Foreign Financial Account Reporting Requirements IRS Announces Formation of Global High Wealth Industry Group UNITED STATES-SWITZERLAND TREATY REQUEST DEVELOPMENTS

The agreement between the United States and Switzerland on the request for information from the U.S. Internal Revenue Service (IRS) regarding certain foreign accounts held in a Swiss bank sought to resolve the conflict over sovereignty with the United States, along the lines provided for in the U.S.-Swiss Tax Treaty. However, the process has encountered strong resistance in the Swiss courts.

Here is a chronology of relevant events updated through the end of February 2010.

April 30, 2009—Switzerland files a brief with the U.S. District Court in Miami in the UBS summons enforcement case, explaining its legal position that Switzerland's legal system, and thus its sovereignty, must be respected. July 12, 2009—The parties to the summons-enforcement proceedings file a joint motion to stay the proceedings, pending settlement negotiations. The court stays the proceedings two other times in order to provide the parties time to achieve a settlement. August 12, 2009—The United States and Switzerland inform the U.S. District Court that they have reached a settlement in the summons-enforcement proceedings. August 19, 2009—The agreement between the United States and Switzerland provides that the United States will submit a new treaty request to Switzerland and will withdraw the John Doe summons that demands disclosure of the identity of 52,000 account holders. In return, Switzerland agrees to undertake to process the new treaty request, concerning approximately 4,450 accounts, within a year. August 19, 2009—The Swiss Federal Council instructs the Swiss Federal Tax Administration (SFTA) to establish a team to deal with the request for administrative assistance from the United States. August 31, 2009—The United States files a request for administrative assistance with the SFTA concerning approximately 4,450 accounts. November 17, 2009—The annex to the agreement between the United States and Switzerland is made public, setting forth the criteria for the disclosure of the approximately 4,450 account holders. November 24, 2009—The SFTA announces the processing of more than 500 cases, but states that administrative assistance regarding these cases would not be provided to the IRS unless no appeals against its decrees were filed within the next 30 days. January 21, 2010—An account holder won a Federal Administrative Court case in Switzerland preventing data from being disclosed to the IRS. This ruling involved a single test case on continued and severe tax evasion. The failure by U.S. citizens to provide a Form W-9 or declare income does not constitute "tax fraud or the like" that would require Switzerland to disclose account data, according to the Federal Administrative Court. The ruling put in doubt the disclosure of approximately 4,200 of the 4,450 accounts that had been covered by the agreement. The remaining 250 accounts involving tax fraud as defined under Swiss law were unaffected by the ruling. January 27, 2010—Pursuant to an analysis of the Swiss Federal Administrative Court's latest ruling, the Swiss Federal Council decides to continue talks with the United States regarding the treaty request. Putting the Treaty Request Agreement (the "agreement") to the Swiss Parliament for approval is considered. February 24, 2010—The Swiss Federal Council agrees to submit the Treaty Request Agreement to the Swiss Parliament for formal approval. If approved by Parliament, in any future appeals to the Swiss Federal Court, the court would no longer be able to regard the agreement as merely a mutual agreement. Instead, it would stand as a treaty of the same status as the older and more-general bilateral double-taxation convention. According to the general rules of interpretation of Swiss law, it would also take precedence over the latter. As a result, Switzerland would be in a position to provide treaty assistance not only in cases of "tax fraud," but also in cases of continued and serious tax evasion. The SFTA would begin issuing final decisions on cases involving tax fraud under Swiss law, but it would not process other cases under the agreement until the protocol is signed. Furthermore, the Swiss government has announced that it will not transfer any client data to the IRS until the agreement has been approved by the Parliament. Even with the delay brought on by the court decision and other hurdles for the agreement, the Swiss government has said that it expects to fulfill its obligation to complete the processing of the U.S. information request by the August 2010 deadline. February 26, 2010—SFAC orders the SFTA not to provide the IRS with financial information on additional account holders in a ruling that tracked the SFAC's January 2010 decision. The Swiss court ruling appears to have come as a surprise to many, and further surprises that may await the 4,450 account holders remain to be seen. The Swiss government has indicated through its ruling an effort to move beyond this matter as quickly as possible—which would likely mean by August 2010.

DOJ CONTINUES AND EXPANDS PROSECUTIONS OF HOLDERS OF UNDISCLOSED FOREIGN ACCOUNTS

The U.S. Department of Justice has continued its prosecution of U.S. taxpayers with undisclosed foreign accounts and their advisors. The prosecutions to-date are as follows:

April 10, 2008—Bradley Birkenfeld was indicted for conspiracy to defraud the United States and was later sentenced to 40 months in federal prison. April 10, 2008—Mario Staggl was indicted with Birkenfeld and is presently a fugitive. April 14, 2008—Igor Olenicoff was sentenced to two years' probation and the payment of $52 million in taxes for filing a false tax return-a sentence reflective of his cooperation with the IRS regarding Birkenfeld. November 12, 2008—Raoul Weil was indicted for conspiracy to defraud the United States and is presently a fugitive. August 20, 2009—Hansruedi Schumacher and Matthias Rickenbach were indicted for conspiracy to defraud the United States. April 14, 2009—Robert Moran was charged with filing a false tax return and was later sentenced to two months in prison and required to pay $1.9 million in tax, penalty and interest. June 25, 2009—Steven Michael Rubinstein pleaded guilty to filing a false tax...