On August 19, 2009, a large Swiss bank agreed to release the identities of up to 4,450 account holders (including individuals and entities) to the IRS as part of a settlement agreement with Switzerland and the U.S. Government relating to a John Doe summons issued on July 21, 2008.

Disclosure Criteria

On November 17, 2009, the IRS disclosed the criteria used to determine which account holders will have their identities released to the IRS. The criteria were contained in a previously confidential annex to the August 19, 2009 settlement agreement between the U.S. and Swiss governments. IRS Commissioner Schulman stated that the criteria were aimed at uncovering those accounts that were "largest, hardest to find, and had the most egregious behavior."

The disclosure criteria focuses on two categories of account holders: (1) U.S. domiciled individuals with direct ownership of an undisclosed custody or deposit account; and (2) U.S. persons with beneficial ownership of an offshore company account.

Undisclosed Accounts Directly Held by U.S. Domiciles

The criteria call for disclosure of U.S. domiciled individuals who directly held and beneficially owned undisclosed custody accounts or banking deposit accounts in excess of 1 million or more Swiss francs ($983,866) at any time between 2001 and 2008 (the "relevant period"), for which a reasonable suspicion of "tax fraud or the like" can be demonstrated.

For undisclosed custody or banking deposit accounts, "tax fraud or the like" indicates activities that are presumed to constitute fraudulent conduct, including actions that led to concealing assets and underreporting income based on a "scheme of lies" or submitting incorrect or false documents. Where such conduct is established, holders of accounts with less than 1 million Swiss francs ($983,866) in assets (except those accounts holding assets below 250,000 Swiss francs ($246,000)) during the relevant period are also be subject to disclosure.

A "scheme of lies" is deemed to exist where, based on banks records, account holders: (1) used false documents; (2) engaged in a fact pattern that was set out as a "hypothetical case study" that used related entities or persons as conduits to repatriate or transfer funds in offshore accounts; or (3) used calling cards to disguise the source of trading. This list is not intended to be exhaustive.

In addition, the IRS may request information from Switzerland on accounts indicating "acts of continued and serious tax offense." Such acts include instances where: (1) the U.S. domiciled taxpayer has failed to provide a Form W-9 (Request for Taxpayer Identification Number and Certification) for a period of at least 3 years (including at least 1 year covered by the IRS request); and (2) the account generated revenues of more than 100,000 Swiss francs ($98,377) on average per annum for any 3 year period (including at least 1 year covered by the request.)

Undisclosed Offshore Company Accounts

The criteria also call for disclosure of U.S. persons (irrespective of domicile) who beneficially owned "offshore company accounts" during the relevant period for which a reasonable suspicion of "tax fraud or the like" can be demonstrated. "Offshore company accounts" include accounts held by entities such as trusts, corporations, or foundations.

For offshore company accounts, "tax fraud or the like" has the same definition as that described above for custody or banking deposit accounts, except that the asset threshold is lowered to include accounts holding assets of 250,000 Swiss francs ($246,000) or more.

The IRS may also request disclosure of offshore company accounts indicating "acts of continued and serious tax offense." Such acts exist where a U.S. person failed, upon request, to provide the Swiss Federal Tax Administration with consent to obtain the taxpayer's FBAR returns from the IRS for any relevant years. Absent such compliance, Switzerland will disclose account information where: (1) the offshore company account has been in existence over a prolonged period of time (i.e., at least 3 years including 1 year covered by the request); and (2) generated revenues of more than 100,000 Swiss francs ($98,377) on average per annum for any 3 year period (including at least 1 year covered by the request).

IRS Continuing Enforcement Efforts

Accounts meeting any of the criteria listed above are subject to release to the IRS, even if the account is no longer in existence. Though the annex is attached to the August 19, 2009 settlement agreement between the U.S. and Swiss governments, and initially pertains to a single bank involved in IRS enforcement efforts, it is anticipated that the criteria establish a new standard that will be used in targeting similarly situated account holders at other offshore financial institutions around the world.

Public release of the disclosure criteria is part of a continuing IRS effort to eliminate tax avoidance through the use of offshore accounts. The release also comes at the same time the IRS reported record participation in its Voluntary Disclosure Program. According to IRS Commissioner Doug Schulman, the popular program, which ended October 15, 2009, was flooded with applicants in its final days, bringing the total number of participants to 14,700 or nearly double previous estimates.

Though scores of account holders have come forward, and thousands of additional accounts are scheduled for release, it is believed that many accounts remain undisclosed. In a recent press release, Commissioner Schulman and U.S. Deputy Attorney General stated that while they are "pleased with the extraordinary results achieved" they will "continue to work closely together to ensure compliance with U.S. tax laws."

This article was prepared by Jasper G. "Jack" Taylor III (jtaylor@fulbright.com or 713 651 5670), Kathryn Keneally, Shawn R. O'Brien, Gregory M. Matlock and Matthew T. Theurer from Fulbright's Tax Controversies Practice Group. If you have any questions or need any assistance related to these or any other tax controversy matters, please feel free to contact any of the authors listed above or Nancy T. Bowen, Andrius R. Kontrimas (akontrimas@fulbright.com or 713 651 5482), William S. Lee (wlee@fulbright.com or 713 651 5633), Charles W. Hall (chall@fulbright.com or 713 651 5268), Richard L. Hunn (rhunn@fulbright.com or 713 651 5293) ), Robert C. Morris (rmorris@fulbright.com or 713 651 8404) or Susan V. Sample (ssample@fulbright.com or 713 651 5458).

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