One day before the Swiss-based financial entity UBS AG (UBS) hearing was set to begin with respect to the Internal Revenue Service’s effort to identify thousands of suspected American tax evaders, the U.S. and Swiss governments and UBS asked a federal judge for a delay.

The case, seeking the identities of some 52,000 wealthy American clients suspected of hiding $15 billion at UBS, has already made unfavorable ripples through the international banking system.

The one-page motion filed in Miami asked for a the hearing to be rescheduled for Aug. 3, 2009, in order to allow the two governments to continue their discussions seeking a resolution of this matter, unless a deal is reached beforehand. A request for a postponement that allows parties in civil cases extra time to settle out of court is relatively routine.

Per the U.S. Justice Department, any agreement would require UBS provide information on a significant number of individuals with UBS accounts, and if an alternative resolution is not reached, “a vigorous pursuit of enforcement of the summons through the court” is promised by the statement.

The Swiss government’s stance is that by honoring the IRS summons, UBS would need to violate Swiss criminal law. As a result, the Swiss government threatening to block release of the UBS account names if the judge rules on behalf of the IRS.

Per the bank’s view, if the ruling does not favor UBS, cross-border commerce would be disrupted, forcing people to withdraw huge sums of money from financial entities with offshore offices, and play havoc with respect to international tax treaties. Interestingly, it appears some other foreign banks have been asking its American clients to close out accounts, so that those entities are not in the IRS’s cross-hairs.

Clearly, the precedent this case may set is relevant to all financial institutions with global operations, as hundreds of taxpayers with offshore accounts have voluntarily disclosed to the IRS. Currently, the IRS has a program which allows most people to pay a fine and back taxes without facing criminal prosecution.

Previously, UBS had admitted wrongdoing in a more limited case, when the IRS filed a “John Doe summons” seeking U.S. taxpayer identities from UBS, shortly after a deferred prosecution agreement with the Justice Department over its tax evasion practices was reached. UBS agreed then to identify 300 people (some now facing criminal charges) reported to having used sham offshore entities, false paperwork and questionable client recruitment.

This exception to Swiss banking secrecy law stemmed from its clients deliberately defrauding tax authorities, failing to declare all assets. In addition, UBS paid a $780 million penalty.

It is estimated that abusive tax shelters and hidden offshore accounts cost the U.S. government approximately estimated $100 billion a year in lost tax revenue.
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