Group says IRS audits of wealthy have plummeted

The Internal Revenue Service has counted auditing the wealthy among its top priorities and successes in recent years, yet the rate of such tax probes dropped significantly in 2008, according to a report by a Syracuse organization that tracks government data.

Using IRS figures, the report by Transactional Record Access Clearinghouse calculated at least a 19 percent drop in the audit rate of people with incomes of $1 million or more between 2008 and 2007 - a statistic confirmed by the IRS.

Beyond that, however, the two organizations' interpretations of these statistics diverge.

TRAC sharply criticized the tax agency in its report out today, noting the IRS had to revise downward the number of millionaire audits it recorded in two earlier years by as much as 35 percent. TRAC also questioned the IRS' methods of accounting and reporting its data.

The IRS, however, explained the revisions of its 2006 and 2007 audits as the result of a "regrettable" coding error that affected its published reports but not its operations. The agency maintains it still holds the scrutiny of millionaire tax returns as a high priority.

The decline in audits for the wealthy took place at the height of the real estate boom and at a time when returns submitted by people with incomes of $1 million or more were increasing, said Susan B. Long, co-director of TRAC.

"They [the IRS] have been really boasting about the need to increase the attention paid to high-income groups," Long said. "The public should know, is the agency achieving its stated goals? What are the facts?'"

TRAC said the IRS had published conflicting figures regarding millionaire audits recently. Using some of these figures, TRAC calculated the decline in such audits may have fallen by 36 percent - far more than the IRS' acknowledged drop of 19 percent.

Long wants to know whether the coding errors affected the IRS' ability to track the audits.

The IRS rejects the criticism. "In addition to our normal responsibilities on service and enforcement, we had to get 117 million additional payments to taxpayers," Bruce I. Friedland, an IRS spokesman said of 2008. "We had a tight budget and slight staffing declines in key enforcement positions."

The IRS says TRAC misinterpreted the data when it concluded that the drop in millionaire audits might be as high as 36 percent.

UBS Will Disclose Names, Pay $780 Million to U.S.

Switzerland’s largest bank, will pay $780 million and disclose the names of some secret account holders to avoid U.S. prosecution on a charge that it helped thousands of wealthy Americans evade taxes.

The Justice Department accused UBS of conspiring to defraud the U.S. by helping 17,000 Americans hide accounts from the Internal Revenue Service. The U.S. will drop the charge in 18 months if the bank reforms its practices, helps prosecutors and makes payments. UBS will immediately turn over names of about 250 clients, according to people familiar with the matter.

By gaining those names, the U.S. will pierce the veil of Swiss bank secrecy. The IRS, which has sought the names of all U.S. account holders since July, has met resistance from the Swiss government. The final number of account holders Zurich- based UBS must disclose will hinge on future legal battles, according to the agreement.

“UBS sincerely regrets the compliance failures,” Chairman Peter Kurer, 59, said in a statement after the accord was unsealed yesterday in federal court in Fort Lauderdale, Florida. “Client confidentiality, to which UBS remains committed, was never designed to protect fraudulent acts or the identity of those clients, who, with the active assistance of bank personnel, misused the confidentiality protections.”

UBS rose 30 centimes, or 2.5 percent, to 12.51 francs by 9:21 a.m. in Swiss trading, valuing the bank at 36.7 billion francs ($31.1 billion). The stock fell 16 percent this year.

Settlement Estimates

The Securities and Exchange Commission also reached an agreement to resolve claims that UBS acted as an unregistered broker-dealer and investment adviser to U.S. citizens who held accounts directly or in the names of others.

The $780 million is lower than previous settlement estimates, which exceeded $1 billion. The U.S. government agreed to the lower amount because of the bank’s eroding financial condition, according to a person familiar with the matter. UBS said the cost of the settlement will be booked in 2008 accounts.

“It is certainly a positive for the bank, that some sort of agreement has been found,” Dirk Hoffmann-Becking, an analyst at Sanford Bernstein & Co., said in a note today. “In a broader context, we doubt the saga is over. The success in getting the documentation out of Switzerland with support from the Swiss authorities is likely to encourage other tax authorities to pursue claims against the Swiss more vigorously.”

IRS Summons

UBS has announced more than 11,000 job cuts, exited parts of debt trading and commodities businesses and raised $32 billion from investors to offset record losses at the securities unit. Last week, it posted a fourth-quarter loss of 8.1 billion Swiss francs on trading losses and leveraged loan impairments.

Financial institutions worldwide have amassed $1.1 trillion of writedowns and credit losses and shed more than 274,000 jobs since the U.S. subprime-mortgage market collapsed in 2007, data compiled by Bloomberg show.

UBS will pay $380 million to disgorge profits from its cross-border business from 2001 to 2008, and $400 million in interest, penalties and restitution for unpaid taxes.

On July 1, a federal judge in Miami approved an IRS summons seeking information on thousands of UBS accounts owned or controlled by U.S. citizens. Under the deferred prosecution agreement, UBS and the government disagree on how many names the bank must disclose. The U.S. may continue to seek enforcement of the summons, and UBS may assert legal defenses.

‘Breached’ Obligations

The U.S. authorities, who have been seeking client data from Switzerland through an administrative assistance procedure, will withdraw this request, the Swiss Financial Market Supervisory Authority said in a statement today. The regulator allowed UBS to pass on some data to prevent the U.S. from filing criminal charges against the bank, it said.

“Such charges could have had drastic consequences for UBS and its liquidity situation and ultimately put its existence at risk,” the Swiss regulator said. UBS had “severely breached” its obligations to “remain fit and proper as well as adequately organized,” said the Swiss market watchdog, which also investigated the case.

UBS agreed only to the immediate disclosure of account holders involved in fraudulent or sham offshore account structures, according to people familiar with the matter.

U.S. law views tax evasion as a crime, Swiss law does not. The Swiss view tax fraud as a more serious offense. A dispute between the two governments slowed negotiations on the agreement, which was filed under seal last week and made public yesterday.

It’s “extremely likely” the government will prevail in U.S. court on the summonses, said Eileen O’Connor, who oversaw the Justice Department’s Tax Division from 2001 until 2007.

Civil Lawsuit

“We didn’t have to sue to enforce very often, but when we did we were successful,” said O’Connor, now a partner at the Washington law firm Pillsbury Winthrop Shaw Pittman.

UBS said in July it would stop providing cross-border banking services to American clients through units that aren’t licensed in the U.S. Under the accord, UBS agreed to give banking advice in the U.S. only through licensed subsidiaries and appoint an internal risk committee to oversee its “orderly and expeditious” exit from the business.

Bank executives “knew that UBS’s cross-border business violated the law,” R. Alexander Acosta, U.S. Attorney for the Southern District of Florida, said in a statement. “They refused to stop this activity, however, and in fact instructed their bankers to grow the business. The reason was money -- the business was too profitable to give up.”

Art Shows

Since at least 1999, UBS held billions of dollars for U.S. clients in accounts in Switzerland and other overseas locations while ignoring requirements that it register with the SEC, the agency said in a civil lawsuit in federal court in Washington.

The bank’s Swiss advisers traveled to the U.S. a few times a year to solicit customers at art shows, as well as yachting and other sporting events, the SEC said. To conceal their activities, advisers carried encrypted laptop computers and got training from the bank on avoiding detection, the agency said.

UBS settled the probes after a series of disclosures that followed the guilty plea last June of a former private banker, Bradley Birkenfeld.

The company reaped $200 million a year by helping high- income clients through such practices as setting up sham entities in tax havens including Switzerland, Panama, the British Virgin Islands, Hong Kong and Liechtenstein, Birkenfeld said in pleading guilty in federal court in Fort Lauderdale.

A Breakthrough

The bank helped Americans evade taxes even after signing a 2001 agreement that required it to identify account holders and their income to U.S. authorities, according to prosecutors. Birkenfeld said many clients refused to disclose their assets because it would defeat the purpose of banking with UBS -- evading taxes.

UBS announced it was ending its cross-border business in July at a hearing of the U.S. Senate Permanent Subcommittee on Investigations where the company was criticized for sending bankers to the U.S. to woo wealthy Americans. The announcement yesterday precedes another subcommittee hearing set for Feb. 24.

The agreement is “a tremendous breakthrough in the national effort to combat offshore secrecy and tax abuse,” said Senator Carl Levin, the Michigan Democrat who leads the subcommittee. “Efforts to tear away the offshore cloak of secrecy are gradually succeeding.”

In November, Switzerland-based UBS executive Raoul Weil was indicted in Florida on a charge that he helped rich Americans evade taxes. Weil attorney Aaron Marcu said it was “extremely disappointing” that the government did not drop its case.

“Mr. Weil is an innocent victim of a political dispute between the United States and Switzerland over Swiss bank secrecy,” Marcu said in a statement.