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Tax Suspicions Grow on Swiss Accounts

Lynnley Browning, The New York Times
Thursday, 26 Feb 2009 | 7:00 AM ET

Federal authorities suspect the scandal over Americans’ secret offshore accounts at UBS, the big Swiss bank, runs far deeper than they believed only a week ago.

While UBS admitted last week that it had failed to properly withhold American taxes on 17,000 accounts held by affluent Americans, the authorities are now investigating how the bank and its intermediaries handled taxes for an additional 35,000 accounts, according to two people briefed on the investigation.

At issue is whether UBS withheld taxes, as required by American law, and, if so, where the money went, these people said. If UBS failed to collect taxes on all 35,000 accounts, the bank could owe the Treasury Department as much as $800 million in taxes, interest, fines and penalties, according to a tax lawyer briefed on the investigation, who spoke on the condition he not be named because he is representing UBS clients.

Mark Arena, a UBS spokesman, declined to comment on Wednesday.

Federal authorities are stepping up their investigation into the Swiss bank’s activities and pressing UBS to divulge the names of tens of thousands of American clients. The effort is drawing sharp criticism from the Swiss, who say disclosing the names would violate Swiss law.

There are two main parts of the federal investigation. The first concerns the individuals who may have used UBS accounts to evade taxes. The second involves whether the bank itself properly collected tax money and forwarded it to the Treasury Department. UBS stunned the secretive world of Swiss banking last week by agreeing to pay $780 million and identify about 250 clients to settle claims that it had defrauded the Internal Revenue Service. But the I.R.S. is demanding that UBS divulge the names of 52,000 account holders as part of an investigation into individual tax evasion. The Justice Department is conducting a separate investigation.

UBS
Sharon Lorimer
UBS

For some accounts, UBS is required to tell third-party agents whether to withhold taxes. Federal authorities are investigating whether UBS did so or deliberately chose not to. People familiar with the matter said UBS remitted tax money on at least some of the accounts in question in recent years, although it was unclear how much.

UBS is required to withhold taxes because it is part of an I.R.S. program known as Qualified Intermediary.

Under that program, for American clients who do not sign W-9 disclosure forms, UBS generally must withhold 31 percent of interest income and 16 percent of dividend income.

For foreign clients, UBS generally must withhold at a base rate of 30 percent, but tax treaties typically reduce that rate to zero on interest and 15 percent on dividends.

The Justice Department, in court papers filed last week, accused UBS of disguising American clients as foreigners to hide their identity from the I.R.S and allow them to evade taxes, and of not properly collecting W-9 forms.

American clients are allowed to claim a tax credit for any money withheld, but those with offshore accounts intended to evade taxes generally do not do so because that would disclose their secret accounts to the I.R.S.

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