Nov. 24 (Bloomberg) -- Wealthy U.S. clients of UBS AG are offering to settle their tax liabilities with the Internal Revenue Service before the Swiss bank’s possible disclosure of their names to government authorities, lawyers said.

Clients fear a U.S. probe of whether UBS fostered tax evasion by 17,000 customers who the Justice Department said failed to report income to the IRS. Those coming forward include descendants of Holocaust survivors whose families opened accounts decades ago, hoping for a safe haven to stow their assets as they fled Europe, lawyers said.

“We’re starting to get phone calls from U.S. citizens who say, ‘When these names get handed over, I’m in trouble,’” said Lawrence Horn, a defense attorney who said he represents several UBS clients. “People are nervous.”

In July, a federal judge approved an IRS request to press the Swiss bank for its client list. UBS also may resolve the probe through a so-called deferred prosecution agreement in which the Justice Department would demand that it disclose the names, pay a large fine and make reforms during a probationary period.

“It’s very important to the IRS to pursue those large numbers of people who didn’t report income,” said former IRS Commissioner Donald Alexander, an attorney at New York-based Akin Gump Strauss Hauer & Feld.

Zurich-based UBS helped U.S. clients hide as much as $17.9 billion through offshore accounts, according to a July report by the Senate Permanent Subcommittee on Investigations. The Securities and Exchange Commission also is examining whether UBS failed to register as a broker-dealer or investment adviser.

National Settlement

The IRS is considering a national settlement that would hasten the process for UBS clients coming forward, the Wall Street Journal reported today, citing unidentified people familiar with the situation. Such a settlement may come before the end of the year, the Journal reported, citing the people.

“Those who believe that the IRS will be announcing a settlement initiative soon are misinformed,” agency spokesman Bruce Friedland said.

Undisclosed foreign bank accounts are a “top priority” for the IRS, he said. Taxpayers hiding assets overseas “should be concerned, and would do well to come in and voluntarily disclose their offshore accounts,” Friedland said. “Taxpayers who voluntarily disclose in most cases avoid criminal prosecution.”

UBS Clients

UBS clients hope to avoid prosecution by making a voluntary disclosure to the IRS, defense lawyers said. To qualify for such treatment, the agency requires they reveal legal income and assets while agreeing to pay taxes, interest, and penalties of as much as 75 percent. The program doesn’t apply if the IRS has begun a civil exam or criminal probe of a taxpayer, if a third party told authorities about them or if their income was illegal.

“It’s a way of disposing of cases, of getting rough justice because they pay the tax and penalty, and of encouraging people to come forward,” said ex-IRS Commissioner Sheldon Cohen, an attorney at Washington-based Farr, Miller & Washington. “God help you if you disclose 15 minutes after they start looking for you.”

With the U.S. pressing the Swiss government to not block disclosure, timing is important for clients, said Steve Johnson, a tax law professor at the University of Nevada, Las Vegas.

“If you are inclined to put this behind you, you should act sooner rather than later,” Johnson said. “If the various levels of heat become too intense, UBS will turn it over to the Swiss authorities and say, ‘Here is the list.’”

UBS Probe

The UBS probe accelerated when a former private banker, Bradley Birkenfeld, began helping authorities more than a year ago. One of his former clients, California billionaire Igor Olenicoff, pleaded guilty last December to tax violations after investing more than $200 million with the bank. Olenicoff, a real estate developer, was sentenced to two years of probation and paid $52 million in back taxes, penalties and interest.

Birkenfeld pleaded guilty in June, saying he engaged in a variety of schemes to help 20,000 U.S. clients hide $20 billion in assets and evade income tax laws.

On Nov. 6, the chairman of global wealth management at UBS, Raoul Weil, was indicted for allegedly leading 60 private bankers who routinely traveled to the U.S. to conduct unlicensed banking and investment advisory activities in the U.S. The business provided $200 million a year to UBS from 2002 to 2007, prosecutors said.

UBS said on July 17 that it would stop providing cross- border private banking services to U.S. clients through non- regulated units.

‘Deferred Prosecution’

“UBS has to do something like a deferred prosecution agreement,” said Kenneth Kies, a tax lawyer and lobbyist at Federal Policy Group of Clark & Wamberg. “You can’t be a financial institution and be convicted of a felony.”

Kies said the government would likely demand the client list as part of any deal.

“The orderly wind down of the business is still ongoing,” UBS spokesman Mark Arena said in an interview. He declined to comment on a possible deferred prosecution agreement, saying only that UBS is cooperating with the Justice Department and SEC.

The defense lawyers noted that some of their UBS clients inherited accounts from relatives, including Holocaust survivors or Europeans who fled the continent during World War II. The account holders, believing Switzerland a safe haven for their assets, stowed their funds there as they fled, later passing those accounts on to descendants in the U.S.

Holocaust Survivors

“They eventually made their way to the U.S., but they had a nest egg in Switzerland,” attorney Bryan Skarlatos of New York- based Kostelanetz & Fink, whose firm represents several Holocaust survivors or their descendants. The survivors passed their money onto children who often were unaware “they were beneficiaries of a numbered bank account. A lot of them didn’t know what to do with the accounts. It was sort of radioactive.”

Such accounts “become an albatross around the neck of the owners,” said attorney Cono Namorato of Caplin & Drysdale, whose firm also represents clients who survived or descended from survivors of the Holocaust. Filing tax forms each year is like “returning to the scene of the crime.”

Horn said that the UBS list is “really hot stuff now” for tax attorneys around the U.S.

“One has reason to believe there will be public officials, entertainers and athletes on these lists,” said Horn, an attorney at Sills Cummis & Gross in Newark, New Jersey.

Skarlatos said his firm has “several dozen” UBS clients. Many are younger clients who didn’t disclose the existence of their accounts on income tax forms or file a separate return for foreign bank and financial accounts, he said.

“The IRS is very interested in bringing these people in from out in the cold,” said Skarlatos.

To contact the reporter on this story: Carlyn Kolker in New York at ckolker@bloomberg.net; David Voreacos in Newark, New Jersey, at dvoreacos@bloomberg.net.

Last Updated: November 24, 2008 17:40 EST