IRS Taps Audit Firms to Probe Foreign Bank Role in Tax Cases

By Ryan J. Donmoyer

July 3 (Bloomberg) -- The Internal Revenue Service summoned six of the biggest accounting firms to help detect foreign banks whose U.S. customers may be evading taxes through secret accounts, expanding an investigation that yielded a guilty plea by a former banker for UBS AG.

The IRS scheduled a July 8 conference call with the auditors to discuss how they can aid the agency in uncovering foreign banks that break their promise to report U.S. customers' identities and earnings in their accounts.

``We are concerned generally by what we are seeing and hearing'' about the conduct of some foreign banks, Barry B. Shott, a deputy IRS commissioner in charge of international taxes, wrote in an e-mail to the firms. A copy of the e-mail was read to Bloomberg News yesterday by an executive at one of the accounting firms.

A U.S. judge on July 1 granted the IRS power to issue a summons demanding that Zurich-based UBS reveal the names of U.S. customers who may have used secret accounts at the bank to avoid taxes. Last month, former UBS private banker Bradley Birkenfeld pleaded guilty to conspiracy and said the bank helped wealthy U.S. citizens conceal $20 billion in assets.

The IRS scheduled next week's conference call with the auditors to discuss the so-called Qualified Intermediary program adopted in 2000 to help the agency keep track of U.S. customers' money in foreign banks.

Under the program, foreign banks agree to confirm U.S. depositors' identities and notify the IRS of income earned in the accounts. In exchange, the banks can withhold taxes at favorable rates. Without the agreement, they would be required to withhold 30 percent.

IRS-Approved Auditors

Banks participating in the program also must agree to be examined by external auditors approved by the IRS.

About 5,000 foreign banks in 70 countries participated in the program in 2005, according to a December 2007 report by the Government Accountability Office, the investigative agency for Congress.

About $5 billion in taxes was withheld from U.S. citizens out of $293 billion in offshore income under the program in 2003, the most recent year for which data was available, the GAO said.

The GAO said auditors ``are not responsible for following up on possible indications of fraud or illegal acts.'' The IRS said that's because fraud laws vary among the 70 countries. The GAO recommended giving the external auditors more power to report possible fraud.

The e-mail was sent to accounting firms Ernst & Young LLP, PricewaterhouseCoopers LLP, KPMG LLP, Deloitte & Touche LLP, Grant Thornton LLP and BDO Seidman LLP, the executive said.

IRS spokesman Bruce Friedland declined to make Shott available for an interview.

Two Categories

In the UBS case, IRS agent Daniel Reeves said in court papers that the bank divided U.S. customers into two categories: those who were willing to submit proper IRS paperwork and those who chose to remain ``undeclared.''

UBS spokeswoman Rohini Pragasam said July 1 that the bank ``takes this matter very seriously and is working diligently with both Swiss and U.S. government authorities.''

The IRS summons would direct UBS to produce records identifying U.S. taxpayers who had accounts with the bank in Switzerland between 2002 and 2007 and who kept their accounts hidden from the IRS.

Birkenfeld said when he pleaded guilty June 20 that he and his colleagues helped wealthy Americans hide money by telling them to put cash and jewelry in Swiss safety deposit boxes, buy artwork and jewels using offshore accounts and set up accounts in the names of others.

To contact the reporter on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net

Last Updated: July 2, 2008 22:07 EDT

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