IRS to Retire Tax Probe vs. UBS - Analyst Blog

The Internal Revenue Service (IRS) is planning to retire the tax probe against UBS AG (UBS). This decision of IRS follows the Swiss government’s assurance that it is about to deliver the details of the American account holders of UBS AG, who are alleged to have evaded American taxes.

Earlier in June, the Swiss parliament voted in favor of a deal that would allow the sharing of banking data for 4,500 clients of UBS AG with the IRS in connection to the tax probe. The details of these clients were supposed to be handed over to the IRS by August this year.

Details of 2,000 clients have already been received by the IRS and the rest 2,450 client details are to come in by the fall this year. Though this exceeds the initial deadline of August, the IRS has faith in the Swiss government and is convinced that the government would fulfill the other terms of the agreement.

The names were sought after by the IRS through a John Doe summons. Typically, a John Doe Summons is a summon where the name of the taxpayer under investigation is unknown and therefore not specifically identified. In fact, the types of clients referred were picked on the basis of their actions and not by their names. Following the Swiss government assurance, IRS intends to withdraw the John Doe summons this fall.

Details of those clients are disclosed by UBS AG who have unreported accounts of a minimum of a million CHF (about $977,000). Additionally, the details include those Americans who held fraud company accounts with that total over the period of 2001 to 2008. Moreover, the account details of clients who have failed to file a special disclosure document, called a W-9, in at least three years ever since 1998 will also be opened up.

However, as the clients whose accounts have been picked up for investigation in the recent months still have time to appeal to the Swiss authorities for avoiding their account disclosures, the turn out of account details have been lower than the 4,450 clients sought by the IRS.

The global economic turmoil and the issues emanating from alleged tax evasion investigation and the dilution of Swiss banking secrecy significantly impacted UBS AG’s balance sheet in the past several quarters. Worried clients moved in search of safer refuge.

However, with the Swiss parliament’s approval to the data-sharing deal and IRS’s intention to drop the charges against UBS AG, we believe the uncertainties have somewhat been tackled. This approval also paves the way for similar deals between the U.S. government and other Swiss banks.

Increasing profitability and decreasing outflows remain UBS AG’s top priorities. The company has undertaken several restructuring initiatives, which should support its results in the upcoming quarters.

Last month, UBS AG posted its third consecutive quarter of net profit, aided by strong contribution from its Investment Bank division and a drop in client money outflows. However, its rival, Credit Suisse Group’s (CS) investment banking results were not that impressive. Credit Suisse reported its second quarter profit of CHF 1.6 billion, primarily based on tax and accounting gains.

UBS AG is currently carries a Zacks #1 Rank (Strong Buy), implying significant potential of upward pressure on the stock over the next one to three months. The stock has also been rated Outperform.
 
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