Details of IRS Deal With UBS Expected Friday

The government is trying to crack down on Swiss bank accounts and other offshore tax havens.

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A deal has been reached in principle in the showdown between the Internal Revenue Service and the Swiss banking giant, UBS, over the identity of thousands of U.S. account holders that the feds believe aren't paying their share of taxes. A U.S. district court judge in Florida will hear details of the proposed deal this week, in a civil case which has the potential to undo Swiss traditions of bank secrecy that date to the Middle Ages.

The IRS and the Justice Department say that the 50,000 American account holders have some $14.8 billion squirreled away in secret offshore accounts.

The IRS is seeking to force UBS to disclose the names of U.S taxpayers, who are required to annually report income generated by foreign accounts. Bank secrecy laws in foreign countries help would-be cheats hide those earnings. Both the Swiss government and UBS contend that divulging the information to U.S. authorities would violate Switzerland's strict bank secrecy laws. Releasing the names could also threaten a pillar of the Swiss economy, the tradition of strict secrecy that has made its banks a top repository for global deposits.

Earlier this month, the Swiss government threatened to seize the records of the American clients, rather than allow UBS to violate its laws by handing them over to U.S. officials. The situation sets up a dilemma for the banking giant: If UBS complies with U.S. demands, the bank and its officers could face sanctions and prosecution in Switzerland. On the other hand, not doing so would run the bank afoul of U.S. courts.

As a result, the case has created a diplomatic imbroglio for Barack Obama's administration, which didn't initiate the prosecution but has been as determined as the Bush Justice Department to compel UBS to disclose the information. Cracking down on tax cheats and offshore havens was a campaign issue for Obama and has become a priority for his administration. Even as the case winds through the courts, diplomats in Washington and Bern are frantically trying to come up with a last-minute compromise to head off a legal clash.

The IRS prevailed in the criminal phase of the case, with the aid of former UBS officials who alleged that the company systematically helped wealthy Americans conceal money. In February, as part of a deferred-prosecution agreement ending the criminal prosecution, UBS disclosed to U.S. investigators the names of 250 to 300 American clients whom the bank suspected of tax fraud, an evidentiary standard UBS contends has not been met in the request for the additional names. The company also paid a $780 million fine to avoid criminal prosecution for aiding tax cheats. Last month, a New York toy dealer pleaded guilty to filing false tax returns and concealing more than $8 million in accounts at UBS and a second Swiss bank. He is the third American UBS client since April to plead guilty to filing false returns, according to the Justice Department.

Meanwhile, in anticipation of the case being resolved, hundreds of wealthy Americans are turning themselves in to the IRS, which has offered leniency, though not amnesty, for those who come clean before the end of September. The voluntary disclosure forms also ask cheats to provide detailed descriptions of who may have helped conceal the funds, in turn giving the IRS more ammunition to challenge banks like UBS in court.