As part of the litigation settlement between Swiss bank UBS and the U.S. Treasury, UBS promised to turn over 4,450 names to the IRS. The process involved turning over the names to Swiss authorities who would then forward them to the IRS. But in a strange move, UBS sent thousands of letters to US account holders warning them of their intention to turn over their names. Is this really newsworthy?

Actually, yes.

First, by sending warning letters, those taxpayers have the potential to avoid prosecution. Obviously, it’s too late to unwind the original transactions but if the IRS continues to follow its “First Contact” policy, those taxpayers who failed to participate in the IRS amnesty may yet avoid criminal prosecution.

For years the IRS has followed the so-called first contact policy. That policy says if you come clean before the IRS has commenced an investigation and contacted you, criminal prosecution can be avoided. That makes sense; our tax system is based on the concept of voluntary compliance. The government wants to encourage people to come forward and get back in the system.

The flip side of the policy is if the IRS begins an investigation and contacts the taxpayer first, then any subsequent filing or payment does not prevent prosecution.

The first contact policy is not a rule or regulation. You won’t find it in the Internal Revenue Code. The IRS is not bound to follow its own policy. Deviations, however, are rare and usually occur when the unreported income is illegally sourced (e.g. drug trafficking).

By leaking the names that are to be turned over, UBS potentially gives those account holders the opportunity to run to the IRS before the IRS starts an investigation on them. Remember, the IRS does not know who these people are yet. They know of some 52,000 U.S. account holders but not their names. That is why they sued UBS.

UBS’ move to warn their account holders is newsworthy. But there is even more to this story.

UBS has not disclosed exactly how many letters were sent. Were letters sent to all U.S. account holders, only those account holders who meet the criteria for potential disclosure under the terms of the settlement or just the 4,450 names that will be turned over.

Why is this important?

UBS sent the letters registered mail. The U.S. Postal Service can electronically identify and track registered mailings. That means the IRS can obtain the names long before the names go to Swiss authorities and are later disclosed. Theoretically, the IRS could even intercept those letters before delivery.

Whether this was an intentional leak or accidental, UBS’ recent mass mailing of registered letters raises both opportunities and problems for those that have not taken advantage of the recently concluded amnesty program.

Our advice? If you still have not declared foreign accounts and foreign source income, there is probably still time to do so and avoid possible prosecution. If you are one of the tens of thousands who did not take advantage of the amnesty, and still elect to not report, the waiting game begins. Can the government prosecute every violation? Probably not. But those that do get targeted will likely see jail terms. The IRS may not catch everyone but those that do get caught often pay the price.

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MahanyLaw is a boutique law firm assisting highly successful individuals with wealth preservation strategies. We concentrate in a wide range of services including asset protection, tax collection representation, tax compliance, audit defense and white collar criminal defense. Our team of highly skilled professionals will protect your rights at every stage of an IRS or state tax matter. From our offices in Portland, Milwaukee and California, we have assisted clients from Maine to Hawaii.

If you are the subject of an audit, tax liens, levies or a criminal investigation for tax evasion or other tax crimes, call us today. See our website for more details, www.mahanylaw.com or read our blog at www.mahanylaw.com/mahanylaw for the story behind the headlines.