UBS AG and the Justice Department have agreed that they will seek an out of court settlement on a contentious civil lawsuit that seeks to force the Swiss bank to divulge the names of rich Americans suspected of tax evasion. Read today’s New York Times article here.

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The Justice Department demanded that UBS to turn over 52,000 names of account holders suspected of using the Swiss accounts to evade U.S. taxes.  The Swiss government turned the matter into a diplomatic issue, saying it would forbid UBS from complying with any U.S. court order to reveal the names. We previously reported that settlement talks are now focusing on some 7,000 accounts tied to offshore companies and trusts. While the final contours of the settlement aren’t known, it’s likely the DOJ will get at least some of the names it sought.

Tax Division attorney Stuart Gibson said in a conference call with U.S. District Court Judge Alan Gold in Miami that UBS and the U.S. would be able to reach a final deal by Aug. 7, according to The Times. Gold said he would call off a trial that was slated to start Monday, the newspaper reported.

UBS paid $780 million to settle criminal charges in February. And it was the criminal side of the Tax Division that helped negotiate the settlement, after “high-ranking Swiss officials” flew to Washington to resolve it, the Times reported. Gibson, who is heading up the civil case, learned about the agreement Thursday at 7:45 p.m, the Times reported.

Secretary of State Hillary Clinton is slated to discuss the matter with Swiss Foreign Minister Micheline Calmy-Rey today, The Times added.

UPDATE: The final version of the New York Times story deleted information that had appeared on the Web mid-day Friday about the criminal division participating in international settlement negotiations that did not include the civil division lawyers pursuing the case. The possible explanations for the deletion are 1) the information was wrong and someone complained or 2) an editor deemed it extraneous and cut it.

The Swiss government has turned the UBS AG tax evasion case into a major affaire diplomatique. In an amicus filing, Switzerland said UBS would violate Swiss bank secrecy laws if the bank complied with any U.S. court order to reveal the names of 52,000 Americans suspected of using UBS accounts to duck the tax man. Therefore, Switzerland will order UBS not to comply and could even seize UBS documents to prevent disclosure.

“When the Government of Switzerland issues such an order, it will be an Act of State,” the Swiss government said in the amicus filing, throwing down the gauntlet.

This afternoon, U.S. District Judge Alan Gold asked the Department of Justice to prepare a response to the Swiss government’s ultimatum by Sunday at noon, “after consultations with the Executive Branch, the Department of State and/or  other relevant government agencies.”

Specifically, Gold wants to know “what remedies the United States is prepared to request of this Court… in the event the Petition is granted and there is non-compliance.”

The U.S. needs to explain “how far it intends to proceed by way of request for enforcement, up through and including receivership and/or seizure of UBS’ assets within the United States,” Gold wrote.

You can download the order here.

The Swiss government has called the Justice Department’s bluff in the fiercely fought UBS AG tax evasion case.

After the DOJ’s Tax Division took a club to the Swiss in a ferocious brief filed June 30 in Miami federal court, the Alpine tax haven said today it would forbid UBS from complying with any U.S. court order to reveal the names of 52,000 Americans suspected of using hiding assets from the IRS in accounts at the Swiss bank.

Even more wild: The Swiss government said it would consider seizing UBS documents to prevent the release of the names. Read the Associated Press story here.

There’s no telling what will happen if U.S. District Judge Alan Gold after a hearing in Miami on Monday rules that UBS must hand over the names. If Switzerland refuses to let the bank comply, it could be hit with a fine. How much, who knows. But Reuters looks at UBS’s financials and says the bank could probably afford to pay as much as $5.5 billion. Read the Reuters story here.

The Swiss are absolutely livid that the U.S. might destroy its precious bank secrecy rules, which for decades have allowed the world’s despots, potentates, oligarchs and ordinary tax cheats to launder stolen billions or otherwise hide assets. In really egregious cases, like the late Nigerian military dictator Sani Abacha, the Swiss will cooperate with investigators.

But opening the door as wide as the U.S. is demanding in the UBS case would destroy Switzerland’s business as a tax haven. And it would also make Swiss cities like Geneva a lot less amusing to visit: You’d see lot fewer jewel-bedecked Russian women teetering in high heels and tight jeans down the street next to fully draped Saudi women, who reveal only their eyes and their Fendi hand bags.

The Justice Department issued a statement today shooting down a New York Times report that the U.S. is considering dropping its  tax enforcement case against Swiss bank UBS AG.

“There is no basis for the report in the New York Times,” DOJ spokesman Charles Miller said in the statement. “While the Department is always willing to consider  settlement in any case, the suggestion that the Department is planning to drop this suit is simply untrue. The Department is continuing with the case against UBS and will file its brief asking the court to enforce the summons on June 30.”

The U.S. wants the Swiss bank to cough up the names of 52,000 Americans who may have used UBS to evade taxes by putting money in overseas accounts. Naturally, this effort has caused a huge diplomatic row. The U.S. is taking direct aim at Swiss banking secrecy laws – and if your Swiss bank account isn’t secret, Switzerland ain’t much use as a tax haven, is it?

So you see the problem here.

The Times reported that the move to drop the case could be made by mid-July, which would fall right after the June 30 I.R.S. deadline requiring clients of offshore banks to file certain disclosures, known as F-bars.  The U.S. official told the Times:

“If you look at the repatriations and F-bar filings and voluntary disclosures, and if these are big numbers, then it would make sense to settle this case.”

Many wealthy UBS account holders have already come forward recently to declare their accounts out of fear that they would be outed anyways.  According to the official, the rationale in dropping the case is that:

“To have a complete meltdown in Swiss-U.S. relations and go to the mat with Switzerland three years from now when money is getting back into the system doesn’t make sense,”

The Times also reports that a new treaty was established between the United States and Switzerland to fight tax evasion by increasing information sharing.  The DOJ has also filed legal papers in Swiss courts as an alternate avenue to getting names of Americans hiding money in UBS accounts.  The Swiss government is considering a compromise where the charges in the United States are dropped while the Swiss government complies with the Swiss-based filings.

A trial is scheduled before Federal Judge Alan S. Gold of the United States District Court in Miami on July 13.

You can read our previous reports on the UBS case here, here, here, here, here, and here.