As I predicted months ago, the U.S. Internal Revenue Service wants to clamp down with greater long-distance oversight of foreign banks that provide banks accounts or sell offshore services to American clients. The goal? Thwarting what IRS agents claim, (without offering any proof), to be rampant tax evasion.
New IRS rules, issued Monday, toughen up the little known, IRS "qualified intermediary" (QI) program that currently allow participating foreign banks to maintain accounts on behalf of American clients without disclosing their names to the IRS. Until now the IRS has allowed the banks to promise to identify clients, withhold any taxes due on U.S. securities in their accounts, typically 30%, and send the tax money owed to the IRS.
Under the newly proposed IRS rules, foreign banks in the QI program must now actively investigate, determine and report to the IRS whether United States investors or their legal entities are the holders of the foreign accounts they open. (U.S. persons already are required by law to report offshore accounts on the annual IRS Form 1040).
No Americans Wanted
In the last year numerous offshore banks, wary of increasing IRS pressures, have begun refusing to accept any new American clients. These latest IRS rules will only increase this unfortunate anti-American trend. (Ask us: we know where the still American-friendly offshore banks are).
The new rules, to take effect in 2010, will also require foreign banks to alert the IRS to any potential fraud, whether detected through their own internal controls, complaints from employees or investigations by regulators. The IRS will also begin auditing small samples of individual bank accounts in the program, without knowing the clients’ names, to determine whether American investors actually have control over foreign entities with bank accounts.
Qualified Intermediary (QI) Rule
More than 7,000 foreign banks participate in the program, which was established in 2001, to help the IRS keep track of American offshore investors. Under current rules, foreign banks need only report to the IRS U.S. clients' investments in American securities.
According to the IRS, foreign banks in the QI program hold more than $35 billion abroad in accounts for U.S. individual investors, partnerships, trusts, family foundations and corporations, but withheld taxes of only 5% on that amount in 2003. The IRS argues entities receiving the offshore income claimed exemptions under foreign double taxation treaties with the United States, but if U.S. investors controlled those entities, some were not entitled to the tax exemptions.
The clear threat to offshore banks underpinning the QI rules is the possibility that an uncooperative foreign bank would be denied access to the entire American banking system, meaning they and their clients could not to do business with the major banking system of the world.
Alleged Tax Evading Bank Gets $54 Billion U.S. Loan
The tightened QI rules are said to be the result of allegations that the world’s largest private bank, the Swiss UBS, assisted an unknown number of their American account holders to evade U.S. taxes.
(To show just how schizophrenic is U.S. government policy, the Swiss government announced today that the U.S. Federal Reserve has joined with the Swiss National Bank to loan up to US$54 billion from the Fed to buy "illiquid securities" from subprime-loaded UBS)!
The IRS claims that since 2001 it has halted the participation in the QI program by about 100 foreign banks that were accused of violating QI rules. But in my observation, far fewer banks were embargoed and those tended to be banks located in backwater places such as Vanuatu and the Solomon Islands where Russian criminal elements had established a financial presence.
U.S. Rule Imposed Worldwide
In 2001 the IRS first imposed extraterritorial tax enforcement burdens on foreign banks that were forced to meet IRS established anti-money laundering and "know your customer" standards in order to get the "QI" stamp of approval.
But IRS QI approval comes loaded with onerous conditions that now might end customer confidentiality for American offshore investors. It also gives the IRS leverage over foreign nations when demanding exchange of tax and financial information. Some nations, such as Switzerland, Liechtenstein and Panama that have strict financial privacy laws, until now have been able to escape the worst anti-privacy parts of the QI rules.
Tougher New QI Rules
Douglas H. Shulman, the IRS Commissioner, said the goal of the new QI changes "is to get a clear line of sight into the owners of the bank account, and to know where there’s fraud." Inherent in such an over reaching statement is the misguided IRS belief that everyone with an offshore bank account is engaged in tax evasion -- and that offshore banks have a duty to act as IRS informers.
I'll repeat what I've said before: it is the duty of the American government to investigate and indict anyone suspected of violating laws -- on an individual case basis. It is not the government’s duty or right to coerce offshore bankers to act as IRS agents, or to presume tens of thousands of Americans legally engaged in offshore financial activity are therefore criminals.
Conflict of Laws
It remains to be seen how any new QI rules can be made to square with strict laws guaranteeing financial and banking secrecy in many nations, such as Switzerland, Liechtenstein, Andorra, Monaco, Singapore, Belize or Panama. Typically those laws make it a criminal act to reveal any information about bank account holders, foreign or domestic, unless order to do so by a court.
Offshore banks may be forced to choose between obedience to their home country laws, or to the grasping long arm laws of the IRS.
* There still are many legal ways to bank and save taxes offshore; I tell you Where To Stash Your Cash: Click Here. And if you're interested in Switzerland, Click here for Swiss Money Secrets.
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