Coming in 2010: New IRS Rules to Fight Tax Evasion

Many wealthy Americans have been using offshore services provided by foreign banks to evade tax. Things may now get a little difficult.

Until now foreign banks could funnel hundreds of billions of dollars overseas on behalf of American clients without disclosing their names to the Internal Revenue Service (IRS) under a program known as qualified intermediary. The banks would withhold any taxes due on United States securities in their accounts and send that money to the I.R.S. The program was established 2001 in an attempt to attract foreign investors to U.S. securities. More than 7000 foreign banks participate in the program.

Concerned that it has delegated too much control and authority to the banks and that in recent years American investors have been evading taxes by hiding behind offshore shell companies and trusts set up by the banks, the IRS has issued new rules which will go into effect in 2010. The new rules require the banks participating in the program to actively determine whether U.S. investors are behind the foreign accounts they set up. The banks will have to alert the IRS to any potential fraud that they detect, whether through their own internal controls, complaints from employees or investigations by regulators.

The new rule could be an outcome of the federal investigation of the Swiss banking giant UBS. Federal prosecutors claim that UBS misused the program by selling American clients offshore banking services that went undeclared to the IRS, helping its American clients hide as much as $20 billion in assets offshore, thereby evading at least $300 million in taxes.

The changes to the program means the IRS will now audit small samples of individual bank accounts in the program, without knowing the clients’ names, to determine whether U.S. investors actually have control over foreign entities set up by the banks. Participating banks must now hire external auditors who will have to zero in on the bank employees responsible for identifying and preventing abuse of the program. The external auditor must report all red flags to the IRS. In addition, banks using foreign-based external auditors will have to work with an American auditor.

That’s not all. There is more bad news for those looking at foreign banks to evade taxes. The US has succeeded in getting the Swiss tax authorities to hand over confidential data on wealthy American clients of UBS. Under Swiss law, it is a crime to disclose client name or data unless the Swiss authorities think that the client has committed a serious offense like money laundering or tax fraud. Tax evasion is not considered a crime in Switzerland. This is a major shift in the Swiss banking secrecy laws. The US could now use this as a precedent in the future to get more Swiss banks to disclose the details of their American clients.

The message is loud and clear – Uncle Sam will take his rightful share of your money no matter where you hide it.

1 comment to Coming in 2010: New IRS Rules to Fight Tax Evasion

  • Tax Lawyer

    I’ve been involved in taxations for longer then I care to admit, both on the individualized side (all my working life story!!) and from a legal stand since satisfying the bar and following tax law. I’ve supplied a lot of advice and corrected a lot of wrongs, and I must say that what you’ve posted makes complete sense. Please uphold the good work – the more people know the better they’ll be armed to comprehend with the tax man, and that’s what it’s all about.

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