Administration’s Proposals for Preventing Offshore Tax Evasion by U.S. Individuals
May 4, 2009
A summary of international tax proposals that the Obama Administration released today includes various provisions that would increase compliance rules with respect to U.S. individuals with offshore financial accounts and other offshore investments. The proposals were made only in outline form, and their details are therefore uncertain. It is reasonably clear, however, that these enforcement-related initiatives would impose significant additional burdens on financial institutions, as well as on U.S. individuals with offshore investments.
Under current Treasury regulations, certain foreign financial institutions and other entities that serve as brokers, nominees, custodians or other types of agents for customers may enter into agreements with the IRS to serve as “qualified intermediaries” (“QIs”). A QI is responsible for withholding U.S. tax from payments to non-U.S. persons, is subject to special rules with respect to the collection of information about its customers, and is subject to audits by the IRS to verify compliance with its QI agreement. The Administration has expressed concerns that (i) U.S. customers of foreign financial institutions other than QIs are evading identification by submitting false statements to the institutions certifying that they are non-U.S. persons, (ii) QIs are channeling the business of tax-evading U.S. customers to affiliates that are not QIs and (iii) U.S. individuals are evading U.S. federal income tax because QIs are not required to report their U.S. customers’ foreign income.
The Administration’s proposals essentially create a presumption that financial transactions conducted through entities that are not QIs are supporting tax evasion.
- U.S. financial institutions would be required to withhold 20% to 30% of “U.S. payments” (presumably, U.S. source payments) made to individuals through foreign financial institutions other than QIs. The withholding tax would be refundable only if the investor disclosed his or her identity and demonstrated his or her compliance with U.S. federal tax law. It is not clear whether this withholding tax would apply to individual partners’ shares of payments made to foreign partnerships that have not entered into withholding agreements with the IRS. Under current law, these foreign partnerships are subject to certification requirements similar to the requirements for non-QI foreign financial intermediaries.
- The Treasury Department would be granted authority to issue regulations under which a financial institution could be a QI only if all of its related financial institutions were also QIs.
- QIs would be required to report the same information with respect to their U.S. customers as U.S. financial intermediaries are required to report, which would include information as to non-U.S. transactions.
- U.S. persons would be required to report on their U.S. federal income tax returns transfers of money or property made to or from non-QI foreign financial institutions. Under current law, U.S. citizens, U.S. residents and persons doing business in the United States are required to file a Foreign Bank Account Report (“FBAR”) with the IRS for each calendar year in which they have interests in, or signature or other authority over, financial accounts in foreign countries if the aggregate value of those accounts exceeds $10,000 at any time. The Administration proposals would create a rebuttable presumption
- that any foreign financial account held by a U.S. citizen at a non-QI contains enough funds to require the filing of an FBAR, and
- that any failure to file an FBAR is subject to the penalties applicable to willful failures if the financial account with a non-QI has a balance greater than $200,000.
The Administration has also suggested enhanced enforcement tools to prevent international tax evasion by U.S. persons. These proposals appear to be similar to provisions contained in proposed legislation that the Senate Finance Committee circulated in March.
- Financial institutions would be subject to additional reporting requirements for transactions that establish foreign business entities, and for transfers of assets to and from foreign financial accounts, on behalf of U.S. individuals.
- The statute of limitations for a U.S. person’s involvement in certain international transactions would be extended to six years after the U.S. person submits the required information.
- Certain penalties imposed on a U.S. person for failure to provide disclosure with respect to foreign financial accounts would be doubled.
The Administration also proposes hiring nearly 800 new employees devoted specifically to the enforcement of international tax compliance.
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