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Gary S. Wolfe

Gary S. Wolfe

Posted January 26, 2009 | 08:38 PM (EST)

U.S. Taxpayers and The I.R.S. Qualified Intermediary Program


The IRS Qualified Intermediary Program has heightened scrutiny as a result of the federal investigation into the Swiss Bank, UBS (the world's largest private bank). U.S. Prosecutors allege UBS deliberately abused the Qualified Intermediary Program ("QI Program"), selling offshore banking services to U.S. Taxpayers to evade taxes.

U.S. Prosecutors allege UBS helped American clients hide as much as $20B in assets offshore, evading at least $300M in taxes.

Using offshore accounts is not illegal for U.S. Taxpayers, but hiding income in undeclared accounts is illegal. Foreign banks who violate the Qualified Intermediary Program rules may be denied access to the entire American Banking System.

In 2001, the IRS established a Qualified Intermediary Program (QI Program) to attract foreign investors to U.S. securities (more than 7000 foreign banks participate in the program). Until October 13, 2008, the IRS allowed the banks to promise to identify clients, withhold any taxes due on U.S. securities in their account (typically 30%) and send the tax money owed to the IRS.

As of October 13, 2008, the IRS Announcement 2008-98 has proposed new rules to stop rampant tax evasion (i.e., American investors hide behind offshore shell companies and trusts set up by the bank). Under the new rules, foreign banks in the QI Program must now actually investigate, determine and report to the IRS whether U.S. investors (or their legal entities) are the holders of the foreign accounts they open (U.S. Taxpayers are required by law to report offshore accounts on the annual IRS Form 1040 Tax Return).

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 proposed new rules will go into effect in 2010. Under the new QI Program rules: Participating banks must alert the IRS to any potential fraud they detect, whether through their own internal controls, complaints from employees or investigations by regulators.

The IRS will audit small samples of individual bank accounts in the program (on a "no-names basis"), to determine whether U.S. investors have control over foreign entities (set up by the banks). Participating banks must hire external auditors to monitor their compliance. The auditors must identify the bank employees responsible for preventing tax abuses. The external auditor will be required to report "red flags" to the IRS. Banks using foreign-based external auditors (including foreign branches of U.S. auditors) will have to work with an American auditor, who will accept joint responsibility for the audit.

As stated by Douglas Shulman, IRS Commissioner, "This is an important program, and we cannot tolerate anyone abusing or skirting the requirements."

U.S. Taxpayers who do not disclose offshore accounts, do not report income, and do not pay their tax may commit perjury (on filing a false tax return) and may be subject to 3 felonies and a misdemeanor - up to 14 years in jail.

In addition, U.S. Taxpayers who do not disclose foreign bank accounts (with over $10,000) by filing Form TDF-90.22.1 (Report to Foreign Bank and Financial Accounts) are subject to a felony (up to 5 years in jail) and subject to a civil penalty of $100,000, or 50% of accounts (whichever is greater).

U.S. Taxpayers may be subject to jeopardy assessments (i.e., IRS pre-audit seizure of assets). The IRS is aggressively pursuing U.S. Taxpayers and encouraging voluntary disclosures. Under Olenicoff, the Taxpayer plead guilty to a felony, paid civil tax fraud penalty and is an ongoing material witness.