Thursday, May 7, 2009

Obama's International Tax Legislative Proposals

The Obama Administration has announced a major legislative proposal related to international tax. The press release may be viewed here. In the area of tax crimes, the significant proposals are:

1. Strengthen the Qualified Intermediary ("QI") program by taking a tough stance with U.S. taxpayers who use offshore accounts that are not with a QI. The QI is supposed to know the customer and report to the U.S. with respect to U.S. taxpayers. Offshore financial institutions that are not QI's do not report, which, of course, is often why U.S. taxpayers use those non-QI offshore financial institutions. The proposal therefore is:
Impose Significant Tax Withholding On Transactions Involving Non-Qualifying Intermediaries: The Administration's plan would require U.S. financial institutions to withhold 20 percent to 30 percent of U.S. payments to individuals who use non-QIs. To get a refund for the amount withheld, investors must disclose their identities and demonstrate that they're obeying the law.

2. Create new proof mechanisms for applying the penalties. The proposal is to "create rebuttable evidentiary presumptions that any foreign bank, brokerage, or other financial account held by a U.S. citizen at a non-QI contains enough funds to require that an FBAR be filed, and that any failure to file an FBAR is willful if an account at a non-QI has a balance of greater than $200,000 at any point during the calendar year." The press release notes that these presumptions will make the IRS's job easier and are consistent with Senator Levin's proposals. Note in this regard that, although Section 7491(c) imposes a production burden on the IRS for penalties under the IRC (thus leaving the ultimate burden of persuasion with the taxpayer, the draconian FBAR penalties are not imposed under the IRC.

3. Increase penalties. The proposal is to double certain penalties (the press release does not say which penalties, but presumably the penalties include the FBAR penalty).

4. Extend the civil statute of Limitations until six years after the taxpayer submits the required documentation.

5. Enhanced information reporting. I will perhaps have more about this later.

6. Enhanced IRS Staff in International Enforcement. The proposal is to hire nearly 800 "new agents, economists, lawyers and specialists, increasing the IRS' ability to crack down on offshore tax avoidance and evasion, including through transfer pricing and financial products and transactions such as purported securities loans."

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