IRS Chief Promises No Hiding Place For Tax Evaders

by Mike Godfrey, Tax-News.com, Washington

06 March 2009

US Internal Revenue Service Commissioner Doug Shulman told a Senate panel at a hearing on March 4 that the agency intends to deploy a number of weapons to counter international and offshore tax avoidance, including a beefed-up Qualified Intermediary program.

"It is of paramount importance to our system of voluntary compliance with the tax law that citizens of this country have confidence that the system is fair," Shulman stated in prepared testimony for delivery at the Senate Permanent Subcommittee on Investigations hearing on offshore banks and US tax compliance.

"We cannot allow an environment to develop where wealthy individuals can go offshore and avoid paying taxes with impunity," Shulman stated, adding that the IRS intends to "aggressively" pursue individuals and institutions that facilitate unlawful tax avoidance.

Shulman informed the committee that he has already stepped up audits in this area over the last five months, and that he intends to hire more investigators with international expertise. However, he conceded that there is no "silver bullet" compliance solution, and therefore the IRS and other government agencies would deploy a number of strategies to encircle the non-compliant, including through collaboration with national tax administrators at the Joint International Tax Shelter Information Center (JITSIC), and, notably, through an enhanced QI program.

The QI program was established in 2000 to encourage foreign banks to report details of their US clients to the IRS for income tax purposes. Banks participating in the program are offered the carrot of guaranteed access to the US market, and get to withhold tax on client income at a lower rate. However, there has been growing evidence that Americans determined to hide their assets from the US tax man can easily do so by exploiting the system's flaws, in some cases with the help of the banks.

Shulman told the panel that the IRS and Treasury Department are considering a number of changes to the QI program, including expanding information reporting requirements to include more sources of income for US persons with accounts at QI banks, strengthening documentation rules and requiring withholding for accounts with documentation that is considered insufficient.

Additionally, the IRS has already proposed changes that would shore up the QI program in "substantial ways," Shulman stated. Under these proposals, which were put out to consultation in October 2008, financial institutions that are QIs must provide early notification of material failure of internal controls, must improve evaluation of risk of circumvention of US taxation by US persons, and must include audit oversight by a US auditor.

Shulman also requested at the hearing that Congress extend the time to assess a tax liability with respect to offshore issues from three years to six years.

Concluding his testimony, Shulman assured the panel that the IRS intends to be at the forefront of the new charge against offshore.

"Because this is a global problem, it will require a closely coordinated strategy among nations dedicated to ending this scourge that deprives our country of precious resources and erodes confidence in the fairness of effectiveness of our tax administration system," he stated.

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