IRS Ready To Unveil Strengthened QI Scheme

by Glen Shapiro, LawAndTax-News.com, New York

17 July 2008

The US Internal Revenue Service is set to beef up the Qualified Intermediary (QI) program as part of a new crackdown on tax evaders using foreign bank accounts.

According to reports, under the new rules, foreign banks would have to tell the IRS who was the ultimate holder of the account and the beneficiary of interest income, and if that indivdual was an American, file a tax form with the agency and withhold tax at 28%. Failure to comply with the new rules could result in criminal prosecution.

Reports have also suggested that the IRS will allow foreign banks in the program to use third-party databases, such as those maintained by credit reporting firms, to help determine the identity of their clients.

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.

Barry Shott, the IRS's deputy commissioner of international affairs, revealed to Bloomberg that the agency was attempting to "pierce the veil" of banking secrecy in certain offshore jurisdictions.

"It's going to happen in the near future. This is not a long-term project," he said.

The new rules are also expected to place a stronger obligation on audit firms to report cases of suspected fraud or tax evasion to the US authorities.

Currently, banks participating in the QI program are subject to an external audit every three years, but the IRS believes that the system lacks teeth since the rules do not require auditors, usually one of the major accounting firms, to report suspicious activity. There have also been suggestions that some banks escape audit altogether because the rules allow for waivers in certain situations.

The QI program is expected to be high on the agenda at a hearing of the Senate Subcommittee on Investigations on Thursday, which has been called to discuss how financial institutions located in offshore jurisdictions, including Liechtenstein and Switzerland, may be engaged in banking practices that could facilitate, and in some instances have resulted in, tax evasion and other misconduct by US clients.

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