US Law Proposes Clamp Down On Offshore Bank Accounts

by Mike Godfrey, Tax-News.com, Washington

29 October 2009

Senior Congressional Democrats have unveiled legislative proposals that would give the Internal Revenue Service (IRS) new tools to "detect, deter and discourage" the use of foreign bank accounts for the purposes of avoiding US taxes.

The Foreign Account Tax Compliance Act, introduced into both chambers of Congress on October 27, blends proposals included in President Obama’s 2010 budget as well as Senator Carl Levin's 'Stop Tax Haven Abuse Act' and draft legislation published by Senate Finance Committee Max Baucus earlier in the year.

Under the new bill, foreign financial institutions, foreign trusts, and foreign corporations would be forced into providing information about their US account holders, grantors, and owners.

If enacted the Foreign Account Tax Compliance Act would:

• Impose a 30% withholding tax on payments to foreign financial institutions and other entities unless they acknowledge the existence of offshore accounts to the IRS and disclose relevant information including account ownership, balances and amounts moving in and out of the accounts.
• Require individuals and entities to report offshore accounts with values of USD50,000 or more on their tax returns.
• Extend the statute of limitations to 6 years when offshore accounts are unreported or misreported (the current statute of limitations on tax audits is 3 years).
• Require advisors who help set up offshore accounts to disclose their activities or pay a penalty.
• Require electronic filing of information reports about withholding on transfers to foreign accounts to enable the IRS to better match reports to tax returns.
• Strengthen rules and penalties with regard to foreign trusts, including rules to determine whether distributions from foreign trusts are going to US beneficiaries and reporting requirements on US transfers to foreign trusts.
• Clarify the definition of outgoing US dividend payments that are received by foreign persons so they cannot be disguised as other types of distributions in an effort to avoid US taxes.

The bill was introduced in the Senate by Baucus and Sen. John Kerry, and in the House of Representatives by Reps. Charles Rangel and Richard Neal.

Baucus commented: “Last March, I circulated a preliminary draft of offshore compliance legislation to obtain stakeholder input to make the proposal even stronger, more durable and more likely to become law. The proposal offered today is the culmination of that effort and represents the best ideas from both the House and the Senate."

Rangel predicted that the bill would make banking secrecy "a thing of the past".

“This bill offers foreign banks a simple choice – if you wish to access our capital markets, you have to report on US account holders. I am confident that most banks will do the right thing," he stated.

The new proposals have been welcomed by the Obama administration, with Treasury Secretary Tim Geithner noting that they chime with the White House's aspirations to create a "level playing field" with regard to tax.

"This legislation fits well into the administration's dual-track strategy of improving our domestic tax laws while increasing global cooperation on tax information exchange to help narrow the tax gap and create the fairer tax system we need," Geithner concluded.

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