On July 2nd, I reported here on a court's ruling in favor of the IRS in its attempt to get UBS to divulge the name of its wealthy clients who had engaged in offshoring of their assets, probably to the tune of some $20 billions. A commenter suggested that UBS would be unlikely to comply with the summons, given its stake in bank secrecy. Of course, the IRS has an ace up its sleeve, in the form of a UBS banker who has pled guilty and is cooperating on revealing information about the bank's secret operations. But surely long-drawn-out litigation is not a reasonable way for the IRS to learn about vast sums of cash sequestered abroad in (or through) well-known banks.
Now there is a breaking story by Ryan Donmoyer (Bloomberg) about the IRS's larger response to the problem--a crackdown on the banks for exploiting loopholes in the "qualified intermediary" rules issued in 2000 and a requirement that accounting firms report any suspicious activity that looks like fraud as defined under U.S. law. The Bloomberg report quotes Barry Shott, deputy commissioner for international affairs, as saying: "We're trying to pierce the veil. ... It's going to happen in the near future. This is not a long-term project.''
The qualified intermediary rules permit foreign banks to act as the conduit to their clients under simplified reporting and withholding rules, so long as they "know their clients" and provide certain aggregate information to the IRS. See this description on the IRS website. According to the report, new rules several years in the making but to be released shortly will require banks to identify actual owners of accounts and recipients of interest payments. If the owner is an American, foreign banks will be required to file 1099 forms and withhold taxes.
Banks for years didn't bother to file with withholding agents the information on their clients that they were supposed to file under the withholding rules, justifying it as too hard to administer. When the new withholding regulations were released in the later part of the 1990s that provided for qualified intermediaries who would "know their customers" and thus be able to serve as intermediaries and certify the beneficial owner status on their behalf, I was a fledgling tax associate in New York and found the new withholding regulations enormously complicated. Yet I couldn't help wondering, given all the talk about corporate and wealthy individual tax shelters, if foreign banks were sufficiently trustworthy to use the qualified intermediary rules appropriately. We've seen now that at least some were not. It's about time to issue new, tighter rules and require 1099 interest reporting for Americans.
As for accountants, they are supposed to be performing a public service when they conduct audits as objectively independent gatekeepers, though the familiarity and economics pushes them towards considerable friendliness with the enterprise being audited. Accountants know a great deal about their clients (or could easily know a great deal) and in some ways can facilitate fraud. It is appropriate to require them to report suspicious activities.
When all is said and done, the crackdown on banks and accounting firms is on target, though about 8 years late. Neither has any business helping the ultra-wealthy avoid the pittance of tax due on their income.
In another story, UBS is now buying back $3.5 billion of the auction-rate preferred that it sold to investors as practically equivalent to cash, leading to lawsuits by investors (and states) claiming fraud. See this story on Bloomberg.com.
Will foreign banks learn anything from these difficulties with the IRS and SEC, or will they continue to find exploitable loopholes that permit them to make significant profits from activities that are legally questionable?
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