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IRS to Close Loopholes in U.S. Tax Accords after UBS Bankers Guilty Plea (Shell CFO Peter Voser is a director of UBS)




IRS Set to Close Tax Loopholes for Non-U.S. Banks (Update1) 

By Ryan J. Donmoyer

July 16 (Bloomberg) — The Internal Revenue Service will close loopholes in its agreements with foreign banks that Swiss lender UBS AG and its clients allegedly exploited to shield $20 billion in assets from U.S. taxes, an agency official said.

Barry Shott, the IRS’s deputy commissioner of international affairs, said in an interview the crackdown will make it harder for Americans to conceal assets in offshore shell companies. The agency for the first time will require accounting firms to report any activity that may constitute fraud as defined by the U.S., he said.

“We’re trying to pierce the veil,” Shott said. “It’s going to happen in the near future. This is not a long-term project.”

The IRS is putting the finishing touches on the new rules one day before the Senate Permanent Subcommittee on Investigations releases a report on secret accounts at Zurich- based UBS and Liechtenstein’s LGT Group.

The new rules, at least two years in the making, are aimed at tightening enforcement of so-called Qualified Intermediary contracts. The QI program was adopted in 2000 to help the IRS keep track of U.S. customers’ money in foreign banks.

Under the program, foreign banks agree to confirm U.S. depositors’ identities and notify the IRS of income earned in the accounts. In exchange, the banks can eliminate withholding taxes or withhold taxes at favorable rates. Without the agreement, they would be required to withhold 30 percent.

External Audits

Banks participating in the program also must agree to be examined by external auditors approved by the IRS. Foreign banks generally agree to take part in order to maintain access to U.S. markets.

The new rules would require banks to identify the actual owner of an account’s assets and the recipient of any interest payments. If the individual is an American, the bank must file a 1099 tax form with the IRS and withhold taxes at a 28 percent rate or face possible criminal charges, Shott said.

Shott said the IRS is still in discussions with the Treasury Department over whether to make the rules retroactive.

In court papers filed last month, the IRS quoted former UBS official Bradley Birkenfeld as saying the bank separated clients into those willing to comply with disclosure rules and those who wanted to remain hidden. Many of the clandestine depositors hid assets by using layers of shell companies.

Shell Companies

The new rules would require foreign banks to sift through layers of offshore shell companies to determine whether Americans ultimately control the accounts, Shott said.

Under current rules, auditors can ignore suspicious activity because the definition of fraud varies from country to country.

“We’re going to say if you’re going to work with a QI, you’re going to be using a U.S. definition,” Shott said.

Rohini Pragasam, a spokeswoman for UBS in New York, declined to comment on the planned IRS action.

The QI program is expected to be among the issues focused on at tomorrow’s Senate hearing. Martin Liechti, UBS’s head of international wealth management business for the Americas, IRS Commissioner Douglas Shulmanand four Americans with secret bank accounts are scheduled to testify.

About 5,000 foreign banks participated in the QI program in 2005, according to a December 2007 report by the Government Accountability Office, the investigative agency for Congress.

Since the program began, the IRS has revoked 100 Qualified Intermediary agreements, Shott said. About 600 were placed in default, which requires the participating banks to answer additional questions to satisfy IRS concerns about their compliance with the terms of the agreement.

To contact the reporter on this story: Ryan J. Donmoyer in Washington at[email protected]

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