US Taxpayers and the IRS Qualified Intermediary Program
The IRS Qualified Intermediary Program has heightened scrutiny as aresult of the federal investigation into the Swiss Bank, UBS (theworld's largest private bank). U.S. Prosecutors allege UBS deliberatelyabused the Qualified Intermediary Program ("QI Program"), sellingoffshore banking services to U.S. Taxpayers to evade taxes.U.S. Prosecutors allege UBS helped American clients hide as much as$20B in assets offshore, evading at least $300M in taxes.Using offshore accounts is not illegal for U.S. Taxpayers, but hidingincome in undeclared accounts is illegal. Foreign banks who violate theQualified Intermediary Program rules may be denied access to theentire American Banking System.In 2001, the IRS established a Qualified Intermediary Program (QIProgram) to attract foreign investors to U.S. securities (more than7000 foreign banks participate in the program). Until October 13,2008, the IRS allowed the banks to promise to identify clients,withhold any taxes due on U.S. securities in their account (typically30%) and send the tax money owed to the IRS.As of October 13, 2008, the IRS Announcement 2008-98 has proposednew rules to stop rampant tax evasion (i.e., American investors hidebehind offshore shell companies and trusts set up by the bank). Underthe new rules, foreign banks in the QI Program must now actuallyinvestigate, determine and report to the IRS whether U.S. investors(or their legal entities) are the holders of the foreign accounts theyopen (U.S. Taxpayers are required by law to report offshore accountson the annual IRS Form 1040 Tax Return).According to the IRS, foreign banks in the QI Program hold more than$35 billion abroad in accounts for U.S. individual investors,partnerships, trusts, family foundations and corporations, but withheldtaxes of only 5% on that amount in 2003.The proposed new rules will go into effect in 2010. Under the new QIProgram rules: Participating banks must alert the IRS to any potentialfraud they detect, whether through their own internal controls,complaints from employees or investigations by regulators.