US Taxpayers and the IRS Qualified Intermediary Program

The IRS Qualified Intermediary Program has heightened scrutiny as a

result of the federal investigation into the Swiss Bank, UBS (the
world's largest private bank). U.S. Prosecutors allege UBS deliberately
abused the Qualified Intermediary Program ("QI Program"), selling
offshore 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 hiding
income in undeclared accounts is illegal. Foreign banks who violate the
Qualified Intermediary Program rules may be denied access to the
entire American Banking System.

In 2001, the IRS established a Qualified Intermediary Program (QI

Program) to attract foreign investors to U.S. securities (more than
7000 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 (typically
30%) and send the tax money owed to the IRS.

As of October 13, 2008, the IRS Announcement 2008-98 has proposed

new rules to stop rampant tax evasion (i.e., American investors hide
behind offshore shell companies and trusts set up by the bank). Under
the new rules, foreign banks in the QI Program must now actually
investigate, determine and report to the IRS whether U.S. investors
(or their legal entities) are the holders of the foreign accounts they
open (U.S. Taxpayers are required by law to report offshore accounts
on 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 withheld
taxes of only 5% on that amount in 2003.

The proposed new rules will go into effect in 2010. Under the new QI
Program rules: Participating banks must alert the IRS to any potential
fraud they detect, whether through their own internal controls,
complaints from employees or investigations by regulators.
The IRS will audit small samples of individual bank accounts in the
program (on a "no-names basis"), to determine whether U.S. investors
have control over foreign entities (set up by the banks).
Participating banks must hire external auditors to monitor their
compliance. The auditors must identify the bank employees
responsible for preventing tax abuses. The external auditor will be
required to report "red flags" to the IRS. Banks using foreign-based
external auditors (including foreign branches of U.S. auditors) will have
to work with an American auditor, who will accept joint responsibility
for the audit.

As stated by Douglas Shulman, IRS Commissioner, "This is an

important program, and we cannot tolerate anyone abusing or skirting
the requirements."

U.S. Taxpayers who do not disclose offshore accounts, do not report

income, and do not pay their tax may commit perjury (on filing a false
tax return) and may be subject to 3 felonies and a misdemeanor - up
to 14 years in jail.

In addition, U.S. Taxpayers who do not disclose foreign bank accounts

(with over $10,000) by filing Form TDF-90.22.1 (Report to Foreign
Bank and Financial Accounts) are subject to a felony (up to 5 years in
jail) and subject to a civil penalty of $100,000, or 50% of accounts
(whichever is greater).

U.S. Taxpayers may be subject to jeopardy assessments (i.e., IRS pre-

audit seizure of assets). The IRS is aggressively pursuing U.S.
Taxpayers and encouraging voluntary disclosures. Under Olenicoff, the
Taxpayer plead guilty to a felony, paid civil tax fraud penalty and is an
ongoing material witness.

Gary S. Wolfe
A PROFESSIONAL LAW CORPORATION
9100 Wilshire Blvd., Suite 530 East
Beverly Hills, CA, 90212
Tel: 310-274-8847 Fax: 310-274-3118
http://www.gswlaw.com
email: gsw@gswlaw.com