March 17, 2009
Statement of Senator Carl Levin Before Senate Finance Committee Hearing on Tax Issues Related to Ponzi Schemes and an Update on Offshore Tax Haven Legislation

"Scope of the Problem

Each year, the United States loses an estimated $100 billion from U.S. taxpayers using offshore tax schemes to dodge their U.S. tax obligations. Those offshore shenanigans cheat honest U.S. taxpayers who pay their fair share and rob the U.S. Treasury of funds needed for the operations of our government.

The Permanent Subcommittee on Investigations, which I chair, has dedicated significant effort to combating offshore tax abuse. We’ve exposed some of the facilitators – the lawyers, accountants, broker-dealers, company formation agents, trust administrators, and others that help clients dodge their U.S. tax obligations.

We’ve exposed some of the schemes, such as mass marketed tax shelters peddled as investment strategies, networks of offshore trusts and corporations with hidden assets, and deceptive offshore transactions used to recast taxable income as allegedly tax free payments.

Here are just a few of the examples offshore tax abuse uncovered by the Subcommittee:

Enron, with its 440 plus shell corporations in the Cayman Islands;
KPMG, which sold the abusive FLIP and OPIS tax shelters employing shell Cayman Island corporations as part of a scheme to generate phony losses;
Two Americans who transferred over $190 million in stock options to 58 offshore trusts and corporations, which they secretly controlled, and which they used to enjoy over $700 million in offshore profits, while paying no taxes on that income; and
A U.S. tax shelter promoter that relied on $9.6 billion worth of phantom stock trades between two offshore shell companies to generate fake stock losses which were then used to shelter billions in income for six U.S. taxpayers.
Offshore banks in tax havens that used code names, subterfuge, and shell companies to help Americans hide billions of dollars from the Treasury.

The hallmark of all these schemes is the use of offshore jurisdictions that make it difficult, if not impossible for the IRS to find out what the facts really are.

Switzerland and a major Swiss bank UBS provide a timely example. Just last month UBS entered into a deferred prosecution agreement with the Department of Justice in which they admitted to participating in a scheme with certain U.S. taxpayers to defraud the United States of tax revenue.

UBS agreed to pay a $780 million fine. Now our government is attempting to identify and recover unpaid taxes from the tens of thousands of U.S. citizens who hid $18 billion in income and assets in UBS accounts.

UBS has refused to provide us the names of their clients, saying that to do so would violate Swiss law. These actions show the inadequacies of our tax treaties in protecting U.S. interests.

Stopping Offshore Tax Abuses

Tax havens sell secrecy to attract clients to their shores. They peddle secrecy the way other countries advertise high quality products or services. And though they go to great lengths to justify and defend their practices, that secrecy is utilized by thousands of people to cloak tax evasion and other misconduct.

The “Stop Tax Haven Abuse Act,” S. 506, which I have introduced with Senators Whitehouse, McCaskill, Nelson, and Shaheen and as cosponsors, offers a powerful set of tools to stop offshore abuses and put tax dollars in the U.S. Treasury, where they belong.

Our bill would:

ESTABLISH PRESUMPTIONS TO COMBAT OFFSHORE SECRECY (§101) by allowing U.S. tax and securities law enforcement to treat for tax purposes non-publicly traded offshore entities as being controlled by the U.S. taxpayer who formed them, sent them assets, received assets from them, or benefited from them, unless the taxpayer shows otherwise.

IMPOSE TOUGHER REQUIREMENTS ON U.S. TAXPAYERS USING OFFSHORE SECRECY JURISDICTIONS (§101) by authorizing Treasury to develop a list of jurisdictions starting from an initial 34 jurisdictions identified in IRS court proceedings.

AUTHORIZE SPECIAL MEASURES TO STOP OFFSHORE TAX ABUSES (§102) by giving Treasury authority to take special measures against foreign jurisdictions and financial institutions that impede U.S. tax enforcement, including by prohibiting U.S. banks from doing business with them.

CURE THE UGLAND HOUSE PROBLEM OF SHELL COMPANIES RUN FROM THE UNITED STATES CLAIMING FOREIGN STATUS (§103) by treating foreign corporations that are managed primarily from the United States and are publicly traded or have gross assets of $50 million or more as U.S. domestic corporations for income tax purposes.

STRENGTHEN DETECTION OF OFFSHORE ACTIVITIES (§105) by requiring U.S. financial institutions that open accounts for foreign entities controlled by U.S. clients, open accounts in offshore secrecy jurisdictions for U.S. clients, or establish entities in offshore secrecy jurisdictions for U.S. clients, to report such actions to the IRS.

CLOSE OFFSHORE TRUST LOOPHOLES (§106) by taxing distributions, gifts and loans from foreign trusts of real estate, artwork, or jewelry to U.S. persons, and treating U.S. persons who receive offshore trust assets as trust beneficiaries.

CLOSE THE OFFSHORE TAX DIVIDEND LOOPHOLE (§108) by treating all U.S. corporate dividend-based payments to non-U.S. persons as taxable income subject to withholding.

EXPAND IRS REPORTING REQUIREMENTS (§109) for passive foreign investment companies (PFICs) to include not only U.S. persons who own a PFIC but also those who have formed, sent assets to, received assets from, or benefitted from a PFIC.

REQUIRE ANTI-MONEY LAUNDERING PROGRAMS (§203) for hedge funds and company formation agents to ensure they screen their clients and any offshore funds.

STRENGTHEN PENALTIES (§§301-302) on persons who aid or abet tax evasion by increasing the maximum fine to 150% of their gains, and on corporate insiders who hide offshore stock holdings by increasing the maximum fine to $1 million per violation of U.S. securities laws.

BAN TAX SHELTER PATENTS (§303) by prohibiting the U.S. patent office from issuing patents for “inventions” designed to minimize, eliminate, or defer taxes.

These provisions represent a partial list of the innovative measures we’ve included in the bill to strengthen the ability of federal regulators to combat offshore tax haven and tax shelter abuses.

One bill provision that has already caught the attention of some offshore tax havens is a requirement that the Treasury Department maintain a list of “Offshore Secrecy Jurisdictions” that have corporate, bank, or tax secrecy rules or industry practices, and a poor record of cooperation with U.S. tax enforcement. S. 506 doesn’t attempt to do what we don’t have the power to do: change any jurisdiction’s secrecy laws or tax rates.

Instead, the bill aims at making it more difficult for U.S. taxpayers to use offshore secrecy laws and practices to hide essential facts from the IRS. It would greatly strengthen the IRS’ ability to collect tax dollars hidden offshore. Americans will still be free to utilize banks in tax haven jurisdictions for legitimate purposes, but in a court of law the burden will shift to the taxpayers to prove that they don’t control the corporations and trusts they’ve established or financed in those jurisdictions.

Recent Developments

Last week, in response to growing international pressure and spurred in part by the work of my Subcommittee, several offshore secrecy jurisdictions, including Andorra, Austria, Belgium, Liechtenstein, Luxembourg, and Switzerland, announced significant changes in how they will apply their bank secrecy laws.

Each of these countries seems to say that it will no longer use secrecy laws to help people evade taxes, and will begin exchanging information on all types of alleged tax evasion, not just so-called ‘tax fraud.’

That is a very welcome development which is long overdue, and we look forward to effective implementation of the promised new policies. Hopefully, dozens of other secrecy jurisdictions which have cost the U.S. Treasury so many billions of dollars will follow suit.

At the same time, the promised new limits on offshore secrecy will not only likely take years to implement, but even after taking effect, will not eliminate all offshore tax abuses. For example, even after implementation of the proposed reforms, the IRS will still be at a disadvantage in trying to obtain notice of abusive accounts, the names on those accounts, and in proving beneficial ownership and control of the accounts in court.

That’s why Congress needs to enact the Stop Tax Haven Abuse Act to strengthen U.S. offshore tax enforcement and help end offshore abuses that enable U.S. tax cheats to offload their tax burden onto the backs of honest, hardworking taxpayers.

Conclusion

These are exceedingly difficult times. The economy is in turmoil; the unemployment rate is as high as it has been in a generation and rising. Congress just passed an unprecedented stimulus package in order to get the economy back on track, but it comes at a significant cost to the Treasury.

Now more than ever, the government needs to collect all of the money it is lawfully owed. Tax cheats make it harder to maintain our highways, protect our borders, advance medical research, and inspect our food.

They make it difficult to give needed tax relief to small businesses and middle-income victims of the alternative minimum tax. And at a time when the government must borrow hundreds of billions of dollars to shore up our financial system and stimulate our economy, tax cheats deepen the deficit and threaten the economic well-being of our children and grandchildren.

We must vigorously enforce our tax laws. S. 506 offers a set of practical and innovative tools that would help shut down offshore tax cheats and begin to reduce the $100 billion offshore tax gap that forces honest taxpayers to shoulder a greater tax burden than they would otherwise have to bear.

I applaud Chairman Baucus and Ranking Member Grassley for their willingness to tackle offshore tax abuses. I look forward to working with the Committee on legislation this year to reduce this unfair drain on our treasury."

INTRODUCED:

Statement of Senator Carl Levin on President Obama's Support of Stop Tax Haven Abuse Act


Sen. Carl Levin, D-Mich., chairman of the Senate Permanent Subcommittee on Investigations, issued the following statement today:

“President Obama’s support for the Stop Tax Haven Abuse Act, as announced by Treasury Secretary Geithner at a Ways and Means Committee hearing today, is very welcome news and greatly improves the chances of an offshore tax bill becoming law this year.

It also sends a strong signal to tax havens that this Administration is not going to tolerate the kind of offshore tax abuses that have been draining $100 billion a year from the U.S. Treasury and that, as a result, offload the tax burden onto the backs of honest taxpayers.

I hope that Secretary Geithner will now add his voice to the chorus of nations calling for action to be taken at the G20 meeting in April to clamp down on offshore secrecy jurisdictions that impede tax enforcement.”

From the Act

"Each of the following foreign jurisdictions, which have been previously and publicly identified by the Internal Revenue Service as secrecy jurisdictions in Federal court proceedings, shall be deemed listed by the Secretary as an offshore secrecy jurisdiction:

`(i) Anguilla.

`(ii) Antigua and Barbuda.

`(iii) Aruba.

`(iv) Bahamas.

`(v) Barbados.

`(vi) Belize.

`(vii) Bermuda.

`(viii) British Virgin Islands.

`(ix) Cayman Islands.

`(x) Cook Islands.

`(xi) Costa Rica.

`(xii) Cyprus.

`(xiii) Dominica.

`(xiv) Gibraltar.

`(xv) Grenada.

`(xvi) Guernsey/Sark/Alderney.

`(xvii) Hong Kong.

`(xviii) Isle of Man.

`(xix) Jersey.

`(xx) Latvia.

`(xxi) Liechtenstein.

`(xxii) Luxembourg.

`(xxiii) Malta.

`(xxiv) Nauru.

`(xxv) Netherlands Antilles.

`(xxvi) Panama.

`(xxvii) Samoa.

`(xxviii) St. Kitts and Nevis.

`(xxix) St. Lucia.

`(xxx) St. Vincent and the Grenadines.

`(xxxi) Singapore.

`(xxxii) Switzerland.

`(xxxiii) Turks and Caicos.

`(xxxiv) Vanuatu.

Senate, House Members Introduce Stop Tax Haven Abuse Act

Stating that “tax havens are engaged in economic warfare against the United States, and honest, hardworking Americans,” Sen. Carl Levin, D-Mich., Sen. Sheldon Whitehouse, D-RI, Sen. Claire McCaskill, D-Mo. and Sen. Bill Nelson, D-Fla., today introduced comprehensive legislation to stop offshore tax haven and tax shelter abuses.

A companion bill was introduced in the U.S. House of Representatives by over 40 Members led by Rep. Lloyd Doggett, D-Tex. and Rep. Rosa DeLauro, D-Conn.

Offshore tax abuses cost the U.S. Treasury an estimated $100 billion each year in lost tax revenues, including $40-$70 billion from individuals and $30-$60 billion from corporations. Abusive domestic tax shelters cost tens of billions of dollars more.

“Offshore tax haven and tax shelter abuses are undermining the integrity of our tax system and increasing the tax burden on middle income families,” said Levin, chairman of the Permanent Subcommittee on Investigations which has conducted numerous inquiries into offshore abuses.

“We cannot tolerate $100 billion in offshore tax abuses burning a hole through our budget each year. We can fight back against secrecy jurisdictions and shut down offshore tax abuses if we have the political will. This bill provides a powerful set of new tools to clamp down on offshore tax and tax shelter abuses.”

“When over 80% of our largest companies have subsidiaries in tax havens, and one major recipient of taxpayer bailout monies achieves a 1% effective tax rate through ‘changes in geographic earnings mix,’ it is long past time to take effective action to stop offshore tax dodging.” said Congressman Doggett, a senior member of the House Ways and Means and Budget Committees, and a long-time foe of offshore tax havens.

“These outrageous tax havens add to the soaring budget deficit and shift the tax burden to small businesses and families, who play by the rules.”

The Stop Tax Haven Abuse Act is an improved version of legislation introduced in the last Congress by Levin, Sen. Norm Coleman, R-Minn., then Sen. Barack Obama, and others in the Senate and by Doggett and over 40 cosponsors in the House, including then Rep. Rahm Emanuel.

The bill has been strengthened with the addition of three new provisions that would:

(1) treat foreign corporations managed and controlled in the United States as domestic corporations for income tax purposes;

(2) close an offshore tax dividend loophole that enables non-U.S persons to dodge payment of U.S. taxes on U.S. stock dividends; and

(3) expand the tax return reporting requirements for passive foreign investment corporations (PFICs) to include U.S. persons who don’t own a PFIC, but have formed, sent assets to, received assets from, or benefitted from a PFIC.

The bill will be referred to the Finance Committee in the Senate and the Ways and Means Committee in the House.

Among other measures, the 84-page bill would:

ESTABLISH PRESUMPTIONS TO COMBAT OFFSHORE SECRECY (§101) by allowing U.S. tax and securities law enforcement to treat for tax purposes non-publicly traded offshore entities as being controlled by the U.S. taxpayer who formed them, sent them assets, received assets from them, or benefited from them, unless the taxpayer proves otherwise.

IMPOSE TOUGHER REQUIREMENTS ON U.S. TAXPAYERS USING OFFSHORE SECRECY JURISDICTIONS (§101) by authorizing Treasury to develop a list of jurisdictions starting from an initial 34 jurisdictions identified in IRS court proceedings.

AUTHORIZE SPECIAL MEASURES TO STOP OFFSHORE TAX ABUSES (§102) by giving Treasury authority to take special measures against foreign jurisdictions and financial institutions that impede U.S. tax enforcement.

CURE THE UGLAND HOUSE PROBLEM OF SHELL COMPANIES RUN FROM THE UNITED STATES CLAIMING FOREIGN STATUS (§103) by treating foreign corporations that are publicly traded or have gross assets of $50 million or more and whose management and control occurs primarily in the United States as U.S. domestic corporations for income tax purposes.

STRENGTHEN DETECTION OF OFFSHORE ACTIVITIES (§105) by requiring U.S. financial institutions that open accounts for foreign entities controlled by U.S. clients, open accounts in offshore secrecy jurisdictions for U.S. clients, or establish entities in offshore secrecy jurisdictions for U.S. clients, to report such actions to the IRS.

CLOSE OFFSHORE TRUST LOOPHOLES (§106) by taxing distributions, gifts and loans from foreign trusts of real estate, artwork, or jewelry to U.S. persons, and treating U.S. persons who receive offshore trust assets as trust beneficiaries.

CLOSE THE OFFSHORE TAX DIVIDEND LOOPHOLE (§108) by treating all U.S. corporate dividend-based payments to non-U.S. persons as taxable income subject to withholding.

EXPAND IRS REPORTING REQUIREMENTS (§109) for passive foreign investment companies (PFICs) to include not only U.S. persons who own a PFIC but also those who have formed, sent assets to, received assets from, or benefitted from a PFIC.

REQUIRE ANTI-MONEY LAUNDERING PROGRAMS (§203) for hedge funds and company formation agents to ensure they screen their clients and any offshore funds.

STRENGTHEN PENALTIES (§§301-302) on tax shelter promoters by increasing the maximum fine to 150% of their ill-gotten gains, and on corporate insiders who hide offshore stock holdings by increasing the maximum fine to $1 million per violation of U.S. securities laws.

BAN TAX SHELTER PATENTS (§303) by prohibiting the U.S. patent office from issuing patents for “inventions” designed to minimize, avoid, or defer taxes.

Senator Levin, Reps. DeLauro, Doggett and Levin Urge the Administration to Address Tax Haven Abuse in Budget

In a letter to Office of Management and Budget Director Peter Orszag, U.S. Senator Carl Levin (D-MI) and Reps. Rosa DeLauro (D-CT), Lloyd Doggett (D-TX) and Sander Levin (D-MI) today urged the Obama Administration to include measures from the Stop Tax Haven Abuse Act in its upcoming fiscal year 2010 budget proposal in order to prevent taxpayers from hiding their incomes offshore at an annual cost of approximately $100 billion to the federal government.

The letter cites a recently released Government Accountability Office (GAO) report which found that 83 of the 100 largest publicly traded U.S. corporations, including several that are receiving billions of dollars in taxpayer money through the Treasury’s financial rescue program, and 63 of the 100 largest U.S. federal contractors reported having subsidiaries in tax havens or financial privacy jurisdictions.

The Stop Tax Haven Abuse Act, introduced in the House by Representative Doggett and the Senate by Senator Levin last session (H.R.2136, S.681) and soon to be reintroduced, would deter the use of offshore secrecy jurisdictions, strengthen detection of offshore abuses, increase penalties on tax shelter promoters, close offshore tax loopholes, empower the Treasury Department to act against foreign jurisdictions that impede U.S. tax enforcement, beef-up disclosure of offshore transactions, and prohibit the issuance of tax shelter patents.

“We write to express our deep concern with the continued practice by most of the United States’ largest publicly traded companies - including many federal contractors and recipients of financial bailout funds - of using offshore tax havens or financial privacy jurisdictions to avoid paying U.S. taxes,” the lawmakers write in the letter.

“With estimated annual revenue losses of $100 billion a year as a result of corporations hiding their income offshore, we strongly urge you to consider proposals for shutting down offshore tax abuses as you craft the administration’s proposed fiscal year 2010 budget.”

Levin, Coleman, Obama Introduce Stop Tax Haven Abuse Act -
Bill targets $100 billion in lost tax revenue each year

Sen. Carl Levin, D-Mich., Sen. Norm Coleman, R-Minn., and Sen. Barack Obama, D-Ill., introduced comprehensive legislation to stop offshore tax haven and tax shelter abuses.

For more than four years, Levin and Coleman, the Chairman and senior Republican of the Permanent Subcommittee on Investigations, have led an in-depth Subcommittee investigation into offshore tax havens, abusive tax shelters, and the professionals who design, market, and implement these tax dodges.

Experts have estimated that the total loss to the Treasury from offshore tax evasion alone approaches $100 billion per year, including $40 to $70 billion from individuals and another $30 billion from corporations engaging in offshore tax evasion. Abusive tax shelters add tens of billions of dollars more.

“With a $345 billion annual tax gap and a $248 billion annual deficit,” said Levin, “we cannot tolerate a $100 billion drain on our Treasury each year from offshore tax abuses.

We cannot tolerate tax cheats offloading their unpaid taxes onto the backs of honest taxpayers. Offshore tax havens have declared economic war on honest U.S. taxpayers by helping tax cheats hide income and assets that should be taxed in the same way as other Americans.

This bill provides a powerful set of new tools to clamp down on offshore tax and tax shelter abuses.”

“It is simply unacceptable that some individuals are using offshore tax havens and secrecy jurisdictions to shelter trillions of dollars in assets from taxation,” said Coleman.

“These tax schemes cause a massive revenue shortfall and, sadly, it is the honest American taxpayer who must bear a disproportionate burden of investing in areas like education and healthcare.

We are introducing this bill to close these loopholes, shut down offshore tax schemes, and ensure that every American pays their fair share of taxes.”

“This is a basic issue of fairness and integrity,” said Obama. “We need to crack down on individuals and businesses that abuse our tax laws so that those who work hard and play by the rules aren’t disadvantaged.”

The Stop Tax Haven Abuse Act is a strengthened version of a tax reform bill that Levin, Coleman, and Obama introduced in the last Congress. The legislation was strengthened as a result of a year-long Subcommittee investigation which resulted in a hearing and report on August 1, 2006, examining a series of case studies showing how U.S. taxpayers are using offshore secrecy jurisdictions to dodge U.S. taxes.

“None of these offshore schemes would work,” said Levin, “without the secrecy that prevents U.S. agencies from enforcing our laws. Our bill offers innovative ways to combat offshore secrecy. We can’t let the offshore tax havens hide $100 billion in U.S. tax revenues which are needed to protect our troops, fund health care and education, and meet the other needs of American families.”

Among other measures, the 68-page bill would:

ESTABLISH PRESUMPTIONS TO COMBAT OFFSHORE SECRECY by allowing U.S. tax and securities law enforcement to presume that non-publicly traded, offshore corporations and trusts are controlled by the U.S. taxpayers who formed them or sent them assets, unless the taxpayer proves otherwise;

IMPOSE TOUGHER REQUIREMENTS ON U.S. TAXPAYERS USING OFFSHORE SECRECY JURISDICTIONS by listing 34 jurisdictions which have already been named in IRS court filings as probable locations for U.S. tax evasion;

AUTHORIZE SPECIAL MEASURES TO STOP OFFSHORE TAX ABUSES by giving Treasury authority to take special measures against foreign jurisdictions and financial institutions that impede U.S. tax enforcement;

STRENGTHEN DETECTION OF OFFSHORE ACTIVITIES by requiring U.S. financial institutions that open accounts for foreign entities controlled by U.S. clients, open accounts in offshore secrecy jurisdictions for U.S. clients, or establish entities in offshore secrecy jurisdictions for U.S. clients, to report such actions to the IRS;

CLOSE OFFSHORE TRUST LOOPHOLES by taxing offshore trust income used to buy real estate, artwork and jewelry for U.S. persons, and treating as trust beneficiaries those persons who actually receive offshore trust assets;

STRENGTHEN PENALTIES on tax shelter promoters by increasing the maximum fine to 150% of their ill-gotten gains, and on corporate insiders who hide offshore stock holdings by increasing the maximum fine on them to $1 million per violation of U.S. securities laws;

STOP TAX SHELTER PATENTS by prohibiting the U.S. Patent and Trademark Office from issuing patents for “inventions designed to minimize, avoid, defer, or otherwise affect liability for Federal, State, local, or foreign tax”; and

REQUIRE HEDGE FUNDS AND COMPANY FORMATION AGENTS TO KNOW THEIR OFFSHORE CLIENTS by requiring them to establish anti-money laundering programs like other U.S. financial institutions, under regulations to be issued by the Treasury Department.

TITLE I – Deterring the Use of Offshore Secrecy Jurisdictions for Tax Evasion

Establish presumptions for entities and transactions in Offshore Secrecy Jurisdictions. (§101)
Establishes rebuttable evidentiary presumptions in tax and securities legal proceedings for non publicly-traded entities located in Offshore Secrecy Jurisdictions. The presumptions are as follows:

Control – In a tax proceeding, if a U.S. person (other than a publicly traded corporation) directly or indirectly formed, transferred assets to, or was a beneficiary of, or received distributions from an Offshore Secrecy Jurisdiction entity, it will be presumed that the person exercised control over the entity.

Transfers of income – In a tax proceeding, any amount or thing of value
transferred to a U.S. person (other than a publicly traded corporation) directly or indirectly from an account or entity in an Offshore Secrecy Jurisdiction, or transferred from such a U.S. person directly or indirectly to an account or entity in an Offshore Secrecy Jurisdiction, will be presumed to represent previously unreported income to the U.S. person in the year of transfer.

Beneficial ownership – In a proceeding to enforce securities law, if a U.S. person (other than a publicly traded corporation) formed, transferred assets to, or benefited from an Offshore Secrecy Jurisdiction entity (other than a publicly traded corporation), it will be presumed that the person beneficially owned and exercised control over such entity, regardless of the nominal ownership.

Foreign financial accounts – Current law requires that U.S. taxpayers report to the IRS any foreign financial accounts containing at least $10,000 (known as an FBAR filing). Bill establishes presumption that any account in an Offshore Secrecy Jurisdiction contains funds sufficient to trigger this reporting requirement.

These presumptions are needed in civil judicial and administrative proceedings because the tax, corporate, or bank secrecy laws and practices of these jurisdictions make it nearly impossible for U.S. authorities to gain access to needed information. Presumptions may be rebutted by clear and convincing evidence. No evidence may be accepted from a non-U.S. person unless the person appears to testify in the proceedings.

Treasury and SEC are authorized to issue regulations or guidance to implement this section, and exempt classes of transactions, such as corporate reorganizations, that do not present the potential for abuse.

Determine “Offshore Secrecy Jurisdictions.” (§101)
Provides initial list of 34 Offshore Secrecy Jurisdictions, while giving Treasury Secretary discretion to add or subtract from the list using certain criteria. Initial list of jurisdictions was taken from IRS court filings identifying them as probable locations for U.S. tax evasion:

Anguilla Antigua and Barbuda Aruba Bahamas Barbados Belize Bermuda British Virgin Islands Cayman Islands Cook Islands Costa Rica Cyprus Dominica Gibraltar Grenada Guernsey/Sark/ Alderney Hong Kong Isle of Man Jersey Latvia Lichtenstein Luxembourg Malta Nauru Netherlands Antilles Panama Samoa St. Kitts and Nevis St. Lucia St. Vincent and the Grenadines Singapore Switzerland Turks and Caicos Vanuatu

Directs Treasury Secretary to list jurisdictions with secrecy laws or practices that unreasonably restrict U.S. tax authorities from obtaining needed information, unless the jurisdiction has information exchange practices that effectively overcome those secrecy barriers.

Authorize special measures against foreign jurisdictions, financial institutions, and others that impede U.S. tax enforcement. (§102)

Currently, Treasury has the authority under §311 of the Patriot Act (31 U.S.C. 5318(a)) to impose financial sanctions on foreign jurisdictions, financial institutions, or transactions found to be of “primary money laundering concern.”

Bill would authorize Treasury to impose the same sanctions on the same types of entities if Treasury finds them to be “impeding U.S. tax enforcement.” In addition, the bill would add to the list of possible sanctions the ability to deny foreign banks the authority to issue credit cards for use in the United States.

Allow more time for investigations involving Offshore Secrecy Jurisdictions. (§103)

Extends from three years to six years the amount of time IRS has after a return is filed to investigate and propose assessment of additional tax if the case involves an Offshore Secrecy Jurisdiction.

Increase disclosure of offshore accounts, transactions, and entities. (§104)
Requires any bank or securities firm that knows from its anti-money laundering due diligence that the beneficial owner of one of its foreign-owned financial accounts is a U.S. taxpayer, to file, in its role as withholding agent, a 1099 form reporting account income of that beneficial owner to the IRS.

Requires any financial institution directly or indirectly opening a financial account or creating an entity in an Offshore Secrecy Jurisdiction for a U.S. client to report the transaction to the IRS.

These filing requirements would be subject to the same penalties under Title 26 presently applicable to forms 1099 and W-2, and bank and securities regulators are given express authority to use their existing enforcement authority to address failures to report.

Prevent misuse of foreign trusts for tax evasion. (§105)
Attributes all powers and interests held by trust protectors of foreign trusts to the U.S. trust grantor.

Treats a U.S. person who receives or uses cash or other property from a foreign trust as a beneficiary of that trust, unless the exchange was for fair market value.

Expands the list of taxable trust distributions to include loans of real estate, marketable securities, and personal property of any kind, including artwork, furnishings and jewelry.

Amends tax code to treat foreign trusts with current or future U.S. beneficiaries, including contingent U.S. beneficiaries, as “grantor” (i.e. taxable) trusts, rather than limiting that treatment to trusts with current U.S. beneficiaries.

Limit legal opinion protection from penalties with respect to transactions involving Offshore Secrecy Jurisdictions. (§106)

Denies the penalty protections afforded by a legal opinion if the transaction involves an Offshore Secrecy Jurisdiction. Treasury is also authorized to exempt opinions that express a high confidence level regarding the tax treatment of the transaction and opinions on certain classes of transactions that are determined not to present the potential for abuse addressed by the bill.

TITLE II – Other Measures to Combat Tax Haven and Tax Shelter Abuses

Increase penalty for failing to disclose offshore holdings. (§201)

Imposes penalty of up to $1 million per violation of U.S. securities law on public companies or their officers, directors or major shareholders who knowingly fail to disclose offshore holdings that should have been reported to the SEC.

Set deadline for anti-money laundering rule for hedge funds. (§202)

Requires Treasury, in consultation with SEC, to finalize a proposed rule requiring unregistered investment companies, such as hedge funds and private equity funds, to establish anti-money laundering programs and submit suspicious activity reports. Requires rule to make it clear that such unregistered investment companies must use due diligence to evaluate investors supplying offshore funds and comply with same requirements as other financial institutions for producing records.

Apply anti-money laundering requirements to company formation agents. (§203)

Adds company formation agents to current list of those who must comply with Bank Secrecy Act reporting requirements.
Requires Treasury to adopt regulations applying Bank Secrecy Act requirements to company formation agents.

Strengthen summons in cases involving offshore secrecy jurisdictions. (§204)

Improves use of John Doe summonses in cases involving Offshore Secrecy Jurisdictions by:
allowing immediate summonses for U.S. correspondent account records of financial institutions located in an Offshore Secrecy Jurisdiction; authorizing courts to presume for any summons relating to transactions in Offshore Secrecy Jurisdictions that there is a reasonable basis for believing the case involves non-compliance with tax laws; and permitting a court to authorize John Doe summonses on an open-ended basis for three-year periods for project investigations, provided that the court exercises ongoing oversight of the IRS summonses. The bill requires GAO evaluation of this provision after five years.

Improve enforcement of foreign financial account reporting. (§205)

Clarifies the authority of IRS agents investigating Foreign Bank Account Report (FBAR) violations to use tax information in the investigations; simplifies the calculation of FBAR penalties by tying the penalty to the highest balance in the account during the reporting period; and clarifies that Suspicious Activity Reports may be used for civil, and not just criminal, tax law enforcement.

TITLE III – Preventing Abusive Tax Shelter Transactions

Strengthen tax shelter penalties

Strengthens penalties for:
promoting abusive tax shelters (§301)
knowingly aiding or abetting a taxpayer in understating tax liability (§302)

Prohibit tax shelter patents (§303)

Prohibits the issuance of any patent designed to minimize, avoid, defer or otherwise affect the liability for tax.

Prohibit tax service fees contingent upon specific tax savings (§304)

Prohibits charging a fee for tax services in an amount that is calculated according to or dependant upon a projected or actual amount of tax savings or losses offsetting taxable income.

Deter financial institution participation in abusive tax shelter activities (§305)

Requires federal bank regulators and the SEC to develop and utilize examination techniques to detect violations by financial institutions of the prohibition against providing products or services that aid or abet tax evasion or that promote or implement abusive tax shelters and report potential violations to the IRS.

Strengthen law enforcement through information sharing (§§306-307)

Authorizes Treasury to share certain tax return information with the SEC, federal bank regulators, or PCAOB, under certain circumstances, to enhance tax shelter enforcement or combat financial accounting fraud. Clarifies Congressional subpoena authority to obtain information (but not a taxpayer return) from tax return preparers. Clarifies Congressional authority to obtain certain tax information (but not a taxpayer return) from Treasury related to an IRS decision to grant, deny, revoke, or restore an organization’s tax exempt status.

Require tougher tax shelter opinion standards for tax practitioners (§308)

Codifies and expands Treasury’s authority to issue Circular 230 standards for tax practitioners providing “opinion letters” on specific tax shelter transactions.

TITLE IV – Requiring Economic Substance Codify and strengthen the economic substance doctrine (§§401-403)

Codifies and strengthens the economic substance doctrine to invalidate transactions that have no meaningful economic substance or business purpose apart from tax avoidance or evasion. Also increases penalties for understatements attributable to a transaction lacking in economic substance.