IRS Commissioner Douglas Shulman laid out the Obama administration’s plans for cracking down on offshore tax evasion, including extending the statute of limitations.

In a speech before the Organization for Economic Cooperation and Development, Shulman noted that the Obama administration has asked Congress to extend the statute of limitations on international tax enforcement from three to six years “after the taxpayer submits required information.”

“These cases are often highly complex and require additional time to resolve beyond the current three-year statute,” said Shulman.

He pointed out that the IRS has been faced with a growing number of foreign tax credits claimed on both individual and business tax returns. Between 2000 and 2007, the volume of foreign tax credits claimed by individuals rose “an eye-popping 133 percent,” Shulman noted, while the volume claimed by U.S. businesses increased 71 percent.

The problem has become a major concern for the IRS. “In the U.S., international tax issues have moved to center stage,” said Shulman. “It is a major priority for President Obama, and last month he outlined a bold suite of international legislative proposals. At the same time, the IRS has been stepping up enforcement measures in this area. We are aggressively tracking down tax evaders hiding their wealth overseas and the promoters who aid and abet these schemes. We are steadily increasing the pressure on offshore financial institutions that facilitate concealment of taxable income by U.S. citizens.”

To deal with the problem, he is hiring more enforcement personnel at the IRS. “For too many years, the IRS was in the position of not having the resources to go toe to toe with taxpayers operating in the international markets,” said Shulman. “They had deep pockets and could hire a cadre of legal and tax experts. Some observers said we were outmanned and outgunned. To meet this challenge, we must keep existing personnel current on emerging techniques and hire top examiners, lawyers, economists, special agents and financial specialists who can unravel the sophisticated and complex world of international tax issues.”

Shulman noted that the stepped-up enforcement efforts had led to a victory in last week’s Appeals Court ruling against chip maker Xilinx, which had sought to shift research and development costs to its Irish subsidiary in a transfer-pricing arrangement (see IRS Wins Transfer Pricing Tax Dispute Against Chip Maker).

Shulman plans to require more enforcement of information-reporting requirements to catch tax evaders.

“We know that those taxpayers who have their taxes withheld and reported to the IRS through third parties are the most compliant,” he said. “On the other end of the scale, those operating without withholding and reporting are the least compliant. What’s the lesson here? Simple: Better information reporting can boost compliance, and we need more of it from foreign countries and foreign financial institutions.”

Shulman also said he wants to boost the Qualified Intermediary program, which gives the IRS “an important line of sight into the activities of U.S. taxpayers at foreign banks and financial institutions.”

President Obama’s fiscal 2010 budget includes proposed changes to the QI program to provide increased oversight of taxpayers’ activities at foreign banks, as well as additional information reporting on cross-border wire transfers. The proposals would increase tax withholding in certain situations, strengthen penalties, and shift the burden of proof to make it harder for offshore account-holders to evade U.S. taxes, Shulman added. The proposals would also create disincentives for U.S. taxpayers who chose to do business with a financial institution that has chosen not to be a QI. 

On the business tax enforcement side, Shulman acknowledged that many companies adhere to the international tax laws and try hard to comply, but he warned against those that try to take advantage of loopholes.

“Let me be clear," he said. "There are plenty of international tax strategies that are perfectly legal. And many corporations and their legal and tax advisors are genuinely trying to comply with the myriad of international tax laws. While we won’t always agree about what the law is, or how it applies in particular cases, we recognize that many businesses are trying to get it right. However, we also know that some businesses use the complexity of the Tax Code and the international capital markets to push the envelope too far. That is where we have issues, and where we will continue to focus.”

Particular areas of concern include transfer pricing, financial instruments, hybrid structures and withholding taxes. The administration is also cracking down on reforming the tax deferral rules in which U.S. multinational corporations that invest overseas can take immediate deductions on their U.S. tax returns for certain expenses but defer paying U.S. taxes on the income, Shulman noted.

Another area of corporate tax reform proposed by the administration is to change the so-called “check-the-box” rules that can make foreign subsidiaries “disappear” for U.S. tax purposes, according to Shulman.

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