Washington (June 28, 2004) -- The Treasury Department and the Internal Revenue Service have issued a notice that cautions taxpayers against promoters who market arrangements to lower taxes pursuant to the special rules applicable to the U.S. Virgin Islands.

The arrangements involve taking positions that are highly questionable with respect to claims that the taxpayer resides in the U.S. Virgin Islands and that the taxpayer's income is from sources in the U.S. Virgin Islands or is connected with a U.S. Virgin Islands business.

Notice 2004-45 targets an arrangement that involves running a taxpayer's salary or business income through a U.S. Virgin Islands entity such as a limited partnership. Promoters typically advise a taxpayer that he or she can become a U.S. Virgin Islands resident by establishing certain contacts with the islands, even while continuing to live and work in the U.S. Their salary is funneled through a partnership, which purportedly secures a reduction of up to 90 percent in U.S.V.I. income tax liability under the U.S.V.I. Economic Development Program.

The IRS says it will challenge these positions and other similar claims on the grounds that they lack economic substance or that they have no purpose other than tax avoidance or evasion. The notice outlines a range of civil and criminal penalties, including, but not limited to, the accuracy-related penalty, the failure to file or pay penalties, and civil fraud penalties.  Promoters and those who participate in these schemes may also be guilty of criminal offenses, according to the IRS.

"This scheme is an effort to disguise or distort where taxpayers live or do business," said IRS Commissioner Mark W. Everson.  “We appreciate the assistance given us by the U.S. Virgin Islands Bureau of Internal Revenue on this matter."

-- WebCPA staff

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