Congressional Record, Volume 157 Issue 103 (Tuesday, July 12, 2011)

[Congressional Record Volume 157, Number 103 (Tuesday, July 12, 2011)]
[Senate]
[Pages S4518-S4527]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

By Mr. LEVIN (for himself, Mr. Conrad, Mr. Nelson of Florida, Mr.
Sanders, Mrs. Shaheen, and Mr. Whitehouse):
S. 1346. A bill to restrict the use of offshore tax havens and
abusive tax shelters to inappropriately avoid Federal taxation, and for
other purposes; to the Committee on Finance.
Mr. LEVIN. Mr. President, I am introducing today with my colleagues
Senators Conrad, Bill Nelson, Sanders, Shaheen, and Whitehouse, the
Stop Tax Haven Abuse Act, legislation which is geared to stop the $100
billion yearly drain on the U.S. treasury caused by offshore tax
abuses. Offshore tax abuses are not only undermining public confidence
in our tax system, but widening the deficit and increasing the tax
burden on middle America.
People are sick and tired of tax dodgers using offshore trickery and
abusive tax shelters to avoid paying their fair share. This bill offers
powerful new tools to combat those offshore and tax shelter abuses,
raise revenues, and eliminate incentives to send U.S. profits and jobs
offshore. Its provisions will hopefully be part of any deficit
reduction package this year, but should be adopted in any event.
The bill is supported by a wide array of small business, labor, and
public interest groups, including the Financial Accountability and
Corporate Transparency, FACT, Coalition, American Sustainable Business
Council, Business for Shared Prosperity, Main Street Alliance, AFL-CIO,
SEIU, Citizens for Tax Justice, Tax Justice Network-USA, U.S. Public
Interest Research Group, Global Financial Integrity, Global Witness,
Jubilee USA, and Public Citizen.
Frank Knapp, president and CEO of the South Carolina Small Business
Chamber of Commerce, has explained small business support for the bill
this way:

Small businesses are the lifeblood of local economies. We
pay our fair share of taxes and generate most of the new
jobs. Why should we be subsidizing U.S. multinationals that
use offshore tax havens to avoid paying taxes? Big
corporations benefit immensely from all the advantages of
being headquartered in our country. It is time to end tax
haven abuse and level the playing field.

The Stop Tax Haven Abuse Act is a product of the investigative work
of the Permanent Subcommittee on Investigations which I chair. For more
than 10 years, the Subcommittee has conducted inquiries into offshore
abuses, including the use of offshore corporations and trusts to hide
assets, the use of tax haven banks to set up secret accounts, and the
use of U.S. bankers, lawyers, accountants and other professionals to
devise and conduct abusive tax shelters. Over the years, we have
learned a lot of the offshore tricks and have designed this bill to
fight back by closing obnoxious offshore tax loopholes and
strengthening offshore tax enforcement.
The 112th Congress is the fifth Congress in which I have introduced a
comprehensive bill to combat offshore and tax shelter abuses. A number
of provisions from past bills have made it into law, such as measures
to curb abusive foreign trusts, close offshore dividend tax loopholes,
and strengthen penalties on tax shelter promoters, but much more needs
to be done.
The last Congress made significant progress in the offshore battle.
We finally enacted into law the economic substance doctrine which
authorizes courts to strike down phony business deals with no economic
purpose other than to avoid the payment of tax. My past bills supported
the economic substance doctrine, and its enactment into

[[Page S4519]]

law is a victory many years in the making.
Last year also saw enactment of the Baucus-Rangel Foreign Account Tax
Compliance Act or FATCA, which is a tough new law designed to flush out
hidden offshore bank accounts. Foreign banks are currently engaged in a
massive lobbying effort to weaken its disclosure requirements, but U.S.
banks have had it with foreign banks using secrecy to attract U.S.
clients and want those banks to have to meet the same disclosure
requirements U.S. banks do. The Administration is so far resisting
calls to water down the provisions.
President Obama, who when in the Senate cosponsored my bills in 2005
and 2007 to end tax haven abuses, is a longtime opponent of offshore
tax evasion. He knows how fed up Americans are with tax dodgers who
hide their money offshore, use complex tax shelters to thumb their nose
at Uncle Sam, and offload their tax burden onto the backs of honest
Americans.
The bottom line is that each of us has a legal and civil obligation
to pay taxes, and most Americans fulfill that obligation. It is time to
force the tax scofflaws, the tax dodgers, and the tax cheats to do the
same, and end their misuse of offshore tax havens.
The bill I am introducing today is a stronger version of the Stop Tax
Haven Abuse Act introduced in the last Congress. In addition to
preserving the provisions from last year that have not yet been enacted
into law, it contains several new measures to stop tax dodgers from
taking advantage of middle Americans who play by the rules.
Among the bill's provisions are special measures to combat persons
who impede U.S. tax enforcement; establishment of legal presumptions to
overcome secrecy barriers; the treatment of offshore corporations as
domestic corporations for tax purposes when controlled by U.S. persons;
closing a tax loophole benefiting credit default swaps that send money
offshore; closing another loophole that allows corporate deposits of
foreign funds in U.S. accounts to be treated as nontaxable,
unrepatriated foreign income; disclosure requirements for basic
information on country-by-country tax payments by multinationals; and
stronger penalties against tax shelter promoters and aiders and
abettors of tax evasion.
Probably the biggest change in the bill from the last Congress is
that it would no longer require Treasury to develop a list of offshore
secrecy jurisdictions and then impose tougher requirements on U.S.
taxpayers who use those jurisdictions. Instead, the bill would build on
the Foreign Account Tax Compliance Act of 2010, by creating tougher
disclosure, evidentiary, and enforcement consequences for U.S. persons
who do business with foreign financial institutions that reject FATCA's
call for disclosing accounts used by U.S. persons. By focusing on non-
FATCA financial institutions instead of offshore secrecy jurisdictions,
the bill relieves Treasury of a difficult task, while providing
additional incentives for foreign banks to adopt FATCA's disclosure
requirements.
Mr. President, I ask unanimous consent that a section by section
analysis and a bill summary be printed in the Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:
Section 101--Special Measures Where U.S. Tax Enforcement Is
Impeded
The first section of the bill, Section 101, which is
carried over from the last Congress, would allow the Treasury
Secretary to apply an array of sanctions against any foreign
jurisdiction or financial institution which the Secretary
determined was impeding U.S. tax enforcement.
This provision has added significance now that Congress has
enacted the Foreign Account Tax Compliance Act requiring
foreign financial institutions with U.S. investments to
disclose all accounts opened by U.S. persons or pay a hefty
tax on their U.S. investment income. FATCA goes into effect
in 2013, but some foreign financial institutions are saying
that they will refuse to adopt FATCA's approach and will
instead stop holding any U.S. assets. While that is their
right, the question being raised by some foreign banks
planning to comply with FATCA is what happens to non-FATCA
institutions that take on U.S. clients and don't report the
accounts to the United States. Right now, the U.S. government
has no way to take effective action against foreign financial
institutions that open secret accounts for U.S. tax evaders.
Section 101 of our bill would change that by providing just
the powerful new tool needed to stop non-FATCA institutions
from facilitating U.S. tax evasion.
Section 101 is designed to build upon existing Treasury
authority to take action against foreign financial
institutions that engage in money laundering by extending
that same authority to the tax area. In 2001, the Patriot Act
gave Treasury the authority under 31 U.S.C. 5318A to require
domestic financial institutions and agencies to take special
measures with respect to foreign jurisdictions, financial
institutions, or transactions found to be of ``primary money
laundering concern.'' Once Treasury designates a foreign
jurisdiction or financial institution to be of primary money
laundering concern, Section 5318A allows Treasury to impose a
range of requirements on U.S. financial institutions in their
dealings with the designated entity--from requiring U.S.
financial institutions, for example, to provide greater
information than normal about transactions involving the
designated entity, to prohibiting U.S. financial institutions
from opening accounts for that foreign entity.
This Patriot Act authority has been used sparingly, but to
telling effect. In some instances Treasury has employed
special measures against an entire country, such as Burma, to
stop its financial institutions from laundering funds through
the U.S. financial system. More often, Treasury has used the
authority surgically, against a single problem financial
institution, to stop laundered funds from entering the United
States. The provision has clearly succeeded in giving
Treasury a powerful tool to protect the U.S. financial system
from money laundering abuses.
The bill would authorize Treasury to use that same tool to
require U.S. financial institutions to take the same special
measures against foreign jurisdictions or financial
institutions found by Treasury to be ``impeding U.S. tax
enforcement.'' Treasury could, for example, in consultation
with the IRS, the Secretary of State, and the Attorney
General, require U.S. financial institutions that have
correspondent accounts for a designated foreign bank to
produce information on all of that foreign bank's customers.
Alternatively, Treasury could prohibit U.S. financial
institutions from opening accounts for a designated foreign
bank, thereby cutting off that foreign bank's access to the
U.S. financial system. These types of sanctions could be as
effective in ending the worst tax haven abuses as they have
been in curbing money laundering.
In addition to extending Treasury's ability to impose
special measures against foreign entities impeding U.S. tax
enforcement, the bill would add one new measure to the list
of possible sanctions that could be applied: it would allow
Treasury to instruct U.S. financial institutions not to
authorize or accept credit card transactions involving a
designated foreign jurisdiction or financial institution.
Denying tax haven banks the ability to issue credit cards for
use in the United States, for example, offers an effective
new way to stop U.S. tax cheats from obtaining access to
funds hidden offshore.
Section 102--Strengthening FATCA
Section 102 of the bill is a new section that seeks to
clarify, build upon, and strengthen the Foreign Account Tax
Compliance Act or FATCA, to flush out hidden foreign accounts
and assets used by U.S. taxpayers to evade paying U.S. taxes.
When the law becomes effective in 2013, it will require
disclosure of account held by U.S. persons at foreign banks,
broker-dealers, investment advisers, hedge funds, private
equity funds, and other financial firms.
Some foreign financial institutions are likely to choose to
forego all U.S. investments rather than comply with FATCA's
disclosure rules. If some foreign financial institutions
decide not to participate in the FATCA system, that's their
business. But if U.S. taxpayers start using those same
foreign financial institutions to hide assets and evade U.S.
taxes to the tune of $100 billion per year, that's our
business. The United States has a right to enforce our tax
laws and to expect that financial institutions will not
assist U.S. tax cheats.
Section 101 of the bill would provide U.S. authorities with
a way to take direct action against foreign financial
institutions that decide to operate outside of the FATCA
system and allow U.S. clients to open hidden accounts. If the
U.S. Treasury determines that such a foreign financial
institution is impeding U.S. tax enforcement, Section 101
would give U.S. authorities a menu of special measures that
could be taken in response, including by prohibiting U.S.
banks from doing business with that institution.
Section 102, in contrast, does not seek to take action
against a non-FATCA institution, but instead seeks to
strengthen tax enforcement efforts with respect to the U.S.
persons taking advantage of the non-disclosure practices at
non-FATCA institutions. Section 102 would also clarify when
foreign financial institutions are obligated to disclose
accounts to the United States under FATCA.
Background. In 2006, the Permanent Subcommittee on
Investigations released a report with six case histories
detailing how U.S. taxpayers were using offshore tax havens
to avoid payment of the taxes they owed. These case histories
examined an Internet-based company that helped persons obtain
offshore entities and accounts; U.S. promoters that
designed complex offshore structures to hide client
assets, even providing clients with a how-to manual for

[[Page S4520]]

going offshore; U.S. taxpayers who diverted business
income offshore through phony loans and invoices; a one-
time tax dodge that deducted phantom offshore stock losses
from real U.S. stock income to shelter that income from
U.S. taxes; and a 13-year offshore network of 58 offshore
trusts and corporations built by American brothers Sam and
Charles Wyly. Each of these case histories presented the
same fact pattern in which the U.S. taxpayer, through
lawyers, banks, or other representatives, set up offshore
trusts, corporations, or other entities which had all the
trappings of independence but, in fact, were controlled by
the U.S. taxpayer whose directives were implemented by
compliant offshore personnel acting as the trustees,
officers, directors or nominee owners of the offshore
entities.
In the case of the Wylys, the brothers and their
representatives communicated Wyly directives to a so-called
trust protector who then relayed the directives to the
offshore trustees. In the 13 years examined by the
Subcommittee, the offshore trustees never once rejected a
Wyly request and never once initiated an action without Wyly
approval. They simply did what they were told. A U.S.
taxpayer in another case history told the Subcommittee that
the offshore personnel who nominally owned and controlled his
offshore entities, in fact, always followed his directions,
describing himself as the ``puppet master'' in charge of his
offshore holdings.
When the Subcommittee discussed these case histories with
financial administrators from the Isle of Man, the regulators
explained that none of the offshore personnel were engaged in
any wrongdoing, because their laws permit foreign clients to
transmit detailed, daily instructions to offshore service
providers on how to handle offshore assets, so long as it is
the offshore trustee or corporate officer who gives the final
order to buy or sell the assets. They explained that, under
their law, an offshore entity is considered legally
independent from the person directing its activities so long
as that person follows the form of transmitting ``requests''
to the offshore personnel who retain the formal right to make
the decisions, even though the offshore personnel always do
as they are asked.
The Subcommittee case histories illustrate what the tax
literature and law enforcement experience have shown for
years: that the business model followed in all offshore
secrecy jurisdictions is for compliant trustees, corporate
administrators, and financial institutions to provide a
veneer of independence while ensuring that their U.S. clients
retain complete and unfettered control over ``their''
offshore assets. That's the standard operating procedure
offshore. Offshore service providers pretend to own or
control the offshore trusts, corporations, and accounts they
help establish, but what they really do is whatever their
clients tell them to do.
Rebuttable Evidentiary Presumptions. The reality behind
these offshore practices makes a mockery of U.S. laws that
normally view trusts and corporations as independent actors.
They invite game-playing and tax evasion. To combat these
abusive offshore practices, Section 102(g) of the bill would
implement a bipartisan recommendation in the 2006 report by
establishing several rebuttable evidentiary presumptions that
would presume U.S. taxpayer control of offshore entities that
they form or do business with, unless the U.S. taxpayer
presents clear and convincing evidence to the contrary.
The presumptions would apply only in civil, judicial, or
administrative tax or securities enforcement proceedings
examining offshore entities or transactions. They would place
the burden of producing evidence from offshore jurisdiction
on the taxpayer who chose to do business in those
jurisdictions and who has access to the information, rather
than on the federal government which has little or no
practical ability to get the information.
Section 102(g)(1) would establish three evidentiary
presumptions that could be used in a civil tax enforcement
proceeding. First is a presumption that a U.S. taxpayer who
``formed, transferred assets to, was a beneficiary of, had a
beneficial interest in, or received money or property or the
use thereof'' from an offshore entity, such as a trust or
corporation, controls that entity. Second is a presumption
that funds or other property received from offshore are
taxable income, and that funds or other property transferred
offshore have not yet been taxed. Third is a presumption that
a financial account controlled by a U.S. taxpayer in a
foreign country contains enough money--$10,000--to trigger an
existing statutory reporting threshold and allow the IRS to
assert the minimum penalty for nondisclosure of the account
by the taxpayer.
Section 102(g)(2) would establish two evidentiary
presumptions applicable to civil proceedings to enforce U.S.
securities laws. The first would specify that if a director,
officer, or major shareholder of a U.S. publicly traded
corporation were associated with an offshore entity, that
person would be presumed to control that offshore entity. The
second presumption would provide that securities nominally
owned by an offshore entity are presumed to be beneficially
owned by any U.S. person who controlled that offshore entity.
All of these presumptions are rebuttable, which means that
the U.S. person who is the subject of the proceeding could
provide clear and convincing evidence to show that the
presumptions were factually inaccurate. To rebut the
presumptions, a taxpayer could establish, for example, that
an offshore corporation really was controlled by an
independent third party, or that money sent from an offshore
account really represented a nontaxable gift instead of
taxable income. If the taxpayer wished to introduce evidence
from a foreign person, such as an offshore banker, corporate
officer, or trust administrator, to establish those facts,
that foreign person would have to actually appear in the U.S.
proceeding in a manner that would permit cross examination.
The bill also includes several limitations on the
presumptions to ensure their operation is fair and
reasonable. First, criminal cases would not be affected by
this bill which would apply only to civil proceedings.
Second, because the presumptions apply only in enforcement
``proceedings,'' they would not directly affect, for example,
a person's reporting obligations on a tax return or SEC
filing. The presumptions would come into play only if the IRS
or SEC were to challenge a matter in a formal proceeding.
Third, the bill would not apply the presumptions to
situations where either the U.S. person or the offshore
entity is a publicly traded company, because in those
situations, even if a transaction were abusive, IRS and SEC
officials are generally able to obtain access to necessary
information. Fourth, the bill recognizes that certain classes
of offshore transactions, such as corporate reorganizations,
may not present a potential for abuse, and accordingly
authorizes Treasury and the SEC to issue regulations or
guidance identifying such classes of transactions, to which
the presumptions would not apply.
An even more fundamental limitation on the presumptions is
that they would apply only to U.S. persons who directly or
through an offshore entity choose to do business with a
``non-FATCA institution,'' meaning a foreign financial
institution which has not adopted the FATCA disclosure
requirements and instead takes advantage of banking,
corporate, and tax secrecy laws and practices that make it
very difficult for U.S. tax authorities to detect financial
accounts benefiting U.S. persons.
FATCA's disclosure requirements were designed to combat
offshore secrecy and flush out hidden accounts being used by
U.S. persons to evade U.S. taxes. Section 102(g) would
continue the fight by allowing federal authorities to benefit
from rebuttable presumptions regarding the control,
ownership, and assets of offshore entities that open accounts
at financial institutions outside the FATCA disclosure
system. These presumptions would allow U.S. law enforcement
to establish what we all know from experience is normally the
case in an offshore jurisdiction--that a U.S. person
associated with an offshore entity controls that entity; that
money and property sent to or from an offshore entity
involves taxable income; and that an offshore account that
hasn't been disclosed to U.S. authorities should be made
subject to inspection. U.S. law enforcement can establish
those facts presumptively, without having to pierce the
secrecy veil. At the same time, U.S. persons who chose to
transact their affairs through accounts at a non-FACTA
institution are given the opportunity to lift the veil of
secrecy and demonstrate that the presumptions are factually
wrong. These rebuttable evidentiary presumptions will provide
U.S. tax and securities law enforcement with powerful new
tools to shut down tax haven abuses.
FATCA Disclosure Obligations. In addition to establishing
presumptions, Section 102 would make several changes to
clarify and strengthen FATCA's disclosure obligations.
Section 102(b) would amend 26 U.S.C. Section 1471 to make
it clear that the types of financial accounts that must be
disclosed by foreign financial institutions under FATCA
include not just savings, money market, or securities
accounts, but also transaction accounts that some banks might
claim are not depository accounts, such as checking accounts.
The section would also make it clear that financial
institutions could not omit from their disclosures client
assets in the form of derivatives, including swap agreements.
Section 102(c) would amend 26 U.S.C. 1472 to clarify when a
withholding agent ``knows or has reason to know'' that an
account is directly or indirectly owned by a U.S. person and
must be disclosed to the United States. The bill provision
would make it clear that the withholding agent would have to
take into account information obtained as the result of ``any
customer identification, anti-money laundering, anti-
corruption, or similar obligation to identify
accountholders.'' In other words, if a foreign bank knows, as
a result of due diligence inquiries made under its anti-money
laundering program, that an non-U.S. corporation was
beneficially owned by a U.S. person, the foreign bank would
have to report that account to the IRS--it could not treat
the offshore corporation as a non-U.S. customer. That
approach is already implied in the statutory language, but
this amendment would make it crystal clear.
Section 102(c) would also amend the law to make it clear
that the Treasury Secretary, when exercising authority under
FATCA to waive disclosure or withholding requirements for
non-financial foreign entities, can waive those requirements
for only for a class of entities which the Secretary
identifies as ``posing a low risk of tax evasion.'' A variety
of foreign financial institutions are pressing Treasury to
issue waivers under Section 1472, and this amendment would
make it clear that such waivers are possible only when the
risk of tax evasion is minimal.

[[Page S4521]]

Section 102(d) would amend 26 U.S.C. 1473 to clarify that
the definition of ``substantial United States owner''
includes U.S. persons who are beneficial owners of
corporations or the beneficial owner of an entity that is one
of the partners in a partnership. While the current statutory
language already implies that beneficial owners are included,
this amendment would leave no doubt.
Section 102(e) would amend 26 U.S.C. 1474 to make two
exceptions to the statutory provision which makes account
information disclosed to the IRS by foreign financial
institutions under FATCA confidential tax return information.
The first exception would allow the IRS to disclose the
account information to federal law enforcement agencies,
including the SEC and bank regulators, investigating possible
violations of U.S. law. The second would allow the IRS to
disclose the name of any foreign financial institution whose
disclosure agreement under FATCA was terminated, either by
the institution, its government, or the IRS. Financial
institutions should not be able to portray themselves as
FATCA institutions if, in fact, they are not.
Section 102(f) would amend 26 U.S.C. 6038D, which creates a
new tax return disclosure obligation for U.S. taxpayers with
interests in ``specified foreign financial assets,'' to
clarify that the disclosure requirement applies not only to
persons who have a direct or nominal ownership interest in
those foreign financial assets, but also to persons who have
a beneficial, meaning real, ownership interest in them. While
the existing statutory language implies this broad reporting
obligation, the amendment would make it clear.
Finally, Section 102(a) would amend a new annual tax return
obligation established in 26 U.S.C. 1298(f) for passive
foreign investment companies (PFICs). PFICs are typically
used as holding companies for foreign assets held by U.S.
persons, and the intent of the new Section 1298(f) is to
require all PFICs to begin filing annual informational tax
returns with the IRS. The current statutory language,
however, limits the disclosure obligation to any U.S. person
who is a ``shareholder'' in a PFIC, and does not cover PFICs
whose shares may be nominally held by an offshore corporation
or trust, but beneficially owned by a U.S. person. The bill
provision would broaden the PFIC reporting requirement to
apply to any U.S. person who ``directly or indirectly, forms,
transfers assets to, is a beneficiary of, has a beneficial
interest in, or receives money or property or the use
thereof'' from a PFIC. That broader formulation of who should
file the new PFIC annual tax return would ensure that
virtually all PFICs associated with U.S. persons will begin
filing informational returns with the IRS.
Section 103--Corporations Managed and Controlled in the
United States
Section 103 of the bill focuses on corporations which claim
foreign status--often in a tax haven jurisdiction--in order
to avoid payment of U.S. taxes, but then operate right here
in the United States in direct competition with domestic
corporations that are paying their fair share.
This offshore game is all too common. In 2008, the Senate
Finance Committee held a hearing describing a trip made by
GAO to the Cayman Islands to look at the infamous Ugland
House, a five-story building that is the official address for
over 18,800 registered companies. GAO found that about half
of the alleged Ugland House tenants--around 9,000 entities--
had a billing address in the United States and were not
actual occupants of the building. In fact, GAO determined
that none of the companies registered at the Ugland House was
an actual occupant. GAO found that the only true occupant of
the building was a Cayman law firm, Maples and Calder.
Here's what the GAO wrote:

``Very few Ugland House registered entities have a
significant physical presence in the Cayman Islands or carry
out business in the Cayman Islands. According to Maples and
Calder partners, the persons establishing these entities are
typically referred to Maples by counsel from outside the
Cayman Islands, fund managers, and investment banks. As of
March 2008 the Cayman Islands Registrar reported that 18,857
entities were registered at the Ugland House address.
Approximately 96 percent of these entities were classified as
exempted entities under Cayman Islands law, and were thus
generally prohibited from carrying out domestic business
within the Cayman Islands.''

Section 103 of the bill is designed to address the Ugland
House problem. It focuses on the situation where a
corporation is incorporated in a tax haven as a mere shell
operation with little or no physical presence or employees in
the jurisdiction. The shell entity pretends it is operating
in the tax haven, even though its key personnel and
decisionmakers are in the United States. The objective of
this set up is to enable the owners of the shell entity to
take advantage of all of the benefits provided by U.S. legal,
educational, financial, and commercial systems, and at the
same time avoid paying U.S. taxes.
My Subcommittee has seen numerous companies exploit this
situation, declaring themselves to be foreign corporations,
even though they really operate out of the United States. For
example, thousands of hedge funds whose financial experts
live in Connecticut, New York, Texas, or California play this
game to escape taxes and avoid regulation. In an October 2008
Subcommittee hearing, three sizeable hedge funds, Highbridge
Capital which is associated with JPMorgan Chase, Angelo
Gordon, and Maverick Capital, admitted that, although all
they claimed to be based in the Cayman Islands, none had an
office or a single full time employee in that jurisdiction.
Instead, their offices and key decisionmakers were located
and did business right here in the United States.
According to a recent Wall Street Journal article, over 20
percent of the corporations that made initial public
offerings or IPOs in the United States in 2010 and so far in
2011, have been incorporated in Bermuda or the Cayman
Islands, but also described themselves to investors as based
in another country, including the United States. The article
also described how Samsonite, a Denver-based company,
reincorporated in Luxembourg before going public. Too many of
these tax-haven incorporations appear to be a deliberate
effort to take advantage of U.S. benefits, while dodging U.S.
taxation and undercutting U.S. competitors who pay their
taxes.
Section 103 would put an end to such corporate fictions and
offshore tax dodging. It provides that if a corporation is
publicly traded or has aggregate gross assets of $50 million
or more, and its management and control occurs primarily in
the United States, that corporation will be treated as a U.S.
domestic corporation for income tax purposes.
To implement this provision, Treasury is directed to issue
regulations to guide the determination of when management and
control occur primarily in the United States, looking at
whether ``substantially all of the executive officers and
senior management of the corporation who exercise day-to-day
responsibility for making decisions involving strategic,
financial, and operational policies of the corporation are
located primarily within the United States.''
This new section relies on the same principles regarding
the true location of ownership and control of a company that
underlie the corporate inversion rules adopted in the
American Jobs Creation Act of 2005. Those inversion rules,
however, do not address the fact that some entities directly
incorporate in foreign countries and manage their businesses
activities from the United States. Section 103 would level
the playing field and ensure that entities which incorporate
directly in another country are subject to a similar
management and control test. Section 103 is also similar in
concept to the substantial presence test in the income tax
treaty between the United States and the Netherlands, which
looks to the primary place of management and control to
determine corporate residency.
Section 103 would provide an exception for foreign
corporations with U.S. parents. This exception from the $50
million gross assets test recognizes that, within a
multinational operation, strategic, financial, and
operational decisions are often made from a global or
regional headquarters location and then implemented by
affiliated foreign corporations. Where such decisions are
undertaken by a parent corporation that is actively engaged
in a U.S. trade or business and is organized in the United
States--and is, therefore, already a domestic corporation--
the bill generally would not override existing U.S. taxation
of international operations. At the same time, the exception
makes it clear that the mere existence of a U.S. parent
corporation is not sufficient to shield a foreign corporation
from also being treated as a domestic corporation under this
section. The section would also create an exception for
private companies that once met the section's test for
treatment as a domestic corporation but, during a later tax
year, fell below the $50 million gross assets test, do not
expect to exceed that threshold again, and are granted a
waiver by the Treasury Secretary.
Section 103 contains specific language to stop the
outrageous tax dodging that now goes on by too many hedge
funds and investment management businesses that structure
themselves to appear to be foreign entities, even though
their key decisionmakers--the folks who exercise control of
the company, its assets, and investment decisions--live and
work in the United States. It is unacceptable that such
companies utilize U.S. offices, personnel, laws, and markets
to make their money, but then stiff Uncle Sam and offload
their tax burden onto competitors who play by the rules.
To put an end to this charade, Section 103 specifically
directs Treasury regulations to specify that, when investment
decisions are being made in the United States, the
management and control of that corporation shall be
treated as occurring primarily in the United States, and
that corporation shall be subject to U.S. taxes in the
same manner as any other U.S. corporation.
If enacted into law, Section 103 would put an end to the
unfair situation where some U.S.-based companies pay their
fair share of taxes, while others who set up a shell
corporation in a tax haven are able to defer or escape
taxation, despite the fact that their foreign status is
nothing more than a paper fiction.
Section 104--Increased Disclosure of Offshore Accounts and
Entities
Offshore tax abuses thrive in secrecy. Section 104(a)
attempts to pierce that secrecy by creating two new
disclosure mechanisms requiring third parties to report on
offshore

[[Page S4522]]

transactions undertaken by U.S. persons. The first disclosure
mechanism focuses on U.S. financial institutions that open a
U.S. account in the name of an offshore entity, such as an
offshore trust or corporation, and learn from an anti-money
laundering due diligence review, that a U.S. person is the
beneficial owner behind that offshore entity. In the Wyly
case history examined by the Subcommittee, for example, three
major U.S. financial institutions opened dozens of accounts
for offshore trusts and corporations which they knew were
associated with the Wyly family.
Under current anti-money laundering law, all U.S. financial
institutions are supposed to know who is behind an account
opened in the name of, for example, an offshore shell
corporation or trust. They are supposed to obtain this
information to safeguard the U.S. financial system against
misuse by terrorists, money launderers, and other criminals.
Under current tax law, a bank or securities broker that
opens an account for a U.S. person is also required to give
the IRS a 1099 form reporting any capital gains or other
reportable income earned on the account. However, the bank or
securities broker need not file a 1099 form if the account is
owned by a foreign entity not subject to U.S. tax law.
Problems arise when an account is opened in the name of an
offshore entity that is nominally not subject to tax, but
which the bank or broker knows, from its anti-money
laundering review, is owned or controlled by a U.S. person
who is subject to tax. The U.S. person should be filing a tax
return with the IRS reporting the income of the ``controlled
foreign corporation.'' However, since he or she knows it is
difficult for the IRS to connect an offshore accountholder to
a particular taxpayer, the U.S. person may feel safe in not
reporting that income. That complacency might change,
however, if the U.S. person knew that the bank or broker who
opened the account and learned of the connection had a legal
obligation to report any account income to the IRS.
Under current law, the way the regulations are written and
typically interpreted, the bank or broker can treat an
account opened in the name of a foreign corporation as an
account that is held by an independent entity that is
separate from the U.S. person, even if it knows that the
foreign corporation is acting merely as a screen to hide the
identity of the U.S. person, who exercises complete authority
over the corporation and benefits from any income earned on
the account. Many banks and brokers contend that the current
regulations impose no duty on them to file a 1099 or other
form disclosing that type of account to the IRS.
The bill would strengthen current law by expressly
requiring a bank or broker that knows, as a result of its
anti-money laundering due diligence or otherwise that a U.S.
person is the beneficial owner of a foreign entity that
opened an account, to disclose that account to the IRS by
filing a 1099 or equivalent form reporting the account
income. This reporting obligation would not require banks or
brokers to gather any new information--financial institutions
are already required to perform anti-money laundering due
diligence for accounts opened by offshore shell entities. The
bill would instead require U.S. financial institutions to act
on what they already know by filing the relevant form with
the IRS.
This section would require such reports to the IRS from two
sets of financial institutions. The first set are financial
institutions which are located and do business in the United
States. The second set is foreign financial institutions
which are located and do business outside of the United
States, but are voluntary participants in either the FATCA or
Qualified Intermediary Program, and have agreed to provide
information to the IRS about certain accounts. Under this
section, if a foreign financial institution has an account
under the FATCA or QI Program, and the accountholder is a
non-U.S. entity that is controlled or beneficially owned by a
U.S. person, then that foreign financial institution would
have to report any reportable assets or income in that
account to the IRS.
The second disclosure mechanism created by Section 104(a)
targets U.S. financial institutions that open foreign bank
accounts for U.S. clients at non-FATCA institutions, meaning
foreign financial institutions that have not agreed under
FATCA to disclose to the IRS the accounts they open for U.S.
persons. Past Subcommittee investigations have found that
some U.S. financial institutions help their U.S. clients both
to form offshore entities and to open foreign bank accounts
for those entities, so that their clients do not even need to
leave home to set up an offshore structure. Since non-FATCA
institutions, by definition, have no obligation to disclose
the accounts to U.S. authorities, Section 104(a) would
instead impose that disclosure obligation on the U.S.
financial institution that helped set up the account for its
U.S. client.
Section 104(b) imposes the same penalties for the failure
to report such accounts as apply to the failure to meet other
reporting obligations of withholding agents.
Section 105--CDS Loophole
Section 105 of the bill targets a tax loophole benefiting
credit default swaps, which I call the CDS loophole.
A CDS in simple terms is a financial bet about whether a
company, a loan, a bond, a mortgage backed security, or some
other financial instrument or arrangement will default or
experience some other defined ``credit event'' during a
specified period of time. The CDS buyer bets that the default
or other credit event will happen, while the CDS seller bets
it won't. The CDS buyer typically makes a series of payments
to the seller over a specified period of time in exchange for
a promise that, if a default or other credit event takes
place during the covered period, the seller will make a
bigger payoff to the buyer. In some cases, CDS buyers and
sellers also agree to make payments to each other over the
course of the covered period as the CDS rises or falls in
value according to whether a credit event looks more or less
likely.
Five years ago, few people outside of financial circles had
ever heard of a credit default swap, but we all learned more
than we wanted to during the financial crisis when CDS
disasters brought down storied financial firms and almost
pushed the U.S. financial system over the cliff. We found out
there is now a $30 trillion CDS market worldwide, and that
virtually all U.S. financial players engage in CDS
transactions. And credit default swaps continue to play a
role in financial crises around the world, from Greece to
Ireland to Portugal.
Well it turns out there's a tax angle which promotes not
only CDS gambling, but also offshore finagling. That's
because U.S. tax regulations currently allow CDS payments
that are sent from the United States to someone offshore to
be treated as non-taxable, non-U.S. source income. Let me
repeat that. CDS payments sent from the United States are now
deemed non-U.S. source income to the recipient for tax
purposes. That's because current regs deem the ``source'' of
the CDS payment to be where the payment ends up--exactly the
opposite of the normal definition of the word ``source.''
Well, you can imagine the use that some hedge funds that
operate here in the United States, but are incorporated
offshore and maintain post office boxes and bank accounts in
tax havens, may be making of that tax loophole. They can tell
their CDS counterparties to send any CDS payments to their
offshore post box or bank account, tell Uncle Sam that those
payments are legally considered non-U.S. source income, and
bank the CDS payments as foreign income immune to U.S. tax.
Hedge funds are likely far from alone in sheltering their CDS
income from taxation by sending it offshore. Banks,
securities firms, other financial firms, and a lot of
commercial firms may be doing the same thing.
Our bill would shut down that offshore game simply by
recognizing reality--that CDS payments sent from the United
States are U.S. source income subject to taxation.
Section 106--Foreign Subsidiary Deposits Loophole
Section 106 of the bill would take on another type of
offshore trickery, closing what I call the foreign subsidiary
deposits loophole.
Right now, U.S. corporations report holding substantial
funds offshore, in the range of $1 trillion in accumulated
undistributed earnings. Some of that cash is the result of
legitimate foreign business operations, such as plants,
stores, or restaurant chains located in other countries. Some
of it is the result of transfer pricing arrangements that
moved the funds out of the United States with varying degrees
of legitimacy. But regardless of how or why the funds are
outside of the United States, U.S. corporations generally do
not pay taxes on them, invoking tax code provisions that
allow them to defer taxation of foreign income as long as
those funds are not brought back--repatriated--to the United
States.
But we need to look closer at the corporations claiming
that their funds are offshore. In some cases, those so-called
offshore funds are apparently being held in U.S. dollars in
U.S. bank and securities accounts located right here in the
United States.
One easy way for that to happen is for a U.S. corporation
to direct its foreign subsidiary to deposit its foreign
earnings at a foreign bank, let's say in the Cayman Islands,
and ask the Cayman bank to convert any foreign currency into
U.S. dollars. The Cayman bank typically complies by opening a
U.S. dollar account at a U.S. bank. When one bank opens an
account at another bank, the account is generally referred to
as a correspondent account.
So the Cayman bank opens a correspondent account at a U.S.
bank, deposits the funds belonging to the foreign subsidiary
of the U.S. corporation, converts the funds into U.S.
dollars, and perhaps even invests those dollars in an
overnight or money market account or certificate of deposit
to earn interest on the money. The U.S. corporation or its
foreign subsidiary could even direct the Cayman bank to
invest the U.S. dollars in U.S. securities, which the Cayman
bank could do by opening a correspondent account at a U.S.
securities firm, depositing the corporate dollars, and
directing those dollars to be used to buy stocks or bonds.
Again, the correspondent account would be in the name of the
Cayman bank rather than in the name of the U.S. corporation
or its foreign subsidiary, although the funds involved are
beneficially owned by the corporate client.
The end result is that the U.S. corporation's offshore
funds aren't really offshore at all. They are sitting in a
U.S. bank or securities firm right here in the United States.
The U.S. corporation is getting the benefit of using U.S.
dollars, the safest currency in the world. It is also getting
the benefit of using U.S. financial institutions, sending
funds

[[Page S4523]]

through U.S. wire transfer networks, and investing in U.S.
financial markets, all without paying a dime of income taxes.
Our bill would put an end to the fiction that corporate
funds deposited in U.S. financial accounts somehow still
qualify as offshore funds that have not been repatriated to
the United States. Instead, the bill would recognize the
reality that the funds are in the United States and are no
longer immune to taxation. It would do so by treating any
funds that have been deposited by or on behalf of a foreign
subsidiary in an account physically located in the United
States as a taxable distribution by that foreign subsidiary
to its U.S. parent.
If U.S. corporations want to defer U.S. taxation on their
foreign income by keeping that income offshore, then they
should have to actually keep those funds outside of the
United States. If they bring that income here to the United
States to seek the protections and benefits of having it
deposited in U.S. currency at U.S. financial institutions,
then those deposits should be treated as repatriated and
subject to the same taxes that other domestic corporations
pay.
Section 201--Country-by-Country Reporting
Section 201 of the bill would tackle the problem of
offshore secrecy that currently surrounds most multinational
corporations by requiring them to provide basic information
on a country-by-country basis to the investing public and
government authorities.
Many multinationals today are complex businesses with
sprawling operations that cross multiple international
boundaries. In many cases, no one outside of the corporations
themselves knows much about what a particular corporation is
doing on a per country basis or how its country-specific
activities fit into the corporation's overall performance,
planning, and operations.
The lack of country-specific information deprives investors
of key data to analyze a multinational's financial health,
exposure to individual countries' problems, and worldwide
operations. There is also a lack of information to evaluate
tax revenues on a country-specific basis to combat tax
evasion, financial fraud, and corruption by government
officials.
The lack of country-specific information also impedes
efficient tax administration, leaving tax authorities unable
to effectively analyze transfer pricing arrangements, foreign
tax credits, business arrangements that attempt to play one
country off another to avoid taxation, and illicit tactics to
move profits to tax havens.
The bill would assist investors and tax administrators by
requiring corporations that are registered with the
Securities and Exchange Commission to provide basic
information concerning their operations on a country-by-
country basis. This basic information would be the
approximate number of their employees per country, total
amount of sales and purchases involving related and third
parties, total amount of financing arrangements with related
and third parties; and the total amount of tax obligations
and actual tax payments made on a per country basis. This
information would have to be furnished to the SEC as part of
the corporation's existing SEC filings.
The bill requires disclosure of basic data that most
multinational corporations would already have. The data
wouldn't be burdensome to collect; it's just information that
isn't routinely released by many multinationals. It's time to
end the secrecy that now enables too many multinationals to
run circles around tax administrators.
In the case of the United States, the value of country-by-
country data becomes apparent after reading a recent article
by Professor Kimberly Clausing who estimated that, in 2008
alone, ``the income shifting of multinational firms reduced
U.S. government corporate tax revenue by about $90 billion,''
which was ``approximately 30 percent of corporate tax
revenues.'' Think about that. Incoming shifting--in which
multinationals use various tactics to shift income to tax
havens to escape U.S. taxes--is responsible for $90 billion
in unpaid taxes in a single year. Over ten years, that
translates into $900 billion--nearly a trillion dollars. It
is unacceptable to allow that magnitude of nonpayment of
corporate taxes to continue year after year in light of the
mounting deficits facing this country.
IRS data shows that the overall share of federal taxes paid
by U.S. corporations has fallen dramatically, from 32% in
1952, to about 9% in 2009, the last year in which data is
available. A 2008 report by the Government Accountability
Office found that, over an eight-year period, about 1.2
million U.S. controlled corporations, or 67% of the corporate
tax returns filed, paid no federal corporate income tax at
all, despite total gross receipts of $2.1 trillion. At the
same time corporations are dodging payment of U.S. taxes,
corporate misconduct is continuing to drain the U.S. treasury
of billions upon billions of taxpayer dollars to combat
mortgage fraud, oil spills, bank bailouts, and more.
Corporate nonpayment of tax involves a host of issues, but
transfer pricing and offshore tax dodging by multinationals
is a big part of the problem. Section 201 of the bill would
take the necessary first step to stop multinational
corporations from continuing to dodge payment of U.S. taxes
through offshore trickery by requiring them to disclose basic
corporate data on a country-by-country basis.
Section 202--$1 Million Penalty for Hiding Offshore Stock
Holdings
In addition to tax abuses, the 2006 Subcommittee
investigation into the Wyly case history uncovered a host of
troubling transactions involving U.S. securities held by the
58 offshore trusts and corporations associated with the two
Wyly brothers. Over the course of a number of years, the
Wylys had obtained about $190 million in stock options as
compensation from three U.S. publicly traded corporations at
which they were directors and major shareholders. Over time,
the Wylys transferred these stock options to the network of
offshore entities they had established.
The investigation found that, for years, the Wylys had
generally failed to report the offshore entities' stock
holdings or transactions in their filings with the Securities
and Exchange Commission (SEC). They did not report these
stock holdings on the ground that the 58 offshore trusts and
corporations functioned as independent entities, even though
the Wylys continued to direct the entities' investment
activities. The public companies where the Wylys were
corporate insiders also failed to include in their SEC
filings information about the company shares held by the
offshore entities, even though the companies knew of their
close relationship to the Wylys, that the Wylys had provided
the offshore entities with significant stock options, and
that the offshore entities held large blocks of the company
stock. On other occasions, the public companies and various
financial institutions failed to treat the shares held by the
offshore entities as affiliated stock, even though they were
aware of the offshore entities' close association with the
Wylys. The investigation found that, because both the Wylys
and the public companies had failed to disclose the holdings
of the offshore entities, for 13 years federal regulators had
been unaware of those stock holdings and the relationships
between the offshore entities and the Wyly brothers.
Corporate insiders and public companies are already
obligated by current law to disclose stock holdings and
transactions of offshore entities affiliated with a company
director, officer, or major shareholder. In fact, in 2010,
the SEC filed a civil complaint against the Wylys in
connection with their hidden offshore holdings and alleged
insider trading. Current penalties, however, appear
insufficient to ensure compliance in light of the low
likelihood that U.S. authorities will learn of transactions
that take place in an offshore jurisdiction. To address this
problem, Section 202 of the bill would establish a new
monetary penalty of up to $1 million for persons who
knowingly fail to disclose offshore stock holdings and
transactions in violation of U.S. securities laws.
Sections 203 and 204--Anti-Money Laundering Programs
The Subcommittee's 2006 investigation showed that the Wyly
brothers used two hedge funds and a private equity fund
controlled by them to funnel millions of untaxed offshore
dollars into U.S. investments. Other Subcommittee
investigations provide extensive evidence of the role played
by U.S. formation agents in assisting U.S. persons to set
up offshore structures as well as U.S. shell companies
later used in illicit activities, including money
laundering, terrorism, tax evasion, and other misconduct.
Because hedge funds, private equity funds, and formation
agents are as vulnerable as other financial institutions
to money launderers seeking entry into the U.S. financial
system, the bill contains two provisions aimed at ensuring
that these groups know their clients and do not accept or
transmit suspect funds into the U.S. financial system.
Currently, many unregistered investment companies, such as
hedge funds and private equity funds, transmit substantial
offshore funds into the United States, yet are not required
by law to have anti-money laundering programs, including
Know-Your-Customer due diligence procedures and procedures to
file suspicious activity reports. There is no reason why this
sector of our financial services industry should continue to
serve as a gateway into the U.S. financial system for
substantial funds that could be connected to tax evasion,
terrorist financing, money laundering, or other misconduct.
Nine years ago, in 2002, the Treasury Department proposed
anti-money laundering regulations for these companies, but
never finalized them. In 2008, the Department withdrew them
with no explanation. Section 203 of the bill would require
Treasury to issue final anti-money laundering regulations for
unregistered investment companies within 180 days of the
enactment of the bill. Treasury would be free to draw upon
its 2002 proposal, but the bill would also require the final
regulations to direct hedge funds and private equity funds to
exercise due diligence before accepting offshore funds and to
comply with the same procedures as other financial
institutions if asked by federal regulators to produce
records kept offshore.
In addition, Section 204 of the bill would add formation
agents to the list of persons with anti-money laundering
obligations. For the first time, those engaged in the
business of forming corporations and other entities, both
offshore and in the 50 States, would be responsible for
knowing who their clients were and avoiding suspect funds.
The bill also directs Treasury to develop anti-money
laundering regulations for this group. Treasury's key anti-
money laundering agency, the Financial Crimes Enforcement
Network, testified before the Subcommittee in 2006, that it
was considering drafting such regulations

[[Page S4524]]

but five years later has yet to do so. Section 204 also
creates an exemption for government personnel and for
attorneys who use paid formation agents when forming entities
for their clients. Since paid formation agents would already
be subject to anti-money laundering obligations under the
bill, there would be no reason to simultaneously subject
attorneys using their services to the same anti-money
laundering requirements.
We expect and intend that, as in the case of all other
entities required to institute anti-money laundering
programs, the regulations issued in response to this bill
would instruct hedge funds, private equity funds, and
formation agents to adopt risk-based procedures that would
concentrate their due diligence efforts on clients that pose
the highest risk of money laundering.
Section 205--IRS John Doe Summons
Section 205 of the bill focuses on an important tool used
by the IRS in recent years to uncover taxpayers involved in
offshore tax schemes, known as John Doe summons. Section 205
would make three technical changes to make the use of John
Doe summons more effective in offshore and other complex
investigations.
A John Doe summons is an administrative IRS summons used to
request information in cases where the identity of a taxpayer
is unknown. In cases involving a known taxpayer, the IRS may
issue a summons to a third party to obtain information about
the U.S. taxpayer, but must also notify the taxpayer who then
has 20 days to petition a court to quash the summons to the
third party. With a John Doe summons, however, IRS does not
have the taxpayer's name and does not know where to send the
taxpayer notice, so the statute substitutes a procedure in
which the IRS must instead apply to a court for advance
permission to serve the summons on the third party. To obtain
approval of the summons, the IRS must show the court, in
public filings to be resolved in open court, that: (1) the
summons relates to a particular person or ascertainable class
of persons, (2) there is a reasonable basis for concluding
that there is a tax compliance issue involving that person or
class of persons, and (3) the information sought is not
readily available from other sources.
In recent years, the IRS has used John Doe summonses to try
to obtain information about taxpayers operating in offshore
secrecy jurisdictions. For example, the IRS obtained court
approval to serve a John Doe summons on a Swiss bank, UBS AG,
to obtain the names of tens of thousands of U.S. clients who
opened UBS accounts in Switzerland without disclosing those
accounts to the IRS. This landmark effort to overcome Swiss
secrecy laws not only led to the bank's turning over
thousands of U.S. client names to the United States, but also
to abandon the country's longtime stance of using its secrecy
rules to protect U.S. tax evaders. In earlier years, the IRS
obtained court approval to issue John Doe summonses to credit
card associations, credit card processors, and credit card
merchants, to collect information about taxpayers using
credit cards issued by offshore banks. This information led
to many successful cases in which the IRS identified funds
hidden offshore and recovered unpaid taxes.
Currently, however, use of the John Doe summons process is
time consuming and expensive. For each John Doe summons
involving an offshore secrecy jurisdiction, the IRS has had
to establish in court that the involvement of accounts and
transactions in offshore secrecy jurisdictions meant there
was a significant likelihood of tax compliance problems. To
relieve the IRS of the need to make this same proof over and
over in court after court, the bill would provide that, in
any John Doe summons proceeding involving a class defined in
terms of a correspondent or payable through account at a non-
FATCA institution, the court may presume that the case raises
tax compliance issues. This presumption would then eliminate
the need for the IRS to repeatedly establish in court the
obvious fact that accounts at non-FATCA institutions raise
tax compliance issues.
Finally, the bill would streamline the John Doe summons
approval process in large ``project'' investigations where
the IRS anticipates issuing multiple summonses to definable
classes of third parties, such as banks or credit card
associations, to obtain information related to particular
taxpayers. Right now, for each summons issued in connection
with a project, the IRS has to obtain the approval of a
court, often having to repeatedly establish the same facts
before multiple judges in multiple courts. This repetitive
exercise wastes IRS, Justice Department, and court resources,
and fragments oversight of the overall IRS investigative
effort.
To streamline this process and strengthen court oversight
of IRS use of John Doe summons, the bill would authorize the
IRS to present an investigative project, as a whole, to a
single judge to obtain approval for issuing multiple
summonses related to that project. In such cases, the court
would retain jurisdiction over the case after approval is
granted, to exercise ongoing oversight of IRS issuance of
summonses under the project. To further strengthen court
oversight, the IRS would be required to file a publicly
available report with the court on at least an annual basis
describing the summonses issued under the project. The court
would retain authority to restrict the use of further
summonses at any point during the project. To evaluate the
effectiveness of this approach, the bill would also direct
the Government Accountability Office to report on the use of
the provision after five years.
Section 206--FBAR Investigations and Suspicious Activity
Reports
Section 206 of the bill would make several amendments to
strengthen the ability of the IRS to enforce the Foreign Bank
Account Report (FBAR) requirements and clarify the right of
access by IRS civil enforcement authorities to Suspicious
Activity Reports.
Under present law, a person controlling a foreign financial
account with over $10,000 is required to check a box on his
or her income tax return and, under Title 31, also file an
FBAR form with the IRS. Treasury has delegated to the IRS
responsibility for investigating FBAR violations and
assessing FBAR penalties. Because the FBAR enforcement
jurisdiction derives from Title 31, however, the IRS has set
up a complex process for when its personnel may use tax
return information when acting in its role as FBAR enforcer.
The tax disclosure law, in Section 6103(b)(4) of the tax
code, permits the use of tax information only for the
administration of the internal revenue laws or ``related
statutes.'' To implement this statutory requirement, the IRS
currently requires its personnel to determine, at a
managerial level and on a case by case basis, that the Title
31 FBAR law is a ``related statute.'' Not only does this
necessitate a repetitive determination in every FBAR case
before an IRS agent can look at the potential non-filer's
income tax return to determine if filer checked the FBAR box,
but it also prevents the IRS from comparing FBAR filing
records to bulk data on foreign accounts received from tax
treaty partners to find non-filers.
One of the stated purposes for the FBAR filing requirement
is that such reports ``have a high degree of usefulness in .
. . tax . . . investigations or proceedings.'' 31 U.S.C.
5311. If one of the reasons for requiring taxpayers to file
FBARs is to use the information for tax purposes, and if the
IRS has been charged with FBAR enforcement because of the
FBARs' close connection to tax administration, common sense
dictates that the FBAR statute should be viewed as a
``related statute'' as for tax disclosure purposes. Section
206(a) of the bill would make that clear by adding a
provision to Section 6103(b) of the tax code deeming FBAR-
related statutes to be ``related statutes,'' thereby allowing
IRS personnel to make routine use of tax return information
when working on FBAR matters.
The second change that would be made by Section 206 is an
amendment to simplify the calculation of FBAR penalties.
Currently the penalty is determined in part by the balance in
the foreign bank account at the time of the ``violation.''
The violation has been interpreted to have occurred on the
due date of the FBAR return, which is June 30 of the year
following the year to which the report relates. The statute's
use of this specific June 30th date can lead to strange
results if money is withdrawn from the foreign account after
the reporting period closed but before the return due date.
To eliminate this unintended problem, Section 206(b) of the
bill would instead calculate the penalty using the highest
balance in the account during the covered reporting period.
The third part of section 206 relates to Suspicious
Activity Reports or SARs, which financial institutions are
required to file with the Financial Crimes Enforcement Center
(FinCEN) of the Treasury Department when they encounter
suspicious transactions. FinCEN is required to share this
information with law enforcement, but currently does not
permit IRS civil investigators access to the information,
even though IRS civil investigators are federal law
enforcement officials. Sharing SAR information with civil IRS
investigators would likely prove very useful in tax
investigations and would not increase the risk of disclosure
of SAR information, since IRS civil personnel operate under
the same tough disclosure rules as IRS criminal
investigators. In some cases, IRS civil agents are now
issuing an IRS summons to a financial institution to get
access, for a production fee, to the very same information
the financial institution has already filed with Treasury in
a SAR. Section 206(c) of the bill would end that inefficient
and costly practice by making it clear that ``law
enforcement'' includes civil tax law enforcement.
Title III on Abusive Tax Shelters
Until now, I've been talking about what the bill would do
to combat offshore tax abuses. Now I want to turn to the
final title of the bill which offers measures to do combat
abusive tax shelters and their promoters who use both
domestic and offshore means to achieve their ends.
Abusive tax shelters are complicated transactions promoted
to provide tax benefits unintended by the tax code. They are
very different from legitimate tax shelters, such as
deducting the interest paid on a home mortgage or
Congressionally approved tax deductions for building
affordable housing. Some abusive tax shelters involve
complicated domestic transactions; others make use of
offshore shenanigans. All abusive tax shelters are marked by
one characteristic: there is no real economic or business
rationale other than tax avoidance. As Judge Learned Hand
wrote in Gregory v. Helvering, they are ``entered upon for no
other motive but to escape taxation.''
Abusive tax shelters are usually tough to prosecute. Crimes
such as terrorism and

[[Page S4525]]

murder produce instant recognition of the immorality
involved. Abusive tax shelters, by contrast, are often
``MEGOs,'' meaning ``My Eyes Glaze Over.'' Those who cook up
these concoctions count on their complexity to escape
scrutiny and public ire. But regardless of how complicated or
eye-glazing, the hawking of abusive tax shelters by tax
professionals like accountants, bankers, investment advisers,
and lawyers to thousands of people like late-night, cut-rate
T.V. bargains is scandalous, and we need to stop it.
My Subcommittee has spent years examining the design, sale,
and implementation of abusive tax shelters. Our first hearing
on this topic in recent years was held in January 2002, when
the Subcommittee examined an abusive tax shelter purchased by
Enron. In November 2003, the Subcommittee held two days of
hearings and released a staff report that pulled back the
curtain on how even some respected accounting firms,
banks, investment advisors, and law firms had become
engines pushing the design and sale of abusive tax
shelters to corporations and individuals across this
country. In February 2005, the Subcommittee issued a
bipartisan report that provided further details on the
role these professional firms played in the proliferation
of these abusive shelters. Our Subcommittee report was
endorsed by the full Committee on Homeland Security and
Governmental Affairs in April 2005.
In 2006, the Subcommittee released a report and held a
hearing showing how financial and legal professionals
designed and sold an abusive tax shelter known as the POINT
Strategy, which depended upon secrecy laws and practices in
the Isle of Man to conceal the phony nature of securities
trades that lay at the center of this tax shelter
transaction. In 2008, the Subcommittee released a staff
report and held a hearing on how financial firms have
designed and sold so-called dividend enhancement transactions
to help offshore hedge funds and others escape payment of
U.S. taxes on U.S. stock dividends.
The Subcommittee investigations have found that many
abusive tax shelters are not dreamed up by the taxpayers who
use them. Instead, they are devised by tax professionals who
then sell the tax shelter to clients for a fee. In fact, over
the years we've found U.S. tax advisors cooking up one
complex scheme after another, packaging them up as generic
``tax products'' with boiler-plate legal and tax opinion
letters, and then undertaking elaborate marketing schemes to
peddle these products to literally thousands of persons
across the country. In return, these tax shelter promoters
were getting hundreds of millions of dollars in fees, while
diverting billions of dollars in tax revenues from the U.S.
Treasury each year.
For example, one shelter investigated by the Subcommittee
and featured in the 2003 hearings became part of an IRS
settlement effort involving a set of abusive tax shelters
known as ``Son of Boss.'' Following our hearing, more than
1,200 taxpayers admitted wrongdoing and agreed to pay back
taxes, interest and penalties totaling more than $3.7
billion. That's billions of dollars the IRS collected on just
one type of tax shelter, demonstrating both the depth of the
problem and the potential for progress. The POINT shelter
featured in our 2006 hearing involved another $300 million in
tax loss on transactions conducted by just six taxpayers. The
offshore dividend tax scams we examined in 2008 meant
additional billions of dollars in unpaid taxes over a ten
year period.
Title III of the bill contains a number of measures to curb
abusive tax shelters. It would strengthen the penalties
imposed on those who aid or abet tax evasion. Several
provisions would deter bank participation in abusive tax
shelter activities by requiring regulators to develop new
examination procedures to detect and stop such activities.
Others would end outdated communication barriers between the
IRS and other federal enforcement agencies such as the SEC,
bank regulators, and the Public Company Accounting Oversight
Board, to allow the exchange of information relating to tax
evasion cases. The bill also provides for increased
disclosure of tax shelter information to Congress. In
addition, the bill would simplify and clarify an existing
prohibition on the payment of fees linked to tax benefits;
and authorize Treasury to issue tougher standards for tax
shelter opinion letters.
Let me be more specific about these key provisions to curb
abusive tax shelters.
Sections 301 and 302--Strengthening Tax Shelter Penalties
Sections 301 and 302 of the bill would strengthen two very
important penalties that the IRS can use in its fight against
the professionals who make complex abusive shelters possible.
When we started investigating abusive tax shelters, the
penalty for promoting these scams, as set forth in Section
6700 of the tax code, was the lesser of $1,000 or 100 percent
of the promoter's gross income derived from the prohibited
activity. That meant in most cases the maximum fine was just
$1,000.
We've investigated abusive tax shelters that sold for
$100,000 or $250,000 apiece, and some that sold for as much
as $5 million apiece. We also saw instances in which the same
cookie-cutter tax opinion letter was sold to 100 or even 200
clients. Given the huge profits, the $1,000 fine was
laughable.
The Senate acknowledged that in 2004, when it adopted the
Levin-Coleman amendment to the JOBS Act, S. 1637, raising the
Section 6700 penalty on abusive tax shelter promoters to 100
percent of the fees earned by the promoter from the abusive
shelter. A 100 percent penalty would have ensured that the
abusive tax shelter hucksters would not get to keep a single
penny of their ill-gotten gains. That figure, however, was
cut in half during the conference on the JOBS Act, with the
result being that the current Section 6700 penalty can now
reach, but not exceed, 50 percent of the fees earned by a
promoter of an abusive tax shelter.
While a 50 percent penalty is an obvious improvement over
$1,000, this penalty still is inadequate and makes no sense.
Why should anyone who pushes an illegal tax shelter that robs
our Treasury of needed revenues get to keep half of their
ill-gotten gains? What deterrent effect is created by a
penalty that allows promoters to keep half of their fees if
caught, and all of their fees if they are not caught?
Effective penalties should make sure that the peddler of an
abusive tax shelter is deprived of every penny of profit
earned from selling or implementing the shelter and then is
fined on top of that. Section 301 of this bill would do just
that by increasing the penalty on tax shelter promoters to an
amount equal to up to 150 percent of the promoters' gross
income from the prohibited activity.
Section 302 of the bill would address a second weak tax
code penalty which currently is supposed to deter and punish
those who knowingly help taxpayers understate their taxes to
the IRS. Aside from tax shelter ``promoters,'' there are many
other types of professional firms that aid and abet tax
evasion by helping taxpayers carry out abusive tax schemes.
For example, law firms are often asked to write ``opinion
letters'' to help taxpayers head off IRS inquiries and fines
that might otherwise apply to their use of an abusive
shelter. Currently, under Section 6701 of the tax code, these
aiders and abettors face a maximum penalty of only $1,000, or
$10,000 if the offender is a corporation. When law firms are
getting $50,000 for issuing cookie-cutter opinion letters, a
$1,000 fine provides no deterrent effect whatsoever. A $1,000
fine is like getting a jaywalking ticket for robbing a bank.
Section 302 of the bill would strengthen Section 6701 of
the tax code by subjecting aiders and abettors to a maximum
fine of up to 150 percent of the aider and abettor's gross
income from the prohibited activity. This penalty would apply
to all aiders and abettors, not just tax return preparers.
Again, the Senate has recognized the need to toughen this
critical penalty. In the 2004 JOBS Act, Senator Coleman and I
successfully increased this fine to 100 percent of the gross
income derived from the prohibited activity. Unfortunately,
the conference report completely omitted this change,
allowing many aiders and abettors to continue to profit
without penalty from their wrongdoing.
If further justification for toughening these penalties is
needed, one document uncovered by our investigation shows the
cold calculation engaged in by a tax advisor facing low
fines. A senior tax professional at accounting giant KPMG
compared possible tax shelter fees with possible tax shelter
penalties if the firm were caught promoting an illegal tax
shelter. This senior tax professional wrote to his colleagues
the following: ``[O]ur average deal would result in KPMG fees
of $360,000 with a maximum penalty exposure of only
$31,000.'' He then recommended the obvious: going forward
with sales of the abusive tax shelter on a cost-benefit
basis.
Section 303--Fees Contingent upon Obtaining Tax Benefits
Another finding of the Subcommittee investigations is that
some tax practitioners are circumventing current state and
federal constraints on charging tax service fees that are
dependent on the amount of promised tax benefits.
Traditionally, accounting firms charged flat fees or hourly
fees for their tax services. In the 1990s, however, they
began charging ``value added'' fees based on, in the words of
one accounting firm's manual, ``the value of the services
provided, as opposed to the time required to perform the
services.'' In addition, some firms began charging
``contingent fees'' that were calculated according to the
size of the paper ``loss'' that could be produced for a
client and used to offset the client's taxable income--the
greater the so-called loss, the greater the fee.
In response, many states prohibited accounting firms from
charging contingent fees for tax work to avoid creating
incentives for these firms to devise ways to shelter
substantial sums. The SEC and the American Institute of
Certified Public Accountants also issued rules restricting
contingent fees, allowing them in only limited circumstances.
The Public Company Accounting Oversight Board issued a
similar rule prohibiting public accounting firms from
charging contingent fees for tax services provided to the
public companies they audit. Each of these federal, state,
and professional ethics rules seeks to limit the use of
contingent fees under certain, limited circumstances.
The Subcommittee investigation found several instances of
tax shelter fees that were linked to the amount of a
taxpayer's projected paper losses which could be used to
shelter income from taxation. For example, in four tax
shelters examined by the Subcommittee in 2003, documents
showed that the fees were equal to a percentage of the paper
loss to be generated by the transaction. In one case, the
fees were typically set at 7 percent of the transaction's
generated ``tax loss'' that clients could use to

[[Page S4526]]

reduce other taxable income. In another, the fee was only 3.5
percent of the loss, but the losses were large enough to
generate a fee of over $53 million on a single transaction.
In other words, the greater the loss that could be concocted
for the taxpayer or ``investor,'' the greater the profit for
the tax promoter. Think about that--greater the loss, the
greater the fee. How's that for turning capitalism on its
head?
In addition, evidence indicated that, in at least one
instance, a tax advisor was willing to deliberately
manipulate the way it handled certain tax products to
circumvent contingent fee prohibitions. An internal document
at an accounting firm related to a specific tax shelter, for
example, identified the states that prohibited contingent
fees. Then, rather than prohibit the tax shelter transactions
in those states or require an alternative fee structure, the
memorandum directed the firm's tax professionals to make sure
the engagement letter was signed, the engagement was managed,
and the bulk of services was performed ``in a jurisdiction
that does not prohibit contingency fees.''
Right now, the prohibitions on contingent fees are complex
and must be evaluated in the context of a patchwork of
federal, state, and professional ethics rules. Section 303 of
the bill would establish a single enforceable rule,
applicable nationwide, that would prohibit tax practitioners
from charging fees calculated according to a projected or
actual amount of tax savings or paper losses.
Section 304--Deterring Participation in Abusive Tax Shelter
Activities
Section 304 of the bill targets financial institutions that
offer financing or securities transactions to advance abusive
tax shelters disguised as investment opportunities. Tax
shelter schemes lack the economic risks and rewards
associated with true investments. But to make these phony
transactions look legitimate, some abusive tax shelters make
use of significant amounts of money in low risk schemes
mischaracterized as real investments. The financing or
securities transactions called for by these schemes are often
supplied by a bank, securities firm, or other financial
institution and used to generate paper losses that the
taxpayer can then use to shelter income from taxation.
Currently the tax code prohibits financial institutions
from providing products or services that aid or abet tax
evasion or that promote or implement abusive tax shelters.
The agencies that oversee these financial institutions on a
daily basis, however, are experts in banking and securities
law and generally lack the expertise to spot abusive tax
shelter activity. Section 304 would crack down on financial
institutions' illegal tax shelter activities by requiring
federal bank regulators and the SEC to work with the IRS to
develop examination techniques to detect such abusive
activities and put an end to them.
These examination techniques are intended to be part of
routine regulatory examinations, with regulators reporting
suspect activity or potential violations to the IRS. The
agencies would also be required to prepare a joint report to
Congress in 2013 on preventing the participation of financial
institutions in tax evasion or tax shelter activities.
Section 305--Ending Communication Barriers between
Enforcement Agencies
During hearings before the Permanent Subcommittee on
Investigations on tax shelters in November 2003, IRS
Commissioner Mark Everson testified that his agency was
barred by Section 6103 of the tax code from communicating
information to other federal agencies that would assist those
agencies in their law enforcement duties. He pointed out that
the IRS was barred from providing tax return information to
the SEC, federal bank regulators, and the Public Company
Accounting Oversight Board (PCAOB)--even, for example, when
that information might assist the SEC in evaluating whether
an abusive tax shelter resulted in deceptive accounting in a
public company's financial statements, might help the Federal
Reserve determine whether a bank selling tax products to its
clients had violated the law against promoting abusive tax
shelters, or help the PCAOB judge whether an accounting firm
had impaired its independence by selling tax shelters to its
audit clients.
Another example demonstrates how harmful these information
barriers are to legitimate law enforcement efforts. In 2004,
the IRS offered a settlement initiative to companies and
corporate executives who participated in an abusive tax
shelter involving the transfer of stock options to family-
controlled entities. Over a hundred corporations and
executives responded with admissions of wrongdoing. In
addition to tax violations, their misconduct may be linked to
securities law violations and improprieties by corporate
auditors or banks, but the IRS told the Subcommittee that it
was barred by law from sharing the names of the wrongdoers
with the SEC, banking regulators, or PCAOB. The same is true
for the offshore dividend tax shelters exposed in the
Subcommittee's 2008 hearing. The IRS knows who the offending
banks and investment firms are that designed and sold
questionable dividend enhancement transactions to offshore
hedge funds and others, but it is barred by Section 6103 of
the tax code from providing detailed information or documents
to the SEC or banking regulators who oversee the relevant
financial institutions.
These communication barriers are outdated, inefficient, and
ill-suited to stopping the tax schemes now affecting public
companies, banks, investment firms, and accounting firms. To
address this problem, Section 305 of this bill would
authorize the Treasury Secretary, with appropriate privacy
safeguards, to disclose to the SEC, federal banking agencies,
and the PCAOB, upon request, tax return information related
to abusive tax shelters, inappropriate tax avoidance, or tax
evasion. The agencies could then use this information only
for law enforcement purposes, such as preventing accounting
firms, investment firms, or banks from promoting abusive tax
shelters, or detecting accounting fraud in the financial
statements of public companies.
Section 306--Increased Disclosure of Tax Shelter Information
to Congress
The bill would also provide for increased disclosure of tax
shelter information to Congress. Section 306 would make it
clear that companies providing tax return preparation
services to taxpayers cannot refuse to comply with a
Congressional document subpoena by citing Section 7216, which
prohibits tax return preparers from disclosing taxpayer
information to third parties. Several accounting and law
firms raised this claim in response to document subpoenas
issued by the Permanent Subcommittee on Investigations,
contending they were barred by the nondisclosure provision in
Section 7216 from producing documents related to the sale of
abusive tax shelters to clients.
The accounting and law firms maintained this position
despite an analysis provided by the Senate legal counsel
showing that the nondisclosure provision was never intended
to create a privilege or to override a Senate subpoena, as
demonstrated in federal regulations interpreting the
provision. This bill would codify the existing regulations
interpreting Section 7216 and make it clear that
Congressional document subpoenas must be honored.
Section 306 would also ensure Congress has access to
information about decisions by Treasury related to an
organization's tax exempt status. A 2003 decision by the D.C.
Circuit Court of Appeals, Tax Analysts v. IRS, struck down
certain IRS regulations and held that the IRS must disclose
letters denying or revoking an organization's tax exempt
status. Despite this court decision, the IRS has been
reluctant to disclose such information, not only to the
public, but also to Congress, including in response to
requests by the Subcommittee.
For example, in 2005, the IRS revoked the tax exempt status
of four credit counseling firms, and, despite the Tax
Analysts case, claimed that it could not disclose to the
Subcommittee the names of the four firms or the reasons for
revoking their tax exemption. Section 306 would make it clear
that, upon receipt of a request from a Congressional
committee or subcommittee, the IRS must disclose documents,
other than a tax return, related to the agency's
determination to grant, deny, revoke or restore an
organization's exemption from taxation.
Section 307--Tax Shelter Opinion Letters
The final provision in the bill would address issues
related to opinion letters issued by law firms and others in
support of complex tax schemes. The Treasury Department has
already issued a set of standards for tax practitioners who
provide opinion letters on the tax implications of potential
tax shelters under Circular 230. Section 308 of the bill
would not only provide the express statutory authority which
is currently lacking for these standards, but also strengthen
them.
The public has traditionally relied on tax opinion letters
to obtain informed and trustworthy advice about whether a
tax-motivated transaction meets the requirements of the law.
The Permanent Subcommittee on Investigations has found that,
in too many cases, tax opinion letters no longer contain
disinterested and reliable tax advice, even when issued by
supposedly reputable accounting or law firms. Instead, some
tax opinion letters have become marketing tools used by tax
shelter promoters and their allies to sell clients on their
latest tax products. In many of these cases, financial
interests and biases were concealed, unreasonable factual
assumptions were used to justify dubious legal conclusions,
and taxpayers were misled about the risk that the proposed
transaction would later be designated an illegal tax shelter.
Reforms are essential to address these abuses and restore the
integrity of tax opinion letters.
The Circular 230 standards should be strengthened by
addressing a wider spectrum of tax shelter opinion letter
problems, including preventing concealed collaboration among
supposedly independent letter writers; avoiding conflicts of
interest that would impair auditor independence; ensuring
appropriate fee charges; preventing practitioners and firms
from aiding and abetting the understatement of tax liability
by clients; and banning the promotion of potentially abusive
tax shelters. By authorizing Treasury to address each of
these areas, a beefed-up Circular 230 could help reduce the
ongoing abusive practices related to tax shelter opinion
letters.
Conclusion. Tax evasion eats at the fabric of society, not
only by widening deficits and starving health care,
education, and other needed government services of resources,
but also by undermining public trust--making honest folks
feel like they are being taken advantage of when they pay
their fair share. While the eyes of some people may glaze
over when tax havens and tax shelters are discussed,
unscrupulous taxpayers and tax professionals see illicit
dollar signs. Our

[[Page S4527]]

commitment to crack down on their abuses must be as strong as
their determination to get away with ripping off Uncle Sam
and honest American taxpayers.
We can fight back against offshore tax abuses and abusive
tax shelters if we summon the political will. The Stop Tax
Haven Abuse Act, which is the product of years of work,
offers the tools needed to tear down tax haven secrecy walls
in favour of transparency, cooperation, and tax compliance. I
urge my colleagues to include its provisions in any deficit
reduction or budget package this year or, if not, to adopt it
by separate action.
I ask unanimous consent that following my remarks that a
summary of the bill be reprinted in the record.
____

Stop Tax Haven Abuse Act

Targeting $100 billion in lost revenue each year from
offshore tax dodges, the bill would:
Authorize Special Measures To Stop Offshore Tax Abuse
(Sec. 101) by allowing Treasury to take specified steps
against foreign jurisdictions or financial institutions that
impede U.S. tax enforcement.
Strengthen FATCA (Sec. 102) by clarifying under the Foreign
Account Tax Compliance Act when foreign financial
institutions and U.S. persons must report foreign financial
accounts to the IRS.
Establish Rebuttable Presumptions To Combat Offshore
Secrecy (Sec. 102) in U.S. tax and securities law enforcement
proceedings by treating non-publicly traded offshore entities
as controlled by the U.S. taxpayer who formed them, sent them
assets, received assets from them, or benefited from them
when those entities have accounts or assets in non-FATCA
institutions, unless the taxpayer proves otherwise.
Stop Companies Run From the United States Claiming Foreign
Status (Sec. 103) by treating foreign corporations that are
publicly traded or have gross assets of $50 million or more
and whose management and control occur primarily in the
United States as U.S. domestic corporations for income tax
purposes.
Strengthen Detection of Offshore Activities (Sec. 104) by
requiring U.S. financial institutions that open accounts for
foreign entities controlled by U.S. clients or open foreign
accounts in non-FATCA institutions for U.S. clients to report
the accounts to the IRS.
Close Credit Default Swap (CDS) Loophole (Sec. 105) by
treating CDS payments sent offshore from the United States as
taxable U.S. source income.
Close Foreign Subsidiary Deposits Loophole (Sec. 106) by
treating deposits made by a controlled foreign corporation
(CFC) to a financial account located in the United States,
including a correspondent account of a foreign bank, as a
taxable constructive distribution by the CFC to its U.S.
parent.
Require Annual Country-by-Country Reporting (Sec. 201) by
SEC-registered corporations on employees, sales, financing,
tax obligations, and tax payments.
Establish a Penalty for Corporate Insiders Who Hide
Offshore Holdings (Sec. 202) by authorizing a fine of up to
$1 million per violation of securities laws.
Require Anti-Money Laundering Programs (Sec. Sec. 203-204)
for hedge funds, private equity funds, and formation agents
to ensure they screen clients and offshore funds.
Strenghthen John Doe Summons (Sec. 205) by allowing the IRS
to issue summons to a class of persons that relate to a long-
term project approved and overseen by a court.
Combat Hidden Foreign Financial Accounts (Sec. 206) by
allowing IRS use of tax return information to evaluate
foreign financial account reports, simplifying penalty
calculations for unreported foreign accounts, and
facilitating use of suspicious activity reports in civil tax
enforcement.
Strengthen Penalties (Sec. Sec. 301-302) on tax shelter
promoters and those who aid and abet tax evasion by
increasing the maximum fine to 150 percent of any ill-gotten
gains.
Prohibit Fee Arrangements (Sec. 303) in which a tax advisor
is paid a fee based upon the amount of paper losses generated
to shelter income or taxes not paid by a client.
Require Bank Examination Techniques (Sec. 304) to detect
and prevent abusive tax shelter activities or the aiding and
abetting of tax evasion by financial institutions.
Allow Sharing of Tax Information (Sec. 305) upon request by
a federal financial regulator engaged in a law enforcement
effort.
Require Disclosure of Information to Congress (Sec. 306)
related to an IRS determination of whether to exempt an
organization from taxation.
Direct the Establishment of Standards for Tax Opinions
(Sec. 307) rendering advice on transactions with a potential
for tax avoidance or evasion.
______