Baucus Outlines Offshore Tax Haven Legislation

Senate Finance Committee Chairman Max Baucus, D-Mont., on March 12 began circulating among the IRS, the Financial Crimes Enforcement Network (FinCEN) and the business community a preliminary draft of legislation aimed at curbing offshore tax evasion. Baucus intends to introduce a final bill within weeks and has scheduled a hearing on the subject for March 17.

Baucus outlined a three-pronged approach to the problem that would detect, deter and discourage offshore tax evasion by giving the IRS increased time and tools to spot and shut down offshore noncompliance, requiring certain reports to be filed with tax returns, increasing penalties and closing a loophole that results in employers in offshore tax havens avoiding payment of Social Security taxes on workers.

The information reporting would require entities transferring funds offshore, other than on behalf of publicly traded companies, to report to the IRS the amount and destination of funds transferred. In order to give the IRS more time to detect and examine offshore activity, the measure would extend the statute of limitations from three years to six years for tax returns that reported, or should have reported, certain international transactions. The bill would also require the Foreign Bank Account Reports (FBAR) form to be filed with the income tax return. Currently, the FBAR is filed only with the Treasury’s FinCEN. In addition, it requires preparers to ask a series of due diligence questions to determine whether an FBAR should be filed. This is similar to the existing earned income tax credit due diligence regime.

Deterrence also comes through provisions that would: (1) enhance the foreign trust “failure to file” penalty by establishing a $10,000 minimum penalty, (2) expand the types of property considered to be a distribution, such as artwork and jewelry, and (3) double applicable fines and penalties on tax underpayments attributable to certain offshore transactions Companies would also be discouraged from establishing offshore entities through modification of a provision in the Heroes Earnings Assistance and Relief Tax Act of 2008 (P.L.110-245) and requiring offshore entities that hire workers to perform services pursuant to a government contract to treat those workers as American employees subject to Social Security tax.