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Stop Tax Haven Abuse Act

By John Dietz - Email Editor

Date : March 10, 2009

Dear Valued Reader,

Last Monday, Senator Levin of Michigan reintroduced the Stop Haven Abuse Tax Act on the floor of the Senate. Senators Carl Levine, Norm Coleman and Barack Obama wrote the original bill, S.681, introduced February 17, 2007. At that time, the estimate yielded $345 billion in revenue from tax cheats; with the UBS fraud in pursuit, that is now considered a low estimate. Since the new bill’s introduction on March 2, 2009, the headlines tell the “long story short.”

• "Tax Cheats, Who’s Hiding the Money?" Barron’s
• "Cracking Down on Tax Evaders", Time
• "Obama Admin Backs Tax Haven Bill, IRS Eyes Cheats" – Forbes.com
• "Tax Cheats or Tax Idiots?" – Freakonomics Blog – NYTimes.com
• "Congress, White House Press for Crackdown on Tax Havens, Washington Wire", the Wall Street Journal Blogs

The headlines above come as no shock, and obviously, we do not know the final read of the bill, but we certainly understand the intention. If the purpose of the bill is to get rid of tax evasion, then we applaud the effort. However, if we end up stymieing good business and stopping high-quality Asset Protection techniques, then we are less optimistic.

It is worth a walk through the salient points that raise concern for offshore banking, hedge fund administration, offshore business, insurance and investments, all are affected or at least for now mentioned in the bill.

The bill takes any public company, with an aggregate net worth of $50 million, off the radar screen and exempts them from this tax dodger moniker. At the risk of sounding disingenuous, large public companies, the ones that appear to need more oversight, are exempt. Consequently, financial privacy is facing major assault in every high-tax nation around the world.

Let’s go back to the reason and perhaps the original purpose of Offshore Financial Centers. Their original name “Tax Haven” comes from the fact that smaller jurisdictions offer, in many cases, a respite and a legal option to higher tax jurisdictions for clients around the globe. This feature was never really an available option to U.S. persons, as most people reading this newsletter know, U.S. citizens cannot avoid or evade tax by virtue of location or title the assets take on. In short, you can put your money in the Vatican Vault, but it would still be a reportable and, possibly, a taxable event.

We cannot claim that abuses of the system have to do with the complicated tax code and their reporting requirements, but we can say that high-tax nations all experience this problem. Generally, the law-abiding wealthy have hired experts with teams of attorneys, accountants and planners to mitigate tax and gain Asset Protection. The key to any well thought out advanced tax, estate, and Asset Protection Plan is abiding by the rules rather than avoiding the rules.

Today, without any additional legislation, the IRS has sufficient power to prosecute anyone evading tax in the U.S. or offshore by misuse of foreign bank account reporting, passive foreign investment income rules, foreign corporation reporting rules and so on. The bill aids the government in uncovering the reporting of beneficial ownership, or in the case of tax evasion, the lack of reporting beneficial ownership. Numerous individuals and companies figure out ways to obscure, confuse and hide the true ownership; these entities should be the so-called targets of the bill.

As to the verdict of who is the target of the bill, the jury is still out. House Ways and Means Committee member, Lloyd Doggett, D-Texas, introduced a House companion bill the very same day. The committee was quoted as commenting that giving the IRS the tools necessary to crack down on the fraud may be better approached in a piecemeal fashion instead of by using a far-reaching bill. Consensus of the committee is that the piecemeal type of approach would be considered less controversial by only targeting those that the IRS has “cause” to challenge, instead of challenging under an ambiguous umbrella.

Discord spread across Capital Hill that the proposed bill might likely cause an inverse intended reaction for many solvent and respectable high net worth clients and businesses. The House Ways and Means Committee stated this consideration as part of the reason for the companion bill. While S. 580 seems to fall in line with Democratic Washington ideologues that everything financial is broken, to entrepreneurs it seems more like it is throwing the baby out with the bath water.

Most of us feel that it is a reasonable aspiration for the government to eliminate tax fraud; however, caution must be exhibited as to not squash entrepreneurial and global endeavors. A bill such as this, in any form, will raise the bar for upstarts and companies wanting to play in the international business arena. At this time in our economic cycle, limiting entrepreneurs with potential contributions and solutions to these financial stipulations would be a grave mistake.

Until next time,

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