IRS sets new tax rules for some US Virgin Islands residents
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| Published on Thursday, February 22, 2007 |
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By Ryan J. Donmoyer
WASHINGTON, USA (Bloomberg): The IRS has said that the tax status of 8,500 residents of the US Virgin Islands who earn more than $75,000, including employees of hedge funds, would face renewed scrutiny as the agency steps up efforts to root out tax evaders.
The Internal Revenue Service, in a notice issued on Wednesday, said it would set a three-year limit on audits of upper-income island residents who immediately provide federal tax returns for the past 20 years. The notice also requires islanders to file tax information with the federal government in addition to returns filed with the territorial tax collector.
US Virgin Islands residents are subject to US tax rules, though until now they have only been required to file returns with the territorial Bureau of Internal Revenue. Since 2004, the IRS has begun audits of hundreds of Virgin Islanders as part of a crackdown on an economic development program that allows qualified hedge-fund managers and investors to pay an effective 3.5 percent tax on income earned in the territory.
The rules issued Wednesday are 'clearly another step towards increased IRS involvement in the VI tax system," said Marjorie Rawls Roberts, a tax lawyer in St Thomas who represents hundreds of upper-income residents, including many being audited by the IRS.
At issue is an IRS ruling last year that said the statute of limitations restricting the agency from examining more than three years of tax returns doesn't apply for those claiming USVI residency.
The IRS last year also issued a new form that island residents must use to prove valid residency. The form requires those who stop filing tax returns with the IRS in order to file them in the USVI to list where their immediate family lives, where their cars are registered and where they hold driver's licenses.
The form also asks residents to prove residency by listing memberships in social, cultural, professional and country clubs as well as chambers of commerce and political organizations.
The IRS's actions have been criticized by some members of Congress. Donna Christensen, the delegate to Congress for the territory, called the form "very abusive" in an interview last October and raised concerns about lack of a statute of limitations.
In a January 24 letter to Treasury Secretary Henry Paulson, Representative Charles Rangel of New York, the Democratic chairman of the House Ways and Means Committee, called the lack of a statute of limitations "grossly unfair."
"Situations have been brought to my attention that involve individuals who, in good faith, filed the return with the Virgin Islands and fully paid their liability," Rangel wrote. "The IRS has taken the position that those individuals should have filed their returns with the United States. As a result, the IRS is now asserting deficiencies for the full liability even though many have already paid their share -- although perhaps to the wrong government." Rangel wasn't immediately available for comment today, said his spokesman, Matthew Beck.
The IRS is opening new offices in St Thomas and St Croix in March or April, said Theresa Branscome, an IRS spokeswoman in Washington. Each office will contain two interview rooms and space for up to four desks to be used by auditors who fly in from Puerto Rico or the mainland when their case load requires, she said.
The tax relationship between the IRS and US Virgin Islands is a long and complicated one. The US Virgin Island tax code mirrors the US one, with some differences, including the economic development program that lured 49 hedge funds and private equity firms to the islands from 2001 to 2004 with the prospect of legally cutting their US tax bill by 90 percent.
To qualify for the tax incentives, firms must invest at least $100,000 in the territory, buy products such as office supplies and computers in the USVI, contribute to area charities and hire at least 10 people, 80 percent of whom must be natives of the islands.
Congress cracked down on the program in 2004 after Senate Finance Committee staff discovered marketing materials from an unidentified law or accounting firm advertising the islands as a tax dodge. Although the investigations resulted in only one criminal conviction, half of the hedge funds divested and left the islands and the IRS has undertaken hundreds of audits of those that remain and of other wealthy islanders who didn't participate in the program, Roberts said.
The IRS has the right to obtain tax records filed with the Virgin Islands Bureau of Revenue, though it doesn't routinely do so. The notice on Wednesday said the IRS was exploring the "feasibility" of creating an automated exchange of information with the territory's tax authority.
The notice Wednesday requires those who earn more than $75,000 to file a Form 1040 that reports zero income but includes the filers' name, Social Security number, and address.
Islanders also must include a statement declaring residency in the US Virgin Islands and an affirmation that a tax return was filed with the territorial tax collector, as well details about the amount of income reported and tax paid to the territorial government.
The three principal US Virgin Islands -- St Croix, St John and St Thomas -- have a population of 108,605. Per capita income in the territory is $18,652, less than half the average in the continental US and $7,000 less than in Mississippi, the poorest state. |
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