IRS officials just revealed plans to tighten the rules of their so-called “Qualified Intermediary” (QI) program, says Bob Bauman in The Sovereign Society. Under the QI program, foreign banks have held billions of dollars offshore for American clients without legally having to disclose their names to the IRS.
In exchange, the banks promised to know who their clients are, withhold any taxes due on U.S. securities in their accounts and send that money to the IRS. More than 7,000 foreign banks are enrolled in the program and paid about US$2 billion to the IRS last year.

This all began in 2001. Since then, the IRS has forced foreign banks and financial institutions to become IRS informants, a.k.a. “qualified intermediaries” (QI).

To put it plainly, it’s just like how the IRS forced American bankers to spy on their customers with the Bank Secrecy Act and the PATRIOT Act. In the same way, the QI program turned offshore bankers into spies on their U.S. clients, at least in certain defined situations.

Since the IRS imposed the QI rules, U.S. persons holding U.S.-based investments purchased through their offshore banks did have a choice:

1. They could either have offshore banks report the American holdings to the IRS.
2. Or they could have the bank withhold a 30% tax on all interest and dividends paid to them. .

To avoid either event, the U.S. investor could (and we have recommended) not hold any U.S.-based investments through an offshore bank or financial institution. If you don’t have U.S. investments, then you’re not required to report under the 2001 QI rules.

By comparison, if you held foreign, non-U.S. investments offshore, you would have been exempt both from the QI reporting and the QI tax withholding rules…until now.

Tune in tomorrow, and I’ll explain the latest in this rising development.

BOB BAUMAN, Legal Counsel

Source: Is the IRS About to Extend Their Reach?