June 26, 2009 / 6:58 PM / 10 years ago

Hedge funds, private equity brace for U.S. reports

WASHINGTON (Reuters) - Hedge funds, private equity firms and other investors are scrambling to meet a looming deadline to report their offshore income, as U.S. tax collectors boost efforts to track foreign holdings.

The reports will give authorities a glimpse into just how much money U.S. citizens have tucked away in investment accounts overseas, believed to be in the tens of billions of dollars.

U.S. taxpayers have long been required to file “Report of Foreign Bank and Financial Account” forms with the government when they have holdings of more than $10,000 in foreign banks.

A murky area, though, has been hedge funds, private equity firms and foreign funds, according to industry lawyers. An IRS official recently startled those industries by stating that the agency expects these investors to report offshore holdings. An initial deadline for filing is next Tuesday, June 30.

“There is a fairly good consensus among professionals in this area — it’s really a reinterpretation of what is a foreign financial account,” said Mitch Nichter, an attorney in the investment management practice at Paul Hastings.

An IRS official, who was not authorized to be quoted, said there was no change in policy, just a clarification in light of the agency’s renewed focus on the abusive use of offshore accounts.

“There has been no enforcement on this,” in the past, said George Clarke, a white collar attorney at Miller & Chevalier in Washington, who says many of his clients have done nothing wrong but are being inadvertently pressured to file now.

The increased transparency is partially being driven by wealthy countries’ hunt for revenue amid the global financial slump.

“The offshore accounts not only in the U.S. but in the various G20 countries give governments low-hanging fruit for revenue,” said Alan Granwell, an international tax expert at DLA Piper in Washington. “There has been more movement in this area in the last three months than in the last 10 years.”

Ministers from wealthy countries this week agreed to the possible imposition of sanctions on countries that do not abide by Organization for Economic Cooperation and development tax standards.


Earlier this week, a Florida accountant pleaded guilty to tax evasion, in one of the first U.S. prosecutions of wealthy U.S. clients of Swiss bank UBS AG UBSN.VX.

Officials said to expect more prosecutions, and a government official warned about the filing deadline.

“Taxpayers who hide income offshore and fail to comply with the FBAR (Report of Foreign Bank and Financial Account) filing deadline face criminal prosecution, jail time and steep fines,” Acting Assistant Attorney General John DiCicco said.

The giant Swiss bank admitted in February that it had helped clients conceal their holdings and paid $780 million to settle a criminal case with the United States. A civil case, in which the United States is seeking about 52,0000 names of U.S. clients with Swiss accounts, is still ongoing.

This week, the Justice Department denied a report it was considering dropping the UBS case.

The IRS “is trying to get people to disclose their potential weakness prior to any decision being made,” about the case, Clarke said, echoing several other attorneys.


To respond to an uproar among hedge fund and private equity investors, the IRS this week put out a notice giving those who can document that they did not believe they were required to file an extension until September 23.

Willful failure to file carries a hefty penalty of $100,000 or half the account value, whichever is larger.

The Managed Funds Association, which represents the bulk of the hedge fund industry managing about $1.5 trillion in investments, wrote to IRS officials earlier this week complaining about the confusion.

The group says its members should be excluded because most of its investors are non-U.S. persons or U.S. entities that are tax-exempt, such as pension funds.

“The continued absence of guidance on such a fundamental question creates a continuing level of uncertainty that seems inappropriately and unacceptably high given the penalties for noncompliance,” the group’s president Richard Baker wrote in a letter dated June 19.

The IRS in March clarified guidelines to lure wealthy taxpayers to report previously undisclosed income offshore.

Under this voluntary program, a taxpayer can pay a fee and generally avoid criminal prosecution. IRS Commissioner Douglas Shulman and lawyers for wealthy clients have said they see a substantial uptick in taxpayers coming forward under the program.

Editing by Gerald E. McCormick

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