MEMORANDUM

RE: QUALIFIED INTERMEDIARY RULES - IRS

ANNOUNCEMENT 2008-98 (PROPOSED
REGULATIONS)

I. Background
Edward Kleinbard, Chief of Staff Joint Committee on Taxation,
on 3/31/09 stated (with respect to international tax enforcement):
“The global recession and the UBS Scandal have created a Katrina-
type movement. There is a push to improve tax enforcement and
deter tax havens.”
According to the IRS:
1. Since 1990, cross-border capital flows increased to $8.2
trillion.
2. An estimated $50 billion per year is lost in tax revenue
through off-shore tax haves (President Obama identified
$212 billion in tax revenue over the next decade from IRS
international enforcement).
3. After UBS bought Paine Webber they entered into a
Qualified Intermediary (“QI”) Agreement with the U.S.
which required U.S. tax reporting of tax information for
U.S. source income (i.e., U.S. securities held in foreign
bank accounts) paid to either:
a. A “non-exempt” U.S. Person.
b. A foreign person (subject to U.S. tax withholding
at a 30% tax rate for U.S. “FDAP” income).
According to the IRS, UBS failed to report the U.S. Taxpayer
information as required. The U.S. government is currently suing UBS
to reveal the identity of approximately 52,000 U.S. persons with UBS
foreign bank accounts, who have not reported the income to the IRS.

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 At a 3/4/09 hearing, Senator Carl Levin, Chairman of the
Senate Homeland Security and Governmental Affairs Permanent
Subcommittee on Investigations examined:
1. The recent deferred prosecution agreement between the
Department of Justice (DOJ) and UBS AG Bank of
Switzerland (which paid a $780 million fine).
2. The DOJ’s ongoing attempts to force the bank to identify
its U.S. customers with secret Swiss bank accounts.
Senator Levin advocated putting pressure on U.S. Taxpayers
who avoid paying U.S. tax by using the Swiss (UBS) bank’s secrecy.
Previously, the U.S. congress action to combat off-shore tax
havens included:
1. Senate Bill 506: Stop Tax Haven Abuse Act The
bill would “black list” 34 countries and impose new
reporting obligations on banks when a U.S. customer
establishes a foreign bank account.
2. The Senate Finance Committee has proposed a draft tax
compliance bill, which includes new diligence
requirements for tax preparers and include the Report of
Foreign Bank and Financial Accounts (FBAR) rules in the
tax code.
Senator Levin has updated his “improved version” of the Stop
Tax Haven Abuse Bill to “fight back and end the abuses inflicted upon
us by these tax havens”.
At a 3/4/09 hearing, Senator Levin recommended:
1. Establishment of a special enforcement unit to handle the
prosecutions from the UBS Case.
2. Finalize a regulation to allow the U.S. to engage in
automatic information exchanges of information with
countries (such as Switzerland), specifically for tax-
enforcement purposes.
3. In addition:
a.Establish certain legal presumptions that can be
used to combat off-shore secrecy.

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 b.Authorize special measures against financial
institutions (or countries) that impede U.S. tax
enforcement.
c.Require 3rd party disclosures of off-shore
transactions.
d.Extend the statute of limitations for assessing taxes
(against off-shores cases) from 3 years to 6 years.
e.Improve U.S. tax treaties and tax information
exchange agreements.
The IRS Commissioner Douglas Shulman, at the 3/4/09
hearing, stated:
1. The IRS would expand QI’s information reporting
requirements to include disclosure of U.S. citizen’s
income beyond only foreign accounts with U.S.
securities (i.e., U.S. source income).
2. Improve its audits of trusts used to enable offshore
tax evasion.
On 3/31/09, Commissioner Shulman testified before the
Subcommittee on Select Revenue Measures of the House Ways and
Means Committee and stated, the IRS:
1. Increased the number of audits in the offshore banking
arena (since 11/08).
2. Prioritized “stepped-up” hiring of international tax experts
and investigators.
3. Offered a 6-month amnesty program (thru 10/09) for
offshore account holders who reveal their unreported
assets, including: payment of back taxes, interest (for up
to 6 years), pay either an accuracy-related or delinquency
penalty (for up to 6 years), pay a penalty of 20% of the
amount in the foreign bank account in the year with the
highest aggregate account or asset value.

II. IRS QI’s and Announcement 2008-98

In his 3/31/09 testimony, the Commissioner stated that a “main
tool” to combat international tax evasion will be the revamping of the

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IRS QI program, which provides the IRS with information on the
activities of foreign banks and financial institutions, will include:
1. Expansion of the reporting requirements to include more
sources of income for U.S. account holders.
2. Strengthening the documentation rules.
3. Require tax withholding for accounts with insufficient
documentation.
As of 2001, the QI program was established to make sure U.S.
Taxpayers (U.S. citizens, U.S. tax residents, and non-U.S. tax
residents who receive U.S. source income) report their U.S. source
income (from U.S. securities) and pay tax on their income.
Under the QI agreement (with the IRS, under IRC §1441) for a
5 year term (subject to renewal) the QI agrees to assume U.S. tax
withholding and tax reporting for payments of U.S. source income to
a foreign person (subject to 30% tax withholding under the FDAP
rules unless withheld at a lower tax rate, e.g., treaty), or payments to
a U.S. Person (and issue Form 1099’s for the payment, and if
required withhold 31% tax under IRC §3406 for back-up withholding).
The QI responsibilities include:
1. Obtain documentation to establish the identity and tax
status of the beneficial owner of U.S. source income.
2. Proper tax reporting for U.S. source income (on U.S.
securities held in foreign bank accounts).
3. Withhold and remit taxes of U.S. non-resident aliens (and
“back-up” tax withholding for U.S. residents).
IRS Announcement 2008-98, (2008-44 I.R.B. (10/15/08)
proposed amendments to the Qualified Intermediary (QI) Agreement
(Rev Proc 2000-12, 2000-1, CB 387) and the Guidance for External
Auditors of QI’s (Rev Proc 2005-55, 2002-2 CB 435)).
IRS Announcement 2008-98 contained 3 principal amendments
to the QI rules regarding:
1. Material failure of internal “QI” controls.
2. External Auditor Fact Findings to determine if foreign
accounts are subject to control by U.S. Persons.

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 3. Audit oversight/review by U.S. auditors (who accept
joint and several liability for the conduct of the QI
audit and co-sign the audit report).
Material Failure of Internal “QI Controls”
A QI must notify the IRS of any material failure of internal
controls relating to performance under a QI agreement, including:
1. Employee allegations of failure.
2. Investigation by regulatory authorities regarding such
failure.
The purpose is for the IRS to be notified so they may work with
the QI and remedy failures, not terminate the QI agreement.
External Auditor Fact Findings
Foreign accounts may be subject to control by U.S. Persons.
The external auditor must:
1. Assess material failure of internal controls.
2. Test accounts for foreign account control by U.S.
Persons.
3. Report any facts to the IRS regarding risk of material
failure of internal controls.
To determine if the accounts are subject to a U.S. Person’s
control, the Auditor is required to:
1. Review and examine updated information for the audit
year, drawn from the opening account statement.
2. Review account documents, correspondence and reports.
3. Review other information for purposes of anti-money
laundering, know your customer, tax or other loans.
4. Review account holder’s files that show a U.S. Person
has:
a.Signature authority.
b.Other authority (e.g., withdraw funds, trade, give
instructions, receive account statements).
c.U.S. Person has given or received a power granting
such authority to or from a foreign person.

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 U.S. Auditor Oversight
The goal in associating a U.S. auditor is to assure appropriate
application of U.S. tax withholding rules and to enhance accuracy and
accountability in the audit process.
For a U.S. auditor, who co-signs the audit report and accepts
joint and several liability for the conduct of the audit, they assume
both risk and potential exposure as follows:
1. Liability for External Auditor Omissions, fraud, negligence,
or crimes.
2. Act as a “3rd party guarantor” with unlimited liability for
external auditor conduct.
3. Dual liability for both the conduct and services performed
by the U.S. auditor, and the services performed by the
external auditor.
Conclusion
The IRS intends to force foreign banks and governments to
identify U.S. Taxpayers who are evading taxes. The UBS case
proves the difficulty, in this case, the Swiss government interpreted
the U.S. – Switzerland treaty to prevent U.S. authorities from
successfully identifying and prosecuting UBS customers.
The Swiss government will not disclose information on these
U.S. Taxpayers unless the U.S. government specifically asks for their
financial information by name, shows that the citizen is engaged in an
affirmative act of deception, such as falsifying a document.
IRS Commissioner Shulman stated that tax-enforcement
provisions of U.S. treaties often interfere:
“Tax information requests need to have a specific Taxpayer that
we identify. In a lot of cases, sovereign law (i.e., Switzerland) actively
trumps the treaty . . . in cases where sovereign law trumps it . . . we
use John Doe summons and other tools.”

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Gary S. Wolfe
A PROFESSIONAL LAW CORPORATION
9100 Wilshire Blvd., Suite 530 East
Beverly Hills, CA, 90212
Tel: 310-274-8847 Fax: 310-274-3118
http://www.gswlaw.com
email: gsw@gswlaw.com