Despite the IRS’s eight-year-old qualified intermediary (QI) program, billions of dollars in U.S.-source income continue to flow overseas without proper tax withholding, the Government Accountability Office said. QIs are foreign financial institutions that contract with the IRS to provide withholding of U.S. tax and administer treaty provisions. However, they figure in a relatively small portion of U.S. money going offshore—only about 12.5% of the $293 billion that left the country in 2003, according to the most recent data available, the GAO said. Income flowing through U.S. financial institutions or other “withholding agents” may be more vulnerable to offshore tax evasion by U.S. taxpayers, since, unlike QIs, those institutions don’t always require direct documentary verification of account owners’ identities, the GAO said.
But despite their more stringent identification requirements and smaller volume, QIs handled more money with unknown tax jurisdictions ($11.3 billion) than did U.S. withholding agents ($7.8 billion). The average withholding rate by both conduits combined was 2.7%. IRS officials were unable to explain why that rate was so much lower than the statutory withholding rate, barring any exemption or treaty reduction, of 30%. They said the unknown jurisdictions for QI accounts could be a byproduct of a feature intended to make them more attractive—accounts may be pooled for reporting to the IRS rather than listed individually.