IRS demands tax filings from offshore hedge-fund and private-equity investors

Stepping up its scrutiny of offshore investing, the IRS demanded that hedge-fund and private-equity investors disclose hundreds of billions of dollars they have invested offshore. This is part of a crack down on questionable use of offshore tax havens, which started with a very public case filed against UBS.

UBS agreed to pay $780 million to settle accusations that it had defrauded the IRS by allowing wealthy Americans to hide billions of dollars using secret offshore bank accounts.

In a conference call on June 12, industry lawyers and accountants were told that investors in offshore hedge-fund and private-equity funds must file an FBAR (Report of Foreign and Financial Account) by June 30. Prior to this time many of these offshore investors were advised by tax attorneys that they didn't have to file an FBAR. Some offshore investments aren't taxable, but others are.

There was such an uproar about this new ruling that the IRS extended the deadline to September 23 for filers "who recently learned they must file an FBAR," as long as they've paid their taxes. The IRS insists this requirement to file an FBAR isn't new, but it reflects "a much stronger emphasis on international matters. So I wouldn't say we weren't enforcing it in the past, but we're now turning to issues that hadn't been emphasized in the past," an IRS official told the Journal.

Hedge-fund assets in offshore tax havens such as the Cayman Islands and Bermuda represent more than two-thirds of the roughly $1.3 trillion industry, according to Hedge Fund Research. About $400 to $500 billion belongs to U.S. investors. Tax exempt foundations, endowments and pension funds account for about half of those U.S. investors.

In addition to demanding reports from investors, the Obama administration wants to step up the oversight of hedge funds. The SEC and Congress are proposing that hedge fund managers register with the SEC. The administration also is proposing to end a tax break on compensation for private-equity managers.

In a survey of hedge fund managers done by The Washington Post, the newspaper found that 38 percent said that "onerous government regulation" was the industry's biggest threat. They weren't as worried about finding new investors. Only 16 percent indicated that was a big problem. Other problems that received single digit percentages were lack of access to capital and a lack of market transparency.

Do you think hedge fund and private-equity fund investors and managers should face the same level of scrutiny as other investors and investment managers?

Lita Epstein has written more than 25 books including Trading for Dummies.
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