Treasury, IRS Warns Against Abusive U.S. Virgin Islands Tax Reduction Scheme

This week, the Treasury Department and the IRS issued a notice cautioning taxpayers against promoters who market arrangements that purportedly provide reductions in U.S. federal taxation pursuant to the special rules applicable to the U.S. Virgin Islands.

These arrangements involve taking positions that are highly questionable with respect to claims that the taxpayer resides in the U.S. Virgin Islands and that the taxpayer's income is from sources in the U.S. Virgin Islands or is connected with a U.S. Virgin Islands business. The notice describes certain meritless arguments that promoters typically put forward to support these claims, and warns taxpayers that the Internal Revenue Service will challenge claims made by taxpayers based on such arguments. The notice also outlines civil and criminal penalties that could apply to taxpayers who take these positions and to persons who promote them.

Acting Assistant Secretary for Tax Policy Greg Jenner stated, "This notice is another example of our ongoing efforts to prevent promoters and taxpayers from making highly questionable arguments, and setting up dubious arrangements, in an attempt to avoid paying their fair share of taxes."

The notice describes a form of arrangement that has been promoted and that involves running a taxpayer's salary or business income through a U.S. Virgin Islands entity such as a limited partnership. The notice warns, however, that these questionable positions may also be promoted through other forms of arrangements and with respect to U.S. possessions other than the U.S. Virgin Islands.

The IRS is working on ongoing cases involving arrangements of this type. "This scheme is an effort to disguise or distort where taxpayers live or do business," said IRS Commissioner Mark W. Everson. "We appreciate the assistance given us by the U.S. Virgin Islands Bureau of Internal Revenue on this matter."

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