US Virgin Islands Tax Haven Under Scrutiny

The Justice Department is putting residents of the U.S. Virgin Islands on notice: if you are only pretending to live there to take advantage of a special tax rate, the gravy train may be over.

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The special tax rate that basically amounts to just 3.5 percent of income has been a lure to those looking to get out from under heavy mainland taxes. However, the tax was designed by Congress to aid the 30 percent of Virgin Island residents who were living below the poverty level in 1999, the New York Times reported.

Detractors say the islands' economic development program has lacked definition from the outset.

Many here blame the federal government for failing to carefully define what constitutes residency and what income qualifies under the program, the Times reported. "Congress foresaw that these two areas would be a problem and ordered Treasury to come up with definitions in 1986," Lt. Gov. Vargrave A. Richards told the Times. "We have asked repeatedly for these definitions but have never gotten any."

Doing away with the program now would have a devastating effect on the island citizens who need it most, he said, noting the islands have witnessed a significant economic boom since the program's inception.

"If something were to go wrong with this program, it would have the impact of a major hurricane," Richards told the Times in an interview. "This program is the best thing that ever happened to these islands."

IRS estimates put the total at around $400 million in dodged U.S. taxes by people claiming full-time Virgin Island residence, spurring investigators to question household help about the comings and goings of homeowners, the Times reported.

Some new businesses and individuals have been scared off by the investigations and local officials worry that the islands' boom could go bust thanks to those who are violating the spirit of the tax law.

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