June 28, 2004 – The U.S. attorney for the Virgin Islands says he is not surprised by the recent warning from the Internal Revenue Service to beneficiaries of the territory's Economic Development Program.
But U.S. Attorney David Nissman said the primary warning against getting involved in investment schemes to take advantage of the territory's tax-break laws should not cause undue worry for most participants. "I think there's a lot of panic in the business community that may be unjustified at the moment," he said in an interview
For the last several months, in speaking engagements and at press conferences, Nissman has cautioned business owners to review their EDP compliance agreements to make sure they are adhering to them, especially the rules regarding residency.
Nissman said he was glad to see the IRS spell out the kinds of promotional schemes that put some beneficiaries at risk. (See "IRS Stance on Tax-Break Program Causes Concerns".)
One promotion tactic the IRS described encourages stateside investors to piggyback onto an existing beneficiary operating as a limited liability partnership. According to the IRS, promoters state that by doing so, the mainland residents can claim personal income-tax breaks that they might not be entitled to. The IRS advisory states that those caught engaging in such practices could face tax-evasion charges.
"What they're trying to get at," Nissman said, "is the concept of these people who are going out around the United States and holding meetings and trying to encourage people to enter into an agreement that really doesn't fit the purpose of our law. And they were very specific about it, too. That part of the notice I was happy to see, because they're laying out the things they're concerned about."
He declined to say whether any particular EDP beneficiaries might have something to worry about. The type of warning issued by the IRS on Thursday is non-specific, he said, as opposed to someone becoming the target of a criminal investigation where government officials have evidence of specific wrongdoing. That kind of evidence, he said, might turn up in an audit, something both the IRS and the local Internal Revenue Bureau have the authority to conduct.
While legal residency is a big issue for the IRS, it's not the only one. Nissman said it's illegal for EDP participants to claim income generated by their business if it comes from a portion of the business not based in the Virgin Islands.
And then there's the matter of whose tax it is. "If the IRS audited that individual and found that yes, that person is a Virgin Islands resident, but no, this is not Virgin Islands source income … that tax would not be owed to the federal government; it would be owed to the Virgin Islands government," Nissman said. "There are scenarios in which the Virgin Islands would receive more tax dollars if, in fact, the people were Virgin Islands residents."
In the case of someone who is not a bona fide V.I. resident, if an audit were to show that business revenues not earned in the territory were being claimed as if they were, that would violate federal tax law.
Nissman wouldn't speculate on whether such a case would wind up costing the V.I. government money. "We'll have to see how all that shakes out," he said. "In that scenario, the tax would be owed to the United States government. Would there be an offset between the amount of money that person paid to the V.I. government? And would the V.I. government then have to reimburse the federal government for that percentage? That's difficult to say. I don't know how the two governments would work that out."
Gov. Charles W. Turnbull and Delegate Donna M. Christensen spoke out harshly after the IRS published its warning last week. Christensen said the statement took her by surprise, given her efforts on Capitol Hill to gain a clearer legal definition of "V.I. resident." The governor said he is concerned about technical references in the statement and that lawyers from the administration's Washington firm would seek clarification from the IRS.
Nissman said he's aware that many EDP business owners are concerned about the IRS warning. But he said again that those operating legitimately "have nothing to worry about."
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