States citizens and resident aliens who have offshore accounts and who are not reporting the income derived from these accounts and/or not reporting the existence of these accounts.

Withholding Tax Imposed On Dividends and Interest Paid to Foreign Persons Effective January 1, 2001, the Internal Revenue Service will implement new withholding tax rules on most payments to foreign persons.

Under current tax law, interest income paid from banks and insurance companies and capital gains on the sale of securities realised by foreign persons are not subject to United States income tax.

United States citizens and resident aliens who used a foreign bank, broker, or investment find to act as an intermediary with respect to their United States investments received this income without any withholding taxes being imposed, and in many cases without any report being generated as to the type or source of income.

In practice, it does not take a nefarious act to receive income in this manner. If a United States citizen invested in a local investment fund, it is likely that the fund has investments in the United States, and realizes dividends, interest, and capital gains from United States sources. It would be unusual for a local fund to inform an individual at year-end as to the breakdown of the income, or its source.

However, United States tax law requires United States citizens and resident aliens to report and pay tax on this income, and also to report the existence of a financial interest in an offshore account.

Currently, to avoid United States income tax from being withheld from dividends and interest at a 30 percent tax rate, foreign intermediaries simply have to furnish the Internal Revenue Service with Form W-8 signifying that the income was being paid to a foreign person and was not subject to withholding.

Effective January 1, 2001, the foreign intermediary must decide whether or not to identify the beneficial owners, and the income allocable to each owner. If the foreign intermediary identifies the beneficial owners, the United States withholding agent will withhold, or not withhold, tax as appropriate, and report payments to each individual on Form 1042-S. If the foreign intermediary does nothing, a 30 percent withholding tax will be imposed on all dividends and interest.

The new withholding tax rules create a quandary for foreign intermediaries whose clients consist of both United States citizens, and foreign nationals who are exempt from United States income tax. If they do nothing, their foreign national clients will now need to file United States income tax returns to recover income taxes withheld. If they do identify their United States clients, and the clients have not been reporting the offshore income, the Internal Revenue Service will likely investigate as to when the account was established, the derivation of the funds, and why income has not been reported in prior years.

United States citizens and resident aliens with offshore accounts should ask their foreign intermediary as to what option they will choose.

James Paul Sabo, CPA, is the President of ETS Ltd., PO Box HM 1574, Hamilton HM GX. Questions should be sent to: jsabo y expatriatetaxserices.com BUSINESS BUC