Bill Would Limit IRS's Reach in Virgin Islands

Rangel Backs Measure to Restrict Audits

A tax provision making its way through the House of Representatives would close down IRS audits on hundreds of wealthy Americans who live part of the year in the U.S. Virgin Islands and avoid the higher income taxes paid by mainlanders.

Under law, Americans who maintain a primary residence in the Virgin Islands, run a local business and spend an average of 183 days a year there qualify for a low tax rate.

The House Ways and Means Committee voted last week to limit to three years the time that the IRS could go back and audit individuals it suspects have been falsely claiming to meet those residence requirements. Currently the audits can reach back many more years, and many pending cases do.

The provision, which was backed by the committee's chairman, Rep. Charles B. Rangel (D-N.Y.), would lose $38 million for the U.S. Treasury over 10 years, according to estimates by the nonpartisan Joint Committee on Taxation.

Donna M. Christian-Christensen (D), the delegate of the Virgin Islands in Congress, said in an interview that low tax rates had been intended to bolster the Virgin Islands economy by attracting wealthy Americans who might invest in the islands' economy and hire local workers.

She said hundreds of rich people, including hedge fund managers, insurance executives and manufacturers, have gotten caught up in audits, which she called "unfair" and "intrusive." She said the audits had dissuaded people and companies from moving to or staying in the U.S. territory and investing there.

She also noted that there is a three-year statute of limitations in general for audits of U.S. taxpayers, and argued that there's no reason that period should be longer for those living in the Virgin Islands.

A spokesman for Rangel called the provision a "fundamental matter of fairness."

Other lawmakers disagreed. "Congress rarely takes action that affects ongoing IRS audits, so it's striking that House leaders are proposing changes in the statute of limitations for U.S. taxpayers who are newly claiming residency in the Virgin Islands," said Sen. Charles E. Grassley (Iowa), the senior Republican on the Senate Finance Committee, the Senate's tax-writing panel. "It raises questions of tax fairness" and "whether or not these filers are simply seeking a tax shelter."

A spokesman for the Treasury Department declined to comment.

One reason the IRS has been auditing tax returns that go back longer than three years is that for a while, the agency did not consider that the statute of limitations had begun to run until after tax returns were filed with the U.S. government.

Many people claiming residence in the Virgin Islands had filed their returns with the Virgin Islands government and had to refile with the IRS.