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Congressional Heavy Hitters Defend V.I. Tax Rights

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April 5, 2007 — Some of Congress' heaviest hitters have gone to bat for Virgin Islanders' tax rights, saying IRS rule changes have "dubious legal basis."
In a sternly worded letter to Department of Treasury Secretary Henry M. Paulson Jr., the Congressmen said that rules specific to the Virgin Islands are unlike those anywhere else in the United States.
The letter, signed by Congressman Charles B. Rangel (D-NY), chairman of the House Committee on Ways and Means; as well as three senators who service on the Senate Committee on Finance — John D. Rockefeller IV (D-WV), Orrin G. Hatch (R-UT) and Mike Crapo (R-ID) — said if the IRS did not change V.I.-specific rules, Congress would do so legislatively.
"We are writing you to express our extreme disappointment at the action recently taken by the Treasury Department concerning the statute of limitations applicable to the U.S. citizens who are residents of the Virgin Islands," the March 28 letter said.
Until recently, the IRS had, in most cases, three years to audit a person's tax returns if they totaled more than $75,000.
Then the rule changed to say the IRS could audit a V.I. resident's taxes as far back as 1986.
New Treasury Department rules say tax returns filed before February 2007 can be audited back to 1986, but in the future, new tax returns can only be audited three years back, explained St. Thomas tax attorney Marjorie Roberts.
For a technical evaluation of the rules, see Robert's analysis linked here.
The Treasury Department rule changes follow an ongoing battle between the territory and Washington over the territory's Economic Development Commission (EDC) program.
The EDC allows qualifying companies to receive tax breaks, and in turn, attracts businesses to the islands that might otherwise not set up shop here.
EDC opponents, however, paint the program as nothing more than a tax shelter.
On March 23, four one-time EDC beneficiaries were indicted on tax-evasion charges by a federal grand jury (See Attorney Likens EDC Indictment to Witch Hunt).
Roberts, however, points out the new tax rules apply to all Virgin Islanders making over $75,000 a year, not just EDC beneficiaries.
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