The Internal Revenue Service has collected over $5.5 billion in revenue from taxpayers who came forward and reported on their foreign holdings under its Offshore Voluntary Disclosure Programs, but it could be missing billions more in revenue from tax evaders, according to a new report.
The report, issued Friday by the Government Accountability Office, found that as of December 2012, the IRS’s four offshore programs have resulted in more than 39,000 disclosures by taxpayers, producing over $5.5 billion in revenue. The offshore disclosure programs attract taxpayers by offering a reduced risk of criminal prosecution and lower penalties than if the unreported income was discovered by one of IRS's other enforcement programs.
Tax evasion by individuals with unreported offshore financial accounts was estimated by one IRS commissioner to amount to several tens of billions of dollars, but no precise figure exists. The IRS has operated four offshore programs since 2003 that offered incentives for taxpayers to disclose their offshore accounts and pay delinquent taxes, interest and penalties.
For the 2009 Offshore Voluntary Disclosure Program, nearly all the program participants received the standard offshore penalty of 20 percent of the highest aggregate value of the accounts, meaning the account value was greater than $75,000 and taxpayers used the accounts (that is, made deposits or withdrawals) during the period under review.
The median account balance of the more than 10,000 cases closed so far from the 2009 OVDP was $570,000. Participant cases with offshore penalties greater than $1 million represented about 6 percent of all the 2009 OVDP cases, but accounted for almost half of all offshore penalties.
Taxpayers from these cases disclosed a variety of reasons for having offshore accounts. More than half of them had accounts at the Swiss bank UBS, which signed a deferred prosecution agreement in 2009 with the IRS under which it agreed to pay $780 million in fines, penalties, interest and restitution and later agreed to turn over thousands of names of its U.S. account holders.
Using 2009 OVDP data, the IRS identified bank names and account locations that helped it pursue additional noncompliance. Based on a review of the cases, the GAO found examples of immigrants who stated in their 2009 OVDP applications that they were unaware of their offshore reporting requirements. IRS officials from the Offshore Compliance Initiative office said they have not targeted outreach efforts to new immigrants. Using information from the 2009 OVDP, such as the characteristics of taxpayers who were not aware of their reporting requirements, to increase education and outreach to those populations could promote voluntary compliance, the GAO noted.
The IRS has detected some taxpayers with previously undisclosed offshore accounts who were attempting to circumvent paying the taxes, interest and penalties that would otherwise be owed, but based on GAO reviews of IRS data, the IRS may be missing attempts by other taxpayers attempting to do so.
The GAO analyzed amended returns filed for tax year 2003 through tax year 2008, matched them to other information available to the IRS about taxpayers’ possible offshore activities, and found many more potential quiet disclosures than IRS detected. In addition, the IRS has not researched whether sharp increases in taxpayers reporting offshore accounts for the first time is due to efforts to circumvent the money owed, thereby missing opportunities to help ensure compliance.
From tax years 2007 through 2010, the IRS estimated that the number of taxpayers reporting foreign accounts nearly doubled to 516,000. Taxpayer attempts to circumvent taxes, interest and penalties by not participating in an offshore program, but instead by simply amending past returns or reporting on their current returns previously unreported offshore accounts, result in lost revenues and undermine the programs’ effectiveness, according to the GAO.
Among other suggestions, the GAO recommended that IRS use its offshore data to identify and educate taxpayers who might not be aware of their reporting requirements. The IRS should also explore options for using a methodology to detect and pursue quiet disclosures more effectively and implement the best option. The GAO also suggested that the IRS analyze first-time offshore account reporting trends to identify possible attempts to circumvent monies owed and take action to help ensure compliance.
The IRS agreed with all of the GAO recommendations. “Global tax enforcement is a top priority at IRS, and we have made significant progress on multiple fronts, including ground-breaking international tax agreements and increased cooperation with other governments,” wrote IRS Acting Commissioner Steven T. Miller in response to the report. “In addition, the IRS and the Justice Department have increased efforts regarding criminal investigation of international tax evasion. This combination of efforts helped support the 2009 Offshore Voluntary Disclosure Program (2009 OVDP), the 2011 Offshore Voluntary Disclosure Initiative (OVDI) and the ongoing 2012 Offshore Voluntary Disclosure Program (2012 OVDP). The goal of these programs is to get individuals back into the U.S. tax system and to turn the tide against offshore tax evasion.”