IRS Offshore Voluntary Disclosure Program Increased Tax Compliance

The Internal Revenue Service’s Offshore Voluntary Disclosure Initiatives are generally effective at convincing thousands of taxpayers with foreign bank accounts to come forward and disclose them to avoid heavy penalties and criminal prosecution, but some improvements are needed, according to a new government report.

The report, by the Treasury Inspector General for Tax Administration, noted that the IRS’s 2009 Offshore Voluntary Disclosure Initiative prompted nearly 7,000 taxpayers in 2009 and over 10,000 taxpayers in 2010 with hidden offshore assets and income to disclose them to the IRS. The IRS announced a 2011 OVDI in February with stiffer penalties.

The TIGTA report found that the IRS’s voluntary disclosure practices were effective, and cases were being appropriately assigned and verified, despite the unusually high volume of disclosure requests received and accepted by the IRS. However, some improvements are needed.

TIGTA reviewed 60 closed voluntary disclosure cases, and found that 18 cases had no evidence that the taxpayers reconciled the unreported income in their offshore accounts to their amended or newly filed delinquent tax returns.

In addition, in 28 cases, information from the taxpayers’ financial accounts either was not captured or was incorrectly transcribed on the data collection system used for current and subsequent data mining efforts. In 31 cases, voluntary disclosure agreements were not printed on IRS watermarked paper or initialed by revenue agents on each page to ensure no alterations to the original document were made by taxpayers.

TIGTA recommended that IRS officials implement a requirement for taxpayers to provide a detailed reconciliation of their unreported income. The IRS should also develop a quality review process to ensure that all the data relating to voluntary disclosures are properly transcribed for future data mining and require revenue agents to initial each page of the voluntary disclosure agreement before submitting it to taxpayers for their signature, the report recommended.

In response to the report, the IRS agreed with two of the three recommendations, but disagreed with the recommendation to require revenue agents to initial each page of the voluntary disclosure agreement before submitting it to taxpayers for their signature.

“The experience is that taxpayers and representatives rarely make hidden changes to documents prior to signature and return to the IRS for execution,” wrote Heather Maloy, commissioner of the IRS’s Large Business and International Division. “Specifically, with regard to OVDI closing agreements, we have not encountered a single closing agreement where the taxpayer or representative has altered an agreement before returning it.”