An amnesty program enacted by the IRS for tax filers who were not reporting foreign income has netted the IRS over $5.5 billion in unpaid tax revenue.
Under the program, the IRS has reduced penalties and eliminated jail time for taxpayers who come clean on foreign income they had to date hidden from the IRS. In all, almost 40,000 taxpayers have taken advantage of the amnesty program.
In addition, the IRS has noted an increase in the number of foreign income investment accounts reported on tax returns over the past few years. Government investigators suspect many of these accounts existed previously and taxpayers are simply beginning to report those accounts without formally acknowledging the accounts existed before or the taxpayers taking advantage of the amnesty program.
“[The] IRS has detected some taxpayers with previously undisclosed offshore accounts attempting to circumvent paying the taxes, interest, and penalties that would otherwise be owed,” noted a report released by the Government Accountability Office. “But based on GAO reviews of IRS data, IRS may be missing attempts by other taxpayers attempting to do so.”
In some cases, taxpayers are reporting previously undisclosed foreign income without paying any fines or penalties, even the reduced fines and penalties being offered under the amnesty program, by amending previously filed returns to include foreign income. In other cases, taxpayers are simply adding their foreign income accounts to their current year tax returns without making any adjustments or disclosures on prior-year returns.
“If successful, these techniques result in lost revenue for the Treasury and undermine the offshore programs’ fairness and effectiveness,” the GAO report noted.
Peter Zeidenberg, a partner with the Washington-based law firm DLA Piper that specializes in tax law, confirmed that many foreign income accounts taxpayers are now reporting outside the amnesty program have likely been around for years.
“I don’t think you get an increase like that from people just all of a sudden getting the idea I’m going to open an account in Switzerland,” Zeidenberg said.
In response to the GAO report, acting IRS Commissioner Steven Miller indicated the IRS is working to improve efforts to catch taxpayers who are choosing not to participate in the amnesty program.
The IRS stepped up efforts to enact the amnesty program in 2009 after the Swiss bank UBS AG paid the United States $780 million in fines and disclosed account details related to thousands of taxpayers who it was believed were not disclosing the foreign income on their tax returns.
The GAO report noted that there are numerous valid reasons for a taxpayer to hold an offshore account, such as a desire to diversify investments or make monies more readily available when overseas for work or leisure activities. However, many uses these foreign investment accounts purely for the purpose of reducing their tax liability by hiding assets and income in those accounts and then not reporting the income on their tax returns.
The IRS has a history of not pursuing jail time against taxpayers who willingly report previously undisclosed foreign income, so long as those taxpayers pay taxes due along with interest and penalties.
Under a law passed in 2010, for those taxpayers who have come forward, the IRS is requesting information from those foreign banks on additional accountholders. If the foreign banks refuse to provide information on additional accountholders, the United States is authorized to withhold up to 30 percent of any payments due to the bank, which provides a large financial incentive for those banks to cooperate with the United States.
Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.