Offshore Tax Evasion:

IRS Has Collected Billions of Dollars, but May be Missing Continued Evasion

GAO-13-318: Published: Mar 27, 2013. Publicly Released: Apr 26, 2013.

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What GAO Found

As of December 2012, the Internal Revenue Service's (IRS) four offshore programs have resulted in more than 39,000 disclosures by taxpayers and over $5.5 billion in revenues. The offshore 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. For the 2009 Offshore Voluntary Disclosure Program (OVDP), nearly all program participants received the standard offshore penalty--20 percent of the highest aggregate value of the accounts--meaning the account value was greater than $75,000 and taxpayers used the accounts (e.g., 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 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, and more than half of them had accounts at Swiss bank UBS.

Using 2009 OVDP data, IRS identified bank names and account locations that helped it pursue additional noncompliance. Based on a review of cases, 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.

IRS has detected some taxpayers with previously undisclosed offshore accounts attempting to circumvent paying the taxes, interest, and penalties that would otherwise be owed, but based on GAO reviews of IRS data, IRS may be missing attempts by other taxpayers attempting to do so. GAO analyzed amended returns filed for tax year 2003 through tax year 2008, matched them to other information available to IRS about taxpayers' possible offshore activities, and found many more potential quiet disclosures than IRS detected. Moreover, IRS has not researched whether sharp increases in taxpayers reporting offshore accounts for the first time is due to efforts to circumvent monies owed, thereby missing opportunities to help ensure compliance. From tax year 2007 through tax year 2010, IRS estimates 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 simply amending past returns or reporting on current returns previously unreported offshore accounts, result in lost revenues and undermine the programs' effectiveness.

Why GAO Did This Study

Tax evasion by individuals with unreported offshore financial accounts was estimated by one IRS commissioner to be several tens of billions of dollars, but no precise figure exists. 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. GAO was asked to review IRS’s second offshore program, the 2009 OVDP. This report (1) describes the nature of the noncompliance of 2009 OVDP participants, (2) determines the extent IRS used the 2009 OVDP to prevent noncompliance, and (3) assesses IRS’s efforts to detect taxpayers trying to circumvent taxes, interests, and penalties that would otherwise be owed. To address these objectives, GAO analyzed tax return data for all 2009 OVDP participants and exam files for a random sample of cases with penalties over $1 million; interviewed IRS Offshore officials; and developed and implemented a methodology to detect taxpayers circumventing monies owed.

What GAO Recommends

Among other things, GAO recommends that IRS (1) use offshore data to identify and educate taxpayers who might not be aware of their reporting requirements; (2) explore options for employing a methodology to more effectively detect and pursue quiet disclosures and implement the best option; and (3) analyze first-time offshore account reporting trends to identify possible attempts to circumvent monies owed and take action to help ensure compliance. IRS agreed with all of GAO's recommendations.

For more information, contact James R. White, (202) 512-9110 or whitej@gao.gov.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In response to our recommendation, in the spring of 2014, IRS undertook multiple outreach efforts to educate taxpayers--who are likely to have foreign financial accounts--about their filing requirements. For example, IRS sent articles on reporting requirements to first-generation U.S. citizen professional groups whose members may be more inclined to having foreign accounts. Such outreach efforts could help promote voluntary compliance, draw additional taxpayers into the offshore disclosure programs, and reduce the need for enforcement actions. Additional program participants could then provide yet more information to help identify additional groups that would benefit from education and outreach.

    Recommendation: The Acting Commissioner of Internal Revenue should use data gained from offshore programs to identify and educate populations of taxpayers that might not be aware of their tax obligations related to offshore income and Foreign Bank and Financial Accounts (FBAR) filing requirements.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: In response to our recomendation, in June 2014, IRS updated its program intake letter to include a question asking participants how they learned about the program. Obtaining information on how taxpayers found out about IRS's offshore voluntary disclosure programs can help IRS better identify populations that might benefit from additional taxpayer education and outreach. Such information could also help IRS evaluate the success of its current outreach efforts.

    Recommendation: The Acting Commissioner of Internal Revenue should obtain information that can help IRS test offshore program promotion strategies and identify new ones by adding a question to current and future programs to determine how participants found out about the program.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Open

    Comments: IRS has started exploring options for identifying and pursuing potential quiet disclosures, but has not completed its research. IRS officials reported that they tested GAO's methods of identifying potential quiet disclosures on a select group of tax returns, and found that this methodology did result in the identification of actual quiet disclosures. GAO's quiet disclosure methodology identified many more potential disclosures than IRS originally detected. IRS considered evaluating a larger sample of returns using this same methodology. Based on its review, IRS found that the compliance risk on these cases was extremely low, and most had small tax adjustments related to offshore accounts. IRS concluded that, given limited resources, it will focus on identifying quiet disclosures when amended returns are first submitted, and will not pursue additional analysis of GAO methodologies. IRS implemented a new methodology to identify questionable amended returns with potential offshore compliance issues and forward those returns to a centralized offshore disclosure unit for further review. IRS reported that it identified more than 200 cases using its new methodology; and it has completed examinations on more than half of these cases, resulting in additional taxes being assessed. GAO has not yet evaluated the effectiveness of the new IRS methodology. By continuing to identify taxpayers who are attempting to use quiet disclosures to circumvent some of the taxes, interest, and penalties that would otherwise be owed in IRS offshore programs, and by taking appropriate action to ensure collection, IRS could potentially increase revenues, bolster the overall fairness of the program, and have a more informed basis for improving voluntary compliance.

    Recommendation: The Acting Commissioner of Internal Revenue should explore options for employing a methodology for identifying and pursuing potential quiet disclosures to provide more assurance that actual quiet disclosures are not being missed and then implement the best option.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  4. Status: Open

    Comments: As of September 2014, IRS conducted an analysis of taxpayers who recently reported foreign financial accounts, as GAO recommended in March 2013. This analysis included variations in year-to-year filing behavior that indicated potential taxpayer compliance issues. IRS officials reported in March 2015 that they are currently examining taxpayers with the highest potential compliance risks, as identified through this analysis of previously filed returns and forms. In addition, IRS revised some of its procedures to help screen tax returns for potential quiet disclosures when they are submitted. These revised procedures utilize new data IRS started collecting in 2012 from IRS Form 8938, Statement of Specified Foreign Financial Assets. IRS is currently reviewing the Form 8938 filing population to identify quiet disclosures reported on current year returns. By continuing to identify taxpayers who are attempting to circumvent some of the taxes, interest, and penalties that would otherwise be owed in IRS offshore programs, and by taking appropriate action to ensure collection, IRS could potentially increase revenues, bolster the overall fairness of the program, and have a more informed basis for improving voluntary compliance.

    Recommendation: The Acting Commissioner of Internal Revenue should conduct an analysis designed to measure the extent that taxpayers are reporting existing foreign accounts on the Form 1040, Schedule B or on FBARs for the first time and circumventing some of the taxes, interest, and penalties that would otherwise be owed, and take appropriate action based on the analysis.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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