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GAO Believes IRS May Be Missing Quiet Offshore Disclosures

02 May 2013   (0 Comments)
Posted by: Author: Mike Godfrey
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Source: Mike Godfrey (Tax-News, Washington) 

In a recently-released study, the United States Government Accountability Office (GAO) has concluded that, while the Internal Revenue Service's (IRS) offshore programs had resulted in over USD5.5bn in additional revenues by the end of 2012, it may be failing to detect taxpayers trying to circumvent taxes, interest and penalties that would otherwise be owed.

The GAO pointed out that the four offshore programs since 2003 have attracted more than 39,000 disclosures by 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.

The GAO was asked to review IRS's second offshore program, the 2009 Offshore Voluntary Disclosure Program (OVDP). It analyzed tax return data for all 2009 OVDP participants and examined files for a random sample of cases with penalties over USD1m; interviewed IRS officials; and developed and implemented a methodology to detect taxpayers circumventing monies owed.

It found that, in the 2009 OVDP, nearly all program participants received the standard offshore penalty – 20% of the highest aggregate value of the accounts – meaning the account value was greater than USD75,000 and taxpayers used the accounts (for example, 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 actually USD570,000.

The GAO noted that participant cases with offshore penalties greater than USD1m represented about 6% of all 2009 OVDP cases, but accounted for almost half of all offshore program penalties.

The IRS has detected some taxpayers with previously undisclosed offshore accounts attempting to circumvent paying the taxes, interest, and penalties not by participating in an offshore program, but instead simply amending past returns or reporting previously unreported offshore accounts on current returns, resulting in lost revenues and undermining the programs' effectiveness.

However, based on a review of its data, the GAO has calculated that the IRS may be missing attempts by other taxpayers to report offshore accounts. 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, it found that the IRS has not researched whether sharp increases in taxpayers reporting offshore accounts for the first time is due to such efforts to circumvent monies owed, thereby missing opportunities to help ensure compliance. From tax year 2007 through tax year 2010, IRS has estimated that the number of taxpayers reporting foreign accounts nearly doubled to 516,000.

The GAO recommended that the IRS should therefore 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 implementing the best option to help ensure compliance, and the IRS agreed.


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