Magazine article The CPA Journal

The IRS's Hard Line on Offshore Compliance

Magazine article The CPA Journal

The IRS's Hard Line on Offshore Compliance

Article excerpt

For decades, the IRS has pursued U.S. taxpayers who maintain hidden offshore income and assets. Until recently, most tax professionals would have agreed that the IRS's success in the area of offshore tax evasion was limited at best. The IRS has greatly ramped up its offshore compliance efforts over the past eight years. For the most part, these efforts have been met with success. Yet some taxpayers continue to maintain unreported foreign assets hoping to get away with noncompliance, or hoping that they will face no repercussions when they get caught. In reality, the IRS is becoming more skilled at discovering offshore non-compliance, and it has made it clear that the price of noncompliance will go up.


Prior to the IRS's latest offshore compliance efforts, most foreign asset reporting requirements for individual taxpayers were scarcely enforced, and penalties were rarely imposed. For example, in 2001, compliance with the Report of Foreign Bank and Financial Accounts (FBAR) reporting obligations stood at only 20%; between 1993 and 2002, the FBAR penalty was imposed in only a handful of cases. Criminal indictments for FBAR violations were similarly low. (See the U.S. Department of the Treasury's Report to Congress in Accordance with Section 361(b) of the USA Patriot Act, April 26, 2002, http://www. Congress361.PDF.) Since the start of the latest offshore enforcement push in 2008, FBAR penalties have been at the center of the IRS's efforts and are among its most powerful weapons when dealing with non-compliant taxpayers.

Since 2008, the IRS and the Department of Justice (DOJ) have been increasingly successful in identifying offshore tax offenders. In 2009, UBS, Switzerland's largest bank, entered into a non-prosecution agreement with the DOJ and agreed to cease offering services to U.S. taxpayers. UBS also provided the account information for thousands of U.S. taxpayers. Soon after, Wegelin, one of Switzerland's oldest banks, entered a guilty plea in federal district court in connection with its role in assisting tax evading US taxpayers and ultimately went out of business. More recently, Credit Suisse, another large Swiss bank, pleaded guilty to assisting U.S. taxpayers with evading taxes, and agreed to pay record-breaking fines as well as provide information to U.S. authorities about its U.S. account holders. Finally, the IRS and the DOJ are currently administering a program whereby Swiss banks can come forward with information about their U.S. account holders in an effort to avoid criminal prosecution by the DOJ. More than 100 Swiss banks are participating in the program, which will require the banks to pay large fines and hand over U.S. dient data. In addition to these successes-and in great part because of them-the IRS has spurred over 50,000 taxpayers to come forward and disclose their noncompliant offshore assets under the IRS's Offshore Voluntary Disclosure Program (OVDP).

Despite its greatly improved track record, some insist that the IRS's success in combating offshore evasion remains lacking, and unreported foreign assets may in fact be safe from IRS capture. Such critics argue that the IRS has yet to find the light mechanism to obtain the names of U.S. taxpayers with foreign accounts on a wide-scale basis. In addition, despite small increases in the penalty rate under the OVDP over several years, those making voluntary disclosure today are not paying a significantly higher price than those who made a voluntary disclosure in 2009. Finally, some note that the DOJ Program for Swiss Banks has yet to yield actual taxpayer names since its announcement in August 2013. Recent and upcoming developments make it clear that taxpayers who continue to hide assets offshore should not take any solace m such criticism.

Recent Developments

Increased penalties within the OVDP In the summer of 2014, the IRS announced an increase of the OVDP's miscellaneous offshore penalty from 27. …

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