Crackdown on Offshore Accounts May Increase0

If you have an offshore trust or offshore bank account, you need to appropriately report those assets on the FBAR. The IRS has an amnesty program called Offshore Voluntary Disclosure designed to provide incentives for individuals with unreported accounts to come forward.

The Government Accountability Office (the “GAO”), a government watchdog, has advised the IRS that it can do better in cracking down on offshore tax evasion. The GAO Report, Offshore Tax Evasion: The IRS Has Collected Billions of Dollars, but May Be Missing Continued Evasion, is based on several key findings:

  • Approximately 39,000 disclosures under the amnesty program have netted about $5.5 billion in tax revenue.
  • The median foreign bank account balance was $570,000 (as reported in the results of a previous amnesty program).
  • 6% of voluntary reports paid penalties in excess of $1 million. Over half of the people paying $1 million+ penalties for offshore accounts were involved with UBS.

Quiet Disclosure of Offshore Accounts Rampant

One problem is that many people aren’t reporting their offshore accounts through the IRS’s Offshore Voluntary Disclosure program. Rather, they are “quietly reporting” their offshore accounts by amending past tax returns and FBARs with the hope of avoiding Offshore Voluntary Disclosure penalties. One thing is clear. Quiet disclosure is not good enough in the eyes of the IRS.

IRS Knows About Offshore Account Quiet Disclosures

In reviewing amended tax returns from 2003 to 2008, the GAO found more quiet disclosures than the IRS by matching first time offshore account disclosures with actual offshore accounts. The GAO stressed the need for the IRS to find these quietly disclosed offshore accounts rather than let them slip through the cracks. Voluntary reports of offshore accounts doubled during the period spanning from 2007 to 2010. The total number of offshore accounts is now estimated at 516,000. If only 39,000 people have reported under the Offshore Voluntary Disclosure amnesty program, it stands to reason that hundreds of thousands have not reported.

The GAO made other suggestions as to how the IRS can crackdown on penalties due for unreported offshore accounts. Specifically, the GAO suggested that the IRS can effectively analyze first time reports of offshore accounts for trends that point to people who are potentially trying to avoid past penalties by complying prospectively – from this time forward.

Specifically, the GAO suggested that the IRS should simply identify which tax returns report foreign accounts or file and FBAR and look at the previous year. If no FBAR was filed or foreign account disclosed in the previous year, the IRS will likely catch a huge number of quiet disclosures. That could potentially mean tens of billions of dollars in new tax revenue. While the IRS is free to enforce the tax code in any manner it sees fit, the GAO’s recommendations were quickly adopted. We’ll just have to wait and see how aggressively the IRS implements audits and investigations of those who have disclosed offshore accounts.

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