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Oct. 21 — The IRS has pulled in more than $9.9 billion in taxes and penalties since 2009 from a voluntary compliance program that taxpayers can enter to avoid criminal prosecution for not reporting offshore accounts.
Updated data show 55,800 taxpayers have come into the Offshore Voluntary Disclosure Program to resolve their tax obligations, the Internal Revenue Service said in an Oct. 21 news release (IR-2016-137). The OVDP is designed for taxpayers with exposure to potential criminal liability or substantial civil penalties due to a willful failure to report foreign financial assets and pay all taxes on those assets.
Another 48,000 taxpayers have made use of separate procedures to correct prior non-willful omissions and meet their federal tax obligations, paying about $450 million in taxes, interest and penalties, the agency said.
As the IRS moves forward with its compliance efforts, tax professionals said they expect the type of taxpayers coming forward to evolve due to the changing international financial environment and technological advances that improve information-sharing between countries.
“The IRS has passed several major milestones in our offshore efforts, collecting a combined $10 billion with 100,000 taxpayers coming back into compliance,” IRS Commissioner John Koskinen said in the news release. “As we continue to receive more information on foreign accounts, people’s ability to avoid detection becomes harder and harder.” The IRS urges taxpayers with international tax issues to come forward, he said.
Some of the success of the agency’s compliance efforts stems from the Department of Justice’s Swiss Bank Program, which put pressure on the banks to turn over information on their U.S. clients. In exchange they paid penalties but avoided prosecution.
In Switzerland, the IRS and the DOJ were able to “smoke” out most of the criminals in the Swiss banking system, said Scott D. Michel, a member of Caplin & Drysdale Chartered, adding that the agency’s offshore compliance efforts have been among the most successful.
While the Swiss program uncovered a lot of “low-hanging fruit,” Michel said he expects the voluntary compliance cases that the IRS sees over the next decade will be different than the cases of the past eight years.
One factor pushing taxpayers to come forward is the Foreign Account Tax Compliance Act (FATCA), which requires foreign financial Institutions to report the foreign assets held by their U.S. account holders or be subject to withholding.
“It is the bank pressure on these individuals that I think is starting to drive a smaller, but newer wave of people coming forward, particularly in areas that have not seen a lot of attention like Latin America, the Middle East and Asia,” said Michel, who advises U.S. citizens living abroad and foreign entities doing business in the U.S. about tax compliance.
Taxpayers may choose to enter into the IRS’s voluntary compliance program because they are dealing with a nuanced set of factors that may expose them to U.S. tax obligations that they weren’t originally aware of, Michel said.
A lot of these people have shares in a U.S. company or are beneficiaries of a U.S. trust that their predominantly non-U.S. family has put them in, he said. “Not everyone is as attentive to their compliance obligations when they’re not living in the U.S., confronting tax filing deadlines every year or dealing with tax professionals,” he said.
Enforcement pressure resulting from a decision by the IRS or the DOJ to pursue another program targeting a specific region or country, could also create an influx of taxpayers into the IRS’s compliance program, Michel said.
“If the Department of Justice and the IRS start pursuing Singapore, or Hong Kong, or go back to the Caribbean, or look at certain Middle Eastern or Latin American countries, I think you could see the same effect that you saw in Switzerland where an increased enforcement pressure by the U.S. in a jurisdiction starts to shake the trees in a pretty big way,” he said. “There’s a direct relationship between the DOJ and IRS deciding to target a particularly region or a particular country and the amount of compliance that comes out of the other end.”
The IRS news release mentioned that FATCA, the network of intergovernmental agreements between the U.S. and partner jurisdictions, and the DOJ Swiss Bank Program have increased the automatic exchange of taxpayer information between the U.S. and other countries.
That expanded exchange has increased taxpayer compliance because taxpayers know the IRS has access to their information, said John L. Harrington, a tax partner at Dentons US LLP. “The IRS now has possession of offshore financial information that it previously had to wait months to obtain, if it could obtain the information at all,” he told Bloomberg BNA in an e-mail Oct. 21.
Meanwhile, increased automatic information exchange has reduced the supply of financial institutions that openly facilitate tax evasion, Harrington said.
The expansion of the information exchange network doesn’t come without challenges, he said, noting that the volume of information coming in is like a “fire hose” of data.
“The IRS has to find ways to categorize the information so that it can identify which of the information is relevant from an enforcement standpoint,” Harrington said. “The larger the information flow, the harder it is to find the relevant nuggets among all of the false positives and non-US information.”
To contact the reporter on this story: Allyson Versprille in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Meg Shreve at email@example.com
Text of IR-2016-137 is in TaxCore.
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