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Tax Amnesty for Offshore Accounts: The Program and Results

Introduction: Using a "carrot and stick" approach to tackle the growing problem of taxpayers evading U.S. taxes through the use of offshore financial institutions, IRS has aggressively sought information involving offshore credit and debit card transactions, while offering taxpayers limited amnesty (which ended April 15, 2003) to confess their participation and provide information on promoters of offshore tax evasion schemes. This article discusses IRS's two-pronged approach, the results of the recent amnesty program and how the program works for those who chose to participate.
The Forerunner to Amnesty: John Doe Summons Program: In an effort to stem the use of offshore banking to facilitate tax evasion, IRS launched a "John Doe" summons (a court order for documents) investigation into offshore credit and debit cards issued to U.S. taxpayers. Typically, taxpayers deposit funds in foreign "tax-haven" banks and then access their funds with debit or credit cards issued by the banks. The taxpayer's identity is protected under secrecy laws in the tax haven jurisdiction, so IRS cannot compel the offshore banks to divulge information. Unfortunately for taxpayers and offshore banks, the major debit and credit card providers, such as Visa, MasterCard and American Express (collectively "credit card companies"), are not immune from U.S. legal process.; Approximately 100 summonses issued to credit card companies, and records were obtained, involving bank customers in more than 70 countries. These records were used to track down merchants who accepted offshore bank cards in business and consumer transactions. Again, summonses were issued to several large retailers, airlines and hotel companies seeking information regarding suspicious bank card transactions. Merchants revealed to IRS the names and addresses of purchasers using offshore bank cards.; From this information, IRS identified taxpayers suspected of tax evasion indirectly: It first acquired offshore bank card transaction information from credit card companies by subpoenaing their records, and then went to merchants who accepted these cards to obtain the taxpayer's name and address.; Thus, while the taxpayer's offshore bank account information may have been secret, the use of credit or debit cards tied to the account for purchases in the U.S. were subject to discovery.; While the government acknowledges it is not illegal to hold credit or debit cards issued by offshore banks, IRS has concluded that these cards are often used to access funds held in tax-haven countries outside the reach of U.S. authorities, thus facilitating evasion of U.S. taxes. The John Doe investigation produced thousands of accounts with several dozen cases being referred to the Criminal Investigation Division.
The Target: As an outgrowth of the John Doe Summons Program, IRS estimates that more than one million taxpayers are participating in offshore accounts to avoid taxation. To date, 170,000 taxpayers have been reported to IRS, suggesting annual tax revenue losses in the billions of dollars.; To reign-in the use of offshore banking in U.S. tax evasion schemes, IRS enacted the Offshore Voluntary Compliance Initiative (OVCI) - which offered partial amnesty to taxpayers who maintain offshore financial accounts including offshore credit, debit or other payment cards issued by offshore banks.
Huge Potential Payoff: OVCI is a creative and aggressive response to the proliferation of offshore bank accounts. Because IRS cannot investigate banks located in uncooperative foreign countries, it decided to provide amnesty to those who provide information regarding these tax evasion schemes. At bottom, this is a reward for information program, but without a monetary pay out. Instead, those coming forward must pay the full taxes, interest and negligence penalties (25% of the tax owed) when applicable, relating to their unreported income, but are spared the prospect of civil fraud penalties (75% of the tax owed) and potential criminal prosecution.; Thus, even if only a small percentage of taxpayers participated, IRS could receive valuable information that could lead to many other non-cooperative tax dodgers. IRS hopes to obtain the entire client list of a tax scam promoter from the information provided by just one participant. OVCI is reminiscent of the abusive tax shelter amnesty program initiated in 2002 which netted 1,000 cooperating taxpayers and provided IRS with invaluable information in tracking down abusive tax shelters and their promoters.
The Results: Surprisingly, the number of applicants closely matched the number participating in the tax shelter amnesty program, despite the much larger pool of taxpayers allegedly using offshore accounts. Just 1,253 taxpayers applied for amnesty, despite IRS estimates that over one million taxpayers have offshore bank accounts -- less than 1 in 1,000 suspected taxpayers. Surely, IRS hoped for a response from 1% to 10% of the suspected tax evaders, which would have boosted the applications to between 10,000 and 100,000. At these higher numbers, IRS would have probably received enough information to virtually shut down all offshore tax scams promoted to U.S. taxpayers.; COMMENT: IRS erred by insisting that taxpayers pay negligence penalties in addition to the full tax and interest owing. This additional cost of coming clean probably dissuaded many potential taxpayers from claiming amnesty for financial reasons. Perhaps, if there was no negligence penalty in cases where the participant merely amended prior tax returns to include the omitted income, more taxpayers would have participated.; In the real world, taxpayers involved in heavy-duty tax evasion are not likely to come clean out of moral guilt ("What I did was wrong"). They generally treat dealing with the tax collector strictly on a financial basis and make a cost-benefit analysis ("What will it cost me" compared to the realistic chances of getting caught). If the cost of amnesty is too expensive relative to their financial resources, these people often opt to take their chances, rather than surface through an amnesty program and face financial ruin. After all, many of the victims are in denial about the severity of their predicament. Also, IRS generally tends to criminally prosecute the promoters and their associates, as opposed to the victims of these schemes -- unless the victim is a sophisticated business person or professional, or is actively involved in the scheme.; COMMENT: IRS should have provided a cash reward program for providing the information, in addition to amnesty. That way, those possessing information on tax scams who were not necessarily involved in committing tax evasion -- employees or others who knew of the schemes (computer personnel, printers; those providing facilities or services to the promoters - hotels, lecture halls, caterers); potential clients and their professionals who investigated the schemes and obtained marketing materials, but decided not to participate; and acquaintances, relatives (probably ex-relatives!) or those holding a grudge against someone involved in the scheme, who would have a financial incentive to provide information.; If IRS wanted enough information to shutdown foreign bank tax evasion schemes, it needed to provide the proper incentives to obtain the information. A strict and narrowly-designed amnesty program for potential tax criminals did not cast a large enough net. In short, if IRS needs the public to provide it with information, saving it the costs and delays of conducting investigations, it must be willing to pay for it.
IRS Response: Despite the meager response from the public to OVCI, IRS is placing its best spin on the situation, claiming that a partial analysis of the disclosures identified more than $50 million in uncollected taxes and 80 previously unknown offshore promoters. IRS estimates the amount of uncollected taxes could exceed $100 million (far less than the claimed billions in unpaid taxes) with some cases alone involving taxes that exceed seven figures. Individuals, estates, trusts, and foreign and domestic corporations were among taxpayers applying for amnesty.; Preliminary analysis of the findings so far reveals:; 1. Over 1,246 taxpayers applied for OVCI;; 2. Taxpayers were from 46 states and 48 countries;; 3. Applications covered more than 3,500 tax years;; 4. Uncollected taxes should surpass $100 million; and; 5. A number of cases involve tax liabilities exceeding seven figures.; Florida with 141, led the states with the highest number of applications; California was second with 115; Texas, third with 71, and New York was fourth with 47.; IRS acknowledged strong cooperation from state governments, and said that this contributed to the success of the initiative. California announced, early on in the initiative process, that it would not pursue civil fraud penalties or criminal prosecution against taxpayers participating in OVCI; possibly contributing to the high number of applicants in that state. Other states decided subsequently that they would grant special considerations. IRS also reportedly received assistance from tax practitioners who discussed OVCI with clients and may have encouraged them to file.; IRS noticed a high number of questionable amended returns reporting offshore accounts during the 2003 filing season. These returns were filed outside of OVCI. Simply filing an amended return reporting offshore accounts does not include a taxpayer in the program.
Targeting Promoters: Learning the identities of promoters was the major purpose of OVCI. In the first 229 OVCI cases reviewed, IRS discovered 80 new promoters from the 107 taxpayer identified offshore promoters. Tracking down these scam artists would ostensibly slam the door on many potential tax evaders seeking to hide resources in offshore accounts. Perhaps more important, by seizing a promoter's records, IRS will learn the identities of thousands of tax evaders who failed to seek amnesty under OVCI.; As many as 240 applicants claimed that offshore promoters scammed them out of their money to which an IRS spokesperson responds, "A clear lesson emerges from the offshore initiative - not only do you run risks violating the tax law, you risk losing everything you send offshore."
IRS Amnesty Program - How It Worked: If you are one of the thousands of taxpayers who use an offshore account to hide income and are worried about landing in the pokey for tax evasion, you had until April 15, 2003 to make a voluntary disclosure under OVCI.; The amnesty program is over, but IRS will accept voluntary disclosure under certain circumstances; however, taxpayers making direct disclosures to the government should obtain the advice of an experienced tax attorney, since without the protection of the amnesty program, disclosures could lead to criminal prosecution. For the 1,253 taxpayers who applied under the OVCI program, read on -- here is how the program worked:
Deadline and Disclosure: Madoff's victims should consider theft loss claims, as well as refunds for any taxes paid within the past three years on phantom income.; Unfortunately, tax exempt entities will not benefit from tax code deductions and must rely on discovery and eventual recovery of any money and assets traced to Madoff's scheme.
Required Disclosures: Taxpayers were required to make full disclosure regarding:(1) their unreported income; and (2) the promoter or solicitor of the offshore financial arrangements. Upon full compliance with (1) and (2), IRS notified taxpayers of their eligibility to participate in the program, then within 150 days of acceptance, taxpayers must file an amended return, with full accounting details and documents, to support income on the amended return. Taxpayers will also have to provide all promotional and marketing materials involving the tax scheme as well as any documents used in the scheme.
Closing Agreement: After filing the amended return, taxpayers must enter into a closing agreement whereby taxpayers agree not to challenge the amended return, waiving any taxpayer defenses to the collection of the tax - including expiration of the Statute of Limitation privilege. For further details see Rev. Proc. 2003-11, January 14, 2003 and IRS FAQs regarding OVCI.
Criminals and Tax Cheats Ineligible: OVCI did not apply to taxpayers currently involved with civil tax audits or criminal investigations. Also, criminals who use offshore accounts in their illegal activities, including tax scam promoters and offshore bankers, were likewise ineligible for OVCI amnesty.
Conclusion: I doubt the limited number of taxpayers who took advantage of OVCI will supply enough information to effectively halt the proliferation of the offshore banking tax scams; however, IRS will learn of hundreds of schemes and thousands of delinquent taxpayers, some of whom will be candidates for criminal prosecution. Perhaps the goal was to frighten those who might be considering hiding their money overseas in the future.; With the OVCI, IRS has signaled that it can be creative and aggressive in seeking out those hiding income offshore. The failure of the OVCI stems mainly from a lack of effective marketing by IRS as to OVCI's existence and the inclusion of negligence penalties, which scared off many who would have otherwise come forward. Also, in addition to amnesty, IRS should have coupled OVCI with a rewards program for providing information on offshore tax scam promoters that ultimately leads to increased collection of taxes, penalties and interest. That way, citizens who have not committed tax fraud would have an inducement to provide critical information to IRS regarding these promotions.