04-01-2009 - IRS Ramping Up Offshore Tax-Avoidance Efforts

The Internal Revenue Service is stepping up efforts to recoup an estimated $50 billion in lost tax revenue per year through offshore tax havens and the Obama Administration is dedicating more resources to back new programs and initiatives to bolster the Service's endeavors. Most of the work, however, lies in implementing policies that would expand the obligations of foreign banks to provide information regarding transactions by U.S. citizens.

Testifying on March 31 before the Subcommittee on Select Revenue Measures of the House Committee on Ways and Means, IRS Commissioner Douglas Shulman told lawmakers that offshore issues are a high priority of the administration, noting that the president's budget proposal committed to identifying $212 billion in savings over the next decade from international enforcement, reforming deferral and other tax reform policies.

A main tool to accomplish the administration's directives will come from revamping the Service's qualified intermediary (QI) program, which provides the IRS with information on the activities of foreign banks and other financial institutions. More data is needed said Shulman, and the IRS is considering expansion of the reporting requirements to include more sources of income for U.S. account holders, strengthening the documentation rules, and requiring withholding for accounts with documentation that is considered insufficient.

Shulman said in addition that he has increased the number of audits in the offshore banking arena over the past five months and prioritized stepped-up hiring of international tax experts and investigators. Also, the Service has offered an amnesty program for offshore account holders who reveal their unreported assets. Those who volunteer the information will pay back taxes and interest for six years, and pay either an accuracy-related or delinquency penalty on all six years. They will also pay a penalty of 20 percent of the amount in the foreign bank accounts in the year with the highest aggregate account or asset value. The program will run another six months and then be reevaluated, said Shulman.

Stephen E. Shay, former international tax counsel for the U.S. Department of Treasury and now a tax partner at Boston-based Ropes & Gray, agreed with Shulman that improvements are needed in the QI program and he urged the Service to require information from QI banks on U.S. customers regardless of whether they hold assets in a QI bank account. He also recommended increasing IRS enforcement resources devoted to cross-border enforcement, including resources to allow QI banks to submit information electronically. Shay also suggested that the IRS consider eliminating the foreign-targeted bearer obligation exception to beneficial owner documentation, or QI reporting.