More on the GAO Report on IRS Offshore Disclosure Initiatives (4/27/13)

Yesterday I posted the general summary of the GAO report titled Offshore Tax Evasion:  IRS Has Collected Billions of Dollars, but May be Missing Continued Evasion (GAO-13-318, Mar 27, 2013), here, and made comments regarding the general summary.  Yesterday's blog entry is GAO Report Targets Strategies Other than OVDP (4/26/13), here.  The focus of yesterday's blog was taxpayer use of alternative strategies to OVDP -- particularly quiet disclosure and go forward strategies.  Today, I will focus on the rest of the report that has some very interesting history of the IRS's identification of offshore account noncompliance and statistics of results, particularly from the 2009 OVDP.

Given the scope of the report, I will only present certain select issues.  I strongly encourage those with a particular interest in this general area to read the entire report to mine their own nuggets from it.  Where I quote, I omit footnotes.  However, footnotes are important for those wanting to dig into the report.

1.  The scope of the report is as follows (from opening letter to Senator Baucus):

You asked us to review IRS's 2009 Offshore Voluntary Disclosure Program (OVDP) -- IRS's second offshore program and the most recent program with enough closed cases for analysis. In this report we (1) describe the nature of the noncompliance of taxpayers participating in the 2009 OVDP, (2) determine the extent to which IRS used data from the 2009 OVDP in order to better prevent and detect future noncompliance, and (3) assess IRS's efforts to identify taxpayers who may have attempted quiet disclosures or other ways of circumventing some of the taxes, interest, and penalties that would otherwise be owed.

2.  "As of December 2012, these offshore programs have resulted in more than 39,000 disclosures and over $5.5 billion in revenues."

3.   The reported disclosures in the IRS's formal programs (current OVDP 2012) are:

2003 Offshore Voluntary Compliance Initiative
1,321
2009 Offshore Voluntary Disclosure Program
15,000
2011 Offshore Voluntary Disclosure Initiative
18,000
2012 Offshore Voluntary Disclosure Program
Approximately 5,000 to date

4.   The total collections (tax, penalties and/or fees, but perhaps not interest):

2003 Offshore Voluntary Compliance Initiative
$200 million
2009 Offshore Voluntary Disclosure Program
$4.1 billion (as of December 31, 2012)
2011 Offshore Voluntary Disclosure Initiative
$1.4 billion (as of December 31, 2012
2012 Offshore Voluntary Disclosure Program
Not available

5.  Summary of All 2009 OVDP Closed Cases

Participants in IRS's 2009 OVDP had offshore accounts that varied considerably in size. Of the 10,439 closed 2009 OVDP cases, we estimate based on penalty data that the bottom 10 percent of the participants had account balances of less than $79,000 and the top 10 percent had balances over $4 million, as shown in table 2.14 The amount of offshore penalties also varied widely, which reflected the range of account balances. Some taxpayers were assessed an offshore penalty of a few thousand dollars while others were assessed several million dollars. The average offshore penalty assessed was about $376,000 while the median was approximately $108,000. 

I omit the Table 2 which can be viewed at page 13 of the report (page 19 of the pdf). 

Of the 10,439 closed cases, most were assessed offshore penalties and 96 percent of those assessed penalties received the standard offshore penalty -- 20 percent of the highest aggregate value of the offshore accounts, which was also the maximum offshore penalty rate in the 2009 OVDP. The 20 percent penalty was generally levied when the total account value was greater than $75,000 and when taxpayers used the accounts (e.g., made deposits or withdrawals) during the period under review (2003 to 2008). See table 3. 

I omit the Table 3 which can be viewed at page 13 of the report (page 19 of the pdf). 

Fewer than 5 percent of 2009 OVDP participants received one of the mitigated offshore penalties, 12.5 percent or 5 percent, also shown in table 3. (See sidebars for representative examples of mitigated penalty cases.)

6. Results from Sample of Large Penalty Cases

About half of the revenues collected through the 2009 OVDP, as of March 30, 2012, came from 378 cases where taxpayers received offshore penalties of $1 million or greater, meaning they had account balances of $5 million or greater. This group, which we refer to as "large penalty cases", accounted for about 6 percent of the closed 2009 OVDP cases, but the penalties they received amounted to 49 percent of the total $1.9 billion in offshore penalties that had been assessed by IRS at that time.15 Given this group's high share of penalties assessed, we selected a random sample of 30 of them for further examination and to obtain a better understanding taxpayers' noncompliance.
More than Half of Taxpayers Receiving Large Penalties Had Accounts at Swiss Bank UBS and Some First Transferred Funds from UBS to Other Swiss Banks before 

Entering the 2009 OVDP 

For large penalty cases, we estimate that more than 50 percent of taxpayers had one or more bank accounts with Swiss bank UBS. (See app. VII for detailed information on the location of these taxpayer's offshore accounts, including country and bank names.) Some of these taxpayers with UBS accounts transferred funds from Swiss bank UBS in 2008 -- the time when the U.S. government was actively trying to compel UBS to name its U.S. account holders. The funds were often transferred to other, smaller Swiss banks that generally did not operate in the United States. A few taxpayers claimed that they transferred funds at the recommendation of their UBS financial advisors. Taxpayers transferring funds to other banks may have been attempting to keep their offshore accounts hidden before deciding to participate in the 2009 OVDP.
The report then contains some discussion of anecdotal cases and patterns discerned for offshore account noncompliance (e.g., political and war refugees, inheritances, etc.)

7.  IRS Used 2009 OVDP Data to Identify Noncompliance Involving Additional Banks and Countries and to Improve Subsequent Offshore Voluntary Disclosure Programs

As previously discussed, one of the intended purposes of the 2009 OVDP was mining, or analyzing, data collected from OVDP applications and audits of participants and nonparticipants to identify entities and individuals who promoted or otherwise helped U.S. citizens hide assets and income offshore. We found that IRS collected the names of offshore financial institutions, financial advisors, bankers, attorneys, and other promoters from the 2009 OVDP that were involved in hiding U.S. taxpayers' offshore income, and used the names to (1) identify patterns of noncompliance, (2) encourage banks and other promoters to cooperate with IRS and provide the names of U.S. taxpayers hiding income overseas, and (3) build cases for John Doe summonses.
IRS officials from the Offshore Compliance Initiative office told us that publicity from the John Doe summonses has been the most effective tool to increase participation in its offshore programs. They based their conclusion on the correlation between country specific or bank specific John Doe summonses and the locations of 2009 OVDP participants' accounts. Our case file analysis discussed previously in this report supports IRS's conclusion. 

However, IRS officials also determined that data mining the 2009 OVDP applications would not provide IRS with all of the useful information it could get from participants. For taxpayers accepted into the program, responses on the 2009 OVDP applications varied widely in degree of detail, which we confirmed in our case file review. For example, some application letters included very detailed account information, such as the original source of funds, bank name, banker name, and country name, while other case files we reviewed did not contain any optional letter like the one suggested by IRS in its 2009 OVDP Questions & Answers. As a consequence, IRS sent surveys to 2009 OVDP participants to obtain more details about the offshore accounts. The survey included detailed questions about the taxpayer's financial institutions, bankers, advisors, attorneys, or other promoters' involvement in hiding offshore income. IRS program officials stated that the additional information they received from the surveys was useful and that they were using it, along with various analyses of voluntary disclosures, to identify particular banks, promoters, professionals, and others who promote, facilitate, or enable U.S. taxpayers in avoiding or evading payment of required U.S. taxes through the use of offshore accounts. According to IRS, these analyses have also been used to identify the foreign countries where the offshore accounts were maintained as well as the schemes being used and offshore structures. 

Based on data that IRS collected from mining the 2009 OVDP case files and the survey, IRS 

• obtained information on offshore accounts held by U.S. taxpayers at HSBC (India);
• continued investigations of additional foreign financial institutions in Switzerland, Asia, and the Caribbean;
• built cases for additional John Doe summonses, should they become necessary;
• expanded its investigations of non-bank entities, such as merchant accounts, which are a type of bank account that allows a business to accept payments by payment cards, such as credit or debit cards; and
• improved subsequent offshore programs.

One lesson that IRS learned from the 2009 OVDP was that the applications sometimes did not contain enough information to allow IRS to understand the nature of the noncompliance. To obtain better information going forward, and as a condition of being accepted into the 2011 and 2012 programs, IRS required applicants to submit additional documents related to their offshore accounts.25 This included additional account information about the original source of funds. In addition, applicants to the 2011 and 2012 programs that had offshore accounts with an aggregate balance of $1 million or more were required to submit a separate statement for each foreign financial institution. These applicants were also required to submit a separate statement for each foreign account or asset listed in their voluntary disclosure. (See app. III for sample 2009 and 2012 application letters and, the new required attachment to the 2012 application letter.) IRS officials from the Offshore Compliance Initiative office told us that they have begun to use data from these additional submissions to improve offshore compliance. 

Based in part on its experience with the 2009 OVDP, IRS introduced streamlined offshore program filing procedures. These were, in part, intended to provide a less burdensome process for taxpayers with unreported offshore accounts that were small. As shown earlier in table 2, for the 10,439 2009 OVDP cases that we had data for, the account value for the 10th percentile was about $78,000. According to IRS, some of these taxpayers with smaller accounts, and thus relatively low unpaid-tax obligations, were U.S. residents residing overseas, including dual citizens, who most likely did not owe substantial amounts of unpaid taxes, and who indicated to IRS that they did not understand their filing requirements. The standard offshore penalty for such taxpayers would likely be disproportionately high. The streamlined filing procedures that began in September 2012 allow taxpayers with "low compliance risk" to become current with their offshore tax obligations without facing offshore penalties or additional enforcement action. IRS defined "low compliance risk" as taxpayers with simple tax returns, owing less than $1,500 in taxes for each of the years covered by the streamlined procedures.

8.  The report has some fascinating appendices.  I recommend particularly

• Appendix IV: Hypothetical Examples Comparing Account Balances, Length of Account Ownership, and Penalties
• Appendix V: 2009 Offshore Voluntary Disclosure Program Participants with Employer Identification Numbers
• Appendix VI: Additional 2009 Offshore Voluntary Disclosure Program Participant Characteristics
• Taxpayers participating in the 2009 OVDP most often used the married filing jointly filing status, were most often age 55 and over, and had an average adjusted gross income of about $528,000, as show in table 6.
• Appendix VII: Data Collected from a Sample of 30 2009 Offshore Voluntary Disclosure Program Case Files with Large Penalties  (JAT Note:  Really good analyses)
• Appendix VIII: Quiet Disclosure Analysis Results
• Appendix IX: Comments from the Internal Revenue Service