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The IRS Declares War on Offshore Tax Evasion

by DiRuzzo Talbot on Categories: tax

The IRS Declares War on Offshore Tax Evasion

By Joseph A. DiRuzzo, III and Carlton L. Talbot

From election-cycle news reports of Mitt Romney’s offshore accounts in Luxembourg and the Cayman Islands to the recent revelations that Apple has stashed its pot of gold beneath Ireland’s tax-favorable rainbow, offshore tax avoidance has been front and center in the public’s mind.

Yet it is not just the brazen nature of these offshore tax strategies that has caught the eye of so many, it is also the enormity of the financial reality: the Tax Justice Network recently estimated that almost $32 trillion has been hidden in offshore banking hubs. U.S. Senator Carl Levin (D-MI) has stated, “The universe of offshore tax cheating has become so large, that no one — not even the United States government — could go after it all.”

The IRS is now making its best efforts to prove him wrong.

A 2006 report released by the U.S. Senate’s Permanent Subcommittee on Investigations revealed the alarming rate at which wealthy Americans were using offshore banking as a means of tax evasion. That report set the stage for what would become a war between the IRS and offshore tax avoidance schemes.

Since 2006, the IRS has taken tactical and calculated steps, equipping itself with an arsenal of weapons to help accomplish its goals. Economic turmoil and concern regarding the lost revenue from unpaid taxes has helped to reinforce the IRS’s initiative, and seven years later, 2013 looks the year the IRS may be on the verge of triumph.

Let us take a look at some of these weapons that the IRS has used in its battle against offshore tax avoidance.

The John Doe Summons

The IRS defines a “John Doe Summons” as “any summons where the name of the individual taxpayer under investigation is unknown and therefore not specifically identified.” John Doe summonses have led to the IRS uncovering significant information regarding accountholders who are illegally failing to report their offshore assets and/or income to the IRS. Since these summonses allow the IRS to seek information about unspecified taxpayers, information is collected on an extraordinarily broad and expansive scale from financial institutions wherever located.

In July 2008, for example, the U.S. Department of Justice (“DOJ”) issued a John Doe summons to the Union Bank of Switzerland (“UBS AG”), then Switzerland’s largest bank. The summonses resulted in 300 bank accounts being initially disclosed, and led to UBS AG entering into a deferred prosecution agreement on charges of conspiring to defraud the United States government. As a part of this agreement, UBS AG was required to pay the U.S. $780 million and turned over information on approximately 5,000 U.S. accountholders. This blew the lid off of offshore tax evasion and resulted in a snowball-effect of additional prosecution and worldwide investigation into offshore tax evasion schemes.

Additionally, in early 2013, a John Doe summons was issued to the oldest Swiss private bank, Wegelin & Co., which pleaded guilty to federal tax charges for similarly conspiring to defraud the United States. Most recently, in April 2013, DOJ issued a John Doe summons to First Caribbean International Bank (FCIB). Instead of pursuing foreign bank records directly, in this case the IRS served its summons on Wells Fargo here in the U.S., where FCIB maintained a U.S. correspondent account.

One of the most powerful features of the John Doe summons is that DOJ can issue them repeatedly without having to build a criminal case against an institution or an individual. This provides the IRS with a weapon that is not only powerful and effective, but also has virtually unlimited ammunition.

The Offshore Voluntary Disclosure Program

Along with the issuance of John Doe summonses, the IRS has further established its initiative to combat illegal offshore tax havens by implementing the Offshore Voluntary Disclosure Program (OVDP).

The OVDP currently focuses on the main vehicles of offshore tax evasion — unreported foreign financial accounts and unreported foreign entities — examples of which include depositing unreported and untaxed income into foreign accounts and/or omitting investment income earned from the foreign account on tax returns. Under the OVDP, current tax evaders are encouraged to report previously undisclosed foreign accounts through significantly reduced penalties and elimination of criminal prosecution risks for evasion.

For example, by entering into the OVDP, the IRS waives Foreign Bank Account Report (FBAR) non-compliance penalties, which range from $10,000 to the greater of $100,000 of 50% of the account balance per account per year for unreported foreign bank exceeding $10,000. Instead of applying these blanket penalties, the ODVP rates a specific taxpayer’s general degrees of willful tax evasion and the severity of the case. Based on this rating, the IRS then penalizes the tax evader at rates purported to be lower than the blanket amounts. The threshold limits for these penalties are a respective 27.5%, 10%, and 5% of the maximum foreign account balance based on the three different levels of willfulness.

Foreign Account Tax Compliance Act

Another arrow in the quiver of the IRS is that Foreign Account Tax Compliance Act, or “FATCA.” Since FATCA was signed into law in 2010, it has been used by the IRS to police offshore account transparency.

FATCA requires certain U.S. taxpayers to report foreign assets that exceed certain thresholds. These reports are made on IRS Form 8993 as an addendum to annual federal tax returns. Additionally, FATCA requires foreign institutions to report information directly to the IRS about financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold substantial ownership interests. This reporting requirement extends to foreign banks, brokers, investment entities, and certain insurance companies.

The sum of these IRS programs and initiatives are already reaping rewards for the U.S. government in terms of higher tax revenues. And as the U.S. government tries to shrink its budget deficits and national debt, the war on offshore tax evaders is only going to become bloodier.

Joseph A. DiRuzzo, III, is a senior attorney with Fuerst Ittleman David & Joseph, PL and also a Certified Public Accountant. He concentrates his practice in the areas of tax litigation and controversy, tax law, fraud detection and litigation, corporate law, and white collar criminal defense.

Carlton Talbot is a legal consultant at Fuerst Ittleman David & Joseph. He focuses his practice in the areas of customs and trade law compliance, administrative law, and international business transactions.

South Florida Legal Guide 2013 Midyear Edition

Tags: taxes offshore evasion irs the john doe summons the offshore voluntary disclosure program foreign account tax compliance act

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