U.S. taxpayers with hidden offshore money: the Senate Finance Committee wonders

The IRS had an amnesty program that ended on April 15, 2003. U.S. taxpayers who had money hidden offshore could come clean with reduced penalties and hugs and kisses from the IRS. Yeah, right.The IRS announced that the Voluntary Compliance Initiative was a stunning success. Over 1,200 people came forward, etc. etc.Yesterday the Senate Finance Committee co-chairs sent a letter to the IRS saying, "Oh really?" They wonder if the wonders of the Voluntary Compliance Initiative haven't been oversold.Yup. Take it from me. I have matters on the table right now for clients who need to come clean in a big way. The IRS hasn't set up a system for doing this properly.U.S. people who have money parked offshore face two big problems. One is tax. Typically they didn't pay tax on the investment earnings. Their downside? Taxes, penalties, interest. Sometimes the penalties are really big, if the IRS claims fraud. Prison could even be a factor.The other downside: they didn't do the paperwork. There are penalties -- sometimes pretty big ones -- for not filing the right forms. Mostly the downside risk factors point back to the U.S. Code provision that says "maximum of $250,000 fine or 5 years in prison or both." Pretty scary. Especially when the paperwork is pretty perfunctory (e.g., checking the boxes at the bottom of Schedule B on Form 1040) or universally ignored (e.g., Form TD F 90.22-1).The IRS really needs a system in place to allow a lot of people to transition into compliance. I know this because this is the guts of my practice -- helping people in precisely this situation. The Senators are right.Here's their letter to the IRS.* * * * *July 29, 2003The Honorable John Snow U.S. Department of the Treasury 1500 Pennsylvania Avenue, N.W. Washington, DC 20220Dear Secretary Snow:We would like to bring to your attention a matter involving the government's ability to combat tax evasion through the use of offshore financial accounts. We recently learned the Treasury's Inspector General for Tax Administration (TIGTA) concluded that the Internal Revenue Service's (IRS) Offshore Voluntary Compliance Initiative (OVCI) was significantly less successful than publicly claimed by agency officials. The IRS has advised the Finance Committee there may be hundreds of thousands of individuals with offshore financial arrangements concealing taxable income costing the government tens of billions of dollars in lost revenue each year. To address this serious compliance issue, the IRS announced the OVCI in January 2003 to encourage the voluntary disclosure of previously unreported income. In May, the IRS reported that the program led to more than 1,200 people from 46 states stepping forward to participate. Acting IRS Commissioner Bob Wenzel stated "this is a strong response to the offshore program. People with multimillion dollar tax bills came forward, and they identified scores of new promoters of offshore tax schemes for further investigation. This effort sends a powerful signal to offshore tax evaders still out there and others considering hiding money overseas." Treasury's Assistant Secretary for Tax Policy, Pam Olson, added that the OVCI "has been an effective program in bringing taxpayers back into compliance with the law."TIGTA recently reviewed and compiled data on the OVCI initiative. The data reveals that the success of this program may not be as great as the IRS claims. The IRS initially believed that upwards of $ 100 million in identified unpaid taxes were available for assessment. As of June 30, 2003, the IRS assessed only $ 3.3 million with only $ 744,546 having been collected. According to TIGTA, the largest assessment was for $ 375,000. There have been no $ 1 million assessments made by IRS. TIGTA also reported that the cost of the OVCI project has been estimated at $ 56 million.While we applaud innovative approaches to ensure that taxpayers cannot escape taxes that they properly owe, the preliminary results of the OVCI suggest the program has not succeeded as much as was hoped. Moreover, we are concerned that IRS's public claims regarding the program's success are not substantiated by the facts. It is clear, however, that these abusive offshore schemes, if left unchecked, will erode public confidence in our tax system. We simply cannot let this happen. We believe a more vigorous, sustained and effective approach is warranted.We are asking that you review this matter and provide the Committee with the benefit of your thinking on how the government can more successfully attack the use of offshore bank accounts to conceal taxable income. We are asking you to provide the Committee with your assessment of this problem and concrete recommendations for enhancing taxpayer compliance. In addition, are there particular countries that are more problematic than others and what is Treasury doing to focus its attention on those governments? Are current law reporting requirements adequate? We also note that the Secretary was provided significant new tools as part of the USA Patriot Act (i.e. 31 USC 5318A) that can be used to curb offshore abuses. We are interested in knowing the extent to which these special measures are being used by Treasury. Lastly, we are interested in learning whether you have the requisite tools and resources to pursue offshore cases involving people who did not come forward under the initiative?Compliant taxpayers must be assured that the Federal government is taking all necessary steps to curb deliberate tax cheating. We stand ready to work with Treasury to curb tax abuses and restore confidence in our tax system. Compliant taxpayers expect the government to ensure that everyone is paying their fair share of the nation's revenue needs. We appreciate your prompt attention to this matter and look forward to receiving your response.Sincerely yours,Max Baucus ChairmanCharles E.Grassley Ranking Membercc: IRS Commissioner Mark Everson Assistant Secretary for Tax Policy Pam Olson Joint Committee on Taxation Chief of Staff George Yin Acting TIGTA Pam Gardiner