How is the offshore voluntary disclosure program really working? Not well for USCs and LPRs living overseas.

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The authors have taken the taxpayer information that was finally made, at least partially public, via the following GAO report, to identify the amount of actual estimated taxes collected: Offshore Tax Evasion: IRS Has Collected Billions of Dollars, but May be Missing Continued Evasion (GAO-13-318): March 2013, (referred to as “GAO Report”). Table 3 provides that the total “offshore penalty” collected was $2.81 Billion and “total collected” out of a total US$4.4 Billion collected. Accordingly, the “offshore penalty” represented 64% of all sums collected under the program out of the 10,543 taxpayers analyzed.

The 2013 GAO Report  of the IRS Offshore Voluntary Disclosure Program, International Tax Journal, CCH Wolters Kluwer, January-February 2014.   PDF version here.OVDI Report Martin Ferreira

Fortunately, some revenue agents handling OVD cases in the IRS are now getting a better understanding that USCs and LPRs who live outside the U.S., are typically in a very different category than U.S. resident taxpayers who have taken steps to hide their foreign assets.  Many of these individuals should be opting out of the OVD program, depending upon the facts of their case.

This report was highlighted earlier in the year in Jack Townsend’s blog as follows:

Article Analyzes Counter-Intuitive Effects of IRS Offshore Penalty Structure (2/12/14)

In a comment, a reader directed me and other readers to a recent article that is quite good, so I decided to elevate the article to a separate blog entry.  The article is Patrick W.Martin & Michelle Ferreira, The 2013 GAO Report of the IRS Offshore Voluntary Disclosure Program (1/10/14).  The web version is here, and the pdf is here.  The authors’ bios are here and here.Chart - OVDI Article Martin Ferreira

As the authors note, “the GAO Report indicates [that] taxpayers with little or no criminal or civil fraud exposure were punished proportionately in higher amounts than those who participated and had true criminal tax exposure.”  The authors break these categories into Bad Actors and other actors, referred to as Benign Actors.  That Bad Actors would be treated better than Benign Actors is a counter-intuitive result.”

“One key question that the GAO Report raises is why would so many taxpayers enter into the Offshore Voluntary Disclosure Program if they were not at least as liable for income taxes or penalties under the law? The authors think the answer to this question can be simply answered. Neither taxpayers nor many of their tax advisers understand how tax penalties actually apply under the law, particularly because some penalties are not in the Internal Revenue Code.  Instead of understanding what the requirements are under the law, taxpayers simply relied upon the IRS to inadequately explain how penalties could apply in and outside of the program. Based upon only the Frequently Asked Questions (which were published subsequent to the program’s announcement), taxpayers and their advisers had to make swift and uneducated determinations as to whether a taxpayer should participate in the Offshore Program at all and many feared all would be criminally prosecuted, as the IRS continuously led them to believe.”

This is occurring while the Senate investigations of undisclosed foreign accounts has now started to focus on USCs living overseas.

See my earlier post – Is the new government focus on U.S. citizens living outside the U.S. misguided or a glimpse at the new future?  (Posted March 6, 2014)

  • A large portion of the Senate committee report is dedicated to U.S. citizens who live outside the U.S. and are not compliant with U.S. tax laws.  The . . . chart from the report highlights this focus as to the approximately 6,000 U.S. citizen accounts at Credit Suisse who were/do not live in the U.S:




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