The IRS has announced that it plans to let Americans who hid their assets from the government to avoid paying taxes they owed off the hook for a large portion of the penalties they would otherwise expect to pay if they come forward within the next six months under the announced leniency program. See IRS Memo on Penalty Framework for Voluntary Disclosure Regarding Unreported Offshore Accounts and Entities, Mar. 23, 2009 (BNA link since not yet available on the IRS website); Donmoyer, UBS Offshore Customers Offered Eased Tax Penalties, Bloomberg.com, Mar. 26, 2009. Normally, penalties for secreting your assets from the government are stiff--the penalty under the Bank Secrecy Act for failure to file the required report about assets in foreign accounts is 50% of the amount in the account (or $100,000, if more) for each time the required report is not filed (and criminal penalties may also apply). In just a few years of failed reporting, those penalties alone can confiscate the assets in the account. But now the IRS says it will only try to collect such penalties at a rate of 5-20% of the maximum amount of assets held during the last six years (and that would be on top of taxes, interest, and the ordinary accuracy penalties, which will be assessed without application of any good faith/reasonable cause affirmative defense).
BNA quotes Commissioner Shulman in a phone call as saying that this approach is "a firm but fair resolution." Id. (Bloomberg report). Certainly, the approach will lead to more voluntary disclosures of foreign-held accounts, following on the IRS summonses to UBS for 52,000 account holders' names. Voluntarily revealing failure to file reports is typically treated with some leniency, in order to encourage compliance and to make the administrative and enforcement job easier. Compliance initiatives are fairly common for shelter cases. See, e.g., Kent Lawson, Offshore Misdoings, Repentance, and the US internal Revenue Service, 2006 Private Wealth Management 46 (discussing the increased focus on use of offshore tax havens and the tendency to view taxpayers who turn themselves in as "less culpable" , as well as several prior voluntary compliance initiatives from 2003 and 2005).
But the announcement of a penalty abatement initiative like this nonetheless reinforces fairness concerns about the administration of the tax laws. In many cases, though by no means all, those taxpayers who have not reported their assets held in foreign accounts are intentional tax avoiders with lots of money. Is our government through these compliance initiatives actually establishing two types of penalty systems where the rich who steal the most government revenues (by failing to pay their fair share of taxes) get off the hook too lightly? This leniency, while it may make sense administratively, appears as one more component of the class warfare that has been waged since the Reagan presidency started. The wealthy get tax laws that suit them most of the time, and they get treated fairly leniently even when they engage in obviously inappropriate tax-avoidance behavior. Evidence for the first is available by simply looking at Sen. Baucus' plan for tax reform--it retains the ghost of an estate tax enacted by the Republicans who were intent on eliminating the tax (3.5 million exemption per taxpayer, so 7 million for a couple, and 45% rate); it retains the ridiculously low capital gains rates that give preference to the wealthy who own most of the financial income; and it maintains the AMT exemption in ways that lowers the tax considerably for those rich people who make between $200,000 and $500,000. Evidence for the latter is the many times that the IRS has created settlement programs or announced other lenient enforcement strategies for the wealthy who have engaged in one or another of the various tax shelter schemes, including offshoring of their assets.
It would be appropriate if IRS were able to discover the identities of a sufficient number of them to put a spotlight on this criminal behavior through a criminal tax enforcement action. So it is fitting that along with the penalty abatement policy, the IRS released a memorandum on "Emphasis on and Proper Development of Offshore Examination Cases, managerial Review and Revocation of last chance Compliance Initiative," Mar. 23, 2009 (again, BNA link), which places "the highest priority" on offshore cases and instructs examiners to use "the full range of information gathering tools" to develop those cases. There is a useful addendum in that memorandum that lists the various penalties that may apply to unreported foreign accounts, including the Bank Secrecy Act penalty (greater of 50% of the account or $100,000 for each failure to report), tax fraud penalties (75% of unpaid tax), failure to file returns penalties (25% - 75% of unpaid tax), failure to pay tax due penalties (maximum 25%), accuracy-related penalties (20% -40%), failure to file information returns with respect to various specified entities (e.g., for failing to file regarding a foreign trust, 5% of the gross asset value owned by the US person).
According to one report, taxpayers with Swiss accounts who come forward are now being faced with a detailed list of questions that appear aimed at discovering how and by whom the tax evasive financial devices were promoted. See IRS Squeezes Swiss Bank Clients for Evidence, AP, International Herald Tribune, Mar. 26, 2009. Those questions could reveal not just other taxpayers using the accounts, but also bankers and accountants and tax lawyers who may have assisted taxpayers in figuring out the financial devices to hide their assets.
One tax attorney reported that he has clients who are still planning to "'roll the dice' and see if the IRS catches them." Id. (International Herald article). That's an allusion to the "game" these taxpayers have been playing that is made possible by our low standards for taxpayer compliance--the audit lottery. But the lottery could have an appropriately harsh downside: those who don't come forward voluntarily will likely face tough prosecution when they are discovered, which could include jail time. Take a look at the Lawson article cited above--83% of tax crime convictions end up going to jail, with an average jail time of 42 months (2005 data).
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