“For taxpayers who continue to hide their head in the sand, the situation will only become more dire.” Doug Shulman, the Commissioner of the Internal Revenue Service (“IRS”), issued this warning when the IRS announced its Offshore Voluntary Disclosure Initiative (the “Initiative”) in March 2009. The Initiative marked the beginning of an international tax evasion crackdown by the United States government. Since early 2009, the U.S. government has carried out a multi-pronged campaign to increase international tax compliance.
The Beginning: The Offshore Voluntary Disclosure Initiative
Through the Initiative, the IRS hoped to identify offshore banks and institutions that helped U.S. taxpayers hide assets and avoid paying U.S. taxes. Under the terms of the Initiative, U.S. persons who had not properly reported offshore financial accounts could voluntarily disclose this information to the IRS in return for reduced civil and criminal penalties.
On October 14, 2009, Commissioner Shulman announced that more than 7,500 taxpayers had entered the program, reporting accounts in hundreds of banks in seventy countries. The disclosures gave the IRS insight into how taxpayers hid assets and evaded tax through offshore financial accounts and structures, and the IRS declared its intention to use this information to find and prosecute tax evaders who had not participated in the Initiative. Commissioner Shulman announced on the same day that the IRS would open three new international criminal investigation offices in Beijing, Panama City, and Sydney and increase the staff at eight existing offices.
Digging Deeper: The Global High Wealth Industry Group
Following the success of the Initiative, the IRS continued its campaign against international tax evasion. In October 2009, the IRS launched the Global High Wealth Industry group, a new unit aimed at unraveling the complex offshore structures used by some taxpayers to evade U.S. tax. The group targets partnerships, offshore trusts, and other entities owned by ultra high net worth individuals in order to “better understand the entire economic picture of the enterprise controlled by the wealthy individual and to assess the tax compliance of that overall enterprise.”
Support from the Top
These efforts enjoy support from the highest levels of U.S. government. In February, President Obama announced his proposed fiscal 2011 budget, including a record $12.6 billion budget for the IRS. This amount represented a 4% increase over fiscal 2010. The increased funds were intended to modernize computing systems and increase funding for audits, criminal investigations, and collections as part of the crackdown on offshore tax evasion. The IRS said it expects additional personnel to generate almost $2 billion in additional enforcement revenue per year by fiscal 2013.
Congress has joined the President in attacking offshore tax evasion. In March 2010, Congress passed the Foreign Account Tax Compliance Act (“FATCA”). This law, which goes into effect after 2012, aims to improve information reporting by imposing additional withholding taxes on foreign financial institutions that do not provide the IRS with information on U.S. account holders. It also expands reporting requirements for foreign financial accounts and other assets. For example, a taxpayer with foreign financial assets in excess of $50,000 must report those on his tax return in addition to filing a Form TD F 90-22.1 (FBAR).
The United States is not the only country concerned with international tax evasion. In March 2009, then-British Prime Minister Gordon Brown called on world governments to “outlaw offshore tax havens” before a joint session of the U.S. Congress, and Commissioner Shulman explained that the U.S. needed to actively engage other countries in order to root out tax evaders. The G20 even considered publishing a “blacklist” of tax-haven nations. The U.S. government has also been working with foreign governments to revise tax treaties and tax information exchange agreements with the goal of increasing transparency and communication to make it more difficult for taxpayers to evade taxes through international activities.
Breaking Swiss Secrecy
The most highly-publicized international discussions arising from this crackdown have been those between the United States and Switzerland. Even in the country best known for its bank secrecy, the United States is making progress in identifying and prosecuting tax evaders.
In June 2010, Swiss Parliament approved the tax treaty with the United States that forms the legal basis for requiring UBS to identify clients with undisclosed private banking accounts. Swiss banking giant UBS disclosed the information of as many 4,450 clients as a result of the approval of this treaty. The Swiss tax authority reviewed the accounts and was required to turn over all information to the United States by August.
There have been various reports that the Justice Department and the IRS intend to force other Swiss banks to reveal the same type of information about their account-holders.
IRS’s Most Recent Efforts
In early August, the IRS announced that it was restructuring its Large and Mid-Size Business Division (“LMSB”) to focus it more directly on international issues. As part of the restructuring, LMSB changed its name to the Large Business and International division (“LB&I”) on October 1. The new organization will house the IRS’s best international agents. It also adds about 875 employees to the existing staff of about 600. The IRS announcement included the following list of ways in which it expects the reorganization to strengthen international tax compliance for individuals and corporations:
- Identifying emerging international compliance issues more quickly.
- Removing geographic barriers, allowing for the dedication of IRS experts to the most pressing international issues.
- Increasing international specialization among IRS staff by creating economies of scale and improving IRS international coordination.
- Ensuring the right compliance resources are allocated to the right cases.
- Consolidating oversight of international information reporting and implementing new programs, such as the Foreign Account Tax Compliance Act (FATCA).
- Coordinating the Competent Authority more closely with field staff that originates cases, especially those dealing with transfer pricing.
- Otherwise centralizing and enhancing the IRS’s focus on transfer pricing.
The reorganization of LMSB into LB&I demonstrates the IRS’s continued commitment to improving international tax compliance. As Commissioner Shulman explained, “Executing our international strategy is a top priority, and our work continues to intensify in this area. Every day, we are moving forward in our international compliance efforts. Bringing together our top international personnel in this new group will help us advance our global tax administration efforts and ensure focus and fairness in a critical area for our nation.”
As a result of the U.S. government’s increased emphasis on international tax matters, it is more important than ever for taxpayers to be educated and compliant on these issues, including the following:
- U.S. tax residency
- Expatriation (giving up your green card)
- Foreign earned income exclusions
- Foreign tax credits
- Foreign bank and financial account reporting
- Foreign corporations and partnerships (note that you may be considered to own an entity that your parents own)
- Foreign trusts
- Gifts and inheritances from foreign persons
- Foreign mutual funds and other investments
Please contact us for a consultation if you have questions about international tax matters, including any of the issues listed above.
This newsletter is for informational purposes only. It should not be constituted as tax, legal, or investment advice. Information has been gathered from sources believed to be reliable, but individual situations can vary and you should consult with your investment, accounting and/or tax professional.
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE WOLF GROUP TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.