The IRS Gets Serious about Tax Enforcement

On Nov. 17, the Internal Revenue Service (IRS) announced [1] that some 14,700 taxpayers had taken part in its recently concluded tax amnesty program by coming forward to report previously undisclosed income hiding in foreign bank accounts. The figure represents a near doubling of the original estimate of 7,500 taxpayers the IRS provided at the end of the voluntary disclosure program. Credited in part for the success of the tax amnesty program is the Obama administration's larger emphasis on tax enforcement. With a beefed up IRS enforcement budget, new tax treaties with countries that once acted as tax havens, and stricter tax haven legislation in the works on Capitol Hill, the U.S. is starting to get serious about international tax enforcement.

When President Obama released [2] his FY 2010 budget in May, watchdog groups noted the IRS stood to receive an overall increase in funding of $764 million, including a $400 million increase in tax enforcement funds. This represented a 13 percent increase for IRS enforcement activities, a much-overlooked area within the federal government during the Bush administration. Though the House has passed its Financial Services appropriations measure, which includes IRS funding, the Senate has not passed its version yet. Despite this, the IRS stands to receive [3] a substantial funding boost, as both versions of the Financial Services appropriations bill are very similar to the president's request, and there is little reason to believe there will be significant changes in a conference committee.

Increased attention to stopping tax avoidance and evasion carries beyond the federal budget. In August, the Swiss government came to terms [4] with U.S. demands that the Swiss bank UBS turn over information on U.S. clients suspected of tax avoidance. Along with revealing information about the identities of some 4,450 American UBS clients, the arrangement between the two governments included a new information exchange agreement. The agreement will allow the IRS and the Department of Justice (DOJ) to work with the Swiss government in prodding other Swiss financial institutions to disclose the identities of Americans suspected of hiding money in Swiss accounts.

In a similar development, the Mediterranean island of Malta, another former tax haven, recently agreed [5] to a new tax information-sharing treaty with the United States. New information-sharing agreements fashioned after the Swiss settlement and the Malta treaty may provide a model for lawmakers in Washington looking to assist the IRS in cracking down on tax havens.

Even though the Obama administration's tax enforcement push spurred the IRS to begin a tax amnesty program in March, it was not until the agreement with the Swiss government was in place that the program began to see significant usage. The program [6], which offered a streamlined, uniform penalty for citizens hiding assets overseas, became exceedingly popular after the UBS agreement in August. In fact, the IRS pushed back the original deadline of the program, which was Sept. 23, to Oct. 15 to accommodate the surge in interest from taxpayers. The more than 14,000 taxpayers who came forward to take advantage of the program disclosed secret accounts in overseas tax havens containing anywhere from $10,000 to $100 million, though it will be some time before the Treasury Department can determine the total amount of back taxes and fines brought into the government.

At the end of the tax amnesty program, some lawmakers called for stricter legislation to help the IRS root out taxpayers hiding money in overseas tax havens. In late October, a group of legislators introduced [7] the Foreign Account Tax Compliance Act in both the House and the Senate. The chairmen of the Senate Finance and House Ways and Means committees, Sen. Max Baucus (D-MT) and Rep. Charles Rangel (D-NY), respectively, who wrote the bill, sought to force foreign financial institutions, including trusts and corporations, to provide information about their U.S. account holders. If a foreign bank were to refuse to comply with the new regulations, the government would levy a 30 percent withholding tax on income from U.S. financial assets held by that foreign institution. Neither of the bills has moved out of its respective committee.

The increased emphasis by the Obama administration on tax enforcement has pushed the legislative branch and the global community to reassess tax policy in general and tax evasion in particular. With an increased budget and additional resources going toward enforcement – including new international criminal investigation offices and a program focused on unraveling the complex business entities used by some taxpayers to avoid paying taxes – the IRS is cracking down on tax evasion. If Congress passes additional tax haven legislation, the IRS will be able to do even more to ensure the tax system is as equitable as possible.