You’ve heard that old saying, "Virtue is its own reward."
Well, a more accurate proverb for some tax evaders is "Patience is the best tax reward."
It seems that if you’re engaged in a financial activity that the IRS finds suspicious, like say an offshore account, you and your tax haven money have a pretty good chance of escaping any rebuke (or worse) from the tax agency.
The reason is quite simple: Tax examiners just don’t have time to complete these types of investigations. As long as you can wait out Uncle Sam, you’re likely to get away without any tax damage.
"Examinations involving offshore tax evasion take much more time to develop and complete than examinations of other types of returns," according Michael Brostek, director of strategic issues for the Government Accountability Office, the investigative branch of Congress.
In fact, the complexity of the accounts requires so much more time than do typical audits that the three-year statute of limitations runs out before the investigations can be completed.
For offshore investigations initiated from fiscal years 2002 to
2005, the GAO found that it took around 500 more days to wrap up the
cases. The IRS says it regularly runs out of time because of stalling tactics by taxpayers, difficulties in getting financial
information from foreign institutions and the technical complexity of
many offshore transactions.
Even worse, Brostek said in written testimony presented today to a Senate hearing on tax evasion techniques, sometimes the IRS "chooses not to open an examination at all, despite evidence of likely noncompliance."
Leaving money on the tax table: That’s too bad for many reasons, not the least of which is what it costs the U.S. Treasury.
According to Brostek’s testimony, where investigations of offshore accounts are completed, the median assessment for violating tax laws is about three times larger than the penalties for all other audits. That’s due in large part to the fact that, according to the GAO, the average audit of offshore accounts turned up twice as much in unpaid taxes than did audits of money kept inside the United States.
More time to look into these accounts can really pay off.
The GAO found that in almost 2,000 offshore examinations between 2002-05 that were allowed to extend past the three-year cutoff date, the IRS ultimately assessed 63 percent of the accounts.
The median assessment in these cases was around $17,500 vs. $5,800 from assessed offshore cases closed with the statute of limitations.
Lots of loot: Now there’s nothing inherently illegal with U.S. taxpayers putting
money into offshore acocunts. But it is illegal if an account holder
refuses to disclose U.S.-earned income held in that offshore
arrangement.
And there’s a lot of potentially unreported loot out there over the waves.
Almost $300 billion in investment and business
income was moved out of the United States in 2003, according to IRS
data. The Joint Committee on Taxation estimates that more than $400 billion
a year has left U.S. tax borders since then.
Questioning Q1s: So the GAO, at the request of the Senate Finance Committee, also looked at ways to enhance tax compliance of these accounts. One approach is mandating greater withholding and reporting by foreign financial institutions that contract with the IRS to keep tabs on U.S. income paid offshore to foreign customers.
Unfortunately, a very small amount of income from the United States goes through such institutions, known as Q1s. Brostek’s testimony indicated that for tax year 2003, less than 13 percent of American money was handled by Q1s vs. almost 88 percent of income that went through U.S. withholding agents.
Current Q1 contracts do not require auditors to follow up on indications of suspected illegal acts, a common practice under U.S. auditing standards. Plus, said Brostek, U.S. taxpayers with a desire to evade taxes can simply pretend to be foreign corporations.
Full inquiry: In addition to sending an official to testify before Finance Committee members (the subtitle of the official hearing name: Stashing Cash Overseas), the GAO also today issued a companion report, "Additional Time Needed to Complete Offshore Tax Evasion Examinations."
This is just the latest look Congress has taken into tax shelters. Last fall, the Investigative Subcommittee of the Senate Homeland Security and Governmental Affairs Committee held a hearing on illegal tax havens.
