U.S. closes in on offshore tax evasion
The Internal Revenue Service loses billions of dollars annually because of offshore tax evasion.
For years, a number of American taxpayers have evaded federal income taxes by channeling income into secret foreign or offshore bank accounts in some 70 countries.
An award-winning investigative series by the Tribune-Review, $hadow Economy , revealed that more than half the world’s money passes almost undetected through such financial black holes to shelter it from not only the tax collector but from shareholders, business partners and even spouses. These secret bank accounts hold at least $21 trillion — more money than the economies of the United States and Japan combined, the Trib reported.
The United States consistently has pursued undeclared income in foreign accounts held offshore, and voluntary admissions garnered more than $5.5 billion in back taxes as of 2013. But the IRS is heightening even more its enforcement measures to expose the offshore accounts of tax dodgers and the activities of their advisers.
The IRS defines delinquent tax liability as the gross tax gap. The tax that subsequently remains uncollected is defined as the net tax gap. Included in the latter is a guesstimate of the amount of tax due on money hidden in offshore bank accounts.
The IRS calculates the tax gap every few years. The latest tax liability figures, issued in 2012 and based on 2006 estimates, amounted to $2.6 trillion. The gross tax gap was $450 billion; the net tax gap, $385 billion.
In “Closing the International Tax Gap,” authors Joseph Guttentag and Reuven Avi-Yonah estimated that in 2008, annual tax evasion by American individuals totaled $36 billion.The Congressional Research Service estimates the current figure between $40 billion and $70 billion. This was attributed partly to a lack of withholding tax on many types of passive income, such as interest paid to foreign entities.
By establishing lawful offshore entities, individuals can channel payments through them to conceal tax evasion. The Trib series showed how an offshore account can be established for less than $1,000.
In 2007, Bradley Birkenfeld, an American employee of UBS AG, Switzerland’s largest bank, disclosed to the Department of Justice the names of thousands of American clients with secret accounts, the funding mechanisms and the amounts of U.S. taxes UBS had helped them evade.
Birkenfeld’s whistleblowing enabled the Department of Justice Tax Division, the U.S. attorney’s office and the Swiss government to forge major inroads in combating the use of offshore bank accounts to evade taxes.
The Justice Department employed the political, financial and trade leverage of the United States and European Union to compel Switzerland to abandon its long-standing banking secrecy laws. Effectively, this terminated the ability of Swiss banks to hide the identity of their U.S. depositors.
So far, UBS has paid the United States $780 million in restitution, fines, penalties and interest.
In 2013, the United States and Switzerland signed a joint statement to cooperate in a program exposing the use of “foreign bank accounts to commit tax evasion.” The Justice Department announced this year voluntary resolutions with 29 Swiss banks and more than 45,000 voluntary disclosures by individuals through the IRS.
Taxpayers looking for safe havens offshore in which to hide income should no longer feel safe.
