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Is the IRS losing revenue by discouraging voluntary compliance?

American taxpayers with foreign bank accounts might face steep penalties for failing to report their assets to the Internal Revenue Service. Pursuant to a 2010 law called the Foreign Account Tax Compliance Act, foreign banks must file reports or face penalties themselves. FATCA has helped the IRS learn about many taxpayers’ previously undisclosed accounts.

Of course, the IRS also requires sufficient manpower and investigative resources to pursue and prosecute taxpayers with undisclosed offshore accounts. Although IRS penalties might cover some of the expenses associated with successful enforcement efforts, it seems that a lot of time and effort would be spared by encouraging voluntary taxpayer compliance.

In an effort to find the happy medium between administrative resources and investigative efforts, the IRS began offering in 2009 a program that rewards proactive, truthful tax returns. Under the offshore voluntary disclosure program, or OVDP, taxpayers who disclose previously hidden or undisclosed offshore bank accounts would avoid criminal charges and potentially only have to pay a smaller fine, called the miscellaneous offshore penalty.

However, a recent report authored by the Treasury Inspector General for Tax Administration concluded that the OVDP has not been a complete success. The IRS is missing out on an estimated $21.6 million in penalties by taxpayers who withdraw from or are denied entry in the OVDP.

As a law firm that has represented many clients in dealings with the IRS, we understand how persuasive a financial incentive can be. In this instance, the report's findings could potentially provide similar leverage. We discuss this and other aspects of our approach to our tax law practice in greater depth on our website.

Source: Accounting Today, “IRS Overlooks Noncompliance in Offshore Voluntary Disclosure Program,” Michael Cohn, June 21, 2016

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