Congress, IRS, prosecutors crack down on offshore tax evasion

The Senate Homeland Security and Government Affairs Committee's Permanent Subcommittee on Investigations (PSI) held a mid-July hearing and issued a report that highlighted offshore tax evasion by high net worth individuals, aided by leading banks in tax haven countries. The IRS is cracking down on bank practices that aid and abet individuals' tax evasion. The Department of Justice has obtained a guilty plea from a Swiss bank official involved in the tax evasion schemes and is pursuing further cases in tax haven countries.

Comment. The IRS maintains that tax evasion by high net worth individuals is a major contributor to the tax gap, the difference between tax revenues owed and paid by American taxpayers. The PSI estimated that $100 billion in annual income taxes and $1.5 trillion in assets are being shielded by tax haven banks. The report cited other sources estimating offshore assets of $11.5 trillion and annual revenue losses of $255 billion.

Abuses

The PSI hearing and report focused on the practices of UBS AG Bank of Switzerland and the LGT Bank Group of Liechtenstein, two countries that operate "behind an iron ring of secrecy" that shields the identities and assets of their account holders, according to the committee. A senior UBS employee recently pleaded guilty to conspiracy to defraud the IRS by helping wealthy Americans avoid U.S. tax reporting and withholding rules on income from bank accounts in Switzerland and Liechtenstein. One client secretly held $200 million and owed $7.2 million in taxes.

The IRS has obtained court approval to serve a "John Doe" summons on UBS to obtain the identities of U.S. account holders whom the bank has shielded from reporting assets and paying taxes on the income earned on those assets.

Qualified intermediary program

Foreign banks that agree to participate in the IRS's qualified intermediary (QI) program must verify when accounts held by Americans have income from U.S. securities, withhold the proper amount of tax (up to 30 percent), and send that amount back to the IRS. Ranking PSI member Sen. Norm Coleman, R-Minn., reported that the QI program has been quite effective in enabling the IRS to collect substantial taxes that it previously could not.

Comment. IRS Commissioner Douglas Shulman testified that he was "outraged" by the behavior of high net worth individuals who move assets and income offshore to avoid U.S. taxes. In response, the agency is taking steps to improve compliance under the QI program, which he said rests on bank cooperation. Under the QI program, banks are required to know their customer; the noncompliance is deliberate, Shulman said.