The IRS’ interest in cracking down on offshore tax havens is well documented.  Just this week, the Department of justice announced that the oldest bank in Switzerland – Wegelin & Co. plead guilty to conspiring with U.S. taxpayers and others to hide more than $1.2 billion in secret Swiss bank accounts and the income generated in these accounts from the Internal Revenue Service.

The IRS has information various gathering tools to combat abuses:

1.       Foreign Account Tax Compliance Act (FATCA).

  • This law enacted in 2010 requires U.S. taxpayers holding foreign financial assets with an aggregate value exceeding $50,000 to report information about those assets on Form 8938.  Failure to report foreign financial assets can result in the imposition of huge penalties.
  • Additionally this law requires foreign financial institutions to report directly to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest

2.      Tax Treaties and Tax Information Exchange Agreements.

  • The IRS has a multitude information exchange agreements with other countries.  For instance, the IRS has a tax treaty with Canada that allows the United States to obtain information in Canada through the powers of the Canadian government.  A listing of the tax treaties is available here.  A listing of other agreements the US is available throughthe OECD – here.

3.        Whistleblowers.

  • Perhaps the best tool for the IRS are whistleblower awards.  Link to my previous blog about this topic is here.  Clearly if informants stand to collect millions of dollars like Bradley Birkenfeld – why would they not come forward and report it to the IRS?

Solutions

The good news is there are solutions to this problem.  The IRS Offshore Voluntary Disclosure Program being option number one.  While this program has huge monetary penalties – they are much better than what the law would allow the government to take and most importantly criminal conviction and jail time is avoided.