This past week the IRS Commissioner of the Large and Midsized Business Division summarized the IRS’s efforts to combat offshore tax evasion. He predicted that whistleblowers will become increasingly important to the IRS’ efforts, given the existence of the new IRS Whistleblower rewards.
IRS Commissioner Frank Ng described to Congress the “critical importance to tax administration in this country — the practice of sheltering U.S. earned income in foreign jurisdictions as a means of avoiding U.S. taxation.”
He identified as “Tier I” issues the following transactions::
Transfer of intangibles/cost sharing
Abusive foreign tax credit transactions
Abusive hybrid instrument transactions
Transfer pricing
Foreign earnings repatriation
The IRS Commissioner described some of what has been revealed through ongoing investigations:
Ongoing IRS Investigations
In the area of ongoing investigations, let me start by laying out some of the facts about one case that I am able to discuss, because the case that I am about to describe is a matter of public record. It involves a major Swiss bank.
In 2001, the bank signed a disclosure agreement with the U.S. to become a qualified intermediary (QI). This, among other things, required the bank to report on the income of U.S. taxpayers that were clients of the bank. However, a former employee of the bank, as part of his guilty plea to assisting a wealthy real estate developer in evading $7.2 million in Federal income taxes by concealing $200 million of assets in Switzerland and Liechtenstein, stated that a number of the bank’s clients objected to such reporting.
The IRS has since requested, via a so-called John Doe summons, that a Swiss bank turn over account information on any U.S. clients who may have used Swiss bank accounts to avoid U.S. income taxes. The summons directs the bank to produce records identifying U.S. taxpayers who had accounts with the bank in Switzerland between 2002 and 2007 and who sought to have their accounts remain hidden from the IRS.
On July 1st a federal judge in Miami approved a Justice Department request to enable the IRS to serve the summons. We are working closely with the Justice Department to ensure that we get the information requested in the summons.
Accordingly, the IRS is exploring our options on how to bring a potentially large number of U.S. taxpayer cases to resolution.
Another recent example relates to U.S. citizens with accounts in Liechtenstein. As we announced in February, the IRS has initiated enforcement action involving more that 100 taxpayers with accounts in this jurisdiction. Because these are ongoing investigations that are not a matter of public record, I cannot go into great detail on these matters. At the highest level, we are again looking at circumstances where U.S. citizens have systematically avoided reporting income from foreign trusts.
Patterns of Evasive Activities
In the cases that we have seen around the world, I want to highlight a few patterns of behavior that we have uncovered in our investigations. Some of the activities I will describe are not, on their own, illegal. Taken together, though, they help to paint a picture of the complexity these investigations present.
First, we have seen financial institutions avoiding wire transfers from U.S. banks. In some cases, funds are diverted through a series of wire transfers using tax secrecy jurisdiction banks to disguise the identity of the true owners.
In some cases, discreet communications are stressed to the client. Phone calls are discouraged in favor of private visits. E-mail is not permitted, and code words are used to communicate. Clients have been advised not to carry documents related to accounts into the U.S.
Another method observed in examinations involves individuals physically carrying large amounts of cash from U.S. sources to tax secrecy jurisdiction banks. In some cases, taxpayers were advised to physically transport millions of dollars to an overseas bank.
We have also observed a number of techniques using offshore accounts to effect a form of estate planning. For example, there are cases where decedents who have an undisclosed foreign trust will leave an account to one or more heirs, but outside of the reported, taxed estate. The heirs may leave their inherited balance in the foreign trust unreported in the U.S. tax system.
These cases often involve sovereign jurisdictions where we have little legal authority and taxpayers that are often difficult to identify. As I will discuss later in my remarks, the United States has agreements to obtain and share tax information with many jurisdictions, but there are limits on our ability to use those agreements. And success in obtaining information can be short-lived. If we are successful in our enforcement strategies in one jurisdiction, the promoters and the schemers often simply move to another.
To put these issues in context, let me offer a little background about these issues and explain why they are so difficult for us. I then want to explain how we are dealing with these challenges, as well as lessons learned. Finally, I will discuss what we think needs to be done moving forward.
The Commissioner observed that whistleblowers or informants are “valuable sources of information for IRS civil and criminal investigations into offshore tax evasion.”