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by Harry Rabb, C.P.A.
Special to Tropical Breeze
The Internal Revenue Service is curtailing
audits of many people who use offshore tax havens, even when agents
see signs of tax evasion, because agents fear they cannot meet a
three-year deadline for finishing an examination, Congressional
investigators have found.
In a report to be released by the
Government Accountability Office (GAO), it was found that IRS
agents are so hobbled by “dilatory tactics” by offshore
taxpayers and other problems that it takes almost two and a half
years to complete a typical audit. Many IRS agents told the GAO,
the investigative arm of Congress, that the “safest
way” was often to stop an audit prematurely and sometimes to
refrain from starting one in the first place.
The IRS reported that almost $300 billion
in investment and business income was moved out of the U.S. in
2003, the most recent year for which data was fully available.
Analysts at the Joint Committee on Taxation have estimated that the
annual outflow has shot to more than $400 billion since then.
Of that, a portion went to tax havens that
impose few taxes of their own and provide little information to
authorities in the U.S. The other went to countries with tax
treaties and agreements to exchange financial data with the U.S.
The report did not provide a breakdown of how much money went to
specific countries.
Even so, the GAO found that the average
audit of people with money offshore turned up twice as much in
unpaid taxes — about $5,800 — than audits of money kept
inside the U.S. The average assessment of unpaid taxes tripled to
$17,500 for the limited number of audits that were allowed to run
longer than three years, and it shot up to nearly $100,000 for the
small number allowed to run four or five years.
The new report was requested by the Senate
Finance Committee, where Democrats and Republicans alike are
looking for more ways to crack down on people who move their
profits overseas.
The IRS has estimated that the government
loses about $300 billion a year from companies and people who
underreport incomes. While much of that so-called tax gap stems
from people inside the country, often self-employed people or
family-owned businesses, majority party lawmakers contend that the
government could be losing tens of billions of dollars a year from
offshore tax evasion.
Tax analysts say it is almost impossible
to know with certainty how much the government is losing from
international tax evasion. It is, however, estimated to be in the
billions.
The IRS’s estimates of money moved
offshore are based on transfers that are reported by financial
institutions like banks and investment firms that handle such
transactions.
But those estimates leave out at least two
potentially big pots of taxable income: transfers of money that are
not reported to the government and overseas profits made by
Americans on money that is already outside the country.
Experts have estimated last year that the
U.S. could be losing as much as $50 billion from international tax
maneuvering. They have based their estimates on calculations by the
Boston Consulting Group that residents of the U.S. —
individuals as well as corporations — are holding about $1.5
trillion outside the country. If that money produced a 10 percent
return, he said, the U.S. might be failing to collect taxes on
about $150 billion a year.
The new GAO report focuses on the narrower
issue of auditing people who move money out of the U.S. each year.
It reported that offshore audits routinely become bogged down by
stalling tactics by taxpayers, difficulties in getting financial
information from foreign institutions and the technical complexity
of many offshore transactions.
As part of its inquiry, the GAO examined
12 offshore tax audits. In one case, which the GAO said typified
the obstacles, the IRS spent four years investigating a person with
businesses in both the U.S. and an unnamed overseas tax haven. It
was reported that the investigation included 20 summonses, 23
demands for documents, 5 missed appointments and 2 refusals by the
person being investigated to supply information. After four years,
the government still did not know how much money had been moved to
the tax haven.
Audits can be pursued for more than three
years, especially when fraud is suspected, but agents have to meet
tough requirements and their findings can be dismissed and the
agents reprimanded if the unpaid taxes turn out to be smaller than
expected. Revenue agents and managers have told the GAO that some
developed cases are not opened for examinations because
insufficient time remains under the statute. Many case files that
are prepared for an audit, it said, are instead
“surveyed” and closed.
The three-year deadline creates an even
bigger problem, the GAO said, by making it even harder to recover
money from previous years after auditors find that a person
underreported income in the most recent year.
The so-called tax gap continues to be a
problem but it appears that Congress has finally identified a large
problem – offshore tax havens where otherwise taxable dollars
are sheltered by Americans with foreign government assistance.
• • •
This information is provided as a public
service and should not be construed as individual accounting or tax
planning advice. For information on how these general principles
apply to your situation, please consult an accounting or tax
professional.
Harry Rabb is a C.P.A. and owner of
Accounting Services, Inc., 935 Main Street, Suite D-1, Safety
Harbor. Call 727-725-4121.
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