Offshore Tax Evasion: IRS Has Collected Billions of Dollars, but May be Missing Continued Evasion
Published: 2013-03-27T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Tax evasion by individuals with unreported offshore financial accounts was estimated by one IRS commissioner to be several tens of billions of dollars, but no precise figure exists. IRS has operated four offshore programs since 2003 that offered incentives for taxpayers to disclose their offshore accounts and pay delinquent taxes, interest, and penalties. GAO was asked to review IRSs second offshore program, the 2009 OVDP. This report (1) describes the nature of the noncompliance of 2009 OVDP participants, (2) determines the extent IRS used the 2009 OVDP to prevent noncompliance, and (3) assesses IRSs efforts to detect taxpayers trying to circumvent taxes, interests, and penalties that would otherwise be owed. To address these objectives, GAO analyzed tax return data for all 2009 OVDP participants and exam files for a random sample of cases with penalties over $1 million; interviewed IRS Offshore officials; and developed and implemented a methodology to detect taxpayers circumventing monies owed.
section_title: What GAO Found
paragraphs: As of December 2012, the Internal Revenue Service's (IRS) four offshore programs have resulted in more than 39,000 disclosures by taxpayers and over $5.5 billion in revenues. The offshore programs attract taxpayers by offering a reduced risk of criminal prosecution and lower penalties than if the unreported income was discovered by one of IRS's other enforcement programs. For the 2009 Offshore Voluntary Disclosure Program (OVDP), nearly all program participants received the standard offshore penalty--20 percent of the highest aggregate value of the accounts--meaning the account value was greater than $75,000 and taxpayers used the accounts (e.g., made deposits or withdrawals) during the period under review. The median account balance of the more than 10,000 cases closed so far from the 2009 OVDP was $570,000. Participant cases with offshore penalties greater than $1 million represented about 6 percent of all 2009 OVDP cases, but accounted for almost half of all offshore penalties. Taxpayers from these cases disclosed a variety of reasons for having offshore accounts, and more than half of them had accounts at Swiss bank UBS.
Using 2009 OVDP data, IRS identified bank names and account locations that helped it pursue additional noncompliance. Based on a review of cases, GAO found examples of immigrants who stated in their 2009 OVDP applications that they were unaware of their offshore reporting requirements. IRS officials from the Offshore Compliance Initiative office said they have not targeted outreach efforts to new immigrants. Using information from the 2009 OVDP, such as the characteristics of taxpayers who were not aware of their reporting requirements, to increase education and outreach to those populations could promote voluntary compliance.
IRS has detected some taxpayers with previously undisclosed offshore accounts attempting to circumvent paying the taxes, interest, and penalties that would otherwise be owed, but based on GAO reviews of IRS data, IRS may be missing attempts by other taxpayers attempting to do so. GAO analyzed amended returns filed for tax year 2003 through tax year 2008, matched them to other information available to IRS about taxpayers' possible offshore activities, and found many more potential quiet disclosures than IRS detected. Moreover, IRS has not researched whether sharp increases in taxpayers reporting offshore accounts for the first time is due to efforts to circumvent monies owed, thereby missing opportunities to help ensure compliance. From tax year 2007 through tax year 2010, IRS estimates that the number of taxpayers reporting foreign accounts nearly doubled to 516,000. Taxpayer attempts to circumvent taxes, interest, and penalties by not participating in an offshore program, but instead simply amending past returns or reporting on current returns previously unreported offshore accounts, result in lost revenues and undermine the programs' effectiveness.
section_title: What GAO Recommends
paragraphs: Among other things, GAO recommends that IRS (1) use offshore data to identify and educate taxpayers who might not be aware of their reporting requirements; (2) explore options for employing a methodology to more effectively detect and pursue quiet disclosures and implement the best option; and (3) analyze first-time offshore account reporting trends to identify possible attempts to circumvent monies owed and take action to help ensure compliance. IRS agreed with all of GAO's recommendations.

section_title: Letter
paragraphs: By law, U.S. citizens are required to report worldwide income from all  sources, including income from offshore accounts. While taxpayers can  hold offshore accounts for a number of legitimate reasons, some use  them to illegally reduce their tax liabilities, often by not reporting the  income earned on these accounts. There is no precise estimate of how  much money the U.S. Treasury loses due to unreported income from  offshore accounts. Former Internal Revenue Service (IRS) Commissioner  Charles O. Rossotti said at a congressional hearing in 2002 that he  believed offshore noncompliance to be several tens of billions of dollars,  but did not have a precise number. IRS has been limited in its ability to  uncover and pursue taxpayers with unreported offshore accounts by  traditional means, in part because the reporting requirements that apply  to domestic financial institutions do not generally apply to foreign  institutions.
Since 2003, IRS has carried out four offshore voluntary disclosure  programs, collectively referred to in this report as “offshore programs,”  that offer incentives for taxpayers to disclose their offshore accounts and  pay delinquent taxes, interest, and penalties. Generally, the programs  offered somewhat reduced penalties and no risk of criminal prosecution if  eligible taxpayers fully disclosed their previously unreported offshore  accounts and paid taxes due plus interest. As of December 2012, these  offshore programs have resulted in more than 39,000 disclosures and  over $5.5 billion in revenues.
Some taxpayers with unreported foreign accounts may have chosen not  to participate in one of IRS’s offshore programs, and attempted to  circumvent some taxes, interest, and penalties owed. One technique,  which IRS calls a “quiet disclosure,” is to file amended tax returns that  report offshore income from prior years. Another technique is for  taxpayers to declare existing offshore accounts for the first time with their  current year’s tax return, but not amend prior year returns. If successful,  these techniques result in lost revenue for the Treasury, and undermine  the offshore programs’ fairness and effectiveness.
You asked us to review IRS’s 2009 Offshore Voluntary Disclosure  Program (OVDP)—IRS’s second offshore program and the most recent  program with enough closed cases for analysis. In this report we (1)  describe the nature of the noncompliance of taxpayers participating in the  2009 OVDP, (2) determine the extent to which IRS used data from the  2009 OVDP in order to better prevent and detect future noncompliance,  and (3) assess IRS’s efforts to identify taxpayers who may have  attempted quiet disclosures or other ways of circumventing some of the  taxes, interest, and penalties that would otherwise be owed.
To describe the characteristics of the population of taxpayers participating  in the 2009 OVDP, we analyzed six years of tax return data from all  participants. To get additional information about taxpayers with large  offshore accounts, we analyzed IRS’s case files from a random sample of  closed 2009 OVDP cases with penalties of $1 million or greater. To  determine the extent to which IRS used data from the 2009 OVDP to  better prevent and detect future noncompliance, we reviewed changes  that IRS made to subsequent offshore programs. We also interviewed  IRS officials from the Offshore Compliance Initiative office about actions  taken to identify and target additional offshore noncompliance. To assess  IRS’s efforts to detect quiet disclosures, we used IRS tax return data from  the tax years covered by the 2009 OVDP, tax year 2003 through tax year  2008, to identify potential quiet disclosures and compared our results with  those from IRS. We also used tax return data from tax year 2003 through  tax year 2010 from IRS and Report of Foreign Bank and Financial  Accounts (FBAR) data from the Financial Crimes Enforcement Network  (FinCEN) to assess other ways taxpayers may be circumventing some of  the taxes, interest, and penalties owed. For the purposes of this review,  we determined that the data used in our analyses were reliable. Our data  reliability assessment included reviewing relevant documentation,  conducting interviews with IRS officials knowledgeable about the data,  and conducting electronic testing of the data to identify obvious errors or  outliers. See appendix I for more information on our scope and  methodology.
We conducted this performance audit from June 2011 to March 2013 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: Reporting Requirements for Offshore Accounts
paragraphs: U.S. taxpayers can hold offshore accounts for a number of non-tax  reasons, including access to funds while living or working overseas, asset  protection, investment portfolio diversification, enhanced investment  opportunities, and to facilitate international business transactions. U.S.  taxpayers must report whether they have offshore accounts on Schedule  B of IRS Form 1040 and pay taxes on income from the offshore accounts  at their individual tax rates. Some taxpayers with large offshore account  balances are also required to report additional account information, such  as the name and location of their bank, by filing a form TD F 90-22.1,  Report of Foreign Bank and Financial Accounts (FBAR). Failure to report  the existence of offshore accounts or pay taxes on these accounts can  lead to civil and criminal penalties.
U.S. financial institutions are required to submit to IRS information returns  that report income earned by account holders. IRS uses the information  to check whether taxpayers are reporting investment earnings and other  income correctly. Unlike the reporting requirements for U.S. financial  institutions, there has been no reporting regime for foreign financial  institutions, and this lack of information has limited IRS’s ability to ensure  taxpayers were reporting offshore income accurately (see fig. 1). IRS has  begun implementing provisions of the Foreign Account Tax Compliance  Act (FATCA), which requires, beginning in 2015, U.S. financial institutions  to withhold a portion of certain payments made to foreign financial  institutions that have not entered into a specific agreement with IRS to  report information on their U.S. clients. It is expected that IRS will use  this information to identify noncompliant taxpayers. While IRS officials do  not anticipate that FATCA will replace the offshore programs, they do  believe that future programs may shift in focus to identifying promoters of  offshore tax schemes that are not associated with the financial institutions  that will be subject to FATCA reporting requirements.
IRS’s offshore programs were designed to encourage taxpayers with  undisclosed income from offshore accounts to become current with their  tax liabilities. Although the offshore programs differed in details, all four  followed a cycle similar to the one illustrated in figure 2. The offshore  programs fit into IRS’s larger compliance efforts, which are intended to  both detect noncompliance and to encourage voluntary compliance, in  part by minimizing the burden for taxpayers to understand their tax  obligations and file tax returns every year.
While open and intended to attract all noncompliant taxpayers with  offshore accounts, the four offshore programs to date all started with IRS  identifying a particular group of taxpayers suspected of having unreported  offshore accounts. The group might be account holders at a particular  bank or in a particular country. Sometimes IRS obtains such information  from whistleblowers. In 2007, a whistleblower provided details to the  U.S. government about how his employer, Swiss bank UBS, was actively  assisting and facilitating U.S. taxpayers’ concealment of taxable income.(See app. II for more information on the UBS whistleblower.) IRS may  also use information gathered through prior offshore programs to identify  other banks or countries where U.S. taxpayers may be hiding offshore  income.
The next step is to learn the identities of some of the taxpayers suspected  of noncompliance. One technique is to use John Doe summonses. In 2008, prior to the announcement of the 2009 OVDP, a federal court  granted IRS permission to serve a John Doe summons to UBS for  information on its U.S. customers. As a result of the summons, and  subsequent government negotiation and agreement, UBS turned over  information on approximately 4,450 accounts held in Switzerland by U.S.  persons. This was a partial list of all U.S. UBS account holders with  accounts in Switzerland. In other cases, IRS has been able to get client  lists from promoters of offshore tax evasion schemes.
In order to encourage program participation, IRS publicizes the fact that it  knows, or soon will know, the names of some offshore account holders.  IRS also publicizes the terms of its offshore programs, which offer  incentives to taxpayers who voluntarily disclose their accounts before IRS  learns about them. As described later, the offshore programs offer a  reduced risk of criminal prosecution, and lower penalties than taxpayers  could receive if unreported offshore accounts were discovered in an audit.  In this report we refer to the reduced penalty offered as part of an  offshore program as the “offshore penalty.” In the 2009 OVDP the  offshore penalty was typically 20 percent of the highest aggregate value  of the unreported offshore accounts between 2003 and 2008.
Provided that they meet certain criteria, taxpayers are accepted into one  of IRS’s offshore programs by responding to IRS questions about the  nature of their offshore noncompliance in an application letter and filing  amended or late tax returns and FBARs. (See app. III for sample  application letters.) Investigators from IRS’s Criminal Investigation  division generally review applications to verify that taxpayers are not  already under investigation, that the offshore income was from legal  sources, and that the taxpayer has made a complete and truthful  disclosure. Taxpayers’ amended or late returns that are submitted as part  of an offshore program are reviewed and certified by IRS examiners who  calculate the delinquent taxes, interest, and penalties, and who may  request additional documents and information from taxpayers.
Taxpayers who did not participate in an offshore program but are known  to IRS (perhaps because they were on the list of names IRS identified in  Step 2) run the risk of being audited outside of an offshore program.  These taxpayers could be subject to substantially greater penalties and  increased risk of criminal prosecution. Since 2009, IRS and the  Department of Justice (DOJ) have publicized more than 40 prosecutions  of UBS clients and UBS bankers.
Through data mining, or analyzing, information from offshore program  application letters, and reviewing the case files of program participants  and auditing nonparticipants, IRS is able to identify new groups of  taxpayers suspected of hiding income offshore. IRS can then choose to  continue offering offshore programs and encourage these newly identified  groups of taxpayers, as well as all taxpayers with unreported offshore  accounts, to disclose their accounts voluntarily, repeating the cycle  illustrated in figure 2. For example, taxpayers that participated in the 2009  OVDP named other Swiss banks and financial advisors who had assisted  them with hiding offshore income. As a result, IRS and DOJ took actions  to compel other Swiss banks to name their U.S. customers. To date,  some Swiss banks have announced that they are cooperating with U.S.  government investigations. One Swiss bank ceased operating after it  pleaded guilty to helping U.S. taxpayers hide income offshore and agreed  to pay approximately $74 million in fines, restitution, and civil forfeiture.  IRS and DOJ are also pursuing other banks in Liechtenstein, Israel, and  India, which had been named by 2009 OVDP participants.
section_title: Terms of IRS’s Offshore Programs
paragraphs: Each of IRS’s four offshore programs had a slightly different structure,  including a higher standard offshore penalty rate for each subsequent  program, as shown in table 1. In the 2009 OVDP, the standard offshore  penalty was 20 percent. The offshore programs offer participating  taxpayers a lower penalty than they could have been subject to if IRS had  discovered their offshore account outside of the program. According to  IRS, the offshore penalty is in lieu of all other liabilities for tax, interest,  and penalties that IRS would not pursue. Taxpayers that do not  participate in an offshore program could potentially face penalties that  total more than 100 percent of the value of their unreported offshore  accounts. These penalties could include FBAR, accuracy-related and/or  delinquency, fraud, and foreign information return penalties.
Most of the offshore programs also offered taxpayers mitigated penalties  at lower rates, generally for taxpayers with small accounts or accounts  that were not accessed, also shown in table 1.
Many offshore accounts were presumably open for decades, something  that we confirmed in our review of 2009 OVDP cases, but practical  reasons prevented IRS from auditing and collecting unpaid taxes from all  of those years. The standard 2009 OVDP 20 percent offshore penalty  was calculated based not on additional taxes assessed, but on the  highest aggregate value of the offshore accounts. As a result, the penalty  has been described by tax practitioners as “rough justice,” in part  because the amount in an account might include decades of tax-free  buildup. (See app. IV for hypothetical examples illustrating tax-free build  up and penalties for accounts of different ages.)
Under the 2003, 2009, and 2011 programs, taxpayers had a specified  period of time to join a program. The 2012 program is, at present, open  ended. In each program, delinquent taxes and interest were assessed  and collected for a limited number of prior years, which varied from four to  eight tax years. Taxpayers were typically assessed accuracy-related  and/or delinquency penalties for the delinquent taxes assessed in an  offshore program, in addition to the offshore penalty described earlier.
Despite the significant risks of not coming forward through one of IRS’s  offshore programs, some taxpayers decide to do nothing and remain  noncompliant. Other taxpayers have attempted to disclose their offshore  accounts without paying all the delinquent taxes, interest, and penalties  required by the programs. In a quiet disclosure, taxpayers file amended  tax returns for all or some of the tax years covered by an offshore  program, and report the income from the previously unreported accounts.  The taxpayers would generally pay interest and either accuracy-related or  delinquency penalties on the newly reported income, but would avoid the  higher offshore penalty. At the same time, taxpayers attempting quiet  disclosures would file late FBARs, if they had not previously filed FBARs,  or amended FBARs, if they had, to disclose the offshore accounts that  they had not previously reported. Taxpayers might also try to circumvent  some of the taxes, interest, and penalties that would otherwise be owed  in offshore programs by reporting the existence of any offshore accounts  and any income from the accounts on their current year’s tax return,  without amending prior years’ returns. These taxpayers would also likely  disclose the existence of the accounts by filing FBARs for the current  calendar year. This filing would appear similar to the opening of a new  account. Such a taxpayer would avoid paying any delinquent taxes,  interest, or penalties, unless audited. As described earlier, taxpayers who  are caught disclosing offshore accounts outside of one of IRS’s offshore  programs risk steeper penalties and criminal prosecution, based on the  facts and circumstances of their cases.
section_title: Almost All 2009 OVDP Participants Received the Maximum Offshore Penalty, Almost Half Had Accounts in Switzerland, and About Half of the Revenue Collected Came from a Small Percentage of High Penalty Cases
subsections: section_title: Summary of All 2009 OVDP Closed Cases
paragraphs: Participants in IRS’s 2009 OVDP had offshore accounts that varied  considerably in size. Of the 10,439 closed 2009 OVDP cases, we  estimate based on penalty data that the bottom 10 percent of the  participants had account balances of less than $79,000 and the top 10  percent had balances over $4 million, as shown in table 2. The amount  of offshore penalties also varied widely, which reflected the range of  account balances. Some taxpayers were assessed an offshore penalty of  a few thousand dollars while others were assessed several million dollars.  The average offshore penalty assessed was about $376,000 while the  median was approximately $108,000.
Of the 10,439 closed cases, most were assessed offshore penalties and  96 percent of those assessed penalties received the standard offshore  penalty—20 percent of the highest aggregate value of the offshore  accounts, which was also the maximum offshore penalty rate in the 2009  OVDP. The 20 percent penalty was generally levied when the total  account value was greater than $75,000 and when taxpayers used the  accounts (e.g., made deposits or withdrawals) during the period under  review (2003 to 2008). See table 3.
Fewer than 5 percent of 2009 OVDP participants received one of the  mitigated offshore penalties, 12.5 percent or 5 percent, also shown in  table 3. (See sidebars for representative examples of mitigated penalty  cases.)
Consistent with IRS’s enforcements efforts and the design of the 2009  OVDP, we found that the population of participants was more likely to  report offshore accounts in Switzerland than the average foreign account  holder who filed an FBAR (see fig. 3). Taxpayers with closed cases also  had higher incomes than the average taxpayer, were older, and were  more likely to use the married filing jointly status. (See app. VI.)
About half of the revenues collected through the 2009 OVDP, as of March  30, 2012, came from 378 cases where taxpayers received offshore  penalties of $1 million or greater, meaning they had account balances of  $5 million or greater. This group, which we refer to as “large penalty  cases”, accounted for about 6 percent of the closed 2009 OVDP cases,  but the penalties they received amounted to 49 percent of the total $1.9  billion in offshore penalties that had been assessed by IRS at that time.  Given this group’s high share of penalties assessed, we selected a  random sample of 30 of them for further examination and to obtain a  better understanding taxpayers’ noncompliance.
For large penalty cases, we estimate that more than 50 percent of  taxpayers had one or more bank accounts with Swiss bank UBS. app. VII for detailed information on the location of these taxpayer’s  offshore accounts, including country and bank names.) Some of these  taxpayers with UBS accounts transferred funds from Swiss bank UBS in  2008—the time when the U.S. government was actively trying to compel  UBS to name its U.S. account holders. The funds were often transferred  to other, smaller Swiss banks that generally did not operate in the United  States. A few taxpayers claimed that they transferred funds at the  recommendation of their UBS financial advisors. Taxpayers transferring  funds to other banks may have been attempting to keep their offshore  accounts hidden before deciding to participate in the 2009 OVDP.
The 95 percent confidence interval for the estimated 70 percent of taxpayers receiving  large penalties with accounts at Swiss bank UBS is 51 percent to 85 percent. See  appendix I for more information on our scope and methodology and appendix VII for more  counts by case file.
subsections: section_title: Taxpayers Receiving Large Penalties Disclosed a Variety of Reasons for Having Offshore Accounts
paragraphs: Many taxpayers in the 30 large penalty cases that we reviewed had  resided outside the United States for extended periods of time—either as  U.S. citizens or prior to obtaining U.S. citizenship. Many taxpayers who  disclosed extended periods of non-U.S. residency reported that they had  opened their offshore accounts with income earned outside of the United  States. A few of these taxpayers had been living and working overseas as  U.S. citizens for decades. Others within this group opened accounts  before immigrating to the United States. Although some taxpayers in  these cases became U.S. residents decades ago, they maintained their  offshore accounts and did not disclose them on tax returns or FBARs.  Some taxpayers reported opening bank accounts in Switzerland as a  means of protecting family assets during periods of war or instability in  their native country. Further, a few taxpayers who immigrated to the  United States reported that they had been unaware of their FBAR  reporting requirements, that they had to state that they had foreign  accounts on the Form 1040, Schedule B, or that the United States taxes  the worldwide income of its residents, including overseas investment  income. (See sidebars for representative examples from our case file  reviews.)
Taxpayers in some of the cases that we reviewed disclosed that the  original source of funds for their offshore accounts came from post-tax  U.S. source income. A few of these taxpayers cited family histories or  personal fears about the safety of U.S. banks as their reasons for moving  savings offshore. Others reasons cited included the need to protect or  shelter assets from possible U.S. lawsuits.
We estimate that 47 percent of taxpayers receiving large penalties  inherited offshore accounts from a parent, spouse, or other relative— some of whom were not U.S. citizens or residents.taxpayers reported inherited accounts that were jointly owned or  managed by extended family members, such as siblings and cousins,  who also applied to the 2009 OVDP and sometimes split the penalties.  Regardless of how taxpayers in the large penalty cases came to own  offshore accounts, many maintained but did not disclose offshore account   In many instances,  balances of several million dollars for many years. Some of these  taxpayers did not pay U.S. taxes on income earned from these accounts  for decades.
We estimate that 40 percent of 2009 OVDP participants receiving large  penalties used complex arrangements to indirectly own or manage their  offshore accounts. These arrangements involved the use of foreign  corporations, foundations, trusts, and other entities in jurisdictions that  have been designated as offshore tax havens and financial privacy  jurisdictions, some of which were recommended by the taxpayers’ foreign  financial advisors. In some cases, the entities were “sham” entities—i.e.,  entities created to conceal ownership from U.S. tax authorities—which  participants in some case files that we reviewed used to conceal the  ownership of accounts or disguise the repatriation of offshore funds back  to the United States. Another complex arrangement present in several  large penalty cases was passive foreign investment companies (PFIC). A  PFIC is a type of mutual fund or investment company held outside of the  United States. Some foreign bank accounts disclosed through OVDP  were in the form of simple interest bearing accounts, but others were  foreign mutual funds that would be treated as PFICs under the Internal  Revenue Code. PFICs may, in some cases, receive less favorable tax  treatment than U.S. entities holding similar assets or earning similar  income. Taxpayers who did not disclose PFICs may not have paid the  additional taxes on such investments. In many cases, a number of  previously unreported investment entities were disclosed through the  2009 OVDP, and IRS decided to accept an alternative tax on all their  associated PFIC gains—20 percent of the gain—potentially a much lower  tax rate than would otherwise have been available to those taxpayers.
section_title: IRS Generally Has Used 2009 OVDP Data Strategically, But Has Not Used the Data to Identify Additional Opportunities to Educate Taxpayers on Offshore Filing Requirements
subsections: section_title: IRS Used 2009 OVDP Data to Identify Noncompliance Involving Additional Banks and Countries and to Improve Subsequent Offshore Voluntary Disclosure Programs
paragraphs: As previously discussed, one of the intended purposes of the 2009 OVDP  was mining, or analyzing, data collected from OVDP applications and  audits of participants and nonparticipants to identify entities and  individuals who promoted or otherwise helped U.S. citizens hide assets  and income offshore. We found that IRS collected the names of offshore  financial institutions, financial advisors, bankers, attorneys, and other  promoters from the 2009 OVDP that were involved in hiding U.S.  taxpayers’ offshore income, and used the names to (1) identify patterns of  noncompliance, (2) encourage banks and other promoters to cooperate  with IRS and provide the names of U.S. taxpayers hiding income  overseas, and (3) build cases for John Doe summonses.
IRS officials from the Offshore Compliance Initiative office told us that  publicity from the John Doe summonses has been the most effective tool  to increase participation in its offshore programs. They based their  conclusion on the correlation between country specific or bank specific  John Doe summonses and the locations of 2009 OVDP participants’  accounts. Our case file analysis discussed previously in this report  supports IRS’s conclusion.
However, IRS officials also determined that data mining the 2009 OVDP  applications would not provide IRS with all of the useful information it  could get from participants. For taxpayers accepted into the program,  responses on the 2009 OVDP applications varied widely in degree of  detail, which we confirmed in our case file review. For example, some  application letters included very detailed account information, such as the  original source of funds, bank name, banker name, and country name,  while other case files we reviewed did not contain any optional letter like  the one suggested by IRS in its 2009 OVDP Questions & Answers. As a  consequence, IRS sent surveys to 2009 OVDP participants to obtain  more details about the offshore accounts. The survey included detailed  questions about the taxpayer’s financial institutions, bankers, advisors,  attorneys, or other promoters’ involvement in hiding offshore income. IRS  program officials stated that the additional information they received from  the surveys was useful and that they were using it, along with various  analyses of voluntary disclosures, to identify particular banks, promoters,  professionals, and others who promote, facilitate, or enable U.S.  taxpayers in avoiding or evading payment of required U.S. taxes through  the use of offshore accounts. According to IRS, these analyses have also  been used to identify the foreign countries where the offshore accounts  were maintained as well as the schemes being used and offshore  structures.
Based on data that IRS collected from mining the 2009 OVDP case files  and the survey, IRS obtained information on offshore accounts held by U.S. taxpayers at  HSBC (India);  continued investigations of additional foreign financial institutions in  Switzerland, Asia, and the Caribbean; built cases for additional John Doe summonses, should they become expanded its investigations of non-bank entities, such as merchant  accounts, which are a type of bank account that allows a business to  accept payments by payment cards, such as credit or debit cards;and  improved subsequent offshore programs.
One lesson that IRS learned from the 2009 OVDP was that the  applications sometimes did not contain enough information to allow IRS  to understand the nature of the noncompliance. To obtain better  information going forward, and as a condition of being accepted into the  2011 and 2012 programs, IRS required applicants to submit additional  documents related to their offshore accounts.account information about the original source of funds. In addition,  applicants to the 2011 and 2012 programs that had offshore accounts  with an aggregate balance of $1 million or more were required to submit a  separate statement for each foreign financial institution. These applicants  were also required to submit a separate statement for each foreign  account or asset listed in their voluntary disclosure. (See app. III for  sample 2009 and 2012 application letters and, the new required  attachment to the 2012 application letter.) IRS officials from the Offshore  Compliance Initiative office told us that they have begun to use data from  these additional submissions to improve offshore compliance.
Based in part on its experience with the 2009 OVDP, IRS introduced  streamlined offshore program filing procedures. These were, in part,  intended to provide a less burdensome process for taxpayers with  unreported offshore accounts that were small. As shown earlier in table 2,  for the 10,439 2009 OVDP cases that we had data for, the account value  for the 10th percentile was about $78,000. According to IRS, some of  these taxpayers with smaller accounts, and thus relatively low unpaid-tax  obligations, were U.S. residents residing overseas, including dual  citizens, who most likely did not owe substantial amounts of unpaid taxes,  and who indicated to IRS that they did not understand their filing  requirements. The standard offshore penalty for such taxpayers would  likely be disproportionately high. The streamlined filing procedures that  began in September 2012 allow taxpayers with “low compliance risk” to  become current with their offshore tax obligations without facing offshore  penalties or additional enforcement action. IRS defined “low compliance  risk” as taxpayers with simple tax returns, owing less than $1,500 in taxes  for each of the years covered by the streamlined procedures.
section_title: Despite the Successes of IRS’s Overall Strategy, IRS Might Benefit from Additional Information to Better Target Outreach and Education
paragraphs: IRS efforts to publicize the 2009 OVDP included notices published in  seven languages and outreach to professional tax practitioners. IRS  officials from the Offshore Compliance Initiative office told us that they  had not formally evaluated the success of these outreach efforts. We  recently reported concerns about the complexity of foreign account  reporting requirements, and that tax practitioners and taxpayers are  confused about what foreign account information should be reported and  how.
The offshore programs are part of IRS’s larger compliance efforts, which  are intended to both detect noncompliance and to encourage voluntary  compliance, in part by minimizing the burden for taxpayers to understand  their tax obligations and file tax returns every year. Obtaining information  on how taxpayers found out about IRS’s offshore voluntary disclosure  programs could help IRS better identify populations that could benefit  from additional taxpayer education and outreach and potentially improve  voluntary compliance by taxpayers with new offshore accounts. Such  information could also help IRS evaluate the success of its current  outreach efforts. IRS’s 2009 OVDP application, however, did not contain  a question on how the taxpayer became aware of the program. IRS made  changes to the applications for subsequent programs, as described  earlier, but did not consider adding questions on how participants became  aware of the program. IRS officials from the Offshore Compliance  Initiative office told us that this information would be useful in terms of  allocating future resources, and that they would be open to considering a  question on how taxpayers found out about the offshore programs.  Presently, IRS has not decided to include this question in the 2012  program application.
In our case file review, we found examples of immigrants who stated in  their 2009 OVDP applications that they were unaware of their FBAR filing  requirements. We found they had often opened banks accounts in their  home country prior to immigrating to the United States. IRS officials from  the Offshore Compliance Initiative office stated that although there are  several FBAR education programs, none are specifically targeted at new  immigrants. Furthermore, these IRS officials were unaware of any IRS  work with other federal agencies such as the State Department or the  Department of Homeland Security to educate recent immigrants about  their foreign account filing requirements. These officials stated that one of  the challenges that they face in their office, which is part of IRS’s Large  Business and International Division, is that taxpayer education and  outreach is the responsibility of IRS’s Wage and Investment Division and  that issues concerning FBARs fall under IRS’s Small Business/Self- Employed Division.
IRS officials from the Offshore Compliance Initiative office agree that  more could be done to improve taxpayer education and outreach about  offshore reporting requirements. They, like us, recognize that multiple  outreach efforts could help to draw additional taxpayers into the offshore  programs, and that data mining information from the program applications  can help identify these groups.
section_title: IRS May Not Be Identifying a Large Number of Quiet Disclosures or Other Attempts to Circumvent Some of the Taxes, Interest, and Penalties that would be Otherwise Owed by Not Participating in an Offshore Program
subsections: section_title: Taxpayer Use of Quiet Disclosures to Avoid Offshore Penalties Involves Significant Risk
paragraphs: Quiet disclosures matter because if IRS does not identify them, it  undermines the incentive to participate in the offshore programs. IRS’s  offshore compliance enforcement efforts, including the offshore programs,  deter taxpayers with noncompliance related to current offshore accounts,  or offshore accounts that might be opened in the future. If taxpayers are  able to quietly disclose and pay fewer penalties than they would have in  an offshore program, the incentive for other noncompliant taxpayers to  participate in a program is reduced. When quiet disclosures remain  undetected, they also result in lost revenue for the government. Further, if  quiet disclosures remain undetected, then IRS will not have information  on the characteristics of these taxpayers and their accounts— characteristics such as bank names, country names, and promoter  names—used to build cases against others.
section_title: IRS May Not Be Detecting Some Quiet Disclosures
paragraphs: We identified 10,595 potential quiet disclosures, a number much higher  than the potential quiet disclosures identified by IRS. In a series of  Questions & Answers that IRS first released on February 8, 2011 to  announce the 2011 offshore program, IRS reported that it had identified,  and will continue to identify, taxpayers attempting quiet disclosures. In  the Questions & Answers, IRS stated that it would be closely reviewing  amended tax returns to determine whether enforcement action is  appropriate. (See sidebar for one example of a quiet disclosure being  detected.)
IRS officials told us that the Offshore Compliance Initiative office tested  several different methodologies to identify quiet disclosures. First, IRS  looked at amended returns during tax year 2003 to tax year 2008, the  period covered by the 2009 OVDP, and removed any non-offshore  related adjustments, such as filings status changes and additional  exemptions. IRS also looked at amended returns with increased tax  assessments over an established threshold during tax year 2003 to tax  year 2010.
The effectiveness of a third effort was questioned by IRS. In this effort  IRS compared taxpayers with a history of filing FBARs in non-secrecy  jurisdictions between tax year 2003 and tax year 2008 who filed  delinquent FBARs processed in 2009 involving a secrecy jurisdiction  along with an amended return.
In 2012, a fourth effort, which was not designed to detect quiet  disclosures, but to reroute misaddressed amended returns sent in by  participants in the 2011 offshore program, was the most successful effort  to find them.
Together, these four efforts led to the review of several thousand tax  returns. Of those, several hundred returns were identified as quiet  disclosures. An IRS official told us that the tax returns that were identified  as part of a quiet disclosure will be examined and that cases already  examined had penalties assessed. Because they were quiet disclosures,  the official said the taxpayers did not receive the reduced offshore  penalty.
Given the importance of IRS’s ability to detect quiet disclosures and  evidence that they exist, we tested a different methodology to identify  potential quiet disclosures, and found many more than IRS detected.  Unlike IRS, we looked at all taxpayers who, for the tax years covered by  the 2009 OVDP  filed amended or late returns, and  filed amended or late FBARs.
We then excluded 2009 OVDP participants from this population. While  only an IRS examination can determine whether a potential quiet  disclosure is an actual quiet disclosure, the 10,595 taxpayers that we  identified have an unlikely combination of characteristics that could  indicate that taxpayers are quietly disclosing. IRS agreed with our  methodology as reasonable and appropriate. (See app. I for additional  details about our methodology and app. VIII for a full breakout of our  results.)
Although any of the 10,595 potential quiet disclosures could be actual  quiet disclosures, certain subpopulations raised more questions. First, we  found 3,386 taxpayers that filed amended or late returns, and filed  amended or late FBARs for multiple years. Second, we found that 94 of  these taxpayers met the same criteria for all six tax years covered by the  2009 OVDP.
IRS officials from the Offshore Compliance Initiative office told us that  they had no additional work planned to identify potential quiet disclosures  and had not yet decided to broaden the methodologies that they had  tested, but they expressed strong interest in researching our methodology  to identify taxpayers attempting quiet disclosures. We recognize that  there are additional costs to using a methodology such as the one we  used, but IRS has already committed resources to identifying quiet  disclosures. Moreover, without rigorously and systematically searching for  potential quiet disclosures, IRS does not have reasonable assurance that  it is controlling such disclosures and collecting the delinquent taxes,  interest, and penalties due. Exploring different methodologies that include  a systematic evaluation of amended returns or late filed returns, along  with amended or late filed FBARs, without too narrowly restricting either  the amended return or the FBAR populations, and implementing the best  option could provide this assurance.
section_title: Increases in Taxpayers Reporting Offshore Accounts May Also Indicate Attempts to Circumvent Some Taxes, Interest, and Penalties that Would Otherwise be Owed
paragraphs: Data from IRS’s SOI division and from FinCEN show that the number of  taxpayers reporting offshore accounts on Form 1040, Schedule B and the  number of taxpayers filing FBARs has increased significantly in recent  years. From tax year 2007 to tax year 2010 (the most recent data  available), IRS estimated that the number of taxpayers reporting offshore  accounts on Form 1040, Schedule B nearly doubled to 516,000, as  shown in figure 4. From tax year 2003 through tax year 2007, only about  1 percent of all taxpayers filing Form 1040, Schedule B checked a “yes”  box in response to the question asking if they owned or controlled a  foreign financial account, but that share increased to more than 2.5  percent by tax year 2010. Furthermore, FinCEN has reported that the  number of FBARs filed more than doubled, as shown in figure 4. Both the  increase in the number of foreign accounts reported on Form 1040,  Schedule B and the increase in FBAR filings are significantly larger than  the approximately 39,000 taxpayers that came forward in one of IRS’s  offshore programs.
There could be legitimate reasons for these trends. For example,  taxpayers could be reporting new offshore accounts or taxpayers who  had always reported income from offshore accounts on their tax returns  could be filing FBARs and reporting the accounts on Form 1040,  Schedule B for the first time. This could be an indication of more  taxpayers coming into compliance as a result of IRS’s efforts to combat  offshore tax evasion.
However, such a sharp increase in foreign account reporting amidst the  global economic recession and the publicity surrounding IRS’s offshore  programs raises the question whether some of these taxpayers may have  attempted to circumvent some of the taxes, interest, and penalties that  would otherwise be owed in the offshore programs. Unlike taxpayers  attempting a quiet disclosure, who would still pay taxes plus interest on  previously unreported income covered by the programs, and possibly an  accuracy-related or delinquency penalty, these taxpayers would only be  paying taxes on the offshore income earned for the year reported.
An IRS official from the Offshore Compliance Initiative office told us that  although the office has coordinated with IRS’s Planning, Analysis,  Inventory, and Research (PAIR) office, they had not discussed Form  1040, Schedule B or FBAR filing trends, and that he was not aware of the  sharp increase. As of January 2013, no projects were planned to  research Form 1040, Schedule B filing trends. However, the Offshore  Compliance Initiative office has asked PAIR to determine whether  taxpayers who reported their offshore income properly, but had not filed  FBARs, recently started filing delinquent FBARs, as directed by the 2009  OVDP instructions. who are reporting existing offshore accounts as new.
This effort may not capture first time FBAR filers  Because the increase in recent years in Form 1040, Schedule B and  FBAR reporting of foreign accounts is measured in the hundreds of  thousands, we recognize that it may be too costly for IRS to audit all of  those filings. A less costly approach could involve, for example, IRS  drawing a random sample of those cases and auditing them to  understand whether taxpayers are trying to circumvent some of the taxes,  interest, and penalties that would otherwise be owed in the offshore  programs. One of the things that IRS could look for in such an audit is the  date that the offshore account was opened. Such a sample could provide  an estimate of the magnitude of any problem. As was the case with quiet  disclosures, without such information, it will be difficult for IRS to provide  reasonable assurance that taxpayers are not reporting, for the first time,  offshore accounts that had been open for years to avoid paying  delinquent taxes, interest, and penalties.
section_title: Conclusions
paragraphs: See Internal Revenue Service, “Voluntary Disclosure: Questions and Answers,”  accessed February 8, 2013, http://www.irs.gov/uac/Voluntary-Disclosure:-Questions-and- Answers, Q9. unreported offshore income. Through these programs, IRS has collected  more than $5.5 billion to date, brought tens of thousands of taxpayers into  compliance, and gained increased information on offshore  noncompliance. It is unclear how many additional U.S. taxpayers have  undeclared foreign accounts and how much unreported income is  associated with those accounts. However, the number of quiet  disclosures IRS was able to find (some by accident), the number of  potential quiet disclosures we identified, and the sharp upswing in Form  1040, Schedule B and FBAR filings all suggest that the amount of  revenue to be collected from previously undisclosed offshore accounts  could be significant.
We found two key issues that, if addressed, could make IRS’s offshore  programs even more successful.
IRS has not used program information to identify populations of  taxpayers that would benefit from education and outreach regarding  their offshore tax reporting obligations. Such information could  promote voluntary compliance and reduce the need for enforcement  actions. Additionally, IRS does not obtain information on how  taxpayers learned about offshore programs. Without this information,  IRS cannot fully evaluate its efforts to promote taxpayer participation  in offshore programs.  IRS may have missed taxpayers attempting to circumvent some of the  taxes, interest, and penalties that would otherwise be owed in its  offshore programs. Our methodology to identify potential quiet  disclosures found many more potential disclosures than IRS detected.  IRS may also have missed other attempts at circumvention by not  researching the upward trends of taxpayers reporting offshore  accounts for the first time. While there would be costs to such efforts,  the amount already collected by the offshore programs suggests that  considerable additional revenue gains might be possible. By  identifying taxpayers attempting to circumvent some of the taxes,  interest, and penalties that would otherwise be owed in its offshore  programs, and taking appropriate action, IRS could potentially  increase revenues, bolster the overall fairness of the program, and  have a more informed basis for improving voluntary compliance.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Acting Commissioner of Internal Revenue take  the following four actions:
Use data gained from offshore programs to identify and educate  populations of taxpayers that might not be aware of their tax  obligations related to offshore income and FBAR filing requirements.
Obtain information that can help IRS test offshore program promotion  strategies and identify new ones by adding a question to current and  future programs to determine how participants found out about the  program.
Explore options for employing a methodology for identifying and  pursuing potential quiet disclosures to provide more assurance that  actual quiet disclosures are not being missed and then implement the  best option.
Conduct an analysis designed to measure the extent that taxpayers  are reporting existing foreign accounts on the Form 1040, Schedule B  or on FBARs for the first time and circumventing some of the taxes,  interest, and penalties that would otherwise be owed, and take  appropriate action based on the analysis.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Acting Commissioner of Internal  Revenue for comment. In written comments, reproduced in appendix IX,  IRS agreed with our four recommendations. IRS noted that it was pleased  that we recognized the overall success of its offshore strategy and  provided steps that they are taking to implement our recommendations  and address any identified noncompliance, as warranted. IRS also  provided technical comments on our draft report, which we incorporated,  as appropriate.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to report to the Chairmen  and Ranking Members of other Senate and House committees and  subcommittees that have appropriation, authorization, and oversight  responsibilities for IRS. We are also sending copies to the Acting  Commissioner of Internal Revenue, the Secretary of the Treasury, the  Chairman of the IRS Oversight Board, and the Deputy Director for  Management of the Office of Management and Budget. In addition, the  report will be available at no charge on the GAO website at  http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  me at (202) 512-9110 or whitej@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. GAO staff who made key contributions to this report  are listed in appendix X.
section_title: Appendix I: Objectives, Scope and Methodology
paragraphs: The objectives of this report were to (1) describe the nature of the  noncompliance of taxpayers participating in the 2009 Offshore Voluntary  Disclosure Program (OVDP), (2) determine the extent to which Internal  Revenue Service (IRS) used data from the 2009 OVDP in order to better  prevent and detect future noncompliance, and (3) assess IRS’s efforts to  identify taxpayers who may have attempted quiet disclosures or other  ways of circumventing some of the taxes, interest, and penalties that  would otherwise be owed in its offshore programs.
To describe the characteristics of taxpayers participating in the 2009  OVDP, we relied on data for tax years 2003 through 2008 from four  sources: (1) the Criminal Investigation Management Information System  (CIMIS) managed by IRS’s Criminal Investigation (CI) division; (2) the  Currency and Banking Retrieval System managed by the Treasury  Department’s Financial Crimes Enforcement Network (FinCEN); (3)  IRS’s Individual Master File and Business Master File; and (4) IRS’s  Compliance Data Warehouse (CDW). We used data from four databases  in CDW: Enforcement Revenue Information System, Individual Returns  Transaction File, Audit Information Management System, Individual, and  Business Returns Transaction File. To determine the reliability of IRS’s  taxpayer data, we reviewed relevant documentation, conducted  interviews with IRS officials knowledgeable of the data, and conducted  electronic testing of the data to identify obvious errors or outliers. We  determined that these data were sufficiently reliable for our purposes.
This population includes 200 participants with an Employer Identification Number (EIN),  which IRS uses to identify businesses, instead of an Individual Tax Identification Number  or Social Security Number. Since these business entities represented less than 1 percent  of the total OVDP participants identified, our use of the term “OVDP participants” in this  report generally refers to individual taxpayers participating in the program. one) in situations where only one spouse applied to the 2009 OVDP  through CI, but both were liable for the delinquent taxes, interest, and  penalties because of their married filing jointly filing status. From the  19,337 participants, we identified 10,439 closed examination cases as of  November 29, 2012, which we use in this report for our analysis of  penalties.
To obtain a better understanding of taxpayer noncompliance, we selected  a random sample of 30 2009 OVDP case files for cases that were closed  as of March 30, 2012, and that received a 2009 OVDP penalty of $1  million or greater. As part of the 2009 OVDP application, taxpayers were  asked to explain their reasons for establishing offshore accounts, the  source of funds, the ownership structure, and the history of accounts.  Many taxpayers in our sample submitted an IRS optional letter containing  this information with their application (referred to in this report as the  “application letter.” See appendix III for sample application letters). Some  taxpayers were interviewed by IRS investigators, and some responded to  IRS follow-up requests for additional information. Additionally, other case  file documents that provided key information were: (1) IRS Form 906,  Closing Agreement On Final Determination Covering Specific Matters; (2)  IRS Form 4549-A, Income Tax Discrepancy Adjustments; (3) OVDP  Penalty Computation Workpaper; and (4) form TD F 90-22.1, Report of  Foreign Bank and Financial Accounts (FBAR).
We used a standard data collection instrument to review each case file to  ensure we consistently captured information about the 2009 OVDP  participants, their offshore accounts, and their penalties, interest, and  additional taxes owed. To ensure reliability, two analysts separately  conducted this analysis, and a third analyst compared and reconciled any  inconsistencies regarding the categorizations of 2009 OVDP cases. The  analysts then tallied the number of observations for each topic or  category and all information was traced and verified. We then analyzed  the results of this data collection effort to identify main themes and  develop summary findings. We determined that these data were  sufficiently reliable for our purposes. (See app. VII for a summary of our  data collection instrument results.)
To determine the extent to which IRS used data from the 2009 OVDP in  order to better prevent and detect future noncompliance, we also  interviewed IRS officials from the office of the Offshore Compliance  Initiative to determine what data they collected from the 2009 OVDP effort  and how, if at all, IRS used that data to create taxpayer profile data to  identify additional offshore noncompliance and inform future offshore  programs. In addition, we reviewed changes that IRS made to the 2011  and 2012 offshore programs.
To assess IRS’s efforts to identify taxpayers who may have attempted  quiet disclosures, we used the same datasets that we used to identify the  2009 OVDP population, as described above, plus FBAR data from  FinCEN. To determine the reliability of FinCEN’s FBAR data, we reviewed  relevant documentation, conducted interviews with FinCEN officials  knowledgeable of the data, and conducted electronic testing of the data to  identify errors or outliers. We determined that these data were sufficiently  reliable for our purposes. To identify potential quiet disclosures we  conducted a three-step analysis. First, we used IRS tax return data to  identify taxpayers who filed late or amended returns for the applicable  2009 OVDP period. We then used FBAR data to identify taxpayers who  filed late or amended FBARs during the same time period to create a  combined list of taxpayers. Finally, we removed from this combined list  any taxpayers that we had previously identified as 2009 OVDP  participants. The remaining taxpayers constitute our population of  taxpayers who potentially “quietly disclosed” offshore accounts. From this  population, we used data from amended tax returns to identify whether  the amended returns had positive adjustments to income, and whether  taxpayers filed amended returns for multiple years. We confirmed this  methodology with IRS officials. The results of our analyses are shown in  appendix VIII. To assess other ways taxpayers might be circumventing  some of the taxes, interest, and penalties that would be otherwise owed,  we analyzed filing trends in FBAR data from FinCEN and in Schedule B,  Interest and Ordinary Dividends, of IRS Form 1040, U.S. Individual  Income Tax Return, from IRS’s Statistics of Income Division (SOI). To  assess the reliability of the SOI data that we analyzed, we reviewed  agency documentation and interviewed officials familiar with the data. We  determined that these data were sufficiently reliable for our purposes.
section_title: Appendix II: Events that Influenced Participation in IRS’s Offshore Programs
paragraphs: IRS’s first offshore program started in 2003 as part of an ongoing,  multipronged effort to counter offshore tax evasion. Related to the 2003  program was the Offshore Credit Card Program, which stemmed from a  series of John Doe summonses issued to a variety of financial and  commercial businesses to obtain information on U.S. persons who held  credit, debit, or other payment cards issued by offshore banks. IRS used  records from the summonses to trace the identities of taxpayers whose  use of these payment cards may have been related to hiding taxable  income; this drew many other taxpayers to the offshore program.figure 5 for a timeline of key events.)
The Internal Revenue Code provides whistleblowers with a significant financial incentive  to report noncompliance. It provides for awards up to 30 percent of the collected proceeds  that arise from the whistleblower’s information. 26 U.S.C. § 7623. A whistleblower is  someone who reports information on potential tax problems, such as fraud, to the IRS.  Although not publicly confirmed by IRS, attorneys for the UBS whistleblower reported that  he was awarded $104 million. For additional information on tax whistleblowers, see GAO,  Tax Whistleblowers: Incomplete Data Hinders IRS’s Ability to Manage Claim Processing  Time and Enhance External Communication, GAO-11-683 (Washington, D.C.: Aug. 10,  2011). specific criteria by which the 4,450 accounts would be selected until after  the 2009 OVDP deadline passed. This created uncertainty among UBS  account holders as to whether their names were on the list to be  disclosed. IRS gave taxpayers until October 15, 2009, to enter the  program. IRS publicity about the program, and correspondence sent by  UBS to all U.S. account holders, emphasized the several criminal and  civil penalties applicable to taxpayers who did not make voluntary  disclosures before Switzerland turned over the account data.
The 2011 and 2012 programs had a similar draw for taxpayers. During  the 2011 program, IRS and DOJ were building cases against tax evasion  involving foreign banks in several countries, including Switzerland,  Liechtenstein, Israel, and India. Many 2011 program participants came  forward as a result of criminal enforcement activity and a John Doe  summons issued to HSBC, a global banking and financial services firm  headquartered in the United Kingdom, with significant business  operations in Hong Kong and Asia. The 2012 program, which is still open  and as of March 2013 does not have an end date, is expected to draw  participants based on further criminal enforcement activity against foreign  banks and opportunities for additional John Doe summonses that are  being built by IRS and DOJ with information from past offshore programs.  Also during this time, as the Foreign Account Tax Compliance Act  (FATCA) becomes fully implemented, IRS expects to have increased  information reporting from certain taxpayers and from foreign financial  institutions on offshore accounts.
section_title: Appendix III: Sample 2009 and 2012 Offshore Program Application Letters
section_title: Appendix IV: Hypothetical Examples Comparing Account Balances, Length of Account Ownership, and Penalties
paragraphs: The 2009 Offshore Voluntary Disclosure Program (OVDP) penalties  follow what some tax practitioners have called “rough justice” because of  the relationship between the offshore penalties and the original taxes  evaded. Figure 6 illustrates how two hypothetical offshore accounts  bearing 5 percent interest might grow over time. One account is owned by  a compliant taxpayer who reports the interest income and pays U.S. taxes  at a 35 percent rate with earnings from the account. The other account is  owned by a noncompliant taxpayer who does not report the interest  income. Assuming both taxpayers deposited $1 million in 1986, the  compliant taxpayer would accumulate a balance of approximately $2.1  million by 2009 and the noncompliant taxpayer would accumulate $3.1  million. The compliant taxpayer would have paid tax in each year the  account was open, totaling about $585,000 in cumulative taxes on the  reported account’s interest over 23 years. A noncompliant taxpayer who  participated in the 2009 OVDP would, after disclosing the account, make  a one-time payment in 2009 of about $993,000 in taxes, interest, and  penalties. Although the 2009 OVDP participant would pay more in total  taxes and penalties, the final account balances for both taxpayers would  be roughly the same.
Using the same hypothetical model from figure 6 can help illustrate how  taxpayers with newer offshore accounts that have not accumulated  decades of untaxed interest income are treated. Assuming the  hypothetical accounts in figure 6 were opened in 2004 (instead of 1986),  the compliant taxpayer would have paid about $93,000 in taxes on the  interest income and accumulated a balance of about $1.2 million by 2009,  and the noncompliant taxpayer paying no taxes would have accumulated  about $1.3 million. If the noncompliant taxpayer came forward through the  2009 OVDP, the penalties, interest, and delinquent taxes would have  totaled about $387,000. The 2009 OVDP participant’s ending account  balance would be about $890,000, which is less than the original opening  deposit amount.
section_title: Appendix V: 2009 Offshore Voluntary Disclosure Program Participants with Employer Identification Numbers
paragraphs: We identified 200 2009 OVDP participants with an Employer Identification  Number (EIN), which is used by IRS to identify a business entity. We did  not have complete information on all of the businesses in our sample. In  addition, not all of the businesses had filing requirements in every year  covered by the 2009 OVDP. Table 4 shows the tax forms filed by some of  the businesses in tax year 2008, and table 5 shows the self-reported  North American Industry Classification System (NAICS) code.
section_title: Appendix VI: Additional 2009 Offshore Voluntary Disclosure Program Participant Characteristics
paragraphs: Taxpayers participating in the 2009 OVDP most often used the married  filing jointly filing status, were most often age 55 and over, and had an  average adjusted gross income of about $528,000, as show in table 6.
section_title: Appendix VII: Data Collected from a Sample of 30 2009 Offshore Voluntary Disclosure Program Case Files with Large Penalties
paragraphs: As noted in appendix I, we used a standard data collection instrument to  capture information from a sample of 30 2009 OVDP cases in which  taxpayers received offshore penalties of $1 million or greater. We then  analyzed the results to identify main themes, and develop the summary  findings presented in this report. The information in this appendix contains  information from our case file reviews.
subsections: section_title: Account Balances and Total Penalties, Taxes, and Interest
paragraphs: We calculated offshore account balances based on penalty information.  For our sample of 30 cases, the average account balance was almost  $15 million, as shown in table 7 with other key information.
Most of the 30 cases we reviewed contained some information about the  bank names and country locations of the offshore accounts. In some  cases, 2009 OVDP participants disclosed dozens of offshore accounts  with multiple banks and in multiple countries; in other cases, participants  reported only one account. Only those offshore accounts that were open  in tax year 2003 through tax year 2008 were included in the calculation of  the 20 percent 2009 OVDP penalty. In compiling our profile, we only  included information on accounts that were open during the 2009 OVDP  applicable period and included in the penalty calculation. (Some  participants disclosed additional offshore accounts that were closed prior  to 2003 and not part of the 2009 OVDP penalty calculation.) Figure 7  illustrates the most commonly disclosed country locations. A total of 17  different locations were noted in the 28 cases that disclosed locations,  with Switzerland being the most commonly reported location.
Figure 8 illustrates the most commonly disclosed bank names. A total of  42 different banks were reported in the 29 cases that contained bank  name information, with UBS by far the most commonly disclosed bank  name, followed by Swiss banks Julius Baer, and Credit Suisse.
Twenty-two of the case files we reviewed contained information about the  history of the accounts and the nature of the taxpayer’s noncompliance.  Many of the accounts had been opened decades ago. The median period  of time that participants had owned but not reported income from these  accounts, was 18 years, and the average period was 25 years. In four  cases, the participants had owned offshore accounts for 50 years or  longer.
section_title: Summary of Data Collection Instrument Results
paragraphs: Table 8 summarizes key information from the data collection instrument  we used to collect information on the 30 offshore case files we reviewed.
section_title: Appendix VIII: Quiet Disclosure Analysis Results
section_title: Appendix IX: Comments from the Internal Revenue Service
section_title: Appendix X: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
paragraphs: James R. White, (202) 512-9110 or whitej@gao.gov.
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Mark Abraham, Tara Carter  (Analyst-In-Charge), Andrew Ching, Leon Green, Mark Kehoe, and Libby  Mixon (Assistant Director) made contributions to the report. Jeff Arkin,  Chuck Fox, Robert Gebhart, George Guttman, Brian James, Sarah  McGrath, Donna Miller, John Mingus, Ed Nannenhorn, Karen O’Conor,  Robert Robinson, Cynthia Saunders, Andrew Stephens, Wayne Turowski,  Jim Ungvarsky, and John Zombro provide key assistance.