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Treasury Audit Finds IRS Overseas Tax Program Missing out on Revenue

A new report from the Treasury Inspector General for Tax Administration says the Internal Revenue Service has missed opportunities to collect over $21 million in penalties due to administrative weaknesses in its Offshore Voluntary Disclosure Program.

The program, originally established in 2009, was created to allow taxpayers holding assets and income in foreign banks in order to avoid taxes, an opportunity to voluntarily disclose those holdings in order to avoid significant IRS penalties, and possible criminal prosecution.

According to the Inspector General's report, the IRS "needs to improve its efforts to address the noncompliance of taxpayers who are denied access to, or withdraw from, the OVDP."

In a press release, Inspector General J. Russell George said the IRS must "ensure that taxpayers with foreign-derived income comply with their U.S. tax obligations.”

Based on a random sampling of 100 taxpayers from a group of 3,182 taxpayers whose requests to join the OVDP were denied, or who withdrew from the program in their own, the Inspector General estimates the IRS "did not assess approximately $21.6 million in delinquent ... penalties."

The report also identified "internal control weaknesses" that lead to "delayed or incorrect processing" of OVDP requests, including "two separate IRS addresses for taxpayers to send correspondence," which "contributed to incorrect processing of some taxpayer disclosure requests."

The IRS often assigns its most experienced revenue agents to handle OVDP cases the report says could better be addressed by "lower-graded employees," because there was "limited revenue agent analysis beyond just the verification of the accuracy of the taxpayer’s tax return and the OVDP penalty computations."

The report recommends the IRS review each of the denied or withdrawn OVDP requests it identified "for potential ... penalty assessments and criminal investigation," as well as establish a review process for "denied and withdrawn cases for further compliance actions."

The report also recommends the IRS establish a single mailing address to handle taxpayer correspondence regarding the OVDP. 

In response to the report, the IRS' Douglas O'Donnell, commissioner of the large business and international division, agreed with the findings, and set target dates for compliance, but also noted the consolidated mailbox recommendation would be put "on hold" pending an IRS decision of the future of the OVDP.

O'Donnell said that while the OVDP has "been successful in improving compliance with offshore accounts," the program was not intended to "exist into perpetuity."

O'Donnell noted that the 2010 Foreign Account Tax Compliance Act, which requires foreign banks and financial institutions to allow the IRS to review their customer lists to identify U.S. citizens, and any financial holdings and activity they have engaged in, is expected to provide "new approaches" for identifying tax cheats and further "constrict the opportunities for offshore tax evasion."

He also challenged the report's estimate that OVDP has failed to collect upwards of $21 million in penalties. The IRS estimates the missed revenue at slightly more than $1.1 million.

O'Donnell stressed that the OVDP has had an "exceptional response," with more than "54,000 voluntary disclosure requests" processed since October 2015, resulting in "more than $8 billion" in revenue to the Treasury.

The United States and Eritrea are the only countries in the world that tax the incomes of their citizens globally, regardless of where they live. 

For the 2015 tax year, Americans living and working abroad could exclude a maximum of $100,800 in foreign earned income from their U.S. taxes, though in most instances, those wages are still subject to both Social Security and Medicare taxes.