GAO Finds Cracks In Offshore Tax Enforcement

by Leroy Baker, Tax-News.com, New York

30 January 2008

United States Senators Max Baucus and Chuck Grassley, have called for stronger overseas tax enforcement by the Internal Revenue Service following the publication of a Government Accountability Office (GAO) report examining the Qualified Intermediary (QI) program.

The report, requested by Baucus and Grassley, Chairman and ranking Republican of the Senate Finance Committee respectively, found holes in the QI program, which was set up in 2000 to address concerns relating to tax evasion via foreign accounts.

The GAO found that the program, which monitors funds flowing through approved foreign banks and other financial intermediaries, is working in some respects. But the Senators were critical of the IRS's role in the program, accusing it of not knowing enough about many program participants. They called on the agency to carry out more aggressive audits to ensure compliance.

“The GAO has pointed to numerous holes in our offshore tax evasion program, and the IRS must do a better job tracking these billions of taxable dollars. With new reports that the federal deficit will surpass USD300 billion this year, we need to look again at taxes that are legally owed, but going uncollected,” observed Baucus. “Honest Americans who work hard and pay the taxes they owe shouldn’t get left holding the bill for scofflaws who don’t. I will work to see that the IRS aggressively addresses the recommendations in this report.”

“Our tax rules and treaty network depend on voluntary compliance and effective enforcement. Voluntary compliance improves when the IRS has and makes effective use of information,” added Grassley. “According to the report, the IRS could do a better job of measuring potential non-compliance. That would lead to better enforcement and help policymakers determine if changes to reporting requirements are necessary. I’ll be following the IRS’ progress in implementing the GAO’s good recommendations. I’ll also continue looking for legislative measures to effectively address offshore tax compliance and enforcement.”

The GAO found that US withholding agents are not required to verify the foreign status of self-certified taxpayers in the QI program. Additionally, QI auditors are not required to follow up on indications of fraud or illegal acts, and owners of offshore corporations can shield their identity from IRS scrutiny; the GAO identified USD19 billion flowing to countries that could not be identified, and USD7 billion flowing to individuals that could not be identified. Foreign corporations received USD200 billion of the USD300 billion examined by GAO.

As a result of the findings, the GAO recommended that the IRS: enhance external reviews of Qualified Intermediaries; require electronic filing of forms in QI contracts whenever possible; measure US withholding agents’ reliance on self-certified documentation and use that data in its compliance efforts; and determine why certain jurisdictions and recipients receiving US dollars cannot be identified.

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