IRS Overseas Tax Program Missing Out On Revenue

IRS has missed opportunities to collect over $21 million in penalties due from OVDP

A new report from the Treasury Inspector General for Tax Administration says the IRS has missed out on collecting 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 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.