Offshore Tax Evaders Taking Big Risk, Former IRS Attorney Says

Government programs allowing Americans with offshore bank accounts to come clean to the IRS have netted the government $5.5 billion from 39,000 taxpayer disclosures.

But a Government Accountability Office (GAO) investigation, released over the weekend, suggests that even more funds have yet to be recovered, citing one estimate that offshore noncompliance may total “several tens of billions of dollars.”

One of the GAO report’s findings is that many taxpayers, in an effort to avoid onerous penalties and back taxes, are not joining the IRS’ offshore voluntary disclosure programs, instead filing amended returns or simply disclosing offshore accounts in current returns, without acknowledging past years’ nondisclosure.

But these “quiet disclosures” could backfire, in the view of Dennis Brager (right), a former IRS senior tax attorney with a tax litigation practice in Los Angeles. That is because the IRS now has the means at its disposal to identify noncompliant taxpayers.  

“People are filing the quiet disclosures because they want to avoid paying a penalty of 27.5% of the highest balance in the offshore account at any time during the prior eight years,” Brager told AdvisorOne in an interview.

The principal of the Brager Tax Law Group said taxpayers who were not disclosing their offshore accounts must pay all back taxes for the past eight years, an additional penalty of 20% of the tax, plus interest—all on top of the 27.5% of their offshore account’s highest balance.

As painful as that might seem to those who failed to report their offshore money, failure to do so could result in penalties of 50% or higher, he says. So that is the reason why offshore account holders should give serious consideration to a “noisy disclosure,” Brager adds.

“If [offshore account holders are] caught, they are subject to a potential penalty of 50% of the balance of the account and that penalty can be imposed for multiple years. You can have a penalty equal to several times the value of the account,” he says.

“In addition, if what you did was intentional, there are potential criminal penalties, jail time. That’s why somebody might be motivated to make a noisy disclosure.”

One of the key points of the GAO report is that the IRS has not done enough to pursue taxpayers taking corrective action without reporting it, hoping to avoid penalties, as well as those reporting foreign accounts for the first time without correcting past returns.

“For some of those people, that gamble will pay off, and some are going to get nailed,” Brager says.