GAO Report: Where Offshore Tax Evaders Live And Bank
Congress is on a roll, trying to track down hidden offshore accounts, and the latest news is a report that shows which states have the most taxpayers disclosing such accounts (California is No. 1), and where they are located (Switzerland is tops). All told, taxpayers in at least 45 states and the District of Columbia reported accounts in 68 countries and territories.
The new U.S. Government Accountability Office report: “IRS’s Offshore Voluntary Disclosure Program: 2009 Participation by State and Location of Foreign Bank Accounts,” is a supplement to its March 2013 report, “Offshore Tax Evasion: IRS Has Collected Billions of Dollars, but May be Missing Continued Evasion.”
There is nothing illegal about keeping money offshore, but you have to report it on a form called the Foreign Bank and Financial Account (FBAR) form–if the account value is $10,000 or more–and pay taxes on earnings. For those ready to fess up, the IRS held the 2009 voluntary disclosure program, followed by one in 2011, and another that opened in 2012 and is still reeling in taxpayers. The programs offer incentives for taxpayers to disclose their offshore accounts and pay delinquent taxes, interest and stiff penalties—to avoid criminal prosecution.
In the new report, the GAO looked at 10,500 tax returns for 2008 filed by 2009 disclosure participants, and the 12,889 accompanying FBAR forms. Some taxpayers disclosed dozens of offshore accounts with multiple banks and in multiple countries; some disclosed just one account in one country.
The states with the most taxpayers who participated in the 2009 voluntary disclosure program are generally higher-income states, with California and New York topping the list. Not surprisingly, the report notes that these taxpayers generally reported higher incomes than the average taxpayer. (Caveat: the state is identified by the mailing address on the tax return, which in some cases could be the address of a tax lawyer or accountant or place of business.)
Only five states had fewer than 10 taxpayers who participated in the 2009 voluntary disclosure program (in that case, the GAO did not include the state totals to safeguard taxpayer identities): West Montana, North Dakota, South Dakota, Virginia, Wyoming.
The top 13 states were:
California 2,524 24%
New York 1,884 18%
Florida 1,022 10%
New Jersey 631 6%
Texas 512 5%
Massachusetts 307 3%
Illinois 291 3%
Pennsylvania 269 3%
Washington 231 2%
Connecticut 210 2%
Maryland 203 2%
Virginia 184 2%
Ohio 159 2%
And here are the top 10 countries and territories where the bank accounts were located, along with the frequency for each country and the percent of the total with at least one financial account in that country (for example, 5,427 of the 12,889 FBARs reported at least one foreign bank account in Switzerland).
Switzerland 5,427 42%
U.K. 1,058 8%
Canada 556 4%
France 528 4%
Israel 510 4%
Germany 484 4%
China 394 3%
Hong Kong 362 3%
Taiwan 307 2%
India 306 2%
The 58 other countries and territories included had 1% or less of the total number of foreign bank accounts reported.
Offshore tax evasion continues to be a hot issue in Washington. The IRS included “hiding income offshore” on its dirty dozen list of tax scams for 2014, touting the voluntary disclosure program and warning: “It is in the best long-term interest of taxpayers to come forward, catch up on their filing requirements and pay their fair share.” The Senate Permanent Subcommittee on Investigations will hold a hearing on February 26, “Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts.”
At the same time, the National Taxpayer Advocate, Nina Olson, in her January annual report to Congress, points out the impact of the disclosure programs on taxpayers who make honest mistakes as one of the most serious problems encountered by taxpayers.
The program imposes stiff penalties on taxpayers whose failure to file was not “willful”: the median offshore penalty was about 381 percent of the additional tax assessed for taxpayers with median-sized account balances, and 580 percent of the tax assessed for taxpayers with the smallest account balances (i.e., the bottom 10 percent, with an average $44,855 account balance), Olson found. Taxpayers who “opted out” of the program and agreed to subject themselves to audits fared better but still faced penalties of nearly 70 percent of the tax and interest.
Olson suggests that the stiff penalties may deter other taxpayers from coming into compliance.