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Is Voluntarily Disclosing a Foreign Account Still a Good Idea?

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    In 2012 alone, the IRS collected over $5.5 billion in revenues from voluntary disclosures.

    According to a GAO report on Offshore Tax Evasion, in 2012, the IRS was pleased to report that it had collected over $5.5 billion from taxpayers hiding assets using offshore accounts:

    “As of December 2012, the Internal Revenue Service’s (IRS) four offshore programs have resulted in more than 39,000 disclosures by taxpayers and over $5.5 billion in revenues.”

    Rather than collecting this revenue through coercive means, the IRS used one of its four voluntary disclosure programs. These voluntary programs seek to “attract taxpayers by offering a reduced risk of criminal prosecution and lower penalties than if the unreported income was discovered by the IRS’s enforcement programs.”

    In 2009 approximately half of those who came forward to the IRS to disclose their unreported bank account had $1 million or more offshore. Further, the IRS estimates that taxpayer reporting offshore income is on the rise: Since 2007, the number of voluntary reporting has nearly doubled.

    Why does the IRS have these voluntary programs, with reduced penalties? At least two reasons. First, it is easier for the IRS to collect undisclosed revenue if it does not have to go looking for it. Although the government has the “criminal investigation division” to track down non-compliant taxpayers, it is not always an efficient means for the government to collect a dollar.

    Second, as one commentator explained, with the voluntary disclosure programs, the IRS can learn more about its tax evaders: “the IRS [can develop] critical new information about the banks where people illegally hide money, and the accountants and financial advisers who help engineer illegal tax schemes.”

    Some have thought that the risk of the IRS discovering their offshore account is low due to the IRS budget cuts. The IRS plans to require five to seven days of unpaid leave for many of it employees this summer.

    However, despite the IRS fiscal cutback, the risk of getting caught is not lower. First, the cutbacks are, in the large scheme of things, rather minor—requiring employees to miss only a few days of one summer. Second, the IRS continues to push its voluntary disclosure programs into the 2013 year.

    Thus, there remains two chief reasons to come forward to the IRS to divulge an undisclosed, offshore account.

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