One of the major concerns for the Internal Revenue Service (IRS) is tax evasion. It was estimated that the amount of money stashed offshore is between a couple of trillion dollars to almost thirty trillion dollars (The Economist, 2016). Tax evasion, specifically offshore tax evasion, is one of the biggest reasons for the difference in tax gap. The difference of expected tax revenue to be collected by the government and the actual amount collected is called the tax gap. Numerous wealthy people look for ways to avoid paying taxes on not only their money, but also their assets. When tax evasion occurs, the government loses out on billions of dollars. In response to this, the IRS has investigated and established some approach to locate and collect the back taxes.
Swiss banks with which the wealthy have an offshore account play a significant role in the evasion of taxes. These individuals promote and in many instances help their clients in evading their taxes. The IRS has launched many investigations on Swiss banks to put an end to the trillions of dollars that are not paid in taxes. Due to these cases, Switzerland, the stronghold in the world of private banking for the wealthy, has lost some of its reputation (Saunders & Sidel, 2012). The Swiss banks will use different ways in aiding and abetting their clients. The Swiss bank secrecy laws make it difficult to investigate possible tax evasion cases because the IRS does not have access to account holder’s names. Swiss laws prohibits the banks from releasing the names of the American clients to the IRS. This makes the operation of the IRS much more difficult and tedious as they have had to double up on their efforts to stop and prevent tax evasion.
In 2007, Bradley Birkenfeld agreed to help U.S. authorities build a case against his employer UBS. Birkenfeld provided authorities with important descriptions of how UBS promoted and helped their clients with tax evasion (Saunders & Sidel, 2012). The IRS, with the help of Birkenfeld and a John Doe summons, was able to obtain the names of 4,450 account holders who were evading taxes (Browning, 2009). John Doe summonses allows the IRS to investigate alleged fraud for a class of taxpayers that fit a certain criteria. Joe Doe summonses are issued when identities are not known. With this case, it marked the first time that a foreign bank was served with a John Doe summon (Mollenkamp, 2009b). The case of UBS was instrumental in lifting the veil off of Swiss bank secrecy that has allowed many wealthy people to evade their taxes (Saunders & Sidel, 2012). Not only did UBS have to provide names of American clients, but in order to resolve the criminal case they had to pay 780 million dollars (Saunders & Sidel, 2012).
In this case, UBS would communicate about transactions in a secret code in the event that any one would happen to come across the information, they would not be aware of what was happening. When discussing about euros, the color orange was used. In regards to dollars, the word green was used. When referring the one million dollars, they would use the word swan (Mollenkamp, 2009a).
Credit Suisse pleaded guilty to conspiring and aiding tax evasion (Grossman, Letzing, & Barrett, 2014). This company was engaged in fraud activity with full knowledge of there actions that extended decades long. Credit Suisse took no steps to ensure any compliance with the tax laws. The crackdown that happened to Swiss accounts in 2008 did not deter them from obstructing the information from investigators (Grossman, Letzing, and Barrett, 2014). In over a decade, Credit Suisse is the first financial institution to plead guilty (Grossman, Letzing, & Barrett, 2014).
Offshore companies are not illegal. However, these companies become illegal when they use an intermediary to hide wealth or suspicious tractions (Mauldin & Saunders, 2016). Panama is a key area for these offshore shell companies. When the Swiss banks confessed to encouraging tax evasions, they stated they did so by using Panamanian corporation (Mauldin & Saunders, 2016). Records from Mossack Fonseca & Co., a law firm in Panama, show that there are many public figures linked to tax havens offshore (Mauldin & Saunders, 2016). Mossack Fonseca & Co. has set up more than 240,000 shell companies around the world (Hong & Córdoba, 2016).
Swiss banks and offshore companies are not the only tax havens for the wealthy. New attractive tax havens are Freeports. A Freeport is a warehouse that houses items such as paintings, fine wine, classic cars, and precious metals (The Economist, 2013). There is a suspension of customs duties and taxes paid when housing assets in Freeports. While Freeports are legal, there is speculation that they play a role in allowing the wealthy to hide assets.
Along with using John Doe summons to curb tax evasions, the IRS also has the Offshore Voluntary Disclosure Program (OVDP). This program in 2011 was known as Offshore Voluntary Disclosure Initiative (OVDI). The OVDP allows people with offshore accounts to come forward and pay back their taxes owed. The individuals who are caught evading taxes are normally faced with criminal charges and substantial penalties. Those who voluntarily come forward will be given criminal liability protection, which allows them to avoid criminal penalties (Mollenkamp, 2009a). Those who come forward to provide all their banks records and also file amended tax returns to include the money in offshore accounts. Even though they have come forward willing, they will not be given this amnesty freely; they will have to pay penalties. In the case of UBS, when they received the names of American clients, people did not know if their name was one of the ones that the IRS now knows. This program allowed them to come forward and avoid the charges they would have faced in the event that the IRS knew of their account.
Another effort in curbing tax evasion is the Foreign Account Tax Compliance Act (FATCA). FATCA requires foreign financial institutions to report details of their American clients’ accounts or they will face punishment for withholding taxes (The Economist, 2016). FATCA is about moving past the Swiss banking secrecy laws and receiving information on American clients. Under FATCA, Americans who have assets in foreign accounts must disclose these accounts in IRS form 8938 (IRS, 2017).
There is also the Whistleblower program. This program pays money to people that blow the whistle on others who fail to pay the taxes that are owed. When you enter the program you must provide information or evidence that without it the IRS will not be able to find the money. The IRS can pay up to 30% of the collected proceeds (Saunders & Sidel, 2012). This is an amount that the IRS will pay out even if the whistleblower had been apart of committing the tax evasion. The award is issued as an incentive to have people willing come in and provide specific and credible information.
The IRS has implemented many tools to help them obtain valuable information on Americans who have not paid taxes on assets in offshore accounts. They have also taken steps to prevent these damaging actions from happening in the future. These steps taken have slowly helped close the differences in the tax gap. The cases of UBS and Credit Suisse helped the IRS recognize where they needed to make some improvements and where they could offer incentives to help people come forward in order to reduce the amount of tax evasion that occurs.
- Browning, L. (2009, August 19). Names Deal Cracks Swiss Bank Secrecy. The New York Times. Retrieved September 7, 2017, from http://www.nytimes.com/2009/08/20/business/global/20ubs.html
- Grossman, A., Letzing, J., & Barrett, D. (2014, May 19). Credit Suisse Pleads Guilty in Criminal Tax Case. The Wall Street Journal. Retrieved September 7, 2017, from https://www.wsj.com/article_email/SB10001424052702304422704579571732769356894-lMyQjAxMTA2MDIwNTEyNDUyWj
- Hong, N., & Córdoba, J. (2016, April 04). Panama Law Firm Has Specialized Practice. The Wall Street Journal. Retrieved September 7, 2017, from https://www.wsj.com/articles/panama-launches-own-investigation-into-mossack-fonseca-law-firm-1459805421
- IRS. (2017, August 3). Summary of FATCA Reporting for U.S. Taxpayers. Retrieved September 7, 2017, from https://www.irs.gov/businesses/corporations/summary-of-fatca-reporting-for-us-taxpayers
- Mauldin, W., & Saunders, L. (2016, April 05). The ‘Panama Papers’ Scandal – At A Glance. The Wall Street Journal. Retrieved September 07, 2017, from https://blogs.wsj.com/briefly/2016/04/05/the-panama-papers-scandal-at-a-glance/
- Mollenkamp, C. (2009, July 14). Behind UBS Case, a Dogged IRS. The Wall Street Journal. Retrieved September 7, 2017, from https://www.wsj.com/articles/SB124749371765532639
- Mollenkamp, C. (2009, April 29). IRS to Expand Use of ‘John Doe’ Tactic. The Wall Street Journal. Retrieved September 7, 2017, from https://www.wsj.com/articles/SB124087601647561481
- Saunders, L., & Sidel, R. (2012, September 11). Whistleblower Gets $104 Million. The Wall Street Journal. Retrieved September 7, 2017, from https://www.wsj.com/article_email/SB10000872396390444017504577645412614237708-lMyQjAxMTA2MDIwNTAyODU3Wj
- The Economist. (2013, November 23). Über-warehouses for the ultra-rich. Retrieved September 14, 2017, from https://www.economist.com/news/briefing/21590353-ever-more-wealth-being-parked-fancy-storage-facilities-some-customers-they-are
- The Economist. (2016, February 20). The biggest loophole of all. Retrieved September 7, 2017, from https://www.economist.com/news/international/21693219-having-launched-and-led-battle-against-offshore-tax-evasion-america-now-part