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IRS, OVDI & Fraudulent refunds: Success has many fathers, failure an orphan.

As its proud press release this past January declared, the IRS collected 4.5 billion dollars during its first two Offshore Voluntary Disclosure Initiatives (OVDI) from US taxpayers who came clean to report foreign income and accounts.  Now $4.5 billion,  a handsome figure indeed, is relatively large when compared to say a company’s value, but is not actually all that substantial when compared to federal expenditures. In a previous post, I noted that the 4.5 billion dollars the OVDI program brought in pays for about 11 hours of federal spending. Yep. From midnight on any given day until right about the time “The Price is Right” comes on, later the same day —  the OVDI program paid for all of that federal spending (H/T to iowahawk for getting me to think about federal spending on the proper scale).

©2012 CBS Interactive

Click here to learn why 2013 could be the best time to disclose foreign bank accounts to the IRS

But then, here’s the bad news. Let’s put that  $4.5 billion haul into further perspective:   The IRS sent out $5 billion in fraudulent refunds to identity thieves. That is, the IRS gave away $5 billion dollars (or enough money to get us to the “Price is Right’s” “Showcase Showdown” finale).

And this is how the IRS gave away this $5 billion. According to bottomline @nbcnews:

“Investigators say the Internal Revenue Service may have delivered more than $5 billion in refund checks to identity thieves who filed fraudulent tax returns for 2011. The Treasury Department’s inspector general for tax administration says the IRS is detecting far fewer fraudulent tax refund claims than actually occur. Thieves assume the identity of a dead person, child or someone else who normally wouldn’t file a tax return. For example, investigators found one single address in Michigan that was used to file 2,137 separate tax returns seeking a total of more $3.3 million in refunds. In other cases, hundreds of refunds were deposited into the same bank account.”

But in actuality, this is not really a fair comparison between how much the IRS collected via the OVDI and how much the IRS gave away to thieves. Because in January 2012, the IRS collected a total of $4.5 billion in two years of running two separate OVDI programs (2009 & 2011). On the other hand, this $5 billion paid out,  is just one year’s worth of fraud. Now before you get angry, just hold on. Hold on. There is more outrage coming. So meter your outrage accordingly, so as not to run out of outrage for the money quote.

And accordingly, here is the money quote:

“They estimate that another $21 billion could make its way to ID thieves’ pockets over the next five years.”

So $21 billion more will be paid out and there’s nothing to stop it?


What will the IRS do?

So now, with this news, which must be kind of humiliating for the IRS, what action do you think the IRS will take with the OVDI program and this fraudulent refund scandal?  And before I give you these two opposing hypotheticals, read this quite from Philip K. Howard’s August 3rd article in the Atlantic, “Reform is Not Enough: The Federal Government Needs a Complete Makeover

“American government is a deviant subculture. Its leaders stand on soapboxes and polarize the public by pointing fingers while secretly doing the bidding of special interests. Many public employees plod through life with their noses in rule books, indifferent to the actual needs of the public and unaccountable to anyone. The professionals who interact with government — lawyers and lobbyists — make sure every issue is viewed through the blinders of a particular interest, not through the broader lens of the common good. Government is almost completely isolated from the public it supposedly serves. The one link that is essential for a functioning democracy — identifiable officials who have responsibility to accomplish public goals — is nowhere to be found. Who’s in charge? It’s hard to say. The bureaucracy is a kind of Moebius strip of passing the buck. The most powerful force in this subculture is inertia: Things happen a certain way because they happened that way yesterday. Programs are piled upon programs, without any effort at coherence; there are 82 separate federal programs, for example, for teacher training. Ancient subsidies from the New Deal are treated as sacred cows. The idea of setting priorities is anathema. Nothing can get taken away, because that would offend a special interest.”

Now let’s discuss this quote and apply it to the situation at hand of the IRS giving away $5 billion of taxpayer money to thieves.


Not responsible

No one expects the President to be accountable for this 5 billion dollar fraudulent refund fiasco, after all, he’s not in charge of the IRS (and in fact, even Republican Presidential candidate Willard “Mitt” Romney doesn’t think it a sufficient line of attack to warrant attention). And no one expects Secretary Timothy Geithner to be responsible, as he is just the figurehead boss of the IRS. Because we know that the real boss of the IRS is Commissioner Douglas Shulman — but no one expects Commissioner Shulman to be accountable. After all, his hands are tied trying to create and administrative procedures that can enforce Congress’ wish list that comes out of the Ways and Means subcommittee. And Congress can’t be to blame because their constituents reelect them 90-98% of the time.

So here we are. With all these problems and no one to correct them, we have reached a point were just 22% of Americans believe the federal government has their consent (to which I wonder: “why this percentage is so high?” — then I see this statistic — 16% of the workforce are government employees)


Success has many fathers, failure is an orphan — it’s not just a proverb, it’s a game plan

The IRS was so proud of the $4.5 billion it collected from the OVDI program. There were people responsible for that. But now an amount just slightly exceeding that — $5 billion is paid out to thieves –in just one year, with much more heading out, well, no one is responsible.

Now with this background discussion in your mind, now how do you suppose the IRS will treat the past OVDI “successes” and the continued fraudulent refund “orphans?” So now, what do you think the IRS will do regarding its prosecution of US taxpayers with unreported offshore accounts and unfiled FBARs?

1. The Reasonable Plan

The IRS will stop being so aggressive with offshore accounts. It will begin to understand that vast majority of people with unreported accounts have completely legitimate reasons. And the taxes not paid, the taxes the Treasury lost out on, pale into comparison to the savings that better tax administration would create by allocating those IRS employees to monitoring fraudulent refunds. The IRS will change its focus from witch-hunts and strong-arming of foreign banks, and begin to worry more about the actual thieves who are actually stealing money directly from the Treasury, rather than people with at least partially legitimate reasons for not reporting all their income earned everywhere in the world due to the barbaric concept known as “universal tax jurisdiction” (for my funny/obnoxious take on what this universal tax jurisdiction is, click here).


2. The Likely Result

The IRS will double-down on the OVDI process. Increase audits of high income people the IRS suspects of owning offshore accounts. Search for more money because the IRS is certain the tax gap its claims to exist actually exists (contrary to evidence) — for the public demands the IRS crack down on the bogeymen imagined. Which makes a fantastic distraction from the fact that no one will ever be accountable for giving away over $5 billion of taxpayer money to thieves…per year.


The last place to expect justice is government

I used to say, the last place to expect justice is a court of law. I have a wider focus now. Think about, what was responsible for the greatest wholesale slaughter and intentional starvation of people around the world? The answer is government. Of course, the US can not be compared to Nazi Germany, the Soviet Union, Khmer Rouge,  Armenian genocide, well… I’ll just stop there. Yet the pathologies of protecting government actors’ self-interest is what encourages injustice. This nonetheless permeates the US governments, for the reasons Mr. Howard does an outstanding job explaining.  My point is not to equate the US with the evil empires that have no value for human life (there is no comparison), but rather to make the point that justice is rarely something that does not happen on its own. Rather,  in fact, that there may be great resistance to obtaining justice. And that obstruction is government.


Downgrade your idea of justice, then fight for it

Just because something is absurd, that does not make it unlikely. Absurdity is more the rule. People think the world should be fair and just. And for that,  I too blame movies. The truth is that the weak are attacked, the most vulnerable prosecuted, meanwhile the real bad guys get away because they are too hard to catch. So in order to attempt to achieve justice, you must be realistic about what you can achieve.

Just don’t stand underneath and you’ll be fine

For those with unreported foreign accounts, the prospects are unfair. But that does not change the reality. I find the very idea that universal tax jurisdiction that the OVDI is predicated upon to be not just wrong, but immoral. But years of criminal appeals have taught me to be realistic and paranoid. I don’t like the law, but I can’t change it either.

And this is exactly why it is my firm’s position that we get realistic about what the prospects of IRS and OVDI are. Contact us if you have pressing concerns.

  1. Article V. Thestates need toget off thier butts .we need to limit the federal government. We can’t expect the Feds to do it themselves anymore than we can expect a meth addict to stop turning tricks for a high.

  2. “[T]here may be a great resistance to obtaining justice. And that resistance is government.”

    Now that’s the money quote

    • this entire article is full of money quotes! fantastic piece, Anthony.

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