From what we gleaned from our clients we have seen and other professionals we talk to, those taxpayers who are currently under audit and possess unreported offshore accounts — well, so far it does not appear that they have been targeted for an audit because the IRS suspected that that owned unreported offshore accounts. They haven’t been specifically IRS offshore account audits. But rather, the audits appear to be, as Hannibal Lector would say, incidental.
So with the intense focus on Offshore accounts since 2008, why is this so? Why are there so few tax audits of those who have unreported offshore accounts?
Most of the reasons are related to budgetary and logistic challenges. According to the IRS 2013 fiscal year budget, we learned that:
The [fiscal year] 2013 budget includes $403 million in new IRS enforcement activities, which are expected to raise $1.48 billion in revenue annually at full performance, once new hires are fully trained and develop broader experience by [fiscal year] 2015….The enforcement budget also includes $200 million in additional examination and collection programs that will generate more than $1.1 billion in additional annual enforcement revenue by 2015. Investments such as these in IRS enforcement programs are especially important to further the IRS’ mission of improving tax compliance. [T]he 2013 funding will enable the IRS to continue to strengthen enforcement efforts and reduce the tax gap includ[ing]…Improving international compliance by individual and business taxpayers… the IRS will continue to address offshore tax evasion by individuals through such efforts as increased examinations and the special offshore voluntary disclosure program.
So, according to the IRS, they really don’t expect to have it offshore audit program up and running at full speed for a few years yet.
And this jibes with the whispers that I hear at the IRS.
More of the seasoned auditors are being rigorously trained, right now, on how to handle offshore tax examinations. The reason? An undisclosed offshore account audit has three very difficult factors that a normal auditor typically does not need to deal with:
- truly difficult accounting rules
- lack of clear guidance on assessing FBAR penalties
- questions on referring a case to the IRS Criminal Investigation Division (CID) for tax evasion.
I have also heard — and again, this is just rumor/speculation, nothing official — that offshore audit “super centers” are being formed composed of the best and brightest IRS auditors. These “super centers” are going to be located in major cities and will focus on the very big cases where a CID referral or massive FBAR penalty is very likely. I believe that there will be a “super center” in New York City to focus on the tri-state area of New Jersey, New York and Connecticut (where the IRS suspects the vast majority of unreported account holders reside). I would also expect “super-centers” in Miami and Southern California. I also would not be surprised to see one located in Switzerland, Hong Kong and/or somewhere in India.
My best guess is that sometime in 2013, we will start seeing the first audits specifically targeting offshore account holders. And I expect the auditors to take a very hardline, a line as hard as one taken in the Williams FBAR decision Once those start, I would expect an uptick into the IRS offshore voluntary disclosure program (OVDP), assuming it is still around by then.