The enforcement of tax laws is a chief component of IRS effort to enhance voluntary compliance. Recently, the IRS Commissioner outlined IRS intentions to focus on tax evasion as it relates to international taxes in the forthcoming year with an increased emphasis on high-net worth taxpayers [IR-2010-122, December 9, 2010].
In 2009, IRS examinations were directed to international taxpayers, high-net worth individuals and non-filers. Overall, IRS examinations have increased by approximately 3% over the prior year and are expected to increase consistently hereafter. Of particular significance are audits of high-wealth individuals, which have increased 11.2%. Large corporation audits have also increased by approximately 3%.
If you maintain assets off shore, the IRS has not only put increased pressure on disclosure by foreign banks, but has put in place initiatives to form cooperative, joint agreements with foreign countries to share information and raise tax revenues.
With regards to corporations, new legislation includes the Foreign Account Tax Compliance Act (FATCA). FATCA provides the IRS with better transparency and additional tools that we need to crack down on Americans hiding assets overseas. FATCA will increase information reporting by U.S. taxpayers holding financial assets outside the United States and impose stiff penalties for failure to comply. It will also require reporting of U.S. persons who hold accounts in foreign financial institutions or who own large interests in foreign entities that hold such accounts.
The IRS has placed a series of extremely harsh penalties on taxpayers who fail to report foreign holdings and transactions. Taxpayers who continue to not file a required return and fail to respond to IRS requests for a return may be considered for a variety of enforcement actions. Continued non-compliance by flagrant or repeat non-filers could result in additional penalties and/or criminal prosecution. Voluntary disclosure of offshore accounts may be a taxpayer’s best defense for mitigating damages that may arise.