May 03, 2007

GAO Says IRS Needs More Time to Audit Offshore Tax Cheats

The indefatigable Edmund Andrews reports in today's New York Times on the inability of the IRS to effectively track down US tax cheats who are stashing their cash in overseas tax havens. The occasion: a new GAO report on this topic. He reads it so you don't have to.

You can fill a warehouse with what tax administrators don't know about the volume of overseas tax avoidance; all we really have to go on right now are broad guesses.
Tax analysts say it is almost impossible to know how much the government is losing from international tax evasion.
Reuven S. Avi-Yonah, a professor of law at the University of Michigan who will testify at the Senate hearing on Thursday, estimated last year that the United States could be losing as much as $50 billion from international tax maneuvering.
Mr. Avi-Yonah based his estimate on calculations by the Boston Consulting Group that residents of the United States — individuals as well as corporations — are holding about $1.5 trillion outside the country. If that money produced a 10 percent return, he said, the United States might be failing to collect taxes on about $150 billion a year.
This is an inspired guess, but ultimately just a guess. Lacking concrete knowledge about the scope of the problem, the new GAO report looks at specific case studies of IRS audits of Americans who shelter income overseas to try to get a handle on the nature of the problem.

Three big findings of the GAO report:
1) audits of international tax cheats routinely turn up more tax avoidance, on average, than audits of domestic tax avoiders. Johnston says:"the average audit of people with money offshore turned up twice as much in unpaid taxes — about $5,800 — than audits of money kept inside the United States.
2) The longer audits are allowed to run, the closer the US government gets to collecting what's owed: The average assessment of unpaid taxes tripled to $17,500 for the limited number of audits that were allowed to run longer than three years, and it shot up to nearly $100,000 for the small number allowed to run four or five years.
3) Tax administrators aren't benefiting from finding #2 as much as they should be able to, because of laws that require auditors to wrap up their investigations in three years.
The Internal Revenue Service is curtailing audits of many people who use offshore tax havens, even when agents see signs of tax evasion, because agents fear they cannot meet a three-year deadline for finishing an examination. Anyone who's ever been audited can probably understand why you'd want to put a statute of limitations on the audit period.
But as the GAO report documents, the overseas tax avoiders the IRS is dealing with are a different breed, often doing everything they can to delay the audit process:
In one case, which the G.A.O. said typified the obstacles, the I.R.S. spent four years investigating a person with businesses in both the United States and an unnamed overseas tax haven.
The investigation included 20 summonses, 23 demands for documents, 5 missed appointments and 2 refusals by the person being investigated to supply information. After four years, the government still did not know how much money had been moved to the tax haven.
There's a growing consciousness that the defanging of the IRS that occurred in the late 1990s went too far-- that what should have been a good-faith effort by Congress to restrain a few "overzealous" tax collectors got hijacked by anti-tax grandstanders in the House and Senate who simply wanted to prevent the IRS from effectively doing its job. The latest GAO report is just the latest evidence that the pendulum has swung way too far in favor of tax cheats-- and too far against federal tax administrators.


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