Holders of Foreign Bank Accounts Need to Worry About IRS's Data-Mining Program !

Have you ever been surprised by Facebook or LinkedIn's ability to suggest people to whom you may be connected, when even you had forgotten how you were connected to those people? 

Perhaps the social networks' technology crunched data that you provided on your home town, Boy Scout troop, high school, first job at McDonald's, or fly-fishing hobby, to find latent connections between you and a long-lost acquaintance.

Use of such data-mining technology is widespread, and the IRS has adopted it to find taxpayers with undisclosed offshore bank accounts.

U.S. taxpayers who are still considering whether to disclose their accounts need to understand that IRS's data-mining software increases their risk of being detected. They should act accordingly and seek legal advice immediately.

According to a Sept. 21, 2011, report by the Treasury Inspector General for Tax Administration (TIGTA), IRS's data-mining software is called the E-Trak Offshore Voluntary Disclosure system.

E-Trak does not lack for data inputs. Since 2009, more than 33,000 taxpayers have contributed detailed information to E-Trak by participating in IRS's Offshore Voluntary Disclosure Program (OVDP).

 

Taxpayers with undisclosed accounts need to act before E-Trak and IRS find them. This is because taxpayers whose accounts IRS has discovered are ineligible to participate in the OVDP.

Unfortunately, even if you have not heard from IRS, it may already be too late to come forward and participate in the OVDP. This is because eligibility depends on when IRS discovers your accounts, not on when IRS informs you of its discovery. This makes it imperative that taxpayers with offshore accounts discuss their options with an attorney immediately.

Taxpayers with undisclosed accounts have options. First, they can enter the OVDP and pay a penalty.

Second, they can enter the OVDP and choose to “opt out.” This allows the taxpayer to use the OVDP's protection from criminal prosecution while choosing to go through a full IRS audit instead of paying the prescribed OVDP penalties. A taxpayer for whom a 27.5% penalty is inappropriate might choose this option. Finally, the taxpayer can make a so-called quiet disclosure. This means filing amended tax returns and Reports of Foreign Bank and Financial Accounts (FBARs) for the years for which the statute of limitations is still open. While a quiet disclosure does not provide the protections of the OVDP, certain taxpayers with small account balances and other favorable characteristics may find this route attractive.
 

Although the risk of detection by IRS may seem low, IRS's use of E-Trak in the last few years has greatly improved its ability to find taxpayers, bankers, and other professionals who are involved in the world of offshore bank accounts.

Data-mining with E-Trak is simply a way to exploit large quantities of data to find connections among people that might not otherwise have been apparent. In a sense it is a cousin of the well-known social networks that have arisen on the internet. It is often said that we are all no more than six degrees of separation from any other person. It seems reasonable to assume that far fewer degrees separate each of the U.S. taxpayers who maintain undeclared offshore accounts at a relative handful of foreign banks in Switzerland, Israel, India, China, Hong Kong, Liechtenstein, the United Arab Emirates, and other jurisdictions.

E-Trak's advantage over commercial social networks is the quality of the data that it processes. IRS requires taxpayers who voluntarily disclose their accounts to provide information that will be fed to E-Trak, including:

• the names of any and all foreign financial institutions where they maintained accounts;

• the dates on which they opened or closed the accounts;

• their points of contact at each financial institution;

• the circumstances of all face-to-face meetings with their points of contact;

• all of their communications with the financial institutions; and

• all face-to-face meetings or communications regarding their accounts with independent, non-bank advisers.

In addition to filling out detailed disclosure forms, many of the 33,000 taxpayers who have disclosed offshore accounts have undergone face-to-face interviews with IRS and the Department of Justice.

This sort of data-mining-as-social-networking is a force multiplier for IRS. Instead of having information on only 33,000 self-reporting U.S. taxpayers, IRS can use data-mining to uncover similarly situated taxpayers who have not disclosed their accounts. The same is true of E-Trak's ability to identify the professionals who may have assisted U.S. taxpayers in setting up and maintaining undisclosed accounts.

The phasing in over the coming year of the Foreign Account Tax Compliance Act of 2010 (FATCA) will only increase the breadth and depth of the data available to IRS and E-Trak.

On its website, IRS touts the role of FATCA reporting in improving its ability to find taxpayers with undisclosed foreign accounts: “The IRS remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts. Moreover, increasingly this information is available to the IRS under tax treaties, through submissions by whistleblowers, and will become more available under the Foreign Account Tax Compliance Act (FATCA) ….”

With large budget deficits for the foreseeable future, the U.S. government is likely to step up its efforts to find undeclared foreign accounts and income. Refusal to deal with this reality is no longer an option.

 

The only way to deal effectively with the internalization of tax enforcement is to get out ahead of IRS and talk about your options with a Tax Attorney from Marini & Associates, P.A. for a FREE Tax Consultation at www.TaxAid.us or www.TaxLaw.ms or Toll Free at 888-8TaxAid (888 882-9243).

 

 

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