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Before the Committee on Finance, U.S. Senate: 

United States Government Accountability Office: 

For Release on Delivery: 
Expected at 10:00 a.m. EST:
Tuesday, March 17, 2009: 

Tax Compliance: 

Offshore Financial Activity Creates Enforcement Issues for IRS: 

Statement of Michael Brostek, Director: 
Strategic Issues Team: 

[Page 6 of this testimony was amended on March 19, 2009, to correctly identify the bank director who admitted wrongdoing as an employee of Swiss bank UBS AG, not the Liechtenstein Global Trust Group.] 


GAO Highlights: 

Highlights of GAO-09-478T, a testimony before the Committee on Finance, 
U.S. Senate. 

Why GAO Did This Study: 

Much offshore financial activity by individual U.S. taxpayers is not 
illegal, but numerous schemes have been devised to hide the true 
ownership of funds held offshore and income moving between the United 
States and offshore jurisdictions. 

In recent years, GAO has reported on several aspects of offshore 
financial activity and the tax compliance and tax administration 
challenges such activity raises for the Internal Revenue Service (IRS). 
To assist the Congress in understanding these issues and to support 
Congress’s consideration of possible legislative changes, GAO was asked 
to summarize its recent work describing individual offshore tax 
noncompliance, factors that enable offshore noncompliance, and the 
challenges that U.S. taxpayers’ financial activity in offshore 
jurisdictions pose for IRS. This statement was primarily drawn from 
previously issued GAO products. 

What GAO Found: 

Individual U.S. taxpayers engage in financial activity involving 
offshore jurisdictions for a variety of reasons. When they do, they are 
obligated to report any income earned in the course of those 
activities. They are also required to report when they control more 
than $10,000 in assets outside of the country. However, much of this 
required reporting depends on taxpayers knowing their reporting 
obligations and voluntarily complying. Some taxpayers do not comply 
with their income and asset reporting obligations. Limited 
transparency, the relative ease and low cost of establishing offshore 
entities, and an array of financial advisors can facilitate tax 
evasion. IRS’s Qualified Intermediary program has helped IRS obtain 
information about U.S. taxpayers’ offshore financial activity, but as 
the recent case against the large Swiss bank UBS AG underscores, the 
program alone is insufficient to address all offshore tax evasion. 
Earlier, GAO had recommended changes to improve QI reporting, make 
better use of reports, and enhance assurance that any fraudulent QI 
activity is detected. 

IRS examinations that include offshore tax issues can take much longer 
than other examinations. GAO’s past work has shown that from 2002 
through 2005, IRS examinations involving offshore tax evasion took a 
median of 500 more calendar days to develop and examine than other 
examinations. The amount of time required to complete offshore 
examinations is lengthy for several reasons, such as technical 
complexity and the difficulty of obtaining information from foreign 
sources. However, the same statute of limitations preventing IRS from 
assessing taxes or penalties more than 3 years after a return is filed 
applies to both domestic and offshore financial activity. The 
additional time needed to complete an offshore examination means that 
IRS sometimes has to prematurely end offshore examinations and 
sometimes chooses not to open them at all, despite evidence of likely 
noncompliance. In testimony before Congress, the Commissioner of 
Internal Revenue has said that in cases involving offshore bank and 
investment accounts in bank secrecy jurisdictions, it would be helpful 
for Congress to extend the time to assess a tax liability with respect 
to offshore issues from 3 to 6 years. 

Figure: U.S. Taxpayers Are Required to Report Offshore Financial 

[Refer to PDF for image: illustration] 

Individual taxpayers: 

Taxpayers may move funds offshore, but all taxable income is required 
to be reported to IRS. 

Offshore financial institution: 

Accounts in which funds over $10,000 are held need to be reported by 

Income earned from interest or other offshore activities is also 
required to be reported to IRS. 

Sources: GAO summary of IRS information; Art Explosion (map). 

[End of figure] 

What GAO Recommends: 

GAO makes no recommendations in this testimony. GAO reiterates previous 
recommendations regarding the Qualified Intermediary (QI) program and 
refers to a previous matter that Congress consider extending the 
statute of limitations for offshore cases. IRS generally agreed with 
the recommendations about the QI program and with the suggestion about 
the statute of limitations. Legislation to extend the statute of 
limitations has been introduced but not enacted. 

View [hyperlink,] or key 
components. For more information, contact Michael Brostek on (202) 512-
9110 or 

[End of section] 

Mr. Chairman and Members of the Committee: 

I appreciate this opportunity to discuss offshore financial activity 
and the problem of offshore tax evasion by individual taxpayers. 
International financial activity is common in our increasingly global 
economy, it is encouraged or facilitated by various federal policies, 
and the number of U.S. taxpayers with foreign financial accounts is 
growing. Financial activity across foreign jurisdictions poses 
challenges for both tax policy and administration. Like all forms of 
noncompliance, offshore schemes add to the tax gap--the difference 
between taxes owed and taxes voluntarily paid on time--and shifts more 
of the tax burden onto compliant taxpayers. Honest taxpayers may then 
find reason to reexamine their own willingness to stay compliant. 
Offshore tax evasion can be especially difficult to identify because of 
the layers of obfuscation that can come with doing business in overseas 
locations outside the jurisdiction of the United States. Doing business 
outside of the country is, of course, perfectly legal, but hiding 
income or assets in offshore locations in order to evade taxes is not. 
As is the case with all tax evasion, the Internal Revenue Service's 
(IRS) success in helping taxpayers who want to comply with the tax laws 
as they pertain to offshore financial activity is of critical 
importance. Likewise, IRS's ability to identify and pursue those who 
choose not to comply is essential to combating abusive offshore 

My statement today will largely draw from our prior work, often done 
for this committee, to describe individuals and the characteristics of 
their offshore tax noncompliance, factors that enable offshore 
noncompliance, and the challenges that U.S. taxpayers' financial 
activities in offshore jurisdictions pose for IRS. 

Our reports on the Qualified Intermediary (QI) program, the Offshore 
Voluntary Compliance Initiative (OVCI), offshore examinations, and the 
Cayman Islands upon which this statement is based were prepared in 
accordance with generally accepted government auditing standards. Those 
standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on the audit objectives for those reports. 

Characteristics of Noncompliant Individual Taxpayers and the Size and 
Nature of Their Offshore Noncompliance Vary Widely: 

It is perfectly legal for U.S. persons to hold money offshore. 
Taxpayers may hold foreign accounts and credit cards for a number of 
legitimate reasons. For example, taxpayers may have worked or traveled 
overseas extensively or inherited money from a foreign relative. As 
shown in figure 1, although holding money offshore is legal, taxpayers 
must generally report their control over accounts valued at more than 
$10,000. Taxpayers must also report income, whether earned in the 
United States, or offshore. 

Figure 1: U.S. Taxpayers Are Required To Report Offshore Financial 

[Refer to PDF for image: illustration] 

Individual taxpayers: 

Taxpayers may move funds offshore, but all taxable income is required 
to be reported to IRS. 

Offshore financial institution: 

Accounts in which funds over $10,000 are held need to be reported by 

Income earned from interest or other offshore activities is also 
required to be reported to IRS. 

Sources: GAO summary of IRS information; Art Explosion (map). 

[End of figure] 

The type and extent of individual taxpayers' illegal offshore activity 
varies. In 2004, we reviewed OVCI[Footnote 1] to provide information to 
Congress on the characteristics of taxpayers who came forward regarding 
their noncompliant offshore activities, and to understand how those 
taxpayers became noncompliant. According to IRS data, OVCI applicants 
were a diverse group, for instance with wide variations in income and 
occupation. In each of the 3 years of OVCI we reviewed, at least 10 
percent of the OVCI applicants had original adjusted gross incomes 
(AGI) of more than half a million dollars, while the median original 
AGI of applicants ranged from $39,000 in tax year 2001 to $52,000 in 
tax year 2000. Applicants listed over 200 occupations on their federal 
tax returns, including accountants, members of the clergy, builders, 
physicians, and teachers.[Footnote 2] 

Some OVCI applicants' noncompliance appeared to be intentional, while 
others' appeared to be inadvertent. Those applicants who had hidden 
money offshore through fairly elaborate schemes involving, for 
instance, multiple offshore bank accounts, appeared to be deliberately 
noncompliant. Other applicants appeared to have fallen into 
noncompliance inadvertently, for example, by inheriting money held in a 
foreign bank account and not realizing that income earned on the 
account had to be reported to IRS on their tax returns. 

OVCI applicants' median adjustment to taxes due was relatively modest. 
For tax year 2001, the median additional taxes owed were $4,401, median 
penalties assessed were $657, and median interest owed was $301. 

However, other examples of offshore evasion have involved very 
substantial sums, complex structures and clear nefarious intent. For 
example, in 2006, Congress found several cases involving taxpayers with 
relatively large sums involved in abusive offshore transactions, 
including a U.S. businessman who, with the guidance of a prominent 
offshore promoter, moved from $400,000 to $500,000 in untaxed business 
income offshore.[Footnote 3] In another case, in 2006 a wealthy 
American pled guilty to tax evasion accomplished by creating offshore 
corporations and trusts, and then using a series of assignments, sales 
and transfers to place about $450 million in cash and stock offshore. 
According to the indictment, the businessman used these methods to 
evade more than $200 million in federal and District of Columbia income 

Several Factors May Facilitate the Use of Offshore Jurisdictions to 
Avoid Paying Taxes: 

Limited transparency regarding U.S. persons' financial activities in 
foreign jurisdictions contributes to the risk that some persons may use 
offshore entities to hide illegal activity from U.S. regulators and 
enforcement officials. For instance, individuals can sometimes use 
corporate entities to disguise ownership or income. Abusive offshore 
schemes are often accomplished through the use of limited liability 
corporations (LLC), limited liability partnerships and international 
business corporations, as well as trusts, foreign financial accounts, 
debit or credit cards, and other similar instruments. According to IRS, 
offshore schemes can be complex, often involving multiple layers and 
multiple transactions used to hide the true nature and ownership of the 
assets or income that the taxpayer is attempting to hide from IRS. 

In addition, creation of offshore entities and structures can be 
relatively easy and inexpensive. For example, establishing a Cayman 
Islands exempted company can be accomplished for less than $600 (not 
taking into account service providers' fees), and the company is not 
required to maintain its register of shareholders in the Cayman Islands 
or hold an annual shareholders meeting.[Footnote 4] Other offshore 
jurisdictions provide similar services to those wishing to set up 
offshore entities. 

Another factor that makes it easier for individuals to avoid paying 
taxes through the use of offshore jurisdictions is that taxpayers' 
compliance is largely based on voluntary self-reporting. When reporting 
is entirely voluntary, compliance can suffer. IRS has found that when 
there is little or no reporting of taxpayers' income by third parties 
to taxpayers and IRS, taxpayers include less than half of the income on 
their tax returns.[Footnote 5] 

One way that taxpayers are required to self-report foreign holdings is 
through the Report of Foreign Bank and Financial Accounts (FBAR) form. 
[Footnote 6] Citizens, residents, or persons doing business in the 
United States with authority over a financial account or accounts in 
another country exceeding $10,000 in value at any time during the year 
are to report the account to the Department of the Treasury (Treasury). 
U.S. persons transferring assets to or receiving distributions from a 
foreign trust are required to report the activity to IRS on Form 3520, 
Annual Return to Report Transactions With Foreign Trusts and Receipt of 
Certain Foreign Gifts. From 2000 through 2007, the number of FBARs 
received by Treasury has increased by nearly 85 percent, according to 
IRS. In 2008, IRS also said that, despite the significant increase in 
filings, concern remains about the degree of reporting compliance for 
those who are required to file FBARs. Also in 2008, the U.S. Senate 
Joint Committee on Taxation (JCT) reported that three categories of 
U.S. persons are potentially not filing FBARs and Form 3520s as 
required by law: taxpayers who are unaware or confused about filing 
requirements, taxpayers who are concealing criminal activity and 
taxpayers who are structuring transactions to avoid triggering the 
filing requirements. 

Our 2004 review of applicants who came forward to declare offshore 
income under OVCI also suggested a high level of FBAR nonreporting, 
even by those individuals who reported all of their income to IRS. 
[Footnote 7] 

For instance, for each year covered by OVCI, more than half of the 
applicants had generally reported all of their income and paid taxes 
due--even on their offshore income--but had failed to disclose the 
existence of their foreign bank accounts as required by Treasury. 

Finally, financial advisors often facilitate abusive transactions by 
enabling taxpayers' offshore schemes. We have reported that most 
possible offshore tax evasion cases are discovered through IRS's 
investigations of promoters of offshore schemes.[Footnote 8] During our 
2004 review of OVCI, we examined Web sites promoting offshore 
investments and found that most provided off-the-shelf offshore 
companies or package deals, including the ability to incorporate 
offshore within the next day by buying an off-the-shelf company at a 
cost of $1,500. These promoters provided taxpayers a way to quickly and 
easily move money offshore and repatriate it without reporting that 
money to IRS. 

Congress also has found promoters behind several offshore evasion 
schemes such as the Equity Development Group (EDG), an offshore 
promoter based in Dallas, that recruited clients through the Internet 
and helped them create offshore structures.[Footnote 9] With few 
resources and no employees, EDG enabled clients to move assets 
offshore, maintain control of them, obscure their ownership, and 
conceal their existence from family, courts, creditors and IRS and 
other government agencies. In another case, a Seattle-based securities 
firm, Quellos Group, LLC, designed, promoted, and implemented 
securities transactions to shelter over $2 billion in capital gains 
from U.S. taxes, relying in part on offshore secrecy to shield its 
workings from U.S. law enforcement. This scheme was estimated to cost 
the U.S. Treasury about $300 million in lost revenue. 

Large financial firms also have been found to have advised U.S. clients on the use of offshore structures to hide assets and evade U.S. taxes. For example, in 2008 the IRS announced that Liechtenstein Global Trust Group (LGT), a leading Liechtenstein financial institution, had assisted U.S. citizens in evading taxes. In another case, in June 2008, Bradley Birkenfeld, a former employee of Swiss bank UBS AG, pleaded guilty in federal district court to conspiring with an American billionaire real estate developer, Swiss bankers and his co-defendant, Mario Staggl, to help the developer evade paying $7.2 million in taxes by assisting in concealing $200 million of assets in Switzerland and Liechtenstein. Birkenfeld admitted that from 2001 through 2006 he routinely traveled to and had contacts within the United States to help wealthy Americans conceal their ownership of assets held offshore and evade paying taxes on the income generated from those assets. In February 2009 the Department of Justice announced that UBS entered into a deferred prosecution agreement for conspiring to defraud the U.S. government by helping U.S. citizens to conceal assets through UBS accounts held in the names of nominees and/or sham entities. In announcing the deferred prosecution agreement, the Department of Justice alleged that Swiss bankers routinely traveled to the United States to market Swiss bank secrecy to U.S. clients interested in attempting to evade U.S. income taxes. Court documents assert that, in 2004 alone, Swiss bankers allegedly traveled to the United States approximately 3,800 times to discuss their clients’ Swiss bank accounts. UBS agreed to pay $780 million in fines, penalties, interest and restitution for its actions. 

IRS Faces Significant Challenges in Identifying the Nature and Extent 
of Offshore Noncompliance: 

IRS has several initiatives that target offshore tax evasion, but tax 
evasion and crimes involving offshore entities are difficult to detect 
and to prosecute. We have reported that offshore activity presents 
challenges related to oversight and enforcement, such as issues 
involved in self-reporting, the complexity of offshore financial 
transactions and relationships among entities, the lengthy processes 
involved with completing offshore examinations, the lack of 
jurisdictional authority to pursue information, the specificity 
required by information-sharing agreements, and issues with third-party 
financial institution reporting.[Footnote 10] 

As noted earlier, individual U.S. taxpayers and corporations generally 
are required to self-report their foreign taxable income to IRS. Self- 
reporting is inherently unreliable, for several reasons. Because 
financial activity carried out in foreign jurisdictions often is not 
subject to third-party reporting requirements, in many cases persons 
who intend to evade U.S. taxes are better able to avoid detection. For 
example, foreign corporations with no trade or business in the United 
States are not generally required to report to IRS any dividend 
payments they make to shareholders, even if those payments go to U.S. 
taxpayers. Therefore, a U.S. shareholder could fail to report the 
dividend payment with little chance of IRS detection. In addition, when 
self-reporting does occur, the completeness and accuracy of reported 
information is not easily verified. 

In addition, the complexity of offshore financial transactions can 
complicate IRS investigation and examination efforts. Specifically, 
offshore schemes can involve multiple entities and accounts established 
in different jurisdictions in an attempt to conceal income and the 
identity of the beneficial owners.[Footnote 11] For instance, we have 
previously reported on offshore schemes involving "tiered" structures 
of foreign corporations and domestic and foreign trusts in 
jurisdictions that allowed individuals to hide taxable income or make 
false deductions, such as in the case of United States v. Taylor. 
[Footnote 12] The defendants in United States v. Taylor and United 
States v. Petersen pleaded guilty in U.S. District Court to crimes 
related to an illegal tax evasion scheme involving offshore 
entities.[Footnote 13] As part of the scheme, the defendants 
participated in establishing a "web" of domestic and offshore entities 
that was used to conceal the beneficial owners of assets, and to 
conduct fictitious business activity that created false business 
losses, and thus false tax deductions, for clients. 

Given the characteristics of offshore evasion, IRS examinations that 
include offshore tax issues for an individual can take much longer than 
other examinations. Specifically, our past work has shown that from 
2002 through 2005, IRS examinations involving offshore tax evasion took 
a median of 500 more calendar days to develop and examine than other 
examinations.[Footnote 14] The amount of time required to complete 
offshore examinations is lengthy for several reasons, such as technical 
complexity and the difficulty of obtaining information from foreign 
sources. For instance, many abusive offshore transactions are 
identified through IRS examination of promoters, and IRS officials have 
said that it can take years to get a client list from a promoter and, 
even with a client list, there is still much work that IRS needs to do 
before the participants of the offshore schemes can be audited. Because 
of the 3-year statute of limitations on assessments,[Footnote 15] the 
additional time needed to complete an offshore examination means that 
IRS sometimes has to prematurely end offshore examinations and 
sometimes chooses not to open them at all, despite evidence of likely 

We said that to provide IRS with additional flexibility in combating 
offshore tax evasion schemes, Congress should make an exception to the 
3-year civil statute of limitations assessment period for taxpayers 
involved in offshore financial activity. IRS agreed that this would be 
useful. In testimony before Congress, the Commissioner of Internal 
Revenue has said that in cases involving offshore bank and investment 
accounts in bank secrecy jurisdictions, it would be helpful for 
Congress to extend the time for assessing a tax liability with respect 
to offshore issues from 3 to 6 years. Legislation was introduced in 
2007, but not enacted, to increase the statute of limitations from 3 to 
6 years for examinations of returns that involve offshore activity in 
financial secrecy jurisdictions. 

At a more fundamental level, jurisdictional limitations also make it 
difficult for IRS to identify potential noncompliance associated with 
offshore activity. Money is mobile and once it has moved offshore, the 
U.S. government generally does not have the authority to require 
foreign governments or foreign financial institutions to help IRS 
collect tax on income generated from that money. In prior work we have 
reported that a Deputy Commissioner of IRS's Large and Midsized 
Business Division said that a primary challenge related to U.S. 
persons' uses of offshore jurisdictions is simply that when a foreign 
corporation is encountered or involved, IRS has difficulty pursuing 
beneficial ownership any further because of a lack of jurisdiction. IRS 
officials told us that IRS does not have jurisdiction over foreign 
entities whose incomes are not effectively connected with a trade or 
business in the United States. Thus, if a noncompliant U.S. person 
established a foreign entity to carry out non-U.S. business, it would 
be difficult for IRS to identify that person as the beneficial owner. 

In addition, while the U.S. government has useful information-sharing 
agreements in place to facilitate the exchange of information on 
possible noncompliance by U.S. persons with offshore jurisdictions, 
agreements involving the exchange of information on request generally 
require IRS to know a substantial amount about the noncompliance before 
other nations will provide information. For example, the U.S. 
government uses Tax Information Exchange Agreements (TIEA) as the 
dedicated channel for exchange of tax information, while Mutual Legal 
Assistance Treaties (MLAT) remain the channel for exchanging 
information for offenses involving nontax criminal violations. 
Nevertheless, the Commissioner of Internal Revenue recently said that 
in some instances the process to obtain names of account holders is 
inefficient, and IRS must rely on other legal and investigative 
techniques. As we have reported previously with regard to the use of 
these channels with the Cayman Islands government, neither TIEAs nor 
MLATs allow for "fishing expeditions," or general inquiries about a 
large group of accounts or entities. Rather, as is standard with 
arrangements providing for exchange of information on request, each 
request must involve a particular target. For example, IRS cannot send 
a request for information on all corporations established in the Cayman 
Islands over the past year. The request must be specific enough to 
identify the taxpayer and the tax purpose for which the information is 
sought, as well as state the reasonable grounds for believing that the 
information is in the territory of the other party. 

One program IRS established to help ensure compliance when offshore 
transactions occur is the QI program. Under the QI program, foreign 
financial institutions voluntarily report to IRS income earned and 
taxes withheld on U.S. source income, providing some assurance that 
taxes on U.S. source income sent offshore are properly withheld and 
income is properly reported. However, significant gaps exist in the 
information available to IRS about the owners of offshore accounts. 
Perhaps most important, a low percentage of U.S. source income sent 
offshore flows through QIs. For tax year 2003, about 12.5 percent of 
$293 billion in U.S. income flowed through QIs. The rest, or about $256 
billion, flowed through U.S. withholding agents. While QIs are required 
to verify account owners' identities, U.S. withholding agents can 
accept owners' self-certification of their identities at face value. 

Reliance on self-certification leads to a greater potential for 
improper withholding because of misinformation or fraud. IRS does not 
measure the extent to which U.S. withholding agents rely on self- 
certifications. In our 2007 report we recommended that IRS perform this 
measurement and use these data in its compliance efforts.[Footnote 16] 
For instance, IRS could increase oversight for U.S. withholding agents 
who primarily rely on self-certifications in determining whether 
withholding should occur. IRS has taken some steps to measure such 
reliance, but IRS's approach thus far has not been systemic and also 
does not address improving the efficiency of its compliance efforts. 

The previously discussed case of Swiss bank UBS provides a stark 
example of the QI program's vulnerabilities. In February 2009, UBS 
entered into a deferred prosecution agreement with Justice and agreed 
to pay $780 million in fines, penalties, interest and restitution for 
defrauding the U.S. government by helping United States taxpayers hide 
assets through UBS accounts held in the names of nominees and/or sham 
entities. UBS entered into a QI program agreement with IRS in 2001, and 
was required to report U.S. citizens' income to the IRS during the time 
that it conspired to defraud the U.S. government. 

We also recommended that IRS require the QI program's external auditors 
report on any indications of fraud or illegal acts that could 
significantly affect the results of their reviews of the QIs' 
compliance with their agreements.[Footnote 17] However, it should be 
noted that we can not say that having this reporting requirement in 
place would have forestalled UBS's efforts to defraud the United States 
or detected them earlier. IRS has proposed some amendments to the QI 
program that would somewhat enhance QI auditors' responsibilities in 
this area. 

In our 2007 report on the QI program,[Footnote 18] we also recommended 
that IRS determine why U.S. withholding agents and QIs report billions 
of dollars in funds flowing to unknown jurisdictions and unidentified 
recipients, and recover any withholding taxes that should have been 
paid. IRS has taken steps toward implementing this recommendation. We 
also recommended that IRS modify QI contracts to require electronic 
filing of forms and invest the funds necessary to perfect the data. IRS 
is including an application for filing information returns 
electronically in all QI applications and renewals but has not measured 
whether including the forms in the applications has had an impact on 
the number electronic filers. 

Multiple Coordinated Strategies Are Necessary to Address the Challenges 
Posed by Offshore Tax Evasion: 

In our 2004 review of OVCI, we noted that the diverse types of 
individuals involved in offshore noncompliance may require multiple 
compliance strategies on the part of IRS.[Footnote 19] 

The limited transparency involved in U.S. persons' activities in 
offshore jurisdictions also presents several challenges to IRS and 
Treasury. As Commissioner of Internal Revenue Shulman recently 
commented, "There is general agreement in the tax administration 
community that there is no 'silver bullet' or one strategy that will 
alone solve the problems of offshore tax avoidance." 

Mr. Chairman, this concludes my statement. I would be happy to answer 
any questions you or other members of the committee may have at this 

Contacts and Acknowledgments: 

For further information regarding this testimony, please contact 
Michael Brostek, Director, Strategic Issues, on (202) 512-9110 or Contact points for our Offices of Congressional 
Relations and Public Affairs may be found on the last page of this 
statement. Individuals making key contributions to this testimony 
include David Lewis, Assistant Director; S. Mike Davis; Jonda VanPelt; 
Elwood White; and A.J. Stephens. 

[End of section] 


[1] Launched in January 2003, OVCI was an attempt to quickly bring 
taxpayers who were hiding funds offshore back into compliance while 
simultaneously gathering more information about those taxpayers as well 
as the promoters of these offshore arrangements. As an incentive to 
come forward, IRS said it would not impose the civil fraud penalty for 
filing a false tax return, the failure to file penalty, or any 
information return penalties for unreported or underreported income 
earned in one or more of the tax years ending after December 31, 1998. 
However, taxpayers were required to pay applicable back taxes, 
interest, and certain accuracy or delinquency penalties. Taxpayers were 
also required to disclose information about themselves and those who 
promoted or solicited their offshore arrangements. 

[2] GAO, Taxpayer Information: Data Sharing and Analysis May Enhance 
Tax Compliance and Improve Immigration Eligibility Decisions, 
[hyperlink,] (Washington, D.C.: 
July 21, 2004). 

[3] Permanent Subcommittee on Investigations, Senate Committee on 
Homeland Security and Governmental Affairs, Tax Haven Abuses: The 
Enablers, The Tools and Secrecy (Washington, D.C.: August 2006). The 
subcommittee's review of cases involved consultation with experts, 
interviews with parties related to the case histories, and review of 
documents and materials such as financial records, correspondence, 
legal pleadings, court documents, and Securities and Exchange 
Commission filings. 

[4] This is not unique to offshore locations. As we previously reported 
in GAO, Company Formations: Minimal Ownership Information Is Collected 
and Available, [hyperlink,] 
(Washington, D.C.: Apr. 2006), most U.S. states do not require 
ownership information at the time a company is formed. 

[5] IRS found that for non-farm sole proprietor income subject to 
little or no third-party reporting, taxpayers misreported more than 
half of such income in 2001, according to IRS's most recent tax gap 

[6] The FBAR form, TD F 90-22.1, is a Department of the Treasury form 
that is filed separately from the taxpayer's tax return. 

[7] [hyperlink,] 

[8] GAO, Tax Administration: Additional Time Needed to Complete 
Offshore Tax Evasion Examinations, [hyperlink,] (Washington, D.C.: Mar. 30, 

[9] Permanent Subcommittee on Investigations, 2006. 

[10] GAO, Cayman Islands: Business and Tax Advantages Attract U.S. 
Persons and Enforcement Challenges Exist, [hyperlink,] (Washington, D.C.: July 24, 

[11] The beneficial owner is the true owner of the income, corporation, 
partnership, trust, or transaction who receives or has the right to 
receive the proceeds or advantages of ownership. 

[12] [hyperlink,]. 

[13] Statement by Defendant in Advance of Plea Guilty, United States v. 
Taylor, No. 2:08-cr-00064-TC (D. Utah, Jan. 24, 2008); Statement by 
Defendant in Advance of Plea Guilty, United States v. Petersen, No. 
2:05-cr-00805-TC-DN (D. Utah, Jan. 18, 2008). 

[14] [hyperlink,]. 

[15] In most cases, the law gives IRS 3 years from the date a taxpayer 
files a tax return to complete an examination and make an assessment of 
any additional tax. This is known as the 3-year statute of limitations 
on assessments. 

[16] GAO, Tax Compliance: Qualified Intermediary Program Provides Some 
Assurance That Taxes on Foreign Investors Are Withheld and Reported, 
but Can Be Improved, [hyperlink,] 
(Washington, D.C. Dec. 2007). 

[17] [hyperlink,]. 

[18] [hyperlink,]. 

[19] [hyperlink,]. 

[End of section] 

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