By James Paul SaboThe Government Accountability Office, an investigative arm of Congress, recently issued a scathing report on the Internal Revenue Service entitled “Offshore Tax Evasion: IRS Has Collected Billions of Dollars But May Be Missing Continued Evasion.”In the past 4 years over 39,000 individuals have enrolled in the Offshore Voluntary Disclosure Program, paying $5.5 billion in back taxes, penalties and interest. A popular misconception is that all these individuals are multimillionaires. In fact, only 6 percent of this group had more than $1,000,000 in offshore accounts. Of the 39,000 individuals who enrolled in the voluntary disclosure programme more than half had an account at the Swiss bank UBS, per the report. The maximum penalty of 27.5% is imposed on accounts with more than $75,000 in an offshore bank or financial account and 94 percent of the voluntary disclosures came from this group. The reality is that the IRS is looking for individuals who do not feel that they are at risk.Quiet FilingsAs discussed in last month’s column the report noted that thousands of individuals are attempting to circumvent the voluntary disclosure programme by amending prior year tax returns and the report of an offshore bank or financial account, quietly filing, and hoping that the IRS doesn’t notice. Apparently the IRS did not notice that the number of such filings increased from about 260,000 to 516,000, but the Government Accountability Office has noticed. The Government Accountability Office chastised the IRS for not having procedures in place to identify and catch these non-filers.New FilingsThe Government Accountability Office report also found tens of thousands of “new” filings where individuals who had resided outside the United States for long periods of time opted to become in compliance with the law prospectively, rather than retroactively, again hoping that the IRS would not notice. The IRS did not notice but the Government Accountability Office did and the IRS will put measures in place to identify this practice.Taxpayer attempts to circumvent taxes, interest and penalties by not participating in the Offshore Voluntary Disclosure Program and by simply amending prior year’s returns or reporting on current returns previously unreported offshore accounts likely resulted in the loss of billions of tax and penalty dollars.Recommendations For ActionThe Government Accountability Office directed the IRS to explore options for employing a methodology for identifying and pursuing potential quiet disclosures, to provide more assurance that actual quiet disclosures are not being missed and then to implement the best option.The second recommendation will clearly give individuals who are not compliant cause for concern. Schedule B is used to report interest and dividend income. At the bottom of Schedule B is Part III, an often overlooked section that asks “at any time during 2012, did you have a financial interest in or signature authority over a financial account located in a foreign country” with a choice of checking a “yes” or “no” box. If you answer “yes” it then asks “are you required to file Form TD F 90-22.1 to report that financial interest or signatory authority” with a choice of checking a “yes” or “no” box. If you answer “yes” it then asks you to enter the name of the foreign country where the financial account is located.The Government Accountability Office has instructed the IRS to examine Schedule B to determine if the taxpayer who has lived abroad for several years (by reviewing prior filings or by reviewing Form 2555) and has failed to check the “yes” box or is only doing so for the first time. It also instructed the IRS to review Form 8938 to determine whether a foreign asset was acquired or sold in the current year.Logically, if a person has lived and worked outside the United States for a few years it would be expected that they would have a foreign bank account and that at a minimum the first box should have been checked “yes.” And if the compensation that they are reporting is more than $120,000 a year it would also follow that at any one point in time they likely had more than $10,000 in the foreign bank account. With a maximum penalty equal to the greater of $100,000 or 50 percent of the amount in the account for failure to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts and other penalties for failure to file an accurate tax return, increased IRS scrutiny is now a given.While it will take the IRS some time to implement the recommendations it will clearly lead to more audits with harsher penalties and interest being imposed than for those individuals who agreed to participate in the Offshore Voluntary Disclosure Program.ExpatriationSome 679 individuals renounced their US citizenship during the first 3 quarters of 2013. The Health Insurance Portability and Accountability Act of 1996 requires the IRS to publish a list of such names quarterly. Occasionally, well known personalities such as Facebook co-founder Eduardo Saverin who ostensibly made billions when Facebook went public and who now lives in Singapore and Denise Rich, songwriter, socialite, and the former wife of a pardoned billionaire (under her maiden name of Denise Eisenberg) appeared in prior lists.Tax ReformMomentum is slowing building for major tax reform in 2014. To date, the guiding principles appear to be a reduction in tax rates for all and no increase in taxes for low income earners. But the reality is that you cannot cut tax rates without trimming or eliminating tax breaks. Two of the largest tax breaks, the earned income credit and the child tax credit primarily aid low and middle income earners and will likely just be simplified. Two other tax breaks, employer paid health coverage and the partial tax on social security also aid low and middle income earners, but the $250 billion it would raise if the tax break was eliminated could prove to be too tempting to Congress. Upper income earners can expect the elimination of an itemised deduction for state and local income taxes and property taxes. It is also likely that the deductible interest on home mortgages will be reduced from the current $1,000,000 limitation to $500,000 and the deduction of interest on second homes disallowed.Pursuant to the requirements relating to practice before the Internal Revenue Service, any tax advice in this communication is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties imposed under the United States Internal Revenue Code, or (ii) promoting, marketing or recommending to another person any tax related manner.The tax advice given by this column is, by necessity, general in nature. You should, of course, check with your own US tax consultant as to how specific transactions affect you since tax advice varies with individual circumstances.James Paul Sabo, CPA, is the President of ETS Ltd., PO Box HM 1574, Hamilton HM GX, Bermuda. Questions should be sent to: jsabo@expatriatetaxservices.com