IRS Says Offshore Effort Tops $5 Billion, Announces New Details on the Voluntary Disclosure Program and Closing of Offshore Loophole

Issue Number:    IR-2012-64

The Internal Revenue Service today announced that its offshore voluntary disclosure programs have exceeded the $5 billion mark and released new details regarding the voluntary disclosure program announced in January, including tightening the eligibility requirements.

“We continue to make strong progress in our international compliance efforts that help ensure honest taxpayers are not footing the bill for those hiding assets offshore,” said IRS Commissioner Doug Shulman. “People are finding it tougher and tougher to keep their assets hidden in offshore accounts.”

Shulman said the IRS offshore voluntary disclosure programs have so far resulted in the collection of more than $5 billion in back taxes, interest and penalties from 33,000 voluntary disclosures made under the first two programs. In addition, another 1,500 disclosures have been made under the new program announced in January.

The voluntary disclosure programs are part of a wider effort by the IRS to stop offshore tax evasion and ensure tax compliance. This includes beefed up enforcement, criminal prosecution and implementation of third-party reporting through the Foreign Account Tax Compliance Act (FATCA).

The IRS also closed a loophole that’s been used by some taxpayers with offshore accounts. Under existing law, if a taxpayer challenges in a foreign court the disclosure of tax information by that government, the taxpayer is required to notify the U.S. Justice Department of the appeal.

The IRS said that if the taxpayer fails to comply with this law and does not notify the U.S. Justice Department of the foreign appeal, the taxpayer will no longer be eligible for the Offshore Voluntary Disclosure Program (OVDP). The IRS also put taxpayers on notice that their eligibility for OVDP could be terminated once the U.S. government has taken action in connection with their specific financial institution.

Additional details of these eligibility issues are available in a new set of questions and answers released today on the current OVDP, which was announced in January (see IR-2012-5). The IRS reopened the OVDP following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs.

This program – which helps bring people back into the tax system — will be open for an indefinite period until otherwise announced. The program is similar to the 2011 program in many ways, but with a few key differences. Unlike last year, there is no set deadline for people to apply.  However, the terms of the program could change at any time going forward.

Under the current OVDP, the offshore penalty has been raised to 27.5 percent from 25 percent in the 2011 program. The reduced penalty categories of 5 percent and 12.5 percent are still available.

The IRS also announced a plan to help U.S. citizens residing overseas to catch up with tax filing obligations and assistance for people with foreign retirement plan issues. See IR-2012-65 also issued today.

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Keep the Child and Dependent Care Tax Credit in Mind for Summer Planning

Issue Number:    IRS Summertime Tax Tip 2012-01

 

During the summer many parents may be planning the time between school years for their children while they work or look for work. The IRS wants to remind taxpayers that are considering their summer agenda to keep in mind a tax credit that can help them offset some day camp expenses.

The Child and Dependent Care Tax Credit is available for expenses incurred during the summer and throughout the rest of the year. Here are six facts the IRS wants taxpayers to know about the credit:

1. Children must be under age 13 in order to qualify.

2. Taxpayers may qualify for the credit, whether the childcare provider is a sitter at home or a daycare facility outside the home.

3. You may use up to $3,000 of the unreimbursed expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit.

4. The credit can be up to 35 percent of qualifying expenses, depending on income.

5. Expenses for overnight camps or summer school/tutoring do not qualify.

6. Save receipts and paperwork as a reminder when filing your 2012 tax return. Remember to note the Employee Identification Number (EIN) of the camp as well as its location and the dates attended.

For more information check out IRS Publication 503, Child and Dependent Care Expenses. This publication is available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

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Tax Cheats Received Federal Mortgage Insurance and Homebuyer Tax Credits

The Federal Housing Administration insured over $1.44 billion in mortgages for 6,327 borrowers with $77.6 million in federal tax debt who benefited from the 2009 American Recovery and Reinvestment Act. Of these borrowers, 3,815 individuals claimed and received $27.4 million of First-Time Homebuyer Credits from the Recovery Act., according to a report by the Government Accountability Office.

Tax debtors, by law, are prevented from obtaining federal subsidies for mortgage insurance. The Recovery Act raised the limit on the loans the FHA was allowed to insure, however, resulting in FHA insurance of more than $20 billion in for 87,000 households.

Tax debtors can legitimately receive mortgage insurance, but only after entering an approved repayment plan set up with the Internal Revenue Service. However, the GAO sampled eight of these tax delinquency cases and found that five did not have valid IRS repayment plans. The number of tax cheats receiving mortgage assistance was in part “due to shortcomings in the capacity of FHA required documentation to identify tax debts” and other policies that lenders may misinterpret.

 

One of the delinquent taxpayers profiled in the report owed $10,000 in taxes, but still received over $700,000 in mortgage insurance. At the same time, the tax cheat claimed the Earned Income Tax Credit. The tax cheat later filed for bankruptcy, defaulted on his federally insured home loan, and lost the house in foreclosure.

The report found that it is critical that the FHA has enforceable policies in place to reduce tax cheats receiving mortgage insurance so that the agency can “minimize the financial risks to the federal government while meeting the housing needs of borrowers.”

The GAO estimated that the impact of giving mortgage insurance to known tax cheats could weaken the already precarious financial condition of the FHA Mutual Mortgage Insurance Fund, which funds its programs. FHA insures lenders against the costs from foreclosures. The fund currently has only $2.6 billion in reserves to protect its entire $1.08 trillion mortgage portfolio, well below statutorily mandated levels. And since tax cheat borrowers are two to three times more likely to be foreclosed upon, the trust fund is likely only to weaken further. Tax-cheat owned foreclosed properties approved under the Recovery Act have already potentially cost the FHA’s MMIF over $81 million.

“Many individuals with tax debt take advantage of government programs, such as federal loan insurance, thereby reaping benefits from these programs while failing to pay their own taxes,” said the report. The report also found tax cheats that took advantage of the program were two-to-three times more likely to default on home loans, posing a much higher risk for the program.

The report was done at the request of Senators Tom Coburn, M.D., R-Okla., Carl Levin, D-Mich., Max Baucus, D-Mont., Orrin Hatch, R-Utah, and Charles Grassley, R-Iowa.

“In the name of ‘stimulus,’ the federal government gave mortgage insurance to thousands of people who were tax cheats and had a bad track record paying their debts,” Coburn said in a statement. “No one would handle their own money that way. Yet, the federal government needlessly put taxpayers on the line to help tax cheats buy homes.  Congress needs to ensure that tax cheats are no longer allowed to take advantage of FHA programs.”

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