On November 10th of this year, the Treasury Inspector General for Tax Administration released a report, "Trends in Compliance Activities Through Fiscal Year 2014." Of particular concern is the report's indication that the IRS has changed their method of selecting the cases they choose to examine. It seems that the IRS has jumped feet first into some ethically-questionable waters. The primary point of concern – the IRS has indicated that they have been targeting a certain class of tax offenders.
It's important to note that even though the IRS has fewer staff and far more responsibilities than ever, they are also now in charge of administering the Affordable Care Act (aka "ObamaCare") and FATCA (aka, "the horrible law that makes Americans second-class citizens overseas"). And yet, somehow the IRS has still managed to collect record revenues. Note the following excerpt from the Inspector General's statement (emphasis is mine):
Despite these challenges, total dollars received and collected (gross collections) increased for the fourth straight year, to $3.1 trillion (a 6.8 percent increase) in FY 2014. Enforcement revenue collected also increased from $53.3 billion in FY 2013 to $57.1 billion in FY 2014 due, in part, to a relatively small number of large dollar examination cases.
Suddenly it makes sense how the IRS is able to keep its collections number up – they're specifically targeting high-income earners. No matter how you want to paint it, specific selection doesn't seem entirely fair.
Who do you think the IRS is interested in? (Also, per Wikipedia, a sperm whale weighs 32,000 pounds. Meanwhile, the heaviest yellowfin tunas weigh in at a solid 400 pounds, so yeah it checks out).
The other whales — offshore investors
Additionally, in some circumstances, the IRS is able to assess penalties based on asset amount, not unpaid taxes. In particular, the IRS can assess "willful FBAR" penalties for not reporting a foreign bank account (or even a foreign life insurance policy) on an FBAR Form (FinCEN Form 114).
In fact, we recently spoke with an IRS Examiner who was forced, by his manager, to assess a willful FBAR penalty against a rather infirm older gentlemen who had been given the wrong legal advice and made a so-called "soft disclosure" only to be subsequently audited. This single assessment net the IRS millions of dollars.
When you think about it, horrible results like this make sense. The IRS must do more with fewer auditors. They could audit twenty plumbers or they could target one person who happens to have some money overseas. Either way, they're bringing in the same dollar amount. However, last time I checked, our justice system is supposed to determine based on mindset and actions, not on the value of your bank account.
The increase in high income and foreign tax audits will likely continue
As I wrote in 2013, the IRS will continue to increase their number of high income tax audits. What I stated back then still rings true – the IRS is not so interested in making sure that everyone is treated equally miserably, but rather that the brunt of enforcement is on those with high incomes and/or foreign accounts. We're going to continue to see the IRS go after those whom they can "farm" for substantial revenue instead of auditing indiscriminately. It's important to remember that the IRS is in the revenue game, often leaving justice by the wayside.
Now — more than ever — if you haven't disclosed your foreign accounts, you should heavily consider entering into one of the available offshore programs. If you've been advised to or have made a soft disclosure, you can still disclose properly and save yourself the pain of involuntary IRS involvement in your life. If you are a high income earner or have international business dealings — even if you have reported all of your foreign accounts properly — it can be worthwhile to get a second opinion to ensure that everything is in order.
If you are concerned about your chances of audit, or if you want to have us look at all of your financial information to ensure it is up to IRS code, or even if you are currently under audit, contact us here. We can help you wherever you are in this journey.