Thursday, May 3, 2007

IRS curtails audits of tax-haven users

Congressional investigators have found that the three-year limitation on conducting a tax audit is causing the IRS to curtail prematurely audits of people who use tax havens, reports the New York Times (a story carried by the International Herald Tribune on May 3). In some cases, the time limit dissuades agents from even opening an audit because it can't be finished on time.

In a report released May 3, the Government Accountability Office found that I.R.S. agents are so hobbled by “dilatory tactics” by offshore taxpayers and other problems that it takes almost two and a half years to complete a typical audit.

The IRS reporter that almost $300 billion in investment and business income was moved out of the U.S. in 2003. Analysts with the Joint Committee on Taxation have estimated that the annual outflow has shot to more than $400 billion since then.

Underreporting income also is a problem, costing the government about $300 billion a year. Democratic lawmakers say the government could be losing tens of billions of dollars a year from offshore tax evasion.

The GAO found that offshore audits routinely become bogged down by stalling tactics by taxpayers, difficulties in getting financial information from foreign institutions and the technical complexity of many offshore transactions.

Audits can be pursued for more than three years, but agents have to meet tough requirements to do so. The Times said that IRS agents' findings can be dismissed and the agents reprimanded if the unpaid taxes turn out to be smaller than expected.