IRS Taxpayer Advocate Releases 2015 Annual Report to Congress

TASToday, the Internal Revenue Service’s National Taxpayer Advocate, Nina E. Olson, released her annual report to Congress. The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that is dedicated to helping taxpayers and protecting taxpayer rights.  Section 7803(c)(2)(B)(ii) of the Internal Revenue Code requires the National Taxpayer Advocate to submit this report each year and in it, among other things, to identify at least 20 of the most serious problems encountered by taxpayers and to make administrative and legislative recommendations to mitigate those problems. The report released today is massive, spanning over 750 pages.

The full text of the press release announcing the National Taxpayer Advocate’s annual report follows:

WASHINGTON — National Taxpayer Advocate Nina E. Olson today released her 2015 annual report to Congress, expressing concern that the IRS may be on the verge of dramatically scaling back telephone and face-to-face service it has provided for decades to assist the nation’s 150 million individual taxpayers and 11 million business entities in complying with their tax obligations.  The report reiterates a recommendation the Advocate made in June that the IRS release its “Future State” plan documents, provide additional detail about their anticipated impact on taxpayer service operations, and solicit comments from the public.  The report also recommends that Congress conduct oversight hearings on the plan.

The Future State Plan.  Since 2014, the IRS has invested substantial resources to develop a Future State plan, which has involved significant participation by virtually all IRS business units and the engagement of management consultants, at a cost of several million dollars.  To date, the IRS has chosen not to make the plan public.

The Advocate’s report says there are many positive components to the plan, including the stated goal of creating online taxpayer accounts through which taxpayers will be able to obtain information and interact with the IRS.  The report also acknowledges that cuts to the IRS budget – about 19 percent in inflation-adjusted terms since fiscal year (FY) 2010 – have forced the IRS to explore cheaper service options.

Reduced Service Levels.  The Advocate expresses particular concern about IRS intentions regarding what is not stated in the plan.  “Implicit in the plan – and explicit in internal discussion – is an intention on the part of the IRS to substantially reduce telephone and face-to-face interaction with taxpayers,” the report says.  “The key unanswered question is by how much. . .It is incumbent upon the IRS to be much more specific about how much personal taxpayer assistance it expects to provide in its ‘future state.’”

The report says the IRS appears to presume taxpayer interactions with the IRS through online accounts will address a high percentage of taxpayer needs, enabling it to curtail existing taxpayer services without significantly impacting taxpayers.  The Future State plan also calls for expanding the role of tax return preparers and tax software companies in providing taxpayer assistance – an approach that likely would increase compliance costs for millions of taxpayers who now obtain that assistance from the IRS for free.

The IRS Future State plan could transform the role the agency has long played in helping taxpayers comply with their tax obligations, the report says.  The IRS historically has maintained a robust customer service telephone operation that, in every year since FY 2008, has received more than 100 million taxpayer telephone calls, as well as a network of nearly 400 walk-in sites that, in every year for over a decade, has provided face-to-face assistance to more than five million taxpayers.

Online accounts are likely to reduce taxpayer demand for telephone and face-to-face interaction to some degree but are unlikely to be useful in addressing complex account-specific matters, the report says. “This is true for several reasons, including that millions of taxpayers do not have Internet access, millions of taxpayers with Internet access do not feel comfortable trying to resolve important financial matters over the Internet, and many taxpayer problems are not ‘cookie cutter,’ thus requiring a degree of back-and-forth discussion that is better suited for conversation.”  Last year, more than 9 million taxpayers either received post-filing IRS notices proposing to adjust their tax or experienced refund delays, all matters that are account-specific.

Technology improvements often do not reduce demand for personal service to the extent expected, the report says. For example, the IRS over the past decade has increased the individual tax return e-filing rate from 54 percent to 85 percent, enhanced the Where’s My Refund? tool, and added substantial content to IRS.gov, yet the number of taxpayer calls to its customer service lines has increased by 59 percent.  Similarly, the report cites a recent Federal Reserve survey in which 72 percent of mobile banking customers reported they had visited a branch and spoken with a teller an average of two times within the preceding month. The report says customers often use online service as a supplement to, rather than a substitute for, personal service, particularly for complex matters.

In recent years, the IRS has already begun to reduce taxpayer services, including by declaring all but simple tax-law questions “out of scope” for the IRS to answer during the filing season; declaring it will not answer any tax-law questions after the filing season (including questions from millions of taxpayers with proper extensions of time to file); eliminating preparation of tax returns in its walk-in sites; and eliminating an online program that allowed taxpayers to submit questions electronically.

Need for Transparency.  “We believe it is critical that the IRS share its plans in detail with Congress and outside stakeholders and then engage in a dialogue about the extent to which it intends to curtail or eliminate various categories of telephone service and face-to-face service, whether it will provide sufficient support for taxpayers – and how – as it transitions to its future state, and whether it has an adequate ‘Plan B’ if taxpayer demand for telephone and face-to-face service remains higher than the IRS anticipates,” the report says.

In releasing the report, Olson emphasized that Congress has repeatedly shown support for high-quality taxpayer service.  In the IRS Restructuring and Reform Act of 1998, Congress directed the IRS to “review and restate its mission to place a greater emphasis on serving the public and meeting taxpayers’ needs.”  Added Olson:  “The fact that Congress just last month provided the IRS with an additional $290 million in funding for taxpayer assistance and codified the provisions of the Taxpayer Bill of Rights, including The Right to Quality Service, demonstrates that Members of Congress continue to believe taxpayer service should be strengthened, not reduced,” Olson said.

“Pay to Play” Tax System.  Olson characterized the combination of reductions in personal service and the IRS’s plans to direct taxpayers with questions to preparers and other third parties (along with the expansion of user fees, discussed below) as creating a “pay to play” tax system, where only taxpayers who can afford to pay for tax advice will receive personal service, while others will be left struggling for themselves.

Data Security Concerns.  Olson also warned about the consequences of giving tax return preparers more access to taxpayer accounts.  “When you give that access to unregulated preparers or to other third parties, I have significant concerns.  We already see the problems in this population of preparers relating to the Earned Income Tax Credit (EITC), where certain unregulated, untrained preparers prey on vulnerable taxpayers.  Why would we want to give these preparers even more access to taxpayer information?  And yet, if we don’t provide these preparers access to taxpayer accounts, it is very likely the tens of millions of taxpayers who use these preparers won’t be able to or won’t want to utilize their own online accounts, thereby carving a big hole in the IRS’s online strategy.  Thus, through a single-minded emphasis on online accounts, the IRS creates a situation where it will face enormous pressure to open up taxpayer account access to unregulated return preparers.”

Need for More Details and Public Discussion.  Because the contemplated reductions in service are significant yet undefined, Olson called on the IRS in her FY 2016 Objectives Report to Congress to release its plans and solicit taxpayer comments.  The new report again recommends that the IRS immediately publish its plan and seek public comments.  “U.S. taxpayers pay the bills for our government.  U.S. taxpayers deserve a say in how the tax collection agency will treat them,” the report says.

The report also recommends that Congress hold hearings on the future state of IRS operations so it can obtain more specific information about the IRS’s plans and have an opportunity to weigh in.

Said Olson:  “This has been a difficult report to write because while the intent to reduce telephone and face-to-face service has been a central assumption in the Future State planning process, little about service reductions has been committed to writing.  Therefore, it is impossible to describe the scope of contemplated reductions with specificity.  If there is good news here, it is that the IRS has not formally committed itself to the service reductions we understand to be contemplated.  I am hopeful the IRS will make the plan public, present its perspective on tradeoffs, seek public comments, and ultimately make a commitment to continue to maintain existing telephone and face-to-face services for the millions of U.S. taxpayers who rely on them.”

National Taxpayer Advocate to Hold Public Hearings on Taxpayer Service Needs.  “For the IRS to do its job well, it must start from the perspective of what government is about – namely, it is of the people, by the people, and for the people,” Olson wrote.  “The government is funded by taxes paid by the people.  Therefore, the future state vision of the IRS needs to be designed around the needs of the people.”  To assist the IRS in developing a plan that is responsive to the needs of U.S. taxpayers, Olson announced plans to conduct public hearings around the country in the coming months to which she plans to invite groups that represent the interests of individual taxpayers (including elderly, low income, disabled, and limited English proficiency taxpayers), sole proprietors, and other small businesses as well as Circular 230 practitioners and unenrolled tax return preparers to describe what they need from the IRS to help them comply with the tax laws.

OTHER KEY ISSUES ADDRESSED

Federal law requires the Annual Report to Congress to identify at least 20 of the “most serious problems” encountered by taxpayers and to make administrative and legislative recommendations to mitigate those problems.  Overall, this year’s report identifies 24 problems, makes dozens of recommendations for administrative change, makes 15 recommendations for legislative change, and analyzes the 10 tax issues most frequently litigated in the federal courts.

The “most serious problems” discussed in the report are grouped into four sections:

(1) IRS Future State Vision: Implications for Today and Tomorrow; (2) Problems that Undermine Taxpayer Rights and Impose Taxpayer Burden; (3) Problems that Waste IRS Resources and Impose Taxpayer Burden; and (4) Problems that Contribute to Earned Income Tax Credit Noncompliance and Recommendations for Improvement.  The report says that as the IRS has struggled with reduced funding, it has sometimes made short-sighted decisions that have had the effect of creating rework for itself as well as increasing taxpayer burden.

Among the problems addressed are the following:

IRS User Fee Decisions May Impose Heavy Taxpayer Burden.  Like other federal agencies, the IRS is required to consider charging for services that convey “special benefits.”  In the past, the IRS tried to avoid imposing fees that would impair its mission, particularly in the years before it was authorized to retain fee revenue.  Between FY 2010 and FY 2015, however, when the IRS’s appropriation was reduced by about 10 percent (nominally), its user fee revenue rose by 34 percent.  The report suggests that cuts to the agency’s budget have prompted it to consider fees that will impede its mission to help taxpayers voluntarily comply and pay their taxes.

As an example, the IRS collects revenue when delinquent taxpayers agree to pay their liabilities voluntarily, even if they can only pay in installments over time rather than in a single lump-sum.  Under an installment agreement, tax is collected without draining IRS enforcement resources.  Yet the IRS charges taxpayers a user fee for entering into installment agreements and is actively considering increasing the fee.  The report says such fees exacerbate the “pay to play” aspects of the IRS Future State (discussed above) and expresses concern that increasing user fees may have the effect of deterring taxpayers from using IRS services that promote compliance, thereby reducing voluntary compliance and potentially costing the government more in tax than it would earn in user fees.

In a Dec. 4 memorandum to the Commissioner, the Advocate conveyed concerns about specific user fees that are under consideration; the memorandum is published in the report but has been substantially redacted at the request of the IRS.  The report recommends the IRS estimate the effect of proposed fee increases on demand for services, make its analysis public before adopting the increases, and refrain from charging fees that will have a significant negative impact on its service-oriented mission, voluntary compliance, or taxpayer rights.

Form 1023-EZ Process Allows Unqualified Entities to Obtain Tax-Exempt Status.  Since July 2014, the IRS has addressed backlogs in its inventory of applications for tax-exempt status by allowing certain organizations to use Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3).  Form 1023-EZ adopts a “checkbox approach” that requires applicants merely to attest, rather than demonstrate, that they qualify for exempt status.  In particular, Form 1023-EZ does not solicit any narrative regarding an organization’s planned activities, any organizing documents (such as articles of incorporation or bylaws), any financial data, or any explanatory material.  The IRS approves about 95 percent of applications submitted on Form 1023-EZ.  However, the IRS’s own data show it approves only about 77 percent of applications when it requests documentation.

Similarly, TAS conducted a research study, published in Volume 2 of the report, that examined a representative sample of organizations in 20 states that make articles of incorporation viewable online and whose Form 1023-EZ application had been approved by the IRS.  It found, among other things, that 37 percent do not meet the organizational test for qualification as a Section 501(c)(3) organization.  In other words, these organizations received favorable determination letters from the IRS even though they are not eligible for exempt status under the law.  The report recommends that the IRS revise Form 1023-EZ to require applicants to submit their organizing documents, a description of actual or planned activities, and past or projected financial information, and that the IRS review this information before deciding whether to approve exemption applications.

IRS Anti-Fraud Filters Delay Refunds for Hundreds of Thousands of Legitimate Taxpayers, with One Major Program Having a False Positive Rate of 36 Percent.  The IRS operates several programs that filter tax returns to ferret out improper refund claims, including returns showing bogus wage or withholding amounts and returns suspicious for identity theft.  While these are critical programs, the filters have high “false positive” rates, causing substantial refund delays for hundreds of thousands of legitimate taxpayers.  For example, the false positive rate was about 36 percent during FY 2015 in the Taxpayer Protection Program (TPP), which freezes returns the IRS suspects may reflect identity theft.  The IRS sends notices to taxpayers whose returns have been flagged by TPP filters and instructs the taxpayers to authenticate their identities online or by phone.  Yet for three consecutive weeks during the filing season, the IRS answered fewer than 10 percent of taxpayer calls on that telephone line, making it extra ordinarily difficult for affected taxpayers to get their returns unfrozen and receive their refunds.  For other anti-fraud programs, the IRS currently does not track the false positive rate.  The report recommends that the IRS begin tracking the false positive rate of all screening programs, monitor and adjust filters and rules quickly if they are not effectively zeroing in on fraud, and establish maximum false positive rates for each process and filter.

Other issues analyzed in the “most serious problems” section of the report include the adequacy of taxpayer service for taxpayers living abroad, the whistleblower program, the IRS’s administration of the Patient Protection and Affordable Care Act, victim assistance in tax-related identity theft cases, and several issues relating to EITC compliance, including the need for better taxpayer education and assistance in the pre-filing environment, more effective use of audits, and greater emphasis on the role tax return preparers can play to promote compliance.

New TAS Research Studies. Volume 2 of the report contains four new research studies, including a study examining whether organizations that obtained Section 501(c)(3) status on the basis of Form 1023-EZ applications meet the requirements for exempt status and a study designed to gain a better understanding of the needs of underserved Hispanic taxpayers.  The report also contains two studies that look at IRS enforcement programs.

One study examined the impact of audits on the subsequent compliance of self-employed individuals.  The results of the study “provide robust evidence that audits have important long-term revenue implications,” the report says.  However, the study found a significant disparity in results when it attempted to differentiate the subsequent behavioral responses of (seemingly) compliant taxpayers and (seemingly) noncompliant taxpayers.  It found that (seemingly) non-compliant taxpayers who were audited increased their reporting compliance of taxable income by about 120 percent three years later, while (seemingly) compliant taxpayers who were audited subsequently reported less income.

A second study examined the IRS’s “collectability curve.”  The IRS generally assigns delinquencies to Taxpayer Delinquent Account (TDA) status within four to five months after it assesses a liability and sends the taxpayer a series of notices.  However, the volume of TDAs may delay collection actions from occurring for some time.  The study found that the IRS is most successful at collecting liabilities soon after TDA assignment.  While dollars continue to be collected throughout the life of the 10-year statutory collection period, the payment rate slows considerably.  These findings are similar to the results reported by private collection agencies, but run counter to some IRS procedures that prioritize collecting larger accounts, even though many “smaller accounts” become “larger accounts” simply because the IRS delays collection, allowing penalties and interest to continue to accrue and ultimately making them more difficult to resolve.

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Please visit http://www.taxpayeradvocate.irs.gov/2015AnnualReport for more information.

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About the Taxpayer Advocate Service

The Taxpayer Advocate Service (TAS) is an independent organization within the Internal Revenue Service (IRS) that helps taxpayers and protects taxpayer rights.  Your local advocate’s number is in your local directory and at taxpayeradvocate.irs.gov.  You can also call TAS toll-free at 1–877–777–4778.  TAS can help if you need assistance resolving an IRS problem, if your problem is causing financial difficulty, or if you believe an IRS system or procedure isn’t working as it should.  And our service is free.  For more information about TAS and your rights under the Taxpayer Bill of Rights, go to taxpayeradvocate.irs.gov. You can get updates on tax topics at facebook.com/YourVoiceAtIRS, Twitter.com/YourVoiceatIRS, and YouTube.com/TASNTA.

Matthew D. Lee is the author of The Foreign Account Tax Compliance Act Answer Book 2015 (published by the Practising Law Institute), a definitive treatment of the due diligence, withholding, reporting, and compliance obligations imposed by FATCA on foreign financial institutions, non-financial foreign entities, and withholding agents.  For more information on this publication, please click here.

 

New Law Authorizes State Department to Revoke U.S. Passports of Tax Delinquents

This afternoon, President Obama signed into law a five-year, $305 billion highway funding bill that includes several controversial tax measures designed to help fund the legislation. One provision in the legislation authorizes the State Department to revoke U.S. passports of taxpayers who owe the U.S. Treasury more than $50,000 in tax liabilities. Another provision authorizes the Internal Revenue Service to use private debt collectors. In this blog post, we address the passport revocation provision, which now provides the IRS with a powerful tool to force tax compliance.

The law adds a new provision to the Internal Revenue Code (section 7345) which authorizes the Treasury Secretary to certify, to the Secretary of State, that a taxpayer has a “seriously delinquent tax debt.” A “seriously delinquent tax debt” is defined as a federal tax liability which been assessed and is greater than $50,000, and for which the IRS has either filed a lien or levy. (This dollar amount will be adjusted for inflation after 2016.)

Upon receipt of such certification, the Secretary of State is authorized to take action with respect to denial, revocation, or limitation of such taxpayer’s U.S. passport. The law prohibits the Secretary of State from issuing a passport to any individual who has a “seriously delinquent tax debt,” with exceptions provided for emergency circumstances or humanitarian reasons. The law authorizes the Secretary of State to revoke a passport previously issued to an individual with a “seriously delinquent tax debt.” If the Secretary of State decides to revoke a passport under these circumstances, he or she is authorized to limit such passport to return travel to the United States only. The Secretary of State may also deny any passport application submitted without a Social Security number.

Taxpayers who have entered into installment agreements or offers-in-compromise, or have requested collection due process hearings or innocent spouse relief, are exempt from this new law. If the Treasury Secretary has already certified a taxpayer to the Secretary of State, such certification must be revoked within 30 days of the taxpayer making full payment and obtaining release of lien; requesting for innocent spouse relief; entering into an installment agreement; or making an offer-in-compromise which is accepted. In the event that the Treasury Secretary issues an erroneous certification, such certification must be revoked as soon as practicable.

The law does includes certain provisions to safeguard taxpayer rights. Taxpayers who are certified to the Secretary of State as having a “seriously delinquent tax debt,” or whose certifications are subsequently revoked, are entitled to prompt written notice. Such notice must specify that the taxpayer is entitled to file a lawsuit in the U.S. Tax Court or a federal district court to challenge the certification. The court may determine that the certification was erroneous and, if so, order the Treasury Secretary to so notify the Secretary of State. Taxpayers who are serving in a combat zone are granted relief from the law’s provisions.

In addition, the new law amends existing Internal Revenue Code provisions to ensure that taxpayers are warned in advance that they could be subject to U.S. passport denial, revocation, or limitation. For example, notices of federal tax lien and notices of intent to levy must now include language advising the taxpayer that they may be certified to the Secretary of State as having a “seriously delinquent tax debt” with attendant passport consequences.

Finally, the law amends the Internal Revenue Code provision addressing confidentiality of tax returns and return information in order to permit the sharing of such information with the Secretary of State. In particular, for each taxpayer certified as having a “seriously delinquent tax debt,” the law authorizes the Treasury Secretary to share information regarding the taxpayer’s identity and the amount of the tax debt.

IRS Criminal Investigation Annual Report Confirms Devastating Impact of Budget Cuts

Today the IRS Criminal Investigation Division released its annual report, summarizing its activities and accomplishments during fiscal year 2015. One of the key takeaways from the report is the devastating impact of budget cuts on the IRS as a whole, and on the criminal investigation function in particular. The report acknowledges that CI hired only 45 new special agents over the last three years, and staffing levels hit their lowest levels since the 1970s. In virtually all categories of enforcement activity – investigations initiated, prosecution recommendations, indictments, convictions, and sentencings – CI’s results for FY2015 were dramatically reduced. In FY2015, CI had only 2,316 special agents, down from a historical high of 3,363 special agents in FY1995.  A Bloomberg article published today neatly summarized this news:

Tax cheats can breathe a little easier. The gun-toting Internal Revenue Service investigators who send felons to prison are retiring in droves and there’s no one to replace them.

The IRS press release announcing the release of the report follows below:

WASHINGTON — The Internal Revenue Service today announced the release of its IRS Criminal Investigation (CI) annual report, reflecting significant accomplishments and enforcement actions taken in fiscal year 2015.

Focusing on tax-related identity theft, money laundering, public corruption, cybercrime and terrorist financing, IRS CI initiated 3,853 cases in FY 2015.

“Our criminal investigators continue to bring complex and meaningful cases that have a significant impact on tax administration,” said John Koskinen, IRS Commissioner. “This work also plays an important deterrent effect on would-be criminals, helping ensure fairness for taxpayers and protecting voluntary compliance in our tax system. The report is a tribute to the important work done by IRS Criminal Investigation.”

“This report reflects the extremely high level of commitment that CI agents bring to the job and the great case work accomplished in the past year,” said Richard Weber, Chief, IRS Criminal Investigation. “But the story that the report tells this year is that fewer agents do mean fewer cases. I’m extremely proud of all that we accomplished in spite of our budget challenges, but the inability to hire is really taking a toll.”

The annual report is released each year for the purpose of highlighting the agency’s successes while providing a historical snapshot of the make-up and priorities of the organization. The very first Chief of IRS CI, Elmer Lincoln Irey, served from 1919 to 1946 and envisioned releasing such a document each year to showcase the agency’s work.

CI is the only federal law enforcement agency with jurisdiction over federal tax crimes. This year, CI again boasted the highest conviction rate in all of federal law enforcement — 93.2%. CI is routinely called upon by prosecutors across the country to be the lead financial investigative agency on a wide variety of financial crimes including international tax evasion, identity theft and transnational organized crime.

“While our highest priority is to enforce the nation’s tax laws, we cannot underestimate the deterrent effect we are having on would-be criminals and the impact we are having on tax administration,” said Weber. “I’m certain that a majority of Americans who follow the law would tell you that they want consequences for those who do not.”

CI investigates potential criminal violations of the Internal Revenue Code and related financial crimes in a manner to foster confidence in the tax system and compliance with the law. The 50-page report summarizes a wide variety of IRS CI activity throughout the fiscal year and includes case summaries on a range of tax crimes, money laundering, public corruption, terrorist financing and narcotics trafficking financial crimes.

The cases in this year’s report represent the diversity and complexity of CI investigations. They touch almost every part of the world and were again some of the most successful in the history of CI. In May, indictments were unsealed in the FIFA investigation, a case that continues to this day. At the time, the investigation involved coordination with police agencies and governments in 33 countries and was one of the most complicated international white-collar cases in recent memory. Ross Ulbricht, the creator and owner of the “Silk Road” website, was sentenced to life in prison and ordered to forfeit more than $183 million. A Michigan man, Dr. Farid Fata, was sentenced to 540 months in prison and ordered to forfeit $17 million for his role in a health care fraud scheme. Fata purposefully misdiagnosed people with cancer, pumping their bodies with chemotherapy that they did not need, in order to get rich.

“I’m proud of IRS CI and the reputation that this agency has as the best financial investigators in the world. We have a long and storied history and we continue to write new chapters to that history each year,” said Weber. “Regardless of our budget situation, I am proud that we have not lost sight of our impact or mission and that the quality of our cases remains high.”

DOJ Announces Four More Swiss Bank Resolutions

DOJ logoLate yesterday, the Justice Department announced that it had reached resolutions with four more Swiss banks under the terms of the DOJ Swiss Bank Program. The latest banks to resolve their U.S. tax issues are the following:  Société Générale Private Banking (Lugano-Svizzera); MediBank AG; LBBW (Schweiz) AG; and Scobag Privatbank AG.

Yesterday’s announcement brings the total Swiss bank resolutions to seven to date. The Justice Department previously announced resolutions with BSI SA, Vadian Bank AG, and Finter Bank Zurich AG.  More than 100 Swiss banks previously notified the Tax Division that they wished to enroll in the program.

In the DOJ press release announcing the resolutions, Acting Assistant Attorney General Caroline D. Ciraolo made the following statement:

Today’s agreements reflect the Tax Division’s continued progress towards reaching appropriate resolutions with the banks that self-reported and voluntarily entered the Swiss Bank Program. The department is currently investigating accountholders, bank employees, and other facilitators and institutions based on information supplied by various sources, including the banks participating in this Program. Our message is clear – there is no safe haven.

Richard Weber, Chief of IRS-Criminal Investigation (CI) made the following statement about the resolutions:

These four additional bank agreements signal a change in terrain for offshore banking. No longer is it safe to hide money offshore and expect that it will not be discovered. ‎ IRS CI Special Agents will continue to follow the money to find those who circumvent the offshore disclosure laws and hold them accountable.

The Swiss Bank Program, which was announced on August 29, 2013, provides a path for Swiss banks to resolve potential criminal liabilities in the United States.  Swiss banks eligible to enter the program were required to advise the Tax Division by December 31, 2013, that they had reason to believe that they had committed tax-related criminal offenses in connection with undeclared U.S.-related accounts.  Banks already under criminal investigation related to their Swiss-banking activities and all individuals were expressly excluded from the program. Under the program, banks are required to:

  • Make a complete disclosure of their cross-border activities;
  • Provide detailed information on an account-by-account basis for accounts in which U.S. taxpayers have a direct or indirect interest;
  • Cooperate in treaty requests for account information;
  • Provide detailed information as to other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed;
  • Agree to close accounts of accountholders who fail to come into compliance with U.S. reporting obligations; and
  • Pay appropriate penalties.

Swiss banks meeting all of the above requirements are eligible for a non-prosecution agreement.

According to the terms of the non-prosecution agreements signed today, each bank agrees to cooperate in any related criminal or civil proceedings, demonstrate its implementation of controls to stop misconduct involving undeclared U.S. accounts and pay the penalties in return for the department’s agreement not to prosecute these banks for tax-related criminal offenses.

The Justice Department announcement provided the following details about each bank’s U.S.-related accounts and practices related thereto:

Société Générale Private Banking (Lugano-Svizzera) SA (SGPB-Lugano) was established in 1974 and is headquartered in Lugano, Switzerland.  Through referrals and pre-existing relationships, SGPB-Lugano accepted, opened and maintained accounts for U.S. taxpayers, and knew that it was likely that certain U.S. taxpayers who maintained accounts there were not complying with their U.S. reporting obligations.  Since Aug. 1, 2008, SGPB-Lugano held and managed approximately 109 U.S.-related accounts, with a peak of assets under management of approximately $139.6 million, and offered a variety of services that it knew assisted U.S. clients in the concealment of assets and income from the Internal Revenue Service (IRS), including “hold mail” services and numbered accounts.  Some U.S. taxpayers expressly instructed SGPB-Lugano not to disclose their names to the IRS, to sell their U.S. securities and to not invest in U.S. securities, which would have required disclosure and withholding.  In addition, certain relationship managers actively assisted or otherwise facilitated U.S. taxpayers in establishing and maintaining undeclared accounts in a manner designed to conceal the true ownership or beneficial interest in the accounts, including concealing undeclared accounts by opening and maintaining accounts in the name of non-U.S. entities, including sham entities, having an officer of SGPB-Lugano act as an officer of the sham entities, processing cash withdrawals from accounts being closed and then maintaining the funds in a safe deposit box at the bank and making “transitory” accounts available, thereby allowing multiple accountholders to transfer funds in such a way as to shield the identity and account number of the accountholder.  SGPB-Lugano will pay a penalty of $1.363 million.

Created in 1979 and headquartered in Zug, Switzerland, MediBank AG (MediBank) provided private banking services to U.S. taxpayers and assisted in the evasion of U.S. tax obligations by opening and maintaining undeclared accounts.  In furtherance of a scheme to help U.S. taxpayers hide assets from the IRS and evade taxes, MediBank failed to comply with its withholding and reporting obligations, providing “hold mail” services and offering numbered accounts, thus reducing the ability of U.S. authorities to learn the identity of the taxpayers.  After it became public that the Department of Justice was investigating UBS, MediBank hired a relationship manager from UBS and permitted some of that person’s U.S. clients to open accounts at MediBank.  Since Aug. 1, 2008, MediBank had 14 U.S. related accounts with assets under management of $8,620,675.  MediBank opened, serviced and profited from accounts for U.S. clients with the knowledge that many likely were not complying with their U.S. tax obligations.  MediBank will pay a penalty of $826,000.

LBBW (Schweiz) AG (LBBW-Schweiz) was established in Zurich in 1995.  Since August 2008, LBBW-Schweiz held 35 U.S. related accounts with $128,664,130 in assets under management.  After it became public that the department was investigating UBS, LBBW-Schweiz opened accounts from former clients at UBS and Credit Suisse.  Despite its knowledge that U.S. taxpayers had a legal duty to report and pay tax on income earned on their accounts, LLB permitted undeclared accounts to be opened and maintained, and offered a variety of services that would and did assist U.S. clients in the concealment of assets and income from the IRS.  These services included following U.S. accountholders instructions not to invest in U.S. securities and not reporting the accounts to the IRS and agreeing to hold statements and other mail, causing documents regarding the accounts to remain outside the United States.  LBBW-Schweiz will pay a penalty of $34,000.

Headquartered in Basel, Switzerland, Scobag Privatbank AG (Scobag) was founded in 1968 to provide financial and other services to its founders, and obtained its banking license in 1986.  Since August 2008, Scobag had 13 U.S. related accounts, the maximum dollar value of which was $6,945,700.  Scobag offered a variety of services that it knew could and did assist U.S. clients in the concealment of assets and income from the IRS, including “hold mail” services and numbered accounts. Scobag will pay a penalty of $9,090.

The DOJ noted that in accordance with the terms of the Swiss Bank Program, each bank mitigated its penalty by encouraging U.S. accountholders to come into compliance with their U.S. tax and disclosure obligations.  While U.S. accountholders at these banks who have not yet declared their accounts to the IRS may still be eligible to participate in the IRS Offshore Voluntary Disclosure Program, the price of such disclosure has increased.

Most U.S. taxpayers who enter the IRS Offshore Voluntary Disclosure Program to resolve undeclared offshore accounts will pay a penalty equal to 27.5 percent of the high value of the accounts.  On August 4, 2014, the IRS increased the penalty to 50 percent if, at the time the taxpayer initiated their disclosure, either a foreign financial institution at which the taxpayer had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement had been publicly identified as being under investigation, the recipient of a John Doe summons or cooperating with a government investigation, including the execution of a deferred prosecution agreement or non-prosecution agreement.  With today’s announcement of these non-prosecution agreements, noncompliant U.S. accountholders at these banks must now pay that 50 percent penalty to the IRS if they wish to enter the IRS Offshore Voluntary Disclosure Program.

The Justice Department released the following documents as part of its announcement: