Get ready for another offshore voluntary program. After two successful Voluntary Disclosure Programs in which about $4.4 billion in hidden taxes was collected from about 33,000 taxpayers, the IRS is set to organize another one soon. In 2009, the first Voluntary Disclosure program, about $3.3 billion in taxes and fines was collected whereas the second program in 2011 collected another $1 billion.

The Voluntary Disclosure program is aimed at giving the opportunity to those who have been hiding taxable income in offshore accounts to declare their assets, pay a fine and avoid criminal prosecution. This time, the participants will have to pay a penalty of up to 27.5% of their biggest offshore asset or their biggest overseas bank account. They must also reveal details of the banks and identities of the advisers who helped them dodge paying taxes.

Since 2009, the IRS has stepped up its worldwide crusade against tax evasion by investigating and prosecuting tax cheats especially in well-known tax shelter countries like Switzerland, Panama, Lichtenstein, Hong Kong etc.
In 2009, the IRS investigated UBS bank of Switzerland and successfully drew an admission from the bank that some of its officers had helped wealthy US clients start bank accounts for the purpose of depositing taxable income to evade taxes. This resulted in a fine of $780 million and the disclosure of more than 4,500 names of American UBS depositors suspected of fax evasion. Since then, the IRS has also investigated HSBC Holdings Plc and the latest case involved Weglin & Co., another Swiss bank. Weglin & Co have admitted that 3 of its officers were involved in helping US depositors hide more than $1.2 billion in bank accounts from the IRS.

“We’re gaining momentum in our international efforts and the word is spreading across the globe,” IRS Commissioner Doug Shulman told reporters on a conference call recently. Similar comments were made by Senator Carl Levin (D-Michigan), head of the Permanent Subcommittee on Investigations when he said the statistics show “how enormous the offshore tax evasion problem is”. In a recent press release, Levin said, “Taxpayers are turning themselves in because federal prosecutors have finally begun to go after the individual tax-haven banks, bankers and other financial professionals helping them cheat on their taxes.”

In the upcoming disclosure program, the IRS is raising the penalty rate to 27.5% compared to the penalties of 25% and 20% imposed in the 2011 and 2009 programs respectively. Taxpayers with smaller amounts of assets to declare will be charged lower rates. In addition, Shulman also said the rates may be increased or the program might be ended at any time. Unlike the previous two disclosure programs that had definite end dates, this next one will not.

“It makes a lot more sense for them to come in now and get the protection of not being prosecuted criminally,” Shulman said. “If we catch them involuntarily, it’s going to be much worse for the taxpayer.”

Tax season has just begun and if you think you do not have to file any tax returns because your income is lower than the taxable income threshold, then you may be leaving money on the table. Generally, people file tax returns because it is compulsory for those whose income is above the taxable income level. This level varies depending on your filing status, age and the type of income you receive. But I am suggesting to you to file your tax returns even if your income is lower than the taxable threshold in your state. My reason for saying so is that you may get a refund if you had taxes withheld or you may qualify for refundable credits.

If you wish to determine if you are eligible to be taxed and whether you should file tax returns, check out the Individuals section in the IRS website, www.irs.gov. Alternatively, you can refer to Forms 1040, 1040A or 1040EZ that have information that may help you determine if you need to file a tax return with the IRS this year. Yet another way to determine if you should file tax returns is by going to the Interactive Tax Assistant (ITA) service at the IRS website. At this tool, you will be taken through a series of questions where you get responses based on tax law.

Even if your income earned do not qualify you to be taxable, you may want to still submit your tax returns based on the following benefits:

1. Refund of taxes withheld
If your employer made tax withholding deductions on your salary, you had an overpayment made from a previous year applied to this year’s tax or if you made estimated tax payments, you might be due a refund from the IRS.

2. Earned Income Tax credit
If you are a low to moderate income earner, you may qualify for the Earned Income Tax credit (EITC). This is a refundable tax credit designed to help you keep more hard-earned money in your pocket. When the EITC exceeds the amount of taxes you owe, it results in a tax refund for you. But to qualify for this credit you must file a tax return even if you do not earn more than the taxable income level.

3. Tax credit for students
Students in their first four years of postsecondary education may qualify for as much as $2,500 through this credit. Furthermore, 40% of this credit is refundable, which means even if you do not owe any taxes you may qualify to receive up to $1,000 of the credit back in cash.

4. Tax credit for your children
If you have at least one qualifying child and did not receive the full amount of the Child Tax credit, you may be able to claim for Additional Child Tax credit.

5. Adoption credit
Likewise, if you adopted a qualifying child, you may be able to claim a refundable tax credit for the qualifying expenses you paid to adopt your child.

6. Health Coverage Tax credit
If you are receiving Trade Adjustment Assistance, Reemployment Trade Adjustment Assistance, Alternative Trade Adjustment Assistance or pension benefit payments from the Pension Benefit Guaranty Corporation, you may be eligible for a 2011 Health Coverage Tax Credit.

The IRS has so far conducted two voluntary disclosure programs in order to recoup tax money from offshore financial accounts that has been unpaid. As a result, the agency collected about nearly $3 billion in taxes, interest and penalties from 30,000 taxpayers that participated in the disclosure programs as of September 2010. If you have an offshore bank account in which you hide taxable income, beware because the law is fast catching up with you.

In the past, many people hide their income in Swiss bank accounts because of the Swiss banking laws that allow secrecy. But since 2009, the IRS has been waging an all-out war against tax cheaters (and they have been winning). So these days, it does not pay to hide your assets offshore anymore unless you do not mind spending time behind bars.

The IRS has been employing various methods to recoup lost taxes that include but are not limited to:

• Enforcement of legislation – the Foreign Account Tax Compliance Act (FATCA) requires taxpayers to report their assets worldwide above certain thresholds.

• The John Doe summons – this is a summons that empowers the IRS to summon anonymous persons that fit into a particular category. This was the summons the IRS used to compel the Swiss bank UBS to divulge personal banking details of more than 4,500 of its American customers suspected of dodging taxes.

• Forming agreements with other countries – these types of agreements are called Tax Information Exchange (TIE) Agreements. The government has signed these agreements with countries like Lichtenstein and Andorra, among others. Under the agreement, if the US is investigating a US citizen based in the foreign country that signed a TIE, the signatory country must give its full cooperation. It covers criminal and civil tax fraud. This is important because in Switzerland they never recognized civil tax fraud, but this loophole's been closed.

• Subpoenas – this is a new method used to get taxpayers to surrender incriminating evidence under penalty of contempt of court. But if they do comply, they incriminating themselves (strange as it may sound).

The penalties for tax evasion in offshore accounts are pretty steep. You may end up losing every cent you have overseas and still owe fines to the government. Generally, the basic fine is half of the highest balance in the account, every year. Then there is tax fraud penalty, which can be 75% of the taxes due. And willful fines could be $100,000 per account per year. This can easily make you bankrupt. On top of these, there is the possibility of jail time, house arrest or probation.

So the take home from this is – do not try to game the system. Instead, make sure all your assets (especially offshore ones) are tax-compliant.

The IRS says that the total taxes paid in 2006 was lower by a massive $450 billion compared to what was supposed to have been paid. That comes up to an underpayment of about 17%. 2006 is the latest year for which the IRS has gathered such statistics. The shortfall in taxes far exceeded the size of the entire federal budget deficit that year, which was $248 billion. However, this amount was reduced to about $385 billion or 14% after audits and other collection efforts were carried out. This still exceeded the budget deficit, meaning that if the shortfall was actually collected, the budget would have shown a surplus instead of a deficit for 2006.

This figure brought about an immediate reaction from lawmakers who spoke up about the need to revise the tax code to reduce the “tax gap”, the term commonly used to refer to the difference in the amount of taxes that should have been collected and the amount actually collected. Michelle Dimarob (R-Mich), spokeswoman for House Ways and Means Committee Chairman Dave Camp said, “The best way to increase compliance is to reform the tax code to make it simpler”. In Dimarob’s opinion, such a move would cause fewer errors and “greater certainty, which is key to job creation.”

With the ballooning federal budget deficit every year, it is all the more critical to reform the tax code and save money. “In an era when we’re squeezing the federal budget for every dollar of savings, we have to make every effort to recover these lost funds,” said Senate Finance Committee Chairman Max Baucus (D-Mont). The federal budget deficit rose to a record $1.4 trillion in 2009 and dipped slightly to $1.3 trillion last year.

The IRS said that out of the $450 billion taxpayers underpaid that year, about $376 billion was due to underreporting of income. This amounted to the largest share of the underpayment. The IRS has noted that when stricter regulations are in place, it makes for compliance by taxpayers. For example, when employers are required to submit details of their employees’ wages through W-2s and withhold taxes from employees’ salaries, the percentage of misreporting and underpayment was only 1%. But a massive 56% of underpayment comes from small business owners, landlords of rented properties and businesses that deal with property sales.

The steps taken by the IRS to improve compliance include tightening the regulation and supervision of tax return preparers and increasing the information that must be reported to the agency by stock brokers, mutual fund companies and for certain business transactions. But despite these measures, most industry experts said they do not believe that the compliance rate has changed significantly from the 2006 figures.

This is primarily because the underpayment arises mainly from businesses and individuals whose incomes are difficult to verify.

The word is out. The identity of the three Swiss bankers charged by the IRS of abetting wealthy US taxpayers in avoiding taxes is revealed. The three work for Switzerland’s Wegelin & Co and are accused of helping US taxpayers dodge taxes on more than $1.2 billion in taxable income. The three are Michael Berlinka, Urs Frei and Roger Keller, who still remain employed at the Zurich branch of the bank.

In 2009 when the IRS began an intensive crackdown on offshore tax evasion in particular by Americans who hold Swiss bank accounts, many tax cheats fled Switzerland’s larger banks like UBS AG and deposited their cash into smaller Swiss banks. St. Gallen-based Wegelin is Switzerland’s oldest private bank. However, the indictment filed by US prosecutors did not name the bank, only calling it ‘Swiss Bank A’.

The US and Swiss governments have been in talks to resolve the problem of offshore tax evasion. Officials are trying to reach a civil settlement with Swiss banks and resolve criminal probes of 11 banks, Wegelin being one of them.

Ever since the IRS started their probe on UBS AG’s involvement in abetting tax evasion, the investigations have not stopped but have continued to other banks, namely Credit Suisse of Switzerland and HSBC Bank of England. Thus far, the IRS has charged at least 24 bankers, advisers and attorneys, including seven Credit Suisse bankers.

In 2009, the IRS won a major victory in the battle against tax evasion when UBS AG admitted to helping US taxpayers hide their assets in their bank accounts to avoid paying taxes. As a result, the bank paid a fine of $780 million to avoid criminal prosecution and was forced to hand over personal banking details of more than 4,400 of its US customers suspected of dodging taxes to the Swiss government who then had to pass it on to the IRS.

The inevitable result of these events was the exodus of US tax cheats from larger Swiss banks to smaller ones to escape detection. According to the indictment, Keller, Frei, Berlinka and another unnamed individual (given the name ‘Managing Partner A’) took the opportunity to woo them into doing business with Wegelin. In addition, the bank, which is principally owned by eight managing partners, also sought business through a third-party website, SwissPrivateBank.com.

According to the indictment, Wegelin’s selling point to these American taxpayers was that the bank was smaller in size and did not have an office outside Switzerland, making detection by the IRS much harder. As a result, the bank was “less vulnerable to United States law enforcement pressure.”

The indictment added that, “In or about 2008, the managing partners affirmatively decided to take advantage of the flight of US taxpayers with undeclared accounts by opening new undeclared accounts for many of them at Swiss Bank A. Swiss Bank A opened new undeclared accounts for at least 70 U.S. taxpayers.”

The three individuals face a prison term of at least 5 years if convicted. In the meantime, at least 17 other people based outside the US has been accused in the tax crackdown but have not responded to the charges in US courts.