IRS May Offer Amnesty to Offshore Tax Evaders

Reports are coming out today that the IRS has plans to offer partial amnesty to individuals involved in tax evasion via offshore accounts. The plan, formulated in response to increased pressure to reduce the tax gap, is to significantly reduce the penalty for failing to file a Report of Foreign Bank and Financial Account. The New York Times reports:

The current penalty is 50 percent of the high balance of each account over the last three years — an amount that can wipe out an investor’s accounts in just two years — but the I.R.S. will reduce that penalty to 5 to 20 percent, depending in part on whether the wealth was inherited.

The I.R.S. will also require taxpayers to pay any taxes and interest owed over the last six years, as well as assess a standard, accuracy-related penalty of 20 percent. Taxpayers must also file amended returns for the last six years.

Theoretically tax amnesty allows the IRS to collect revenue that would otherwise never be collected. But tax amnesty is not something to enter into lightly: the more often the IRS makes these kinds of offers, the more likely people are to try to evade taxes and wait for the next tax amnesty, when they can pay a reduced penalty. Tax amnesty is an issue that comes up often in state revenue departments and is usually not advisable, as states often develop a counterproductive tax-amnesty habit.

Update: The IRS has made various tax amnesty offers as recently as 2005 and 2003.