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How Much Is Actually Lost Each Year To Offshore Noncompliance?

The Senate Subcommittee staff reported that: “According to the IRS, the current estimated annual U.S. tax gap is $450 billion, which represents the total amount of U.S. taxes owed but not paid on time, despite an overall tax compliance rate among American taxpayers of 83 percent. Contributing to that annual tax gap are offshore tax schemes responsible for lost tax revenues totaling an estimated $150 billion each year.”

To justify the reporting of the number of $150 billion a year of lost tax revenue due to “offshore tax schemes”, the Senate Report primarily cites its own investigatory reports and third party articles that refer to transfer pricing issues.  While transfer pricing regulations have been under scrutiny, at least by the Democrats, in the Senate, it is certainly not commonly held by those same Democrats that transfer pricing is illegal or constitutes an “offshore scheme”.

It is proven beyond a doubt by the UBS, Credit Suisse, and other similar investigations, validated by the OVDI disclosures, that some Americans are noncompliant, and that some of those noncompliant Americans would owe tax if disclosing foreign income on their tax returns.  There is also no doubt that the total number of noncompliant Americans between 2008 and 2013 was at least 43,000.

There is also no doubt that the tax that would have been collected from them had they been compliant during their time in the wilderness was in fact, relative to the reported figure of $150 billion lost annually, miniscule (somewhere probably between $300 million and $500 million a year for lost tax, with the majority of the $6 billion collected representing FBAR penalties, tax penalties, and interest).  To date, of the $150 billion referred to as lost a year to offshore schemes, only approximately .003% (a third of one percent) has been collected – and that assuming the above higher number of $500 million a year.

What is motivating the Subcommittee? 

Is the Senate searching for a magic bean to grow a money tree that will help cover up the $500 billion annual deficit (that has led to a $17 trillion national debt)?  The Subcommittee Report states: “Offshore tax evasion has been an issue of concern … because lost tax revenues contribute to the U.S. annual deficit, which today exceeds $500 billion. Collecting unpaid taxes is one way to reduce the deficit without raising taxes.”

90% of Taxpayers with Foreign Accounts are Tax Evaders!

The Taxpayer Advocate, relying on State Department statistics, cited that 7.6 million U.S. citizens reside abroad and many more U.S. residents have FBAR filing requirements, yet the IRS received only 807,040 FBAR submissions as recently as 2012.  The Taxpayer Advocate noted that in Mexico alone, more than one million U.S. citizens reside, and many Mexican citizens reside in the U.S. (and thus are required to file a FBAR for any Mexican accounts of $10,000 or greater).

Thus, more than 90% of taxpayers with foreign accounts are NOT compliant with the tax law? 7.6 million Americans abroad, at least 1 million nonresident aliens in the US, and some number of American in the US with foreign accounts equals a number of approximately 10 million taxpayers.  But the IRS reports that 87% of American residing taxpayers are compliant?  So statistically speaking, having a foreign account is indicative of being a tax evader.

Based on these numbers, being an American living in a foreign country is a leading cause of criminality.  What the statistics do not tell is which comes first?  A person tends toward criminality and thus moves to a foreign country or a person moves to a foreign country and then tends toward criminality? Enough facetiousness…     

I will greatly appreciate if a reader can supply me any studies / audit undertaken in the past five years of a statistically representative sample of the taxable incomes of these approximate 7.6 million Americans residing in foreign countries (I have of course read the CRFB articles and references).  I am curious how many of the nearly seven million non-compliant Americans:

(a) earn more income than that qualifying for the Foreign Income Exclusion of $97,600 for 2013 (combined with the Housing Allowance or Deduction Exclusion), and live in a country with lower effective tax rates than the US that US tax would be owing after the applicable tax credit on the remainder, and  

(b) of the sample, if the exclusion was not available, how many would have an excess tax credit because the foreign taxes paid are higher than the US taxes that would be due?

Maybe Foreign-Resident Americans are a Red Herring?

It will be interesting to learn if these approximate 7–8 million American foreign-residents in general owe tax after the foreign income / housing exemption and qualified retirement planning, or whether this group in general represents a red herring (at least as concerns filling in the $500 billion annual deficit).

$100 million is Still $100 million!

However, even if the number is only $1 billion or even $100 million collected a year from the IRS civil and criminal enforcement efforts, while it’s not going to put a dent in a $500 billion deficit, as Senator John McCain told the Credit Suisse representatives at the hearing February 26, it’s still a large amount of money that turns voters heads.

So Where Did the $150 Billion Figure Come From?

Check back here on TaxConnections to find out … 

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William H. Byrnes has achieved authoritative prominence with more than 20 books, treatise chapters and book supplements, 1,000 media articles, and the monthly subscriber Tax Facts Intelligence. Titles include: Lexis® Guide to FATCA Compliance, Foreign Tax and Trade Briefs, Practical Guide to U.S. Transfer Pricing, and Money Laundering, Asset Forfeiture; Recovery, and Compliance (a Global Guide). He is a principal author of the Tax Facts series. He was a Senior Manager, then Associate Director of international tax for Coopers and Lybrand, and practiced in Southern Africa, Western Europe, South East Asia, the Indian sub-continent, and the Caribbean. He has been commissioned by a number of governments on tax policy. Obtained the title of tenured law professor in 2005 at St. Thomas in Miami, and in 2008 the level of Associate Dean at Thomas Jefferson. William Byrnes pioneered online legal education in 1995, thereafter creating the first online LL.M. offered by an ABA accredited law school (International Taxation and Financial Services graduate program).