As a result, they said, overall  assessments for offshore cases are lower than they would be if IRS had  more time to work these cases. Offshore Cases Take Longer for IRS to Develop and Examine

IRS officials told us that cases involving offshore tax evasion present  special, time-consuming challenges that other types of cases do not. 3. Some Offshore Examinations Present Enforcement Problems Similar to Those Where Congress Granted Changes to the Statute

Some offshore examinations exhibit compliance problems similar to those  where Congress granted a change or exception to the statute in the past. Offshore examinations take longer than nonoffshore examinations for IRS  to develop and examine for reasons such as technical complexity and the  difficulty of obtaining information from foreign sources, and as a result,  IRS may not complete assessments of all taxes owed. If Congress wishes to change the  statute for examinations where offshore compliance is the major issue,  certain design options, such as limiting any examination and possible  assessment to those issues attributable to offshore transactions or only  suspending the statute while IRS is waiting for taxpayer responses to IRS  data requests, might mitigate some of the disadvantages of the statute  extension. For example, they mentioned the ability of IRS to  look back at several tax years once an offshore scheme is identified as an  advantage of such an exception. Specific suggestions that we heard included the following:    Making an exception apply to all taxpayers having offshore  accounts/entities may mitigate concerns about taxpayer uncertainty and  lack of closure. Offshore tax evasion is special, though, in that the  examinations that IRS pursues typically take much longer to develop and  examine because of the inherent difficulty in identifying and obtaining  information from foreign sources, the often dilatory and uncooperative  tactics on the part of taxpayers and their representatives, and the technical  complexity of the examinations. Additional time to complete examinations would give IRS greater  flexibility in choosing which examinations to open and when to close  them. Appendix I: Objectives, Scope, and Methodology

The objectives of this report were to (1) compare the length of and  recommended assessments yielded by offshore and nonoffshore  examinations and determine the effect of the 3-year statute of limitations  on recommended offshore assessments, (2) determine whether or not  enforcement problems posed by offshore examinations are similar to  those where Congress has previously granted an exception to the statute,  and (3) identify possible advantages and disadvantages of an exception to  the statute for offshore examinations.
Why GAO Did This Study

Much offshore financial activity is not illegal, but numerous illegal offshore schemes have been devised to hide or disguise the true ownership of income streams and assets. IRS studies show lengthy development times for some offshore cases, which suggests that time or the lack thereof could be an impediment to effectively addressing offshore schemes. GAO was asked to (1) compare offshore and nonoffshore examination cases and determine whether the 3-year statute of limitations reduces offshore assessments, (2) compare enforcement problems posed by offshore cases to those where Congress has previously granted an exception to the statute, and (3) identify possible advantages and disadvantages of an exception to the statute for offshore cases. To address these objectives, GAO analyzed IRS data, reviewed examination files and other documents, and interviewed IRS officials and others in the tax practitioner and policy communities.

What GAO Found

Examinations involving offshore tax evasion take much more time to develop and complete than other examinations for reasons such as technical complexity and the difficulty of obtaining information from foreign sources. When examinations are completed, the resulting median assessment from an offshore examination is almost three times larger than from other types of examinations. However, due to the 3-year statute, the additional time needed to complete an offshore examination means that IRS sometimes has to prematurely end offshore examinations and sometimes chooses not to open one at all, despite evidence of likely noncompliance. Although data were not available to measure the effect of the statute on assessments, IRS agents and managers told GAO that overall assessments for offshore cases are lower than they would be if IRS had more time to work these cases. Some offshore examinations exhibit enforcement problems similar to those where Congress has granted a statute change or exception in the past. For example, Congress changed the statute for certain abusive tax shelters that involved technical complexity and dilatory tactics on the part of taxpayers. Through discussions with IRS officials and others in the tax practitioner and policy communities, GAO identified advantages and disadvantages to such an exception. Advantages included increased flexibility for IRS to direct enforcement resources to egregious cases of noncompliance and a possible deterrent to future noncompliance. Disadvantages included increased uncertainty and lack of closure for taxpayers. Our commenters also discussed design options to mitigate some of the disadvantages of a statute extension, such as making an exception apply to all taxpayers having offshore accounts/entities, and thereby, mitigating taxpayer uncertainty and lack of closure.