There are many ways the IRS attempts to reveal whether tax evasion has occurred. Sometimes, they use carrots, like amnesty programs. And other times they use sticks, like litigation. This week, it appears that the trend may be moving towards carrots.
The IRS announced that it was dropping a legal summons it had brought against the Swiss bank UBS. The summons was part of an attempt to force the bank to disclose the names of American account holders suspected of tax evasion. The IRS claimed that they will not be softening their efforts to force disclosures. Rather, they stated that they will be attempting to compel such disclosures from other banks.
However, this event may point to a larger trend. Legal maneuvers have not been very successful at forcing banks to reveal the names of suspected tax evaders. For instance, a criminal case brought against UBS in 2009 resulted in a settlement that only revealed the names of 265 clients.
Meanwhile other techniques have resulted in greater success. For instance, voluntary disclosure programs have yielded good results. These are programs where, in exchange for some degree of amnesty, individuals would disclose their hidden accounts to the IRS. The IRS used such a program in 2009. During this program, 15,000 Americans participated. This includes around 2,500 clients of UBS. Thus, the program was far more effective at revealing offshore accounts than the litigation to force bank disclosure.
The IRS appears to have noticed this. They have stated that they are open to having another voluntary disclosure program. However, they warned that this second program would not be as generous as the first.
Consequently, we may be seeing a shift in how the IRS attempts to deal with tax fraud involving hidden accounts.
Source: New York Times, "U.S. Ends Inquiry of UBS Over Offshore Tax Evasion," Lynnley Browning, 16 Nov 2010