updated 2:27 PM CET, Feb 8, 2023

IRS seen ramping up penalties on late-filed foreign trusts, CFCs, FBARs in 2019

The U.S. Internal Revenue Service, which has seen its operating budget slashed over the past eight or nine years, appears to be looking to increase its use of penalties against those non-U.S. resident taxpayers who fail to file documents or pay the taxes they owe on time, U.S. Tax and Financial Services Ltd founder and chief executive Darlene Hart says.

Hart, pictured below, said the IRS’s apparent increased emphasis on its use of penalties for late filings and tax payments was evident from anecdotal evidence, in the form reports of assessments that “in the past we would not have seen,” as well as in recent e-mail notices it has been sending tax industry practitioners.

The Zurich-based Hart cited as an example of such a notice one that the IRS had sent within the last few days, which featured excerpts from the tax agency’s annual “‘Dirty Dozen’ list of tax scams to avoid.”

Darlene Hart USTAFSAmong the “Dirty Dozen” scams the IRS cited here was “abusive tax evasion schemes involving foreign trusts”. Hart said it is thought to be the first time that the IRS has included “abusive trusts” on its annual Dirty Dozen list, and for this reason, it is likely to be significant.

"Syndicated conservation easements" are also thought to be new to the Dirty Dozen list. These are a type of charitable contribution that under certain circumstances can qualify for a tax deduction, but not, the IRS notes, the way some promoters are structuring them, in such a way as to enable investors to claim tax savings that "significantly exceed the amount" they invested.

Budget cutbacks

Even as the political focus on tax evasion and avoidance has intensified in recent years, particularly in the wake of the International Consortium of Investigative Journalists' Panama Papers exposé of 2016, the IRS has seen its budget reduced. Last year, the Center on Budget and Policy Priorities, a Washington, DC-based, nonpartisan research and policy institute, noted that “deep cuts to IRS enforcement capacity since 2010" were "magnify[ing] the challenge of enforcing” the President Trump tax overhaul of 2017.

“Due to funding cuts, [the] IRS has lost roughly 14,000 enforcement employees – more than a quarter of its enforcement staff – since 2010,” it added.

However, earlier this month President Trump released a budget proposal which called for a slight funding increase at the IRS, which was said to be aimed at addressing technology-related challenges and difficulties that the agency was having in implementing the tax law changes. As proposed by the White House, funding for the IRS in fiscal 2020 would rise to US$11.5bn, up from the current level of US$11.3bn.

To read and download the IRS’s 2019 ‘Dirty Dozen’ list, and access details of the various items on that list, click here. 

Hart founded U.S. Tax & Financial Services (USTAXFS) around 30 years ago in London. The company has offices in London, Zurich and Geneva.