IRS Reopens Overseas Disclosure Program, While Congress Considers Business Profit Repatriation

The US Internal Revenue Service is reopening its Offshore Voluntary Disclosure Progam (OVDP) in an effort to collect income taxes from US taxpayers who have parked their funds in overseas banks. This is the third time the IRS has offered the program, which has brought in more than $4.4 billion in 2009 and 2011.

In 2009 and 2011 the IRS reports that 33,000 Americans took advantage of the voluntary program. The agency also noted that since the closure of the 2011 program, “hundreds” of taxpayers have voluntarily sought to disclose offshore assets, and these people will be eligible under the reopened program.

This time, the IRS has set no closing date, choosing instead to keep the program open indefinitely. The catch is that both the terms under which offshore accounts must be declared and taxed could change, usually for the worse from the taxpayer’s point of view. Here’s how the IRS commissioner put it:

As we’ve said all along, people need to come in and get right with us before we find you. We are following more leads and the risk for people who do not come in continues to increase.

The penalty rate is currently set at 27.5% for most taxpayers, but a 5% or 12.5% penalty can be applied in certain instances. Then comes the iron fist in the velvet glove: “As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.”

A different, related issue is the repatriation of the profits earned by US companies in their offshore operations. The Congressional Research Service (CRS) has just completed a study entitled “‘Tax Cuts on Repatriation Earnings as Economic Stimulus: An Economic Analysis” which shows that the stimulative effect of previous tax holidays for overseas corporate earnings was limited.

From the report’s summary:

Viewed in the current debate on how to most efficiently stimulate the economy, economic theory suggests that the simulative effect of a temporary tax cut for repatriations may be offset, or more than offset, by exchange rate adjustments that would reduce net exports. In addition, how businesses use repatriated earnings will impact the stimulative or contractionary effect of a tax cut for repatriations. For example, repatriated earnings will have a larger stimulative effect, or smaller contractionary effect, the greater the degree to which they are used to increase current investment. A smaller stimulative effect or a larger contractionary effect will result, in contrast, if more of the repatriated earnings are used to shore up “cash-flow” issues or pay dividends.

One study cited in the CRS report estimated that for every $1 in repatriated funds, stock buybacks increased by $0.91. Technically using the repatriated funds to repurchase shares is illegal, but “because of the fungibility of money, firms that use part of the repatriation to repurchase shares may not violate the law.”

The American Jobs Creation Act of 2004 resulted in the repatriation of $312 billion and qualified deductions of $265 billion. Two industry groups, pharmaceuticals/medicines and computers/electronics, together accounted for 50% of repatriated funds.

And one tax holiday is expected to lead to another:

The empirical evidence also suggests that corporations expect the temporary rate reduction to recur. According to several researchers, unrepatriated earnings have rapidly grown since 2005. In fact, since the last repatriation rate reduction, unrepatriated earnings for all corporations have grown by 72% to $958 billion and by 81% to $639 billion for firms that repatriated under the American Jobs Creation Act.

The IRS’s voluntary disclosure program and the various repatriation schemes under consideration offer an interesting contrast in how the government treats individual vs. corporate offshore cash. It’s much easier to collect from individuals, even rich ones with Swiss bank accounts, than it is to collect from multi-national corporations, so the government goes where the money is easiest to get, not where most of it is piled up.

Paul Ausick