House Panel Considers Ways To Close Offshore Tax Gap

House Ways and Means Select Revenue Measures Subcommittee Chairman Richard Neal, D-Mass., said today he wants to write bipartisan legislation to enhance the IRS' ability to crack down on offshore tax dodgers. At a hearing today, Neal and IRS Commissioner Douglas Shulman said Congress and the administration need to develop better enforcement tools, which Shulman said would be forthcoming "in the next month or so." University of Michigan Law Professor Reuven Avi-Yonah testified that the amount of tax revenues parked offshore totals about $50 billion a year, which lawmakers said could help close the "tax gap" without resorting to tax increases.

Ways and Means Republicans signaled they are open to a bipartisan bill. "I think we are all in agreement that criminal tax evasion should be pursued aggressively and punished," said Rep. Patrick Tiberi, R-Ohio, the subcommittee's ranking member. Tiberi said the efforts must focus on compliance and not cross into the territory of currently legal tax practices used around the world by U.S. citizens. Republicans also said they are opposed to "blacklisting" certain countries that have been identified as tax havens with strict secrecy laws. "That might make countries less willing to cooperate with the IRS," said Rep. Geoff Davis, R-Ky. Shulman said the IRS prefers to use certain criteria to identify where tax evasion is taking place rather than naming countries. He said identifying nations would raise diplomatic issues that need to be explored in consultation with the White House and State and Treasury departments.

Shulman and Neal said tax enforcement efforts need to fuse administration initiatives with legislation as well as international cooperation. "There is no silver billet or one strategy that will alone solve the problem of offshore tax avoidance," Shulman said. He said the IRS will be taking steps to shore up its "Qualified Intermediary" program, in which foreign banks agree to verify the nationality of U.S. investors and collect the appropriate withholding tax. That could include reporting more sources of income, such as interest income accruing in checking accounts owned by U.S. citizens working abroad. Neal and Shulman said they would like to see increased withholding and better documentation about banks' customers. Shulman specifically asked the panel for the ability to extend the statute of limitations to examine offshore tax liability from three to six years, a proposal included in draft legislation authored by Senate Finance Chairman Max Baucus.

Rep. Lloyd Doggett, D-Texas, has authored a tougher bill that not only names "blacklisted" countries for the IRS to examine but puts the onus on offshore investors to prove they are not actually domiciled in the United States. If they fail to do so, they would face immediate U.S. tax. Shulman did not directly endorse the bill but said "it would certainly give us a variety of more tools." He said the IRS is also working with Baucus on his bill. Doggett said his approach would do more to get at the problem of offshore tax cheats. "We don't just need a sledgehammer, we need something bigger than that," he said.