I had the opportunity to speak with the former Chief of Internal Revenue Service Criminal Investigation (CI), Victor Song, about the future of international tax enforcement. International enforcement has been a top priority for the IRS for many years, and Mr. Song has had a critical role in that effort. Mr. Song’s tenure with the IRS spanned 30 years. He joined in 1981 and became a special agent in 1983. He rose to the position of deputy chief of CI in 2007, was appointed CI chief in January 2010, and retired from CI in December 2011. Mr. Song then served as the Executive Vice President of Compliance and Advisor to the CEO for Samsung Electronics America; he currently runs Victor Song Consulting, concentrating on services for tax controversy, anti-money laundering, corporate compliance and internal investigations.
Song led CI in working closely with global law enforcement agencies to combat tax evasion. That worldwide outreach effort, in conjunction with various IRS offshore voluntary disclosure initiatives implemented in 2009, 2011, 2012, 2014, and currently (collectively, OVDP), has produced over the years enormous amounts of information and numerous prosecutions of U.S. taxpayers holding undisclosed foreign accounts; financial institutions; and professionals and executives who allegedly assisted taxpayers conceal their foreign accounts (see here and here). The international tax enforcement campaign also led to the program, launched in 2013, for Swiss banks to enter into non-prosecution agreements with the Department of Justice in which the banks pay penalties and cooperate by providing information to the U.S. The campaign further resulted in the passage of the Foreign Account Tax Compliance Act, or FATCA, an unprecedented law which requires foreign financial institutions to report information about accounts held by U.S. taxpayers.
Peter Hardy: How effective has the international tax enforcement campaign been to date? What do you perceive as it strengths and weaknesses?
Victor Song: With over 40,000 taxpayers back in the system, I feel that it has been effective. With that being said, there is much more to do because I believe that there are still many more out there waiting to see what happens next. The strengths have been the initial messaging and working with the practitioners out there. They were able to get the message out to the taxpayers rapidly. Recently though, I don’t see the Service placing the same emphasis and priority that it once had. Yes, billions of dollars have been reported to be received by the Service, but much of that has been from the collection of penalties and interest. I firmly believe that there are many more accounts and taxpayers abroad especially in Asia, Central and South America.
PH: Going forward, what approach should the IRS and its partners take in regard to international tax enforcement? Why?
VS: The Service should boldly move forward to the next level. With FATCA information now coming in and being analyzed, information from filed Reports of Foreign Bank and Financial Accounts (FBARs) also needs to be compared to this data and investigations need to be initiated. Much time and effort has been expended with its partners in the Organization for Economic Co-operation and Development (OECD) and they are looking to the United States to be the leader in transparency and tax enforcement. In order for this initiative to be truly global, they cannot stop at just the Swiss banks and Europe. Efforts in enforcement, both civil and criminal, need to be pushed in other areas such as Central and South America and particularly in Asia. Why? Because greed has never disappeared. Greed to make money and greed to hold on to their money. There are still wealth managers and Foreign Financial Institutions that will assist U.S. taxpayers in hiding and holding onto their money. Many high dollar taxpayers in these other areas are waiting to see if there will be any investigations in their country and more importantly, successful prosecutions. Until they see these prosecutions, they are content to keep their accounts hidden.
PH: What are some of the potential disadvantages to, or obstacles facing, the enforcement approach you suggest, particularly in light of the current resources available to the IRS?
VS: The IRS has to work closely with the Department of Justice and the Treasury to get their support to move forward in enforcement. They were very supportive when I was there and it will take an effort on the Service to continue this partnership. The Service also has to have a commitment from the top to address this issue. The IRS Commissioner, Deputy Commissioner for Services and Enforcement, and the Chief of Criminal Investigations all have to be on the same page and have a consistent message to the respective Divisions. Yes, budget and resources are very low at this point and it is difficult. However, if it is made a high priority again, the Service can and has accomplished incredible feats before and can again. As far as CI is concerned, they are the best financial investigators in the world, bar none. Set the vision, give them the directive and let them go.
PH: International tax enforcement by the IRS has targeted both individuals and institutions. Is one of those approaches more important or more successful than the other?
VS: Early on, the institutions were the most important for CI. We needed to get the taxpayers into the program so civil enforcement was best for them. CI would take on the most egregious individual cases on to investigate and work with the DOJ on prosecutions. As far as the institutions have gone, Deferred Prosecution Agreements and Non-Prosecution Agreements have been the norm. I do believe that more individuals should be looked at in this area and maybe the Yates Memo will play more into this in the future.
As stated before, with information mined from FATCA, OVDP, FBAR, FinCEN and even the EB-5 immigrant investors listing, the IRS should be able to be much more successful in the enforcement of individual taxpayers both civilly and criminally.
PH: What are some of the limits of the use of criminal investigations and prosecutions, as opposed to other techniques, in attempting to maximize international tax compliance?
VS: The limits are that CI is but a very small part of the IRS. Less than 4% of the resources and budget goes to CI. The Service and Congress needs to change this model. Every other federal law enforcement agency has grown exponentially since the 1970s, except CI. People are not afraid of being audited. They are however very afraid of going to jail. How successfully CI does its job drives tax compliance and deterrence. CI needs to be a part of the OECD again and in particular with the Financial Action Task Force, to partner with the other countries to combat international tax evasion.
They need to work with the staffers on the Hill to bring more attention to this area that CI can most certainly lead. CI also needs to also work more closely with the banking community both domestic and abroad on this issue.
CI can’t combat this alone, they have to work with businesses and governmental agencies both domestically and internationally. CI’s leadership team has failed to do this in recent years. A look at the Fiscal Year 2015 Annual Report shows evidence of this.