Most people use social networks to stay connected to friends, family and colleagues, and now the Internal Revenue Service (IRS) has taken the social network concept and has begun using data mining technology to find U.S. taxpayers with foreign bank accounts. Bloomberg BNA recently published “Why Holders of Foreign Bank Accounts Need to Worry About IRS’s Voluntary Disclosure Data-Mining Program,” an article discussing the IRS’s latest data mining efforts.
In 2009, the IRS established the E-Trak Offshore Voluntary Disclosure Program system for the 2009 OVDI to control, monitor, and evaluate the success of the effort. E-Trak allows the IRS to capture data related to banks, financial institutions, and tax haven promoters, as well as any tax professionals who assisted taxpayers during the voluntary disclosure process. Revenue agents working voluntary disclosure cases are instructed to update the E-Trak Offshore Voluntary Disclosure Program system during the entire review process and provide all necessary information before closing the cases.
The IRS is using E-Trak to find taxpayers, bankers, accountants and other professionals who are involved with setting up offshore bank accounts for U.S. taxpayers. By data mining through E-Trak, the IRS can establish connections between tax or finance professionals that might not have otherwise been apparent.
E-Trak’s advantage over commercial social networks is the quality of the data that it processes. IRS requires taxpayers who voluntarily disclose their accounts to provide information that will be fed to E-Trak, including:
· the names of any and all foreign financial institutions where they maintained accounts;
· the dates on which they opened or closed the accounts;
· their points of contact at each financial institution;
· the circumstances of all face-to-face meetings with their points of contact;
· all of their communications with the financial institutions; and
· all face-to-face meetings or communications regarding their accounts with independent, non-bank advisers.
In addition to filling out detailed disclosure forms, many of the 33,000 taxpayers who have disclosed offshore accounts have undergone face-to-face interviews with IRS and the Department of Justice. According to published reports, these interviews have focused on the taxpayers’ interactions with others regarding their foreign accounts. E-Trak digests the interviews and written information and suggests possible connections among taxpayers and the bankers, lawyers, and financial advisers who may have assisted them in setting up and maintaining their offshore financial accounts.
As the Foreign Account Tax Compliance Act (FATCA) the amount of data in the hands of the IRS will increase exponentially. U.S. taxpayers with foreign accounts should take heed of the IRS’s latest efforts.