The tough stance on alleged US offshore tax dodgers has been criticised by a watchdog overlooking the Internal Revenue Service, arguing that many Americans who make honest errors are penalised.

The tough stance on alleged US offshore tax dodgers has been criticised by a watchdog overlooking the Internal Revenue Service, arguing that many Americans who make honest errors are penalised.

At a time when the US has enacted legislation such as the Foreign Account Tax Compliance Act, or FATCA, to catch expat Americans suspected of evading tax, the criticisms of the watchdog are notable, media reports say.  

The Congressionally appointed watchdog, Nina E. Olson, has recently criticised the IRS's amnesty programme for people with undeclared offshore accounts.

The concerns about the IRS’ severe approach adds to a scandal about how some officials at the tax collection authority used their audit powers to target conservative political groups in the run-up to the 2012 presidential elections. The issue of IRS powers is particularly sensitive because the US, unlike most countries, operates a worldwide system of tax.

"The IRS Offshore Voluntary Disclosure Program Disproportionately Burdens Those Who Make Honest Mistakes," media reported the watchdog as saying. The programme is intended to encourage people with undisclosed accounts to tell all.

Come forward

According to CNNMoney, citing IRS figures since 2009, around 38,000 people have come forward to pay $5.5 billion in back-taxes, fines, and penalties under the initiatives in exchange for reduced fines and penalties and, in most cases, avoidance of prosecution.

Another programme, unveiled in January 2012, continues to draw in people; this process was galvanised in August when the US and Swiss governments drew up a sweeping pact under which a clutch of Swiss banks have offered to disclose activities.

Until 2011, the IRS said that holders of offshore accounts who accidentally failed to file the right documents could pay a penalty capped at $10,000, in addition to back taxes plus interest. However, willful misuse of the rules carries a penalty of  50 per cent of the highest account balance for each year covered.

According to the CNNMoney report, the most severe penalty means some taxpayers with undisclosed foreign accounts owe more than they had in the actual accounts.