In 2016, the Treasury Inspector General for Tax Administration (TIGTA) released a report which assessed how well that IRS was managing the Offshore Voluntary Disclosure Program (OVDP). OVDP is one of the programs taxpayers may use to become compliant if they previously had failed to report offshore income on their tax returns and file Reports of Foreign Bank and Financial Accounts (FBARs). Currently, it is estimated that almost 56,000 taxpayers have become compliant through OVDP, paying just under $10 billion in taxes, penalties and interest.
One of TIGTAs findings was that the IRS had not followed up on a number of non-compliant taxpayers who requested participation in OVDP, but were either denied access or withdrew from OVDP. TIGTA believes that a significant portion of these taxpayers may still be non-compliant. Their recommendation was that the IRS should review denied or withdrawn OVDP applications for potential FBAR penalty assessments and potential criminal investigation.
In response, the IRS rolled out the 2017 OVDP Declines-Withdrawals Campaign which is being overseen by its Large Business and International Division (LB&I).
The IRS has stated they anticipate that about 6,000 taxpayers may be affected by this campaign. The LB&I will be looking at two specific groups for non-compliance:
- Those taxpayers who applied to OVDP, but were denied access to the program by Criminal Investigations, and
- Those taxpayers who withdrew from OVDP, of their own accord, before they were accepted into the program.
- Formal withdrawal by the taxpayer in writing is not required; it is sufficient that a taxpayer did not complete their submission for withdrawal to exist.
- Opt-outs are not included as part of this LB&I campaign. The difference between a withdrawal from OVDP and an opt-out is that an opt-out occurs after the taxpayer has been accepted into OVDP.
To locate taxpayers for this campaign, the IRS will be reviewing taxpayer identification numbers (TINs), addresses and other identifying information provided on pre-clearance applications and Offshore Voluntary Disclosure Letters. Foreign Account Tax Compliance Act (FATCA) reporting is not expected to be a source of identification at this time. Also, as part of the campaign, the IRS will include U.S. taxpayers residing overseas as well as those in the U.S. Finally, the timeframe will be broad with the IRS including taxpayers who meet the criteria since OVDP began in 2009 to the current date.
Next Steps for Affected Taxpayers
The IRS has identified three treatment streams for affected taxpayers. First, no further action may be taken by the IRS or needed from the taxpayer if the taxpayer has become compliant since the OVDP denial or withdrawal. A second possibility is that the taxpayer may receive a “soft letter.” This letter will be sent by the IRS to taxpayers whose non-compliance is considered immaterial. The IRS has not defined a threshold level for immateriality, only that it will be facts and circumstances based. If the taxpayer receives a soft letter, the IRS will list a number of options to resolve the taxpayer’s non-compliance, requiring a response from the taxpayer.
The third possible treatment stream is examination. While the focus of the examination will be on offshore income and assets, the taxpayer’s entire federal tax return will be subject to review as part of a regular exam. Also, depending on the situation, multiple years may be involved, potentially going back to 2009. Finally, the risk of the examining agent making a referral to Criminal Investigations exists as a potential outcome.
Taxpayers who may be at risk of an examination as a result of the IRS’ OVDP Declines-Withdrawal Campaign no longer have OVDP as an option for full-compliance. However, prior to being selected for examination, taxpayers can still become compliant by amending and filing all required returns and making payment for all taxes, interest, and penalties.
Serious Nature of IRS Compliance Campaigns
Regardless of the treatment stream, taxpayers contacted by the IRS under this campaign should take the matter very seriously. IRS “campaigns,” such as the OVDP Declines-Withdrawals Campaign, are generally subject to much scrutiny at the IRS upper levels. Significant planning, training and resources have gone into rolling out this effort and it is viewed as an investment. As such, campaigns are reviewed against certain metrics for success, with the goal of ensuring taxpayer compliance and accountability.
With such scrutiny, taxpayers may wish to seek counsel or expertise either in voluntarily preparing and filing amended returns or during an examination under the OVDP Declines and Withdrawals Campaign. The tax attorneys at M. Robinson and Company have experience in international tax preparation and audits; we may be able to assist you. Please feel free to contact us at 617-428-6900.
The material in this publication does not constitute legal advice. It is intended for general information purposes only.
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