Tax Law Center Blog

This year taxpayers who either were denied access to or withdrew from the IRS Offshore Voluntary Disclosure Program (OVDP) have been receiving Letter 5935 (HERE) from the IRS notifying them that they need to come into compliance with U.S. reporting requirements relating to foreign income, foreign entities, and/or foreign financial accounts. The letter is part of the IRS Large Business & International (LB&I) campaign announced late last year called “OVDP Declines-Withdrawals Campaign”. The IRS’ description of the campaign includes a link to the letter and is as follows:

The Offshore Voluntary Disclosure Program (OVDP) allows U.S. taxpayers to voluntarily resolve past non-compliance related to unreported offshore income and failure to file foreign information returns. This campaign addresses OVDP applicants who applied for pre-clearance into the program but were either denied access to OVDP or withdrew from the program of their own accord. Taxpayers, who have yet to resolve their non-compliance and who meet the eligibility criteria, are encouraged to consider entering one of the offshore programs currently available. The IRS will address continued noncompliance through a variety of treatment streams including examination and letters.

Taxpayers who receive the letter have three options for complying. Option #1 is to make a submission under the Streamlined Filing Compliance Procedures (HERE) if they meet the eligibility requirements. Option #2 is to “submit all required tax returns, information returns and related filings”, including electronically filed FinCEN Forms 114, Report of Foreign Bank and Financial Accounts (FBARs). Submissions under Option #2 may result in the IRS proposing penalties and/or conducting an audit. Option #3 allows taxpayers who believe they are already fully compliant to submit a “narrative statement of facts” explaining their position. A completed Form 15023 “Offshore Compliance Status Response” must be submitted with any submission a taxpayer makes.

The letter advises taxpayers that if they fail to respond to the letter by the date shown, “the IRS may initiate an audit to determine [the taxpayer’s] compliance with U.S. reporting requirements”. The deadline for responding can be extending by 60 days, if necessary.

Taxpayers who receive Letter 5935 should consult with a tax attorney as soon as possible to determine the taxpayer’s best option for responding and how to do so.