On April 16, 2019, the Large Business and International (LB&I) Division of the Internal Revenue…
IRS announces two new intriguing targeted enforcement campaigns
Every so often the Internal Revenue Service announces a new “campaign” to increase tax compliance. A campaign usually means additional IRS focus and resources are allocated to the areas where the IRS is trying to improve compliance. The IRS recently announced the below two campaigns of targeted enforcement of particular interest to our clients and their tax advisors.
Post-Offshore Voluntary Disclosure Program (OVDP) Compliance enforcement campaign
The new Post OVDP Compliance enforcement campaign was recently announced as a result of IRS data analysis and suggestions from IRS employees. IRS employees likely saw that many taxpayers were not correctly reporting offshore bank accounts, as a result, they suggested the campaign. The IRS Post OVDP Compliance enforcement campaign goal is to improve return selection, identify issues representing a risk of noncompliance, and make the greatest use of IRS limited resources.
The IRS initially launched the Offshore Voluntary Disclosure Program (OVDP) in 2009 to encourage compliance with foreign asset reporting. US persons are subject to tax on worldwide income from all sources, including income generated outside of the United States. It is not illegal or improper for US taxpayers to own offshore structures, accounts, or assets. However, taxpayers must comply with income tax and information reporting requirements associated with these foreign activities, otherwise they are subject to penalties and possible criminal prosecution.
The OVDP was structured as a tax amnesty program since it allowed US taxpayers to come forward and avoid criminal prosecution for not reporting foreign accounts. In 2011, in response to the Foreign Account Tax Compliance Act (FATCA), the IRS announced a new amnesty program called the 2011 Offshore Voluntary Disclosure Initiative (OVDI). In 2014, the IRS modified the program yet again. At the time of the relaunch, the IRS made it clear that there would be no set deadline for taxpayers to apply for the program. In September of 2018, the IRS finally terminated the OVDP.
The IRS is now actively targeting former OVDP taxpayers’ failure to remain compliant with their foreign income and asset reporting requirements. As a result of the Foreign Account Tax Compliance Act (FATCA) and IRS-subpoenaed bank records, the IRS is now in possession of voluminous records that identify US persons with transactions or accounts at offshore private banks. As a result, we anticipate IRS letters to be issued under the campaign later this year.
New Offshore Private Banking enforcement campaign
The new Offshore Private Banking enforcement campaign was also recently announced by the IRS. US persons are subject to tax on worldwide income, including income generated outside of the United States. It is not illegal or improper for US taxpayers to own offshore structures, accounts, or assets. However, taxpayers must comply with income tax and information reporting requirements associated with these foreign activities, otherwise, they are subject to penalties and possible criminal prosecution.
Via FATCA and subpoenaed bank records, the IRS has records that identify taxpayers with transactions or accounts at offshore private banks. This campaign targets tax noncompliance and the information reporting associated with these offshore accounts.
Both of these two new IRS campaigns reveal the IRS’ renewed coordinated focus on taxpayers’ foreign activities. The IRS has stated that they will initially address tax noncompliance (i.e., notify taxpayers) through audit examination and soft letters. Soft letters are IRS correspondence to targeted taxpayers identifying tax noncompliance and passively seeking compliance (this is also an inexpensive way to collect unreported taxes efficiently). According to the IRS campaigns, the failure to respond to such letters may result in audit or penalties and possible criminal prosecution. As a result, we expect increased IRS audit activity for clients with noncompliant foreign activities.