U.S. Taxpayers at New Risk of Audit from OVDP Declines and Withdrawals Campaign

Last year, the US 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).

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 Their recommendation was that the IRS should review denied or withdrawn OVDP applications for potential FBAR penalty assessments and potential criminal investigation.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 Large Business and International Division recently rolled out a compliance campaign specifically targeted against certain unsuccessful applicants of the Offshore Voluntary Disclosure Program (OVDP). The purpose of this campaign is to address the potential noncompliance of applicants who initially applied for entry into the OVDP since 2009, but were either (i) denied entry by IRS Criminal Investigation division, or (ii) withdrew prior to formal acceptance (defined by acceptance by the IRS of the applicant’s voluntary disclosure letter (sometimes referred to as “pre-acceptance letter”) into the OVDP.

Targeted Taxpayers

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:

1. Those taxpayers who applied to OVDP, but were denied access to the program by Criminal Investigations, and
2. 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.

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. According to the Service, a taxpayer’s current residence will not be a factor when choosing the targets of the OVDP compliance campaign.  Hence, as part of the campaign, the IRS will include U.S. taxpayers residing overseas as well as those in the U.S.

Possible Next Steps for Targeted Taxpayers

For those targeted taxpayers who are selected, there are three possible IRS treatments:

1. No further action for taxpayers who have become compliant.
2. “Soft” notices from the IRS outlining taxpayer’s options, and requiring taxpayer response in cases of immaterial noncompliance. 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.
3. Examination (audit) by the IRS for noncompliant taxpayers. 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.

Taxpayers who were denied entry by IRS Criminal Investigation division or withdrew after submitting an application to the OVDP are encouraged to seek legal counsel to ensure that all open years are in compliance and that compliance can be proven. Taxpayers who have otherwise yet to resolve their offshore noncompliance are encouraged to seek legal counsel and consider entering the OVDP or other treatment programs currently available.