The Internal Revenue Service (IRS) has now expanded its compliance campaigns and included “post Offshore Voluntary Disclosure Program compliance” on the list. On July 19th, the IRS through its Large Business and International (LB&I) Division announced six new “compliance campaigns” for taxpayers. Significantly, one of these campaigns targets taxpayers who had entered an Offshore Voluntary Disclosure Program (OVDP) in the past to make sure they are still being tax compliant.
Sounds like this is a case where once you are on the “bad boy” list, you remain there forever and will be under the watchful eye of the IRS. Remember IRS has a list of all the participants in the OVDP. Evidently, some former OVDP participants have not been properly reporting their foreign income and assets. IRS is on the case! The IRS will address tax noncompliance through soft letters and audits.
What is a “Compliance Campaign”?
A “compliance campaign” is a targeted directive on a particular tax issue. A “campaign” is initiated when the IRS determines that there are specific US tax issues on which the agency should be focusing and responding. Typically, the campaign will focus on an area where it believes taxpayers have not been compliant and where it believes tax dollars and penalties can be significant. Clearly, with post-OVDP noncompliance, the taxes due and possible penalties can be a treasure trove for the IRS whose budget has dwindled over recent years and compelled the agency to use all of its resources most judiciously.
To date, LB&I has announced a total of 59 campaigns. The full list is here. In examining the list, it is clear that there is an intent focus on the “offshore” and “international” areas.
Remedies – Act Sooner Rather than Later
If you have fallen out of tax compliance, don’t panic. There are options and remedies available, but it is best to address the situation before the IRS comes calling. Professional advice with an experienced US tax advisor is really a necessity in this kind of situation.
Since the taxpayers who joined OVDP essentially admitted wrongdoing in order to participate in the program, and pledged to be tax compliant in the future, addressing post-OVDP noncompliance carries significant risks. The IRS may determine that the post-OVDP non-compliance is the result of a willful intent to evade taxes or to meet reporting obligations. Another risk involves possible penalties. While the penalties of the prior OVDPs kept increasing with each successive program, noncompliant taxpayers no longer have the fixed penalty framework of the prior OVDPs since the program is now closed. The new Voluntary Disclosure Practice (more on this below) has the potential for sky-high penalties.
Furthermore, if the IRS comes calling before the taxpayer takes action, the Voluntary Disclosure (or other taxpayer submission such as a Streamlined submission) may be considered untimely and result in ineligibility! If you have been noncompliant after joining OVDP, you need to take action.
“Voluntary Disclosure” – what does it mean if you use this option?
The IRS has now had several versions of OVDP. Each version of the OVDP has required the filing of 8 years’ of back tax returns and 6 years of FBARs. In addition, volumes of supporting documentation were required. Choosing this option was very time-consuming and generally very expensive, both in terms of professional fees and penalties. These programs, however, were a welcome relief for taxpayers who faced a real likelihood of criminal penalty sanctions.
Effective September 28, 2018, the OVDP was officially closed; full details from the IRS are here. A new expanded Voluntary Disclosure practice was put into effect by the IRS and is described generally below.
The Voluntary Disclosure guidance put in place in November 2018 is in the form of a 5-page Memorandum. It was authored by Kristen B. Wielobob, Deputy Commissioner for Services and Enforcement, re Voluntary Disclosure Practice (LB&I-09-1118-014 dated 11/20/18 and with an expiration date of 11/20/2020). A lot has changed from OVDP, and not for the better, in my view! I’ve summarized some of the more salient points about the new Voluntary Disclosure practice in my blog post here.
Taxpayers should be extremely cautious if they are thinking of entering this program. Voluntary disclosures are appropriate for taxpayers with exposure to potential criminal sanctions. The guidance mentions “willful” or “fraudulent” conduct that “may rise to the level of tax and tax-related criminal acts” as being of the type for which a voluntary disclosure is called for. Many times taxpayers are not sure where they “fit” on the “willful” or “fraudulent” continuum and question whether their particular facts may tip the scales of justice over to the criminal side. Without question, experienced tax counsel should be sought, and second opinions considered.
What is the “Streamlined Procedure” and what does it mean if you use this option?
The IRS Streamlined Procedure of 2014 is another option for taxpayers who have somehow fallen out of compliance. The Streamlined procedure is generally, a friendlier and less costly approach to bring non-compliant Americans (whether living overseas or living in the USA) back into the tax filing system. Here are the major points:
- Taxpayers will be required to file only 3 years of back tax returns and 6 years of FBARs, and if IRS agrees that the taxpayer is eligible for the Streamlined Procedure, no penalties will be assessed for the late or corrected tax filings if the taxpayer meets the definition of being a non-US resident (more details on non-residency here). US residents will pay a 5% penalty, details on this so-called Title 26 miscellaneous offshore penalty can be found here.
- Tax compliance failures must be the result of “non-willful” conduct and factual statements must be provided under penalty of perjury explaining the reasons for any compliance failures.
- This procedure will not provide protection from possible civil penalties if IRS considers such penalties should apply and it will not provide protection from possible criminal prosecution if the IRS and Department of Justice determine that the taxpayer’s particular circumstances warrant such prosecution. Taxpayers who are unsure of their potential for such sanctions should seek advice from a qualified US tax professional with significant international experience.
Taxpayers who joined OVDP and have again become noncompliant, will have a high bar to reach in order to establish “non-willfulness.” Generally speaking, a taxpayer who joined OVDP would have been made aware of the obligations to report foreign assets and income.
Foreign Information Returns and/or FBARS
Taxpayers who have only missed out on filing certain foreign information returns or FBARs may be able to use the IRS’ Delinquent International Information Return Procedures and/or the Delinquent FBAR Submission Procedures . Again, however, taxpayers who joined OVDP and have again become noncompliant with FBARs or foreign information returns, will not have any easy time to establish “non-willfulness.”
Posted August 22, 2019
All the US tax information you need, every week –
Subscribe to Virginia – US Tax Talk to receive my weekly US tax blog posts in your inbox.
Visit my earlier US tax blog “Let’s Talk About US Tax” hosted by AngloInfo since 2011, it contains all my old posts. Some hyperlinks to my blog posts on AngloInfo may have expired. If you copy the expired URL, you can most likely retrieve the actual post by using the “Wayback Machine” which is an archiving service. Simply paste the URL into the Wayback Machine search box. It will show you the archived post was saved on a specific date. Click on that date to retrieve the post.