TIGTA Report Critical of the Offshore Voluntary Disclosure Program, Finds that the IRS Should Assess More FBAR Penalties

In OVDP by Jason B. FreemanLeave a Comment

TIGTA Report Critical of the Offshore Voluntary Disclosure Program, Finds that the IRS Should Assess More FBAR Penalties

The United States generally taxes its citizens and resident aliens on their worldwide income. The government has long known that some taxpayers use offshore bank/financial accounts to hide assets and income outside the United States in an effort to evade their Federal tax obligations. Taxpayers who intentionally fail to report income earned on offshore accounts or who neglect to disclose foreign assets as required by law face significant penalties and possible criminal prosecution if discovered by the IRS.  For years, the IRS has offered noncompliant taxpayers a program, known as the Offshore Voluntary Disclosure Program (“OVDP”), that provides an opportunity to come forward proactively and fix their past compliance problems for a relatively low cost, as well as to avoid criminal exposure.

TIGTA initiated an audit to assess how well the IRS is managing the OVDP, as well as its efforts to improve taxpayer compliance and to hold taxpayers who fail to report their offshore financial activities on their tax returns and Reports of Foreign Bank and Financial Accounts (FBAR) accountable.  In a report released in June, TIGTA reported its findings.  Some highlights from the report include the following findings:

  • The IRS needs to improve its efforts to address the noncompliance of taxpayers who are denied access to or withdraw from the OVDP.
  • The IRS should be assessing more FBAR penalties.

As a result of its investigation and findings, TIGTA recommended that the IRS:

1) review denied or withdrawn offshore voluntary disclosure requests for potential FBAR penalty assessments and criminal investigation;

2) develop procedures for reviewing denied and withdrawn cases for further compliance actions;

3) centrally track and control OVDP requests;

4) establish one mailing address for taxpayer correspondence;

5) ensure that employees adhere to timeliness guidelines throughout the entire OVDP process; and

6) classify OVDP certifications so that some can be worked by lower-graded revenue agents.

The report provides a useful summary of the history and purpose of the OVDP/OVDI programs and the development of the Streamlined Filing Compliance Procedure:

U.S. taxpayers can hold offshore accounts and foreign assets for a number of nontax reasons, including access to funds while living or working overseas, asset protection, investment portfolio diversification, enhanced investment opportunities, and to facilitate international business transactions. Taxpayers must report whether they have offshore accounts on Form 1040, U.S. Individual Income Tax Return, Schedule B, Interest and Ordinary Dividends, and pay taxes on any income earned from them.

Taxpayers with aggregate foreign financial account balances of more than $10,000 are also required to report additional account information, such as the name and location of their bank, by filing Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR). Starting in Tax Year 2011, under the Foreign Account Tax Compliance Act (FATCA), taxpayers are also required to file Form 8938, Statement of Specified Foreign Financial Assets, if they meet certain criteria.

To assist noncompliant taxpayers in becoming current with reporting their offshore accounts and related income, the IRS implemented the 2009 Offshore Voluntary Disclosure Program (OVDP), the 2011 Offshore Voluntary Disclosure Initiative (OVDI) and the currently ongoing 2012 OVDP.  As of October 2015, the IRS reported that the three disclosure programs have resulted in more than 54,000 voluntary disclosure requests from taxpayers who have paid more than $8 billion from these programs.

. . .

In September 2012, the IRS initiated a Streamlined Procedure that enabled noncompliant U.S. taxpayers residing abroad, owing little or no delinquent taxes, the opportunity to voluntarily resolve their offshore account filing requirements while avoiding any OVDP penalties.  While the Streamlined Procedure had no disclosure penalty, taxpayers ha[d] to fill out a risk questionnaire and sign an agreement acknowledging that their tax returns remain subject to IRS examination, additional civil penalties, and even criminal liability if the IRS identifies in the future that the taxpayers had willfully hidden their offshore accounts.

In July 2014, the IRS made changes to the Streamlined Procedure allowing U.S. citizens or resident aliens living in the United States the opportunity to disclose their offshore accounts through the streamlined process.  These taxpayers will be subject to a 5 percent OVDP penalty and still may be subjected to harsher penalties if it is determined they willfully hid their offshore accounts. In lieu of the risk questionnaire, these taxpayers have to certify that their previous failure to disclose offshore accounts was due to nonwillful conduct. The updated Streamlined Procedure also removed limitations on the amount of delinquent taxes owed for the taxpayer to qualify. The IRS anticipates that these changes will provide taxpayers who are still delinquent with unreported offshore accounts a new incentive to come back into compliance with their tax obligations.

In addition, the IRS is in the process of implementing the FATCA, which will allow it to identify more noncompliant taxpayers with unreported offshore accounts through the mandatory third-party reporting required of foreign financial institutions. However, the OVDP currently has no end date and could continue in the foreseeable future to address offshore noncompliance or schemes not associated with certain foreign financial institutions.

TIGTA’s report is sure to put pressure on the IRS to step up its efforts to look closely at FBAR violations, especially for those violators that are not in the OVDP.  It will also put pressure on the Service to make penalty assessments where the taxpayer’s facts indicate that a FBAR penalty is appropriate.

For a link to TIGTA’s report, click here.


For subsequent, related posts, see The Updated IRS Voluntary Disclosure ProgramLast Call: The IRS Will Soon Close the Offshore Voluntary Disclosure Program, Leaving a Limited Window to Obtain Criminal AmnestyRecent FBAR Case Allows Multiple Penalties for Single Failure to File FBARThe IRS and Big Data: The Future of Fighting Tax FraudA Brave New World: The Panama Papers and the United States’ Role as a Tax HavenThe Panama Papers: The First U.S. Conviction for Tax Fraud.

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