The IRS Large Business and International Division recently rolled out several compliance campaigns, one of which is devoted to certain 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 pre-clearance into the OVDP since 2009, but were either (i) denied entry by IRS Criminal Investigation division, or (ii) withdrew prior to acceptance into the OVDP. According to the IRS lead executive of this campaign, Pamela Drenthe, there are approximately 6,000 taxpayers who may be targets, and that number could increase as the OVDP continues. The Service has clarified that taxpayers who opted out of the OVDP, who were removed from an OVDP, or who are currently in an OVDP are not subject to this campaign.
Since 2009, the Service has effectuated three different OVDPs that, according to recent IRS data, has resulted in more than 55,800 disclosures and $9.9 billion in tax, interest and penalties. The current rendition of the OVDP started in 2012, with the program's terms being significantly modified (including the addition of the streamlined filing procedure) in June 2014.
The focus of this campaign will be on noncompliance in any year where the statute of limitation remains open. Typically, the statute of limitations on an individual tax return remains open for three years after the later of the due date or date of actual filing, but can be extended or tolled in certain circumstances, even indefinitely in the case of fraud, tax evasion or failure to file. One such circumstance includes a taxpayer's failure to file specified information returns relating to certain foreign transfers (e.g., Forms 8621 (PFICs), 5471 (CFCs), 8938 (foreign assets), and 3520 (foreign trusts)). In other words, where a taxpayer fails to file a specified information return for a particular year (and the failure is not due to reasonable cause), the statute of limitation does not begin to run until the required information return is filed, even if the taxpayer has filed their individual tax return. While its unclear whether the Service will aggressively apply this broad rule, it could cause some sleepless nights to a number of the affected applicants under this campaign. Normally the Service would not look further than six years and in the OVDP itself the look-back is limited to eight years.
According to the Service, a taxpayer's current residence will not be a factor when choosing the targets of the OVDP compliance campaign. For those taxpayers who are chosen, there are three possible scenarios that may play out with the IRS:
- No further action for taxpayers who have become compliant;
- Soft letters outlining taxpayer's options, and requiring taxpayer response in cases of immaterial noncompliance; and
- Examination for other noncompliant taxpayers.
In instances were taxpayers are selected for examination, normal audit procedures will be followed.
This new campaign strategy appears to be a shift by the Service to a more targeted approach to noncompliance. It has chosen to mine the vast amount of data it has already collected as opposed to allocating its limited resources to going out and collecting more.
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 one of its ancillary programs currently available.