IRS Overlooks Noncompliance in Offshore Voluntary Disclosure Program

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The Internal Revenue Service is missing out on imposing approximately $21.6 million in penalties on taxpayers who are denied entry or withdraw from its Offshore Voluntary Disclosure Program, according to a new report.

The report, from the Treasury Inspector General for Tax Administration, found the IRS needs to improve its efforts in addressing the noncompliance of taxpayers who are denied access to the OVDP or withdraw from it.

The IRS has offered a series of OVDP initiatives in recent years to allow taxpayers with foreign bank accounts to voluntarily come forward and declare their assets to the IRS to avoid stiff penalties. Increasingly, however, the IRS has already received information about the previously undisclosed bank accounts from foreign financial institutions that are filing reports in accordance with a 2010 law, the Foreign Account Tax Compliance Act, or FATCA, to escape heavy penalties on the banks. When that is the case, the IRS may deny individual taxpayers access to the reduced penalties under the OVDP, perhaps even choosing to prosecute them.

For the report, TIGTA reviewed a random sample of 100 taxpayers out of a group of 3,182 OVDP requests that were either denied by the IRS, or in which the taxpayer elected to withdraw their request. TIGTA found that 29 of the 100 taxpayers could have been potentially subject to penalties for failing to file a foreign bank account report, or FBAR, but the IRS did not initiate any action against them. Projecting that sample to a larger population of taxpayers who were either denied access to the OVDP or withdrew their requests, TIGTA estimated the IRS failed to assess approximately $21.6 million in delinquent FBAR penalties.

“In an increasingly global economy, it is important that the IRS ensure that taxpayers with foreign-derived income comply with their U.S. tax obligations,” said TIGTA Inspector General J. Russell George in a statement.

TIGTA found problems with internal controls and poor communications among the IRS functions that deal with OVDP requests, leading to delays and incorrect processing of the requests. Those weaknesses include two separate IRS addresses where taxpayers are supposed to mail their correspondence.

TIGTA made six recommendations in the report, including suggesting that the IRS review all of the denied or withdrawn OVDP requests that the report identified as potential sources of FBAR penalty assessments and criminal investigation. The IRS should also develop procedures for reviewing the denied and withdrawn OVDP cases for further action, the report recommended, and it should centrally track and control OVDP requests. The IRS should also set up one mailing address for taxpayer correspondence. The IRS agreed with all the recommendations, but has put the recommendation for establishing one mailing address on hold until it can make a decision about the future status of the OVDP.

“While we agree with the potential value in this recommendation, at this time and in light of the non-permanent status of the OVDP program, we cannot commit the resources needed for this change,” wrote Douglas W. O’Donnell, commissioner of the IRS’s Large Business and International Division.

He pointed out that prior to the enactment of FATCA in 2010, the IRS implemented the OVDP in 2009, with modifications in 2011 and 2012. “While OVDP initiatives have been successful in improving compliance with offshore accounts, OVDP was not intended to be a permanent program that would exist into perpetuity,” O’Donnell wrote. “FATCA data is expected to open new approaches for the identification and assessment of compliance risks, as well as support many existing IRS tax compliance programs, all of which provide for greater tax compliance by this sector and constrict the opportunities for offshore tax evasion.”

He noted that while elements of FATCA have been in effect since 2011, the main elements of FATCA reporting began only last year and will continue to unfold over the next few years.

At the same time, the OVDP has been a success in generating extra tax revenue. As of October 2015, according to O’Donnell, more than 54,000 voluntary disclosure requests have been processed from taxpayers around the world and they have paid more than $8 billion.

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