The Internal Revenue Service (IRS) may begin ramping up its investigation of offshore account compliance soon, based on recommendations from the Treasury Inspector General for Tax Administration (TIGTA). TIGTA recently released its final report on the IRS’ offshore voluntary disclosure programs (OVDPs) after analyzing a stratified random sample of 100 taxpayers from a population of 3,182 requests to participate in the OVDP that were ultimately denied or withdrawn. Twenty-nine of these should likely have been subject to FBAR penalties, but the IRS did not pursue compliance actions. TIGTA projected a potential $21.6 million in delinquent FBAR penalties that the IRS could have assessed and collected.
Part of the problem with the current OVDP involves weak internal controls that delay or incorrectly process participation requests. Another issue is the lack of an internal process to identify the necessary revenue agent skills to work on such requests. According to TIGTA, many OVDP requests could ultimately be processed by lower-level agents.
Reassessing the skill level required to process such requests could resolve the timeliness issue with the OVDP. The average processing time for requests to participate in the OVDP as of October 2014 was 89 calendar days. In some cases, the decision to allow or deny participation took more than nine months to complete. Once accepted into the program, it took the OVDP Unit an average of 10 months to finalize the certification process—and over two years for certain cases. (From initial request to end result, the average OVDP case takes just under two years.)
In addition to correcting its internal processes, TIGTA recommended that the IRS review all of the denied or withdrawn OVDP requests to potentially assess FBAR penalties and open criminal investigations. In the current program, opened in January 2012, the OVDP penalty can be up to 50 percent if the foreign financial institution holding the taxpayer’s funds or facilitator for the arrangement “has already been publicly identified as being under investigation or as cooperating with a government investigation.”
To read the full TIGTA report, click here.
If you have not yet disclosed your foreign accounts or assets, contact one of our attorneys today.