Over the last few years, the Internal Revenue Service has granted noncompliant taxpayers with foreign bank accounts multiple reporting options via its Offshore Voluntary Disclosure Program. Specifically, these options enabled taxpayers to escape significant fines and other associated penalties by coming forward of their own free will and declaring these foreign assets.
At the same time, however, the IRS has been increasingly receiving this same information on hidden bank accounts through reports filed by foreign banks otherwise anxious to escape any of the major penalties called for by the Foreign Account Tax Compliance Act, otherwise known as FATCA.
The consequence of the of the IRS coming into possession of this information via foreign banking institutions has been that it enables the agency to essentially close the door on voluntary disclosure -- and its reduced penalties -- to noncompliant taxpayers.
Interestingly enough, however, a recent report from the Treasury Inspector General for Tax Administration determined that the IRS is actually not doing enough to collect financial penalties from these taxpayers who are denied entry to the OVDP or voluntarily withdraw from it.
Here, TIGTA inspectors randomly selected 100 taxpayers out of a group of over 3,000 OVDP requests that were either withdrawn voluntarily or denied by the IRS. They discovered that 29 of these taxpayers could have been hit with FBAR-related penalties by the IRS, and that when this failure rate was applied to a much larger number of similarly situated taxpayers, it amounted to $21.6 million in forfeited penalties.
In addition to these findings, TIGTA made various recommendations to the IRS, including:
- Reviewing all 29 of the withdrawn or denied OVDP requests identified in the report
- Developing enhanced procedures for reviewing all withdrawn or denied OVDP requests going forward
- Introducing central tracking and control over all OVDP requests
- Establishing a single mailing address for OVDP-related correspondence
For its part, the IRS agreed with the recommendations, but did point out that the OVDP has been a success, taking in over $8 billion from 54,000 voluntary disclosure requests since October 2015.
It will be interesting to see how quickly the IRS responds to these recommendations. In the meantime, those with questions about the IRS’s Offshore Voluntary Disclosure Program should strongly consider speaking with an experienced legal professional.