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Audit of the Offshore Voluntary Disclosure Program

The Treasury Inspector General for Tax Administration (“TIGTA”) completed an audit of the Offshore Voluntary Disclosure Program (“OVDP”). US citizens are taxed on their worldwide income and must report bank accounts when their aggregate balance exceeds $10,000. The OVDP and other similar programs allow taxpayers a mechanism to come forward and get into compliance with their tax and offshore bank reporting requirements. Some citizens have hid their assets with offshore bank and financial accounts so that they are not subject to taxes on these accounts. Intentionally failing to report all income could result in significant penalties and potential criminal prosecution. The OVDP gives these citizens a chance to step forward and disclose these accounts to resolve their tax delinquencies. TIGTA completed an audit on this program to see how truly effective this program was and if it was efficiently holding these non-compliant tax payers accountable for their actions.

To apply to the OVDP, the taxpayer must send in an application to the Criminal Investigation unit (“CI”). CI is responsible for determining whether to accept or deny the application into the OVDP. The OVDP does not have authority to accept or deny a taxpayer from the program. If the taxpayer is accepted into the program, the OVDP unit is notified and the taxpayer is sent information regarding the additional documentation that they now need to send to the OVDP unit. Once all initial documentation is received, the case is then transferred to the Large Business and International Division (“LB&I”) or the Small Business/ Self-Employed Division (“SB/SE”). Revenue agents in the LB&I and SB/SE divisions then follow a checklist of tasks that determine whether a taxpayer’s OVDP submission can be certified. During the certification process the revenue agent determines if the information the taxpayer has disclosed is complete and accurate. Once the verification is certified, the case is then recorded and closed.

For the audit of the OVDP, TIGTA took samples of different types of taxpayers that applied to the OVDP program. They analyzed these samples to see areas where the program could be more effective and also looked to see potential weaknesses of the program. Anytime during the OVDP process the taxpayer can choose to be removed from the program, if they choose to be removed the taxpayer is then subject to a full examination on all of their tax information and could receive penalties on the now disclosed foreign financial assets. The taxpayer can also be denied access into the program. In one of the samples, “TIGTA reviewed a stratified random sample of 100 taxpayers from a population of 3,182 OVDP requests that were either denied or withdrawn from the OVDP. Although 29 of these 100 taxpayers should have been potentially subject to…penalties, the IRS did not initiate any compliance actions. Projecting the sample results to the population of denied or withdrawn requests, the IRS did not assess approximately $21.6 million in delinquent… penalties.” After reviewing the samples of taxpayers who were denied or withdrew from the program, TIGTA recommended that compliance actions are needed for taxpayers with denied or withdrawn OVDP applications. TIGTA recommended implementing better procedures for all denied or withdrawn accounts.

TIGTA selected 50 taxpayers out of 781 withdrawn OVDP requests, they found that 40% who withdrew had compliance action taken against them, this means that over 50% who withdrew did not have compliance action taken against them. TIGTA also reviewed 50 of the 2401 taxpayers who had their OVDP requests denied, 68% of the sample was not contacted by the IRS about their tax noncompliance. With these large numbers of taxpayers going without punishment the government is not receiving all of the taxes that it should be from these taxpayers. With the information given in the application process, to the OVDP the IRS already has access to some of what they need in order prosecute the taxpayers that are not compliant. TIGTA said, “It is critical that the IRS establish procedures for addressing potential noncompliance of these taxpayers who have been denied or withdrew from the OVDP process.” In the IRS response to this audit, the IRS agreed that it needs to take steps to correct these problems and needs to develop a system where withdrawn and denied requests are not overlooked.

TIGTA also identified internal weaknesses that led to incorrect processing of OVDP requests because of poor communication among IRS functions involved in the OVDP. These weaknesses include the use of separate inventory controls and two separate IRS addresses for taxpayers to send correspondence. Separate controls and different addresses contribute to incorrect processing of some taxpayer disclosure requests and some taxpayer confusion. A taxpayer may need to send documentation to the CI unit for initial acceptance into the OVDP program, but because of the lack of explanation and different addresses this documentation may get sent to the OVDP unit instead. TIGTA has found cases where information that got sent to the OVDP by mistake has taken months to get sent to the CI, this miscommunication only contributes to the amount of time it takes to examine a case and could be easily fixed with one unified address. TIGTA found that some cases take CI over 9 months to process and CI is only the first step in the OVDP program.

The IRS responded to TIGTA’s recommendation by saying that they agreed a unified address would add potential value to the program but at the moment the IRS cannot commit the resources needed for a unified address. In addition, the IRS does not have a process to determine the appropriate skill level needed for revenue agents to work OVDP requests. OVDP cases are not equivalent to audits of taxpayers’ returns; therefore a different skill set is needed for OVDP revenue agents than general IRS revenue agents. The IRS agreed that they need to ensure cases are assigned to examiners that possess the skill set needed to complete the cases efficiently and effectively.

In conclusion the IRS has some work to do to improve the OVDP program. The audit conducted by TIGTA has shown weaknesses in the program that the IRS is now aware of and actively working to improve. From reading the TIGTA report, TIGTA may not have considered that many of the taxpayers who withdrew from the program, had the requisite reasonable cause for non-assertion of penalties. It is important for taxpayers to hire a qualified law firm when navigating this frequently changing practice area.

This article was written based upon https://www.treasury.gov/tigta/auditreports/2016reports/201630030fr.pdf

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