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IRS to end Offshore Voluntary Disclosure Program in September

The IRS has announced that it will begin winding down its Offshore Voluntary Disclosure Program (OVDP) on September 28, 2018. Under the OVDP, a taxpayer with undisclosed foreign assets or income could come forward to pay tax, interest and reduced penalties in exchange for immunity from criminal prosecution. The IRS will continue its separate Streamlined OVDP, which is only available to certain taxpayers unaware of their international reporting obligations.

The IRS made the announcement now in order to give taxpayers who may still want to come forward time to do so. “Taxpayers have had several years to come into compliance with U.S. tax laws under this program,” said Acting IRS Commissioner David Kautter in a statement. “All along, we have been clear that we would close the program at the appropriate time, and we have reached that point. Those who still wish to come forward have time to do so.”

The program has been very successful, collecting more than US$11 billion in tax, interest and penalties from more than 50,000 taxpayers. With advances in international reporting and information-sharing regimes, the IRS has also aggressive pursued taxpayers who have tried to hide assets abroad. Since 2009, it has indicted 1,545 taxpayers for criminal violations related to international activities with 671 indicted specifically on international criminal tax violations.

Even with the OVDP ending, the IRS will not stop vigorously pursuing international tax evaders. Any US taxpayer who may have unreported assets or income abroad should come forward now and take advantage of the OVDP while it is still available. Otherwise, come September, such taxpayers could face huge penalties and potentially even prison.

About Denton’s Tax Controversy

Dentons’ Tax Controversy team has successfully represented over 100 clients in various OVPD and streamlined OVPD proceedings, addressing a wide variety of tax compliance issues from taxpayers all across the globe. In addition, Dentons is one of few firms that has experience litigating Report of Foreign Bank and Financial Accounts (FBAR) penalties under the Bank Secrecy Act, which are almost always at issue in OVDP proceedings.

If you would like to discuss the above further, please contact any of the members of the Dentons Tax Controversy team.

IRS Issues Final Regulations on BBA Partnership Audit Regime

The IRS has issued final regulations regarding the new centralized partnership audit regime, referred to as the BBA regime. The regulations are effective as of yesterday, January 2, 2018.. We have blogged about the new rules here and here.

These regulations implement the rules for electing out of the new audit rules. Here, we address how the regulations were updated from the proposed regulations issued over the summer.  While it acknowledged that “the new rules are a significant change in the way partnerships have been traditionally audited,” the IRS rejected most of the suggestions made during the notice and comment period. It noted its inexperience in the operation of these new rules as the reason behind its rejecting most of the suggestions, but consistently left the door open for further rulemaking.  Unfortunately, this does not provide certainty for taxpayers and means in the near future taxpayers must carefully review the rules to ensure they are compliant.

This is especially true for taxpayers who may wish elect out of the BBA regime. A taxpayer wishing to elect out of the BBA regime may do so if 1) it has 100 or fewer partners, and 2) all partners are eligible partners.

The 100-or-fewer partner rule

Under section 6221, a partnership is eligible to elect out of the BBA rules if it has 100 or fewer partners. Under now-final Treas. Reg. 301.6221(b)-1(b)(1)(i), a partnership has 100 or fewer partners if it is required to furnish 100 or fewer statements under section 6031(b), which generally requires a partnership to furnish a statement to each person that is a partner in the partnership during the partnership’s taxable year. This is a key issue because a partnership that fails to elect out of the regime or a partnership that attempts to elect out of it but cannot will find itself unexpectedly bound by these new rules.

Notice Requirement

Several commentators had suggested that the IRS exclude pass-through entities or disregarded entities in determining whether a partnership meets the 100-partnership threshold. The IRS rejected those suggestions, noting that under section 6031, notice must be provided to each partner, regardless of whether the partner is a disregarded entity or a pass-through.

The IRS also rejected suggestions that it establish a pre-filing procedure to address qualification issues. It did, however, leave open the door to further regulations on this issue, noting that it “may reconsider whether a pre-filing procedure would be helpful after gaining experience with the election out procedures.” It also left open the door for further regulations on the issue of how a partnership may elect out of the regime if it is found to be a constructive partnership or a de facto partnership. Under the regulations, if such a partnership exists and it does not file an election on a timely filed return for that taxable year, it will be bound by the new BBA rules.

Eligible Partner Requirement

Treasury Regulation 301.6221(b)-1(b)(3) describes the types of partners that are “eligible partners” for the 100-or-fewer rule. Partnerships, trusts, disregarded entities, nominees or other similar persons that hold an interest on behalf of another person, and estates other than the estate of a deceased partner are not considered eligible partners under the rules.

Commentators had requested that the IRS expand the definition of eligible partners to include partnerships, disregarded entities, trusts, individual retirement accounts, nominees , qualified pension plans, profit sharing plans , and stock bonus plans. The IRS rejected these suggestions and did not expand the definition of eligible partners because in its view “the interests of efficient tax administration outweigh” any additional administrative burdens created by a narrower definition. It appears the IRS was concerned about allowing more partnerships to elect out of the new regime, because it would require deficiency proceedings for each of the partners in such partnerships and result in substantially more audits.

Making the election

The IRS also addressed comments it had received regarding the timing for making the election and how it may be revoked. It left unchanged, for example, a partnership would be required to obtain the consent of the IRS to revoke an election out. It also did not address whether the election may be timely made on amended returns, stating that other areas of the code address this issue.

Observations

In addressing these comments, the IRS has sent a strong signal that it favors the new BBA regime and may take an aggressive stance against those partnerships that attempt to elect out of it. It also broadcasts to the tax community that it cannot at this stage address all the issues that may arise under the new regime through regulations because it lacks experience with how these rules will work in the real world. This leave taxpayers in a bind because the IRS is uncertain how these rules will work in practice but is likely to favor one particular outcome.

It is important that partnerships plan carefully and particularly if you are thinking of opting out of the BBA regime to ensure you are ready if the IRS decides to challenge that decision.

If you have any questions about this post or how you can prepare for these rule changes, please contact Jeff Erney at (202) 496-7511 or jeffry.erney@dentons.com

Update on Tax Reform

The more-or-less final version of the tax reform bill is here and Congress is expected to vote on it this week.

Dentons has done an extensive write-up of the provisions of the bill, which can be found here.

 

 

Tax Reform is Here

Dentons is covering all of the latest news on the various tax reform plans that the United States Congress is currently considering.

The latest about the Senate’s plan can be found here.

Check back for more updates.