Recently, the IRS announced that it was targeting individual taxpayers who previously participating in its Offshore Voluntary Disclosure Program (“OVDP”) to check and see if they were still in compliance with their foreign income and asset reporting obligations.
U.S. persons generally owe taxes on their worldwide income and pursuant to the Foreign Account Tax Compliance Act (“FATCA”) must disclose their assets held abroad every year. Failure to either pay the appropriate amount of taxes or disclose foreign assets may subject a taxpayer to penalties and in particularly egregious cases, criminal charges.
Several years ago, the IRS started OVDP in an effort to promote compliance among U.S. taxpayers with foreign assets and income. The program was designed to allow those who faced potential criminal liability to come forward and pay all taxes due and reduced penalties in exchange for an agreement by the IRS not to pursue criminal charges.
The program was a resounding success, with tens of thousands of taxpayers participating. After more than a decade, the IRS closed the program late last year.
Now, the IRS has announced a campaign aimed at addressing “noncompliance related to form Offshore Voluntary Disclosure Program (“OVDP”) taxpayers’ failure to remain compliant with their foreign income and asset reporting requirements.” The IRS claims that it will address such noncompliance “through soft letters and examinations.” This means that the IRS will be devoting its resources to finding taxpayers who have fallen out of compliance and to use its audit-based tools in order to bring them into compliance.
For such taxpayers, however, there is a risk that once an examination begins, criminal charges could follow. The OVDP program was for those taxpayers whose failure to file the proper asset disclosures or file tax returns and pay taxes owed may have been willful.1 If a taxpayer came forward before, acknowledged their duties to pay taxes, and reported their foreign-held assets and then stopped doing so, it may suggest that the post-disclosure noncompliance was the result of some sort of willful intent to evade taxes or reporting obligations. This is particularly so since the taxpayer, by the mere act of making the disclosure, would have been aware of his or her obligation to report foreign assets and income.
Taxpayers finding themselves in this situation are not without ways to protect themselves. Though OVDP is closed, the IRS maintains procedures for taxpayers to come forward and make voluntary disclosures to avoid criminal penalties. While it does not have the same reduced penalties as OVDP, it may offer protection from future criminal charges. Given the IRS’s renewed focus on OVDP participants recent non-compliance, it is something taxpayers should seriously consider.