Every once in a while, the Internal Revenue Service (IRS) announces new targeted campaigns designed to increase tax compliance through additional IRS focus and allocated resources.
Below are the two most recent campaigns that are of particular interest:
1. Post-Offshore Voluntary Disclosure Program (OVDP) Compliance enforcement campaign
Announced as a result of IRS data analysis and suggestions from IRS employees (who likely noticed that many taxpayers weren’t correctly reporting offshore bank accounts), the Post-OVDP Compliance enforcement campaign aims to improve return selection, identify issues that represent a risk of noncompliance, and make the best use of limited IRS resources.
The program was initially launched in 2009 to encourage compliance with foreign asset reporting. All U.S. persons are subject to tax on worldwide income, even if generated outside of the United States. Although it isn’t illegal or improper for U.S. taxpayers to own offshore structures, accounts, or assets, they still must comply with income tax and information reporting requirements associated with these activities. Failure to do so could result in tax penalties and possible criminal prosecution.
The OVDP was originally structured as a tax amnesty program, giving is allowance of U.S. taxpayers to come forward and avoid criminal prosecution for not reporting foreign accounts. However, in 2011 the IRS announced a new program called the 2011 Offshore Voluntary Disclosure Initiative (OVDI) in response to the Foreign Account Tax Compliance Act. In 2014, the program was modified once more. Once relaunched, the IRS made it clear that there was no set deadline to apply for the program. The IRS finally terminated the program in September 2018.
The IRS is now actively targeting former OVDP taxpayer’s failure to remain compliant with their foreign income and asset reporting requirements, and, as a result of the Foreign Account Tax Compliance Act (FATCA) and IRS-subpoenaed bank records, are now in possession of the voluminous records that identify those with transactions or accounts at offshore private banks. It is expected that IRS letters will be issued under the campaign later this year as a result.
2. New Offshore Private Banking enforcement campaign
As mentioned above, all U.S. persons are subject to tax on worldwide income (including that which is generated outside of the United States) and must comply with income tax and information reporting requirements associated with those activities, lest be subject to tax penalties and possible criminal prosecution.
Through FATCA and subpoenaed bank records, the IRS has records identifying taxpayers who have had transactions or who own accounts at offshore private banks. The new Offshore Private Banking enforcement campaign targets tax noncompliance and the information reporting associated with these offshore accounts.
Both of the above campaigns reveal the IRS’ new focus and effort on the foreign activities of taxpayers. The IRS has stated that they will initially address noncompliance and notify taxpayers via audit examination and “soft letters” (IRS correspondence to targeted taxpayers identifying noncompliance and passively seeking compliance). According to the campaigns, failure to respond to soft letters could result in audits or penalties, and possible criminal prosecution. This could result in increased audit activity for those with noncompliant foreign activities.
Have more questions about how the most recent campaigns affect your offshore accounts or assets? Contact us today at (732) 566-3660 to discuss in more detail.