In a recent article on Deducting S Corporation Losses in Excess of Basis, I explained that the Large Business and International (LB&I) division of the IRS signaled a shift in enforcement tactics with its 2017 announcement of 13 issue-specific “compliance campaigns.” Eleven additional campaigns were launched in November 2017, suggesting that the initial 13 are bearing revenue fruit and that the LB&I is well on its way to going “all in” with the new strategy.
Most of the compliance campaigns, such as the one centered on proper filing of Form 1120-F, were developed based on data suggesting widespread inaccurate filing or failure to file. However, one campaign brings a relatively short list of specific taxpayers directly into the LB&I’s crosshairs: the OVDP Declines and Withdrawals Campaign.
What Is the OVDP?
Federal tax law stipulates that U.S. taxpayers who derive income from foreign sources must report all such income on their federal tax returns. Furthermore, most U.S. citizens with foreign bank accounts or assets are required to file a Report of Foreign Bank and Financial Accounts (FBAR) annually.
In an effort to improve compliance with these regulations, the IRS launched its first Offshore Voluntary Disclosure Program (OVDP) in 2009. Various incarnations of the program have existed since then. The current form of the OVDP has existed since 2014, but the IRS has stated that the program may be altered or discontinued at any time.
In brief, the OVDP is a process through which non-compliant taxpayers, including those who have failed to file required FBARs or have underreported foreign income on their tax returns, can become compliant with reduced civil penalties and a greatly reduced risk of referral for criminal investigation.
Applicants to the OVDP are still subject to penalties for past noncompliance. However, taxpayers accepted into the program are protected from the worst consequences suffered by those whose noncompliance is discovered through IRS investigation.
Who Is Targeted Under the LB&I’s Compliance Campaign for the OVDP?
As indicated in both the title of this article and the title of the campaign itself, the LB&I is targeting taxpayers who began the process of entering the OVDP but never completed it for one of two reasons:
- Withdrawal. Note that IRS defines “withdrawal” from the OVDP as any voluntary failure to complete the application process, regardless of whether the taxpayer explicitly stated an intention to withdraw. However, the term “withdrawal” does not apply to taxpayers who completed the application process and were accepted into the OVDP, but later opted out of the program.
- Decline of application by the IRS. The most common reason for the IRS to reject an OVDP application is that the taxpayer has already been referred for criminal investigation.
The IRS believes that a significant percentage of taxpayers who fall into one of these two categories remain noncompliant. For any taxpayer whose noncompliance is deemed “material” (a term that the IRS deliberately defines vaguely so as not to restrict its enforcement options), LB&I treatment may take the form of examination. Once an examination is initiated, LB&I officials have broad leeway to expand the examination to encompass the taxpayer’s entire federal tax standing, not just in relation to FBARs and foreign income reporting.
Importantly, a taxpayer who falls into one of the above two categories is not eligible to apply anew for the OVDP. Yet there are other avenues toward coming into compliance. Anyone with “Declined” or “Withdrawn” status with respect to the OVDP should give serious consideration to discussing options with a qualified tax professional. Remember, the list of taxpayers targeted for this campaign is not long by U.S. Department of Revenue standards, so simply hoping that your number doesn’t come up is an ill-advised approach.
Conclusion: Is It Best to Never Begin the OVDP Application Process?
Clearly, the OVDP is not a “kiddie pool,” where taxpayers can dip in their toes and then beat a hasty retreat if they find the water not to their liking. Entering the OVDP requires a real commitment to see the process through to its conclusion. It might be tempting to conclude that for a taxpayer who is currently delinquent with regard to filing FBARs or reporting foreign income, it is safest to simply avoid the OVDP altogether so that there is no risk of rejection and no possibility of ending up in “withdrawal” status.
Tempting, but very unwise. On its FAQ page about the OVDP, the IRS specifically warns that “IRS and Department of Justice offshore enforcement efforts continue to raise the risk of detection of taxpayers with undisclosed foreign accounts and assets.” In other words, the OVDP may be your last chance to find your way onto solid ground with the IRS before the IRS finds you.
