Taxpayers who have received a letter or notice from the IRS announcing the agency’s intent to conduct an audit are often anxious about the process and concerned about what the audit may turn up. In many cases, the chief source of concern for these taxpayers may be undisclosed offshore accounts. This worry is well-justified because the penalties for violations of FBAR and FATCA carry severe penalties and are especially appealing to criminal prosecutors when badges of fraud are also present.
For offshore account problems, Offshore Voluntary Disclosure Program (OVDP) can often improve the situation faced by the tax payer while providing protection against further criminal prosecution or audit. However, many taxpayers simply assume that because they have received a notice from the IRS about an audit, it is too late to take action that to improve the tax and legal situation the taxpayer faces. However, simply because you have been notified of a tax audit does not mean you are automatically foreclosed from satisfying the preclearance process and entering into OVDP.
While preclearance does not guarantee a taxpayer entry into OVDP, however it is a viable means of entering into the program that is recognized by the IRS. Before submitting a preclearance request or letter, all taxpayers should consult with an experienced tax attorney who can determine whether the taxpayer is likely to be eligible for the program and any other potential legal options he or she may have.
When making a pre-clearance disclosure for acceptance into the Offshore Voluntary Disclosure Program a taxpayer must submit certain information. This information includes:
Many taxpayers are hesitant to turn over this information to the IRS thinking that providing this information can only make the consequences of their audit worse. However, in certain audit situations one can still enter into OVDP and receive protections from the worst case scenarios involving offshore account noncompliance.
At an October 16, 2015 offshore and international tax conference sponsored by American Bar Association Section of Taxation and the Tax Executives Institute, IRS officials discussed when a taxpayer facing an audit would be removed from preclearance and when they would be permitted to remain in the program. For instance, a taxpayer who is unaware that they are being audited can still enter into the program. Furthermore, a taxpayer who is facing a limited audit unrelated to the potential offshore issues can also successfully receive preclearance to enter into OVDP. However, time is always of the essence when considering entry into OVDP. If the taxpayer fails to take action and reaches the stage of the audit where the IRS agent is asking for specific tax and financial records, the audit process has proceeded too far and the taxpayer is unlikely to receive preclearance authorization.
In the past decade or so Congress has provided the IRS and prosecutors from the Department of Justice with an array of legal tools to identify and prosecute taxpayers who are not complaint with their offshore obligations. FBAR, part of the Bank Secrecy Act, was strengthened to contain a harsher penalty for willful compliance failures and a new penalty was created for even accidental failures to disclose. The passage of FATCA and its disclosure obligations for both foreign financial institutions and U.S. taxpayers has provided U.S. government officials with a deluge of previously unavailable local and foreign tax data. That data gathering capability has only been enhanced by the more than 100 information sharing agreements the U.S. holds with foreign countries, the Swiss Bank program, and the recent announcement of automatic and reciprocal data swaps.
Taxpayers who have not yet addressed undisclosed foreign accounts should do so without delay.
While the OVDP program can provide important benefits for taxpayers including protection from criminal consequences, entering into the program is highly technical. Before entering into OVDP taxpayers must consider their level of risk and other factors including whether they currently face an audit and, if so, how far along the audit process has progressed. The experienced and dedicated tax lawyers and CPAs of the Tax Law Offices of David W. Klasing can provide on-point guidance for these and other offshore tax concerns. To schedule a reduced-rate legal consultation at our Los Angeles call 800-681-1295 or contact us online today.