Pursuant to the Frequently Asked Questions of the Offshore Voluntary Disclosure Program (OVDP), if the IRS has initiated a civil examination for any year, regardless of whether the notice or examination relates to an offshore issue, the taxpayer will not be eligible to participate in the OVDP. See FAQ 14 of 2014 OVDP. Similar language precludes taxpayers under examination from participating in the Streamlined Filing Compliance Procedures (SFCP). Based on this broad language, many taxpayers believed that they were ineligible for the OVDP or SFCP if they received letters from the IRS regarding seemingly unrelated matters on their income tax returns (e.g., notices regarding mismatches on Forms 1099, Form W-2, and calculation errors stemming from interests in flow-through entities).
On October 16, 2015, an official from the IRS indicated that these issues are being worked through and provided some clarification on eligibility for the OVDP and SFCP. In general, taxpayers will still be eligible for the OVDP or SFCP so long as they have not received an audit notification letter that also discusses the taxpayer’s appeal rights. Certain information mismatches, and other similar situations, will not disqualify taxpayers from these amnesty programs. For a specific class of taxpayers, this means that there may still be a possibility to resolve their offshore non-compliance through these procedures, rather than facing the uncertainty and potential criminal consequences of either not addressing the issues altogether or by attempting to address the issues through a “quiet disclosure.”
Although this is a positive development, taxpayers should carefully consider their specific situation, and any prior notices received from the IRS, before submitting a request for pre-clearance (or any other information) to the IRS in order to resolve these issues through the OVDP or SFCP. If a taxpayer is deemed to be under civil examination and is ineligible for these amnesty programs (e.g., the notice is not one of the excepted types, from the IRS perspective), disclosure of information could negatively impact the case either by putting the IRS on notice of previously undisclosed foreign accounts that may not have been otherwise discovered or by creating some inference of willful non-compliance. Given the magnitude of potential penalties related to undisclosed offshore accounts and assets – both civil and criminal – taxpayers should consult with a knowledgeable tax professional before addressing these issues.
Contact Brandon Mourges at firstname.lastname@example.org with further questions.