Tuesday, February 27, 2018

IRS OVDP Declines-Withdrawals Campaign (2/27/18)

Late last year, IRS LB&I announced here certain compliance "campaigns" for examinations.  Among the campaigns is the following:
OVDP Declines-Withdrawals Campaign 
The Practice Area is Withholding & International Individual Compliance 
Lead Executive: Pamela Drenthe 
The Offshore Voluntary Disclosure Program (OVDP) allows U.S. taxpayers to voluntarily resolve past non-compliance related to unreported offshore income and failure to file foreign information returns. This campaign addresses OVDP applicants who applied for pre-clearance into the program but were either denied access to OVDP or withdrew from the program of their own accord. Taxpayers, who have yet to resolve their non-compliance and who meet the eligibility criteria, are encouraged to consider entering one of the offshore programs currently available. The IRS will address continued noncompliance through a variety of treatment streams including examination and letters.
 The linked letter which notifies the taxpayer of inclusion in this campaign is Letter 5935, here.  The letter is actually the second two pages of the pdf.  The letter indicates that a Form 15023, here, is included with the letter.  Note that the Form bears a creation date of January 2018, so I suspect that taxpayers did not start receiving the Letter and Form until

A commenter who received the Letter and Form called them to my attention here, and I provided a response just below it.  In the commenter's case, after his withdrawal in 2011 the commenter was in full compliance for 2011 forward and filed 3 years amended returns and original FBARs for the years 2008, 2009 and 2010.  It appeared therefore that the commenter's six-year statute of limitations for FBAR penalties for the latest originally noncompliant year (2010) was June 30, 2017 and statute of limitations for the income tax had expired for all years absent civil fraud.  needless to say, the criminal statute of limitations had expired, something to suspend the statute of limitations.  He says that he is a resident, so the criminal statute under § 6531 was not suspended for absence from the country.

Some issues just off the top of my head:

1.  The letter offers in Option 1 the opportunity to do a Streamlined Filing.  I thought (but have not double checked) that people who filed for preclearance in OVDP did not have the opportunity to do Streamlined.  Apparently, this letter suggests that they can.

2.  How exactly would someone in the commenter's fact pattern do a Streamlined Filing which asks for the last three years amended returns and six years FBARs original or delinquent.  All of those filings are and were compliant by the original due dates.  What is there to file?

3.  The same point as in #2 applies to Option 2.  This seems to be asking for new documents to correct the as yet uncorrected noncompliance.  In the commenters case there never was any noncompliance for any open year.  I suppose that the wording could be to require amended returns and FBARs for the noncompliant years prior to 2008.  Indeed, I would think that, if a taxpayer were to submit returns and payments for those years, the IRS would either return the payment or notify the taxpayer that the taxpayer may be entitled to a refund because of the statute of limitations (because the IRS has no basis to assert fraud to open up the statute of limitations).  I suppose that a taxpayer in this fact pattern might want to respond by simply providing copies of the filings from 2011 and explaining that the statute of limitations is closed for all purposes (should not get into the lack of potential for fraud to open up the earlier years).

4.  Option 3 seems to be an applicable option, although here too it applies "If you believe you are fully compliant."  For the years since 2008, the commenter is fully compliant.  For the years prior to 2008, the commenter is not fully compliant, but the IRS has no legitimate interest in demanding new fully compliant filings for those years.  I don't think I would respond with the complete history that the IRS requests.  The IRS will likely verify the timely filing of returns with the foreign accounts included and then, I suspect, would not open an audit for any open year (because it has no indication of noncompliance) and would likely not open up an otherwise closed year (years prior to 2011 for which there was delinquent compliance for 2008-2010) which normally requires extra steps without any indication of fraud.

Of course, these comments do not apply to persons who do have open statutes of limitations.  Keep in mind in this regard that the criminal statute of limitations (but not the civil statute of  limitations) is suspended for the period the taxpayer is outside the United States.  § 6531, here.  Persons who think they have criminal risk should think hard before attempting Option 1 because they likely cannot make the nonwillful certification.  Option 2 may apply but does not appear attractive, since it asks for new documents to correct the noncompliance without any limit on the years and may be a tacit admission of willfulness because Option 1 was not pursued.  Willfulness would permit the FBAR willful penalty if the FBAR civil penalty statute is still open and, is the equivalent of civil fraud for the unlimited civil tax statute of limitations (although the Government would have a higher standard of proof of fraud, clear and convincing evidence).

Caveat to all of the above:  

1.  The IRS can open an income tax audit and use its compulsory administrative summons for records and information regarding a year that is closed except for fraud, without knowing or even having any indication of fraud.  United States v. Powell, 379 U.S. 48 (1964).  And, if there was fraud on the original return, the civil statute of limitations is open forever even if the taxpayer subsequently filed a nonfraudulent return.  Badaracco v. Commissioner, 464 U.S. 386 (1984).

2.  For those in the bind because they did not file income tax returns (original or delinquent), their statute of limitations is open forever.  § 6501(c)(3), here.

3.  Although the statute of limitations for a filed return is normally three years, there is a 6-year statues of limitations that can potentially apply under § 6501(e), here, for substantial omissions:  (i) 25% omission of gross income or (ii) over $5,000 omission of income from assets reportable on Form 8938 (whether or not that Form actually is required for the year).

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