The IRS Is Now Targeting Former OVDP Taxpayers

As you may know, the Internal Revenue Service (IRS) shut down its Offshore Voluntary Disclosure Program (OVDP) on September 28, 2018. The OVDP allowed taxpayers to voluntarily disclose unreported foreign financial assets in order to avoid civil and criminal prosecution. In other words, the OVDP allowed those who may have willfully hid money in offshore bank accounts to avoid criminal prosecution. According to the IRS, over 56,000 taxpayers used the OVDP since it launched in 2009.

Now, the IRS has launched an active campaign called “Post OVDP Compliance” to ensure that former OVDP taxpayers have remained compliant with their foreign income and asset reporting requirements for each subsequent tax year after entering the OVDP.

To this end, the IRS’s Large Business and International Division (LB&I) has begun issuing a “soft letter” (called a Letter 6198) to former OVDP taxpayers who resolved their case by signing a Form 906, Closing Agreement on Final Determination Covering Specific Matters, and, in some cases, initiating audits of former OVDP taxpayers. If you previously enrolled in the OVDP and have now received a Letter 6198, you will notice that Letter 6198 is requesting information about your post-OVDP compliance, including the filings of all required tax and information returns in subsequent years. In addition, you will notice that Letter 6198 explicitly states that the failure to respond to this letter may result in an examination and additional tax and penalties, which may be very substantial.

The stated intent of Letter 6198 is to ensure taxpayers to take all necessary actions to remedy any noncompliance in reporting foreign income and foreign financial assets. The letter instructs taxpayers to respond using one of the following three options.

• The first option is to mail all delinquent or amended tax returns by the due date specified on the first page of the letter. While FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) must be file electronically with FinCEN, the IRS is requesting copies and proof of submission to FinCEN. Additionally, these returns are subject to applicable penalties unless you show that noncompliance was due to reasonable cause and not willful neglect. If reasonable cause exists, it is critical to include with your delinquent or amended returns a detailed and compelling statement demonstrating reasonable cause.

• The second option is to mail a statement by the due date specified on the first page of the letter explaining (1) why you believe you fully complied with all tax and information reporting requirements related to your foreign financial assets, or (2) why you are not able to become compliant using one of the three options in Letter 6198. The statement must include a complete history of previously unreported foreign income, accounts, and entities; copies of relevant documents that confirm your compliance; and your contact information. Additionally, the statement must include specific language (provided in the letter) that demonstrates your understanding that you are signing under penalty of perjury and that the IRS may contact you for additional information. Your tax attorney or other authorized representative may not sign this statement on your behalf.

• The third option is for those who are concerned that the failure to report foreign financial assets was willful or fraudulent, and may constitute a tax crime. This option allows such taxpayers to voluntarily disclose their accounts in an effort to avoid criminal prosecution. This voluntary disclosure program is not the OVDP. Also, a voluntary disclosure made under this option does not automatically guarantee immunity from criminal prospection. However, a taxpayer’s voluntary disclosure is a favorable fact that the IRS considers in determining whether to recommend criminal prosecution.

Please know that you do not have to determine your best course of conduct on your own. Letter 6198 makes clear that you may appoint a tax attorney or other representative to represent you in this matter by completing a Form 2848, Power of Attorney and Declaration of Representative. Additionally, Letter 6198 states that, if you need additional time to respond, you may send a written request to the address shown on the first page of the letter for an extension of up to 60 days. The IRS must receive your request for an extension prior to the due date shown on the first page of the letter.

Additionally, in regards to Letter 6198, an IRS Revenue Agent has stated (in response to our call to the IRS hotline) that the IRS will be checking the accuracy of information submitted in response to Letter 6198. The Revenue Agent indicated that the IRS has assembled a database of taxpayer information that the IRS has collected during the last decade under the Foreign Account Tax Compliance Act (FATCA). FATCA is a 2010 federal law that requires foreign financial institutions and United States-connected taxpayers to report information about foreign assets and owner identities to the United States government.

Mr. Vic Abajian, a Los Angeles-based former IRS senior trial attorney, has assisted hundreds of clients throughout the world in successfully disclosing offshore financial assets for more than a decade. If the IRS contacts you regarding your OVDP submission, it is critical to contact an experienced attorney like Mr. Abajian to determine the best course of action. As you may likely know, there are substantial civil and potentially criminal penalties associated with the failure to properly disclose offshore bank accounts. The IRS has interpreted reasonable cause in a very narrow manner and taxpayer should proceed cautiously. Mr. Abajian has several active IRS examinations pending that involve foreign bank accounts and assets and this type of insight is required to successfully navigate these issues.

Note: This discussion does not concern the IRS’s separate program called the Streamlined Filing Compliance Procedures, which remains open for eligible non-willful taxpayers who are not concerned about criminal prosecution. According to the IRS, this program may also end at some point. Mr. Abajian is highly experienced with this program as well and welcomes the opportunity to discuss your best course of action.