Audit Against IRS Reveals That Improvements Are Needed In Offshore Voluntary Disclosure Efforts

Audit Against IRS Reveals That Improvements Are Needed In Offshore Voluntary Disclosure Efforts

According to a publicly released audit report by the Treasury Inspector General for Tax Administration (TIGTA), the Internal Revenue Service (IRS) needs to improve its efforts to address the noncompliance of taxpayers who are denied access to or withdrawn from its Offshore Voluntary Disclosure Program (OVDP) and Foreign Bank Account Reporting.

According to the IRS, “The Offshore Voluntary Disclosure Program (OVDP) is a voluntary disclosure program specifically designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to report foreign financial assets and pay all tax due in respect of those assets. OVDP is designed to provide to taxpayers with such exposure (1) protection from criminal liability and (2) terms for resolving their civil tax and penalty obligations.”

Citizens of the United States are taxed on their worldwide income. Occasionally, taxpayers use offshore bank accounts to hide their assets and income outside of the United States, in effort to avoid paying Federal taxes. Hiding your assets in foreign bank accounts can lead to crucial penalties and potential criminal prosecution if exposed by the IRS.

The Offshore Voluntary Disclosure Program helps noncompliant taxpayers reveal their unreported offshore accounts and associated income to the IRS.

In a recent audit, the Treasury Inspector General for Tax Administration measured how well the IRS has managed the OVDP program, their success of improving taxpayer obedience, and the rate at which taxpayers are being held liable for failing to report their offshore financial activities on their tax returns and Reports of Foreign Bank and Financial Accounts (FBAR).

Here is what TIGTA discovered during its audit report:

“TIGTA reviewed a stratified random sample of 100 taxpayers from a population of 3,182 OVDP requests that were either denied or withdrawn from the OVDP. Although 29 of these 100 taxpayers should have been potentially subject to FBAR penalties, the IRS did not initiate any compliance actions. Projecting the sample results to the population of denied or withdrawn requests, the IRS did not assess approximately $21.6 million in delinquent FBAR penalties.”

 “The report also identified internal control weaknesses that led to delayed or incorrect processing of OVDP requests through poor communication among IRS functions involved in the OVDP. These weaknesses include the use of separate inventory controls and two separate IRS addresses to which taxpayers send correspondence, which contributed to incorrect processing of some taxpayer disclosure requests.”

According to TIGTA, six recommendations have been made in its report. The IRS has agreed with all six recommendations and will move forward with corrective action.