A significant number of US taxpayers who went through the OVDP mistakenly believed that they were immune from the IRS post-OVDP audits concerning their post-voluntary disclosure compliance. Sherayzen Law Office has repeatedly warned in the past that these taxpayers were mistaken with respect to their exposure to potential post-OVDP audits. The recent announcement of a new IRS compliance campaign concerning post-OVDP tax compliance confirmed the correctness of Sherayzen Law Office’s analysis.
Post-OVDP Audits: OVDP Background Information
The IRS created the Offshore Voluntary Disclosure Program (“OVDP”) as an incentive for US taxpayers to come forward and disclose their prior willful and non-willful noncompliance with US tax reporting requirements concerning foreign assets and foreign income. In exchange for the voluntary disclosure, the taxpayers paid a significantly lower penalty than what they otherwise could have had to pay outside of the OVDP. Moreover, taxpayers also received protection from IRS criminal prosecution of their prior tax noncompliance.
OVDP is not just one program, but a series of programs. The initial one was created in the early 2000s, but it was a relatively small and unknown program. The first program that became influential was the 2009 OVDP. The 2009 OVDP was created on the heels of the IRS victory in the UBS case and it closed on October 15, 2009.
Then, after the passage of the Foreign Account Tax Compliance Act (“FATCA”) in 2010, the IRS created the 2011 Offshore Voluntary Disclosure Initiative (“2011 OVDI”). The 2011 OVDI was a hugely popular program. Its success led to the creation of 2012 OVDP and, finally, 2014 OVDP.
The implementation of FATCA had materially altered the IRS interest in the OVDP while the number of the OVDP participants precipitously dropped due to the success of the Streamlined Compliance Initiatives (i.e. Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures). The 2014 OVDP program was closed on September 28, 2018.
Post-OVDP Audits: False Sense of Security After OVDP
Some of the OVDP participants have mistakenly treated their OVDP disclosure as a remedy capable of curing not only their past tax noncompliance, but also future compliance issues. In other words, after going through the OVDP, these taxpayers relaxed their commitment to their ongoing annual compliance. Some of them started filing their FBARs irregularly or stopped filing them altogether while others under-reported their foreign income. Still others engaged in a different conduct overseas without realizing that their new way of doing business gave rise to a different set of US reporting requirements.
Many of these taxpayers also erroneously believed that, by going through the OVDP, they were taken off the “IRS radar”. This means that they felt that the IRS was highly unlikely to audit them after their voluntary disclosure.
Post-OVDP Audits: IRS Noticed Noncompliance Among OVDP Participants
In reality, as Sherayzen Law Office had suspected, the IRS engaged in extensive analysis of the OVDP participants’ behavior after their voluntary disclosure. Of course, it was not difficult for the IRS to monitor them, because the IRS already had a full list of the OVDP participants at its disposal. Some of the data came from field audits while other information was derived from FATCA and data analysis.
As a result of its analysis, the IRS discovered the aforementioned disturbing noncompliance trends among former OVDP participants.
Post-OVDP Audits: July of 2019 IRS Compliance Campaign
After it uncovered these noncompliance trends among the former OVDP participants, the IRS announced in July of 2019 a campaign to specifically target taxpayers who went through the OVDP. As part of this campaign, the IRS will send out soft letters and conduct post-OVDP audits.
Post-OVDP Audits: Potentially Disastrous Consequences for Noncompliant Taxpayers
The targets of this IRS compliance campaign will be in a particularly difficult legal situation for two main reasons. First, during a post-OVDP audit, the taxpayers are unlikely to be able to claim non-willfulness with respect to their post-OVDP tax noncompliance because of the knowledge of US tax requirements that they acquired during their voluntary disclosures. In fact, it is difficult to see how non-willfulness can be established in any way other than claims based on new and/or extraordinary circumstances.
Second, since it is not likely that they will be able to establish non-willfulness, taxpayers will most likely face willful penalties during an IRS audit, perhaps even civil and criminal fraud penalties. The IRS is unlikely to be lenient with taxpayers who already benefitted from a voluntary disclosure and persisted in their noncompliance afterwards. In other words, a post-OVDP audit may result in disastrous consequences for noncompliant taxpayers.
Contact Sherayzen Law Office for Professional Help With Post-OVDP Audits
Given the particularly dangerous nature of a post-OVDP audit, a taxpayer subject to this type of an IRS audit must retain an experienced international tax attorney as soon as he is notified about the commencement of the audit. Failure to do so may severely damage the taxpayer’s ability to defend against subsequent IRS penalties.
This is why you need to contact Sherayzen Law Office as soon as possible. We are a highly-experienced international tax law firm that has helped hundreds of US taxpayers to resolve their past noncompliance with US tax laws, including in the context of an IRS audit. We Can Help You!