Following disclosures by UBS whistleblower Bradley Birkenfeld, the IRS launched an aggressive enforcement campaign against undeclared offshore income and financial accounts in 2009. Over time, it has offered a series of compliance programs to give taxpayers with undeclared offshore accounts the opportunity to make voluntary disclosures regarding offshore income and accounts in exchange for fixed civil penalties and the assurance that criminal penalties would not be pursued.
The 2009 and 2011 Offshore Voluntary Disclosure Programs were timed, meaning taxpayers had to enter them between the programs' opening and closing dates. Both are now closed. The 2012 Offshore Voluntary Disclosure Program, and the two 2014 Streamlined programs, one for domestic U.S. taxpayers and the other for U.S. taxpayers who live abroad, are open indefinitely. But recent IRS actions suggest taxpayers may not have much longer to enter any of these programs.
Specifically, the IRS has recently started sending non-complying taxpayers "soft letters," which outline various compliance options the taxpayer may wish to consider. These options may include filing tax returns or entering one of the streamlined compliance programs. Soft letter recipients have included taxpayers who entered either the 2009 or 2011 program, but later withdrew, as well as non-complying taxpayers who have come to the attention of the IRS as a result of the sizable amount of data the agency has acquired since 2009.
Taxpayers who have not yet received soft letters should recognize that the IRS may already have them in its sights. One can speculate that the soft letters may indicate the IRS has grown impatient with recalcitrant taxpayers. Do the letters also indicate the IRS may be inclined to close the voluntary compliance programs it established to encourage these taxpayers to come forward?
Notably, despite massive cuts in IRS staffing and budget overall, the number of international indictments has continued to rise since 2010. The reduced international enforcement staff may be getting more efficient in organizing and using the mountain of data it has received from the various compliance programs regarding evaders and enablers.
At an October 2017 event in Los Angeles, Don Fort, chief of the IRS's criminal investigation division, indicated his division will launch an international group, intensifying IRS indictments in 2018. IRS Deputy Chief of Criminal Investigation Eric Hylton has said global investigations are among the division's top priorities.
Further, recent cases indicate the IRS is seeking sentences for criminal violations based on the highest unreported balance in the undeclared offshore accounts (i.e., under Title 31 governing FBAR violations) rather than on the amount of unreported income generated by the previously hidden accounts (i.e., under Title 26 governing tax violations). During the National Institute on Criminal Tax Fraud in December 2017, Mark Daly, DOJ tax division senior litigation counsel, confirmed that this is the IRS litigation position.
The IRS has had the time to manage and leverage the vast amount of data it received from the tens of thousands of OVDP filings. The soft letters indicate the IRS is now ready to use that data in enforcement actions against recalcitrant taxpayers. And the message to holdouts is clear: If you need to enter a program, time may be running out to do so.
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