Internal Revenue Service’s (IRS) Large Business and International (LB&I) Division now has a new audit strategy known as “campaigns.”
For the past several years, the LB&I Division has attempted to shift its focus toward examining tax issues that will have the broadest impact on tax compliance. It has been reorganizing in order to focus its audit resources on emerging tax compliance risks where tax noncompliance may be greatest. Given the cuts to IRS funding, it’s a wise move for IRS to more effectively harness its examination resources. You can read more about the development and evolution of this strategy in the September 14, 2016 report issued by the Treasury Inspector General for Tax Administration.
Audit Numbers Decreasing, But……
The number of people audited by the IRS in 2016 fell once again for the sixth straight year, amounting to just over 1 million. The year 2004 represented the last time that so few audits took place (bear in mind that since 2004, the US population has expanded by about 30 million people)! The decrease in audits is blamed on IRS budget slashes, shrinking the agency’s budget from $12.2 billion in 2010 to $11.2 billion in 2016. In that 6-year period the IRS lost more than 17,000 employees, including nearly 7,000 enforcement agents. An approximate 80,000 individuals are employed by the IRS.
It is clear that IRS has suffered some serious cuts, and the agency realizes that without audits, tax and penalty dollars will be lost. The “campaigns” seek to “do more with less”. By focusing on the hot areas where tax and penalties may be lush, the agency can make the best use of its budget and perhaps work its way back to Congress’ good graces.
“Campaigns” Initiative: What it’s All About
As part of its reorganization, the LB&I Division is transitioning to selecting which tax returns to pull for an audit by what are called “campaigns.” Through the use of data analyses, it is anticipated that these “campaigns” will leverage the entire knowledge of the IRS to identify areas of tax noncompliance and to target tax returns for audit that will be more productive in bringing in tax revenue and penalties for noncompliance. The “campaign” topics were identified through extensive data analysis, input and suggestions from IRS compliance employees, and feedback from the private-sector tax community.
So far, 13 compliance campaigns have been identified for implementation. A complete listing and description of these IRS “campaigns” is here.
One campaign in particular caught my eye — the campaign involving “OVDP Declines and Withdrawals”. This campaign will likely be of strong interest to US taxpayers in the international community. Here is what the IRS says about it:
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.
Given this announced focus, taxpayers are advised to be very, very careful in making all decisions with regard to OVDP. Once you ring the bell and enter OVDP, it will not be so easy to unring that bell. An attempted entry into the program followed by an IRS decline to accept the taxpayer into the program has now clearly put that taxpayer into the IRS crosshairs. It’s game over. Entry into the OVDP and a later withdrawal by the taxpayer invites a possible (likely) full audit and the focus of this new “campaign”. See IRS OVDP FAQ Number 51 and IRS OVDP Opt-Out and Removal Guide.
I have seen taxpayers enter the OVDP out of extreme fear combined with a lack of information and proper tax advice. I have said before that taxpayers really must look before they leap into OVDP. Before taking any action, it’s worthwhile to get a second or even third opinion. Don’t let fear guide you. Be informed, get yourself some good advice, ask questions and remember, that once you enter, there is really no turning back.
Everyone’s situation is different and a one-size-fits-all approach is not the answer. Your best bet is to seek advice from a US tax attorney familiar with the offshore issues and voluntary disclosures. You will then have the protection of attorney-client privilege. This is NOT available with any other party such as a financial advisor or accountant. Such third parties can be engaged directly by your attorney by way of a so-called “Kovel” arrangement to help extend the attorney-client privilege to communications with these non-attorney parties.
Here is a concise summary of the various options available to noncompliant taxpayers wishing to rectify their tax situation.
Taxpayers Abroad versus Taxpayers Stateside
Generally, I have seen a big difference in the tax noncompliance fact patterns for taxpayers living and working abroad compared to those living in the United States. Many living abroad present with fact patterns strongly demonstrating that the tax noncompliance was not willful. Often, the extreme complexity of the US tax rules will result in unintended tax noncompliance for such individuals who are more likely to own foreign assets that are simply an inherent part of their lives abroad (e.g., foreign pension plans, non-US bank and financial accounts, receiving an inheritance from a foreign relative and so on). These assets usually mean special tax filings are required, and large penalties can apply for failures to file. The subtlety can be extreme. For example, did you know that if you are a US person you must file a special tax information reporting form (Form 5471) when certain of your family members who are nonresident aliens own stock in a non-US corporation, or that you must file the form if you are simply an officer of a foreign company and a US person takes certain ownership in the company? The filing mandates apply even if you, yourself, hold no shares in the company! A $10,000 penalty applies for not filing. More scary information on Form 5471 is here.
To further exacerbate the problem, many Americans abroad may not have ready access to competent US tax advice or preparation services and they are often at a disadvantage in getting good tax help. Generally speaking, the cards are stacked against the overseas American when it comes to properly meeting his US tax obligations, but this certainly does not mean that OVDP is the best solution for them. Unwarranted entry into the OVDP can be a terribly costly mistake, extrication from which is not at all easy. I remind readers of the case of Mr. and Mrs. Kentera.
That different treatment may be warranted in the case of tax noncompliance for taxpayers living abroad compared to those living in the United States has been recognized by the IRS. For example, it is reflected in the difference between the current versions of the Streamlined Foreign Offshore Procedure (available only to US persons living abroad who meet a specific non-residency requirement; no penalties assessed) and the Streamlined Domestic Offshore Procedure (for US residents; assessment of a 5% miscellaneous offshore penalty). For more information on the Streamlined programs, see my tax blog post here. This same notion is reflected in FS 2011-13 wherein the IRS discusses among other things, FBAR penalties and how these can be averted by “reasonable cause” in the case of dual-nationals and US citizens residing outside of the United States.
Coming Soon — IRS Webinars About Its New Compliance “Campaigns”
The LB&I Division will participate in a series of webinars that are open to the public and free of charge. The webinars will be in collaboration with various industry groups in the private sector (“stakeholders”) to provide tax practitioners with information about its new “compliance campaigns”.
The first stakeholder, KPMG, will host the kickoff in the series of webinars along with IRS employees. During the 75 minute webinar, Tina Meaux, assistant deputy commissioner, Compliance Integration, LB&I and Kathy Robbins, director of the Enterprise Activities Practice area will speak about the new “campaign” approach and provide answers to many questions regarding how the campaigns will operate. The webinar is scheduled for March 7, at 2 p.m. EST. Those interested in attending the March 7 webinar can register via this link to KPMG.
Dates and times for additional webinars hosted by other stakeholders, in which IRS executives will discuss more fully the 13 compliance campaigns, will be announced in the weeks ahead.
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