201712.05
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IRS Targets OVDP Denials, Rejections & Abandonment for Tax Audit

IRS Targets OVDP Denials, Rejections & Abandonment for Tax Audit by Golding & Golding

IRS Targets OVDP Denials, Rejections & Abandonment for Tax Audit by Golding & Golding

IRS Targets OVDP Denials, Rejections & Abandonment for Tax Audit

OVDP Preclearance Denied

With the implementation of FATCA, and the IRS receiving account disclosures and account holder information from more than 300,000 Foreign Financial Institutions, there has been a surge in the number of OVDP preclearance denials.

Investigation vs. Information

Preclearance denials are not necessarily because the IRS has initiated investigations against individuals. Rather, the basis for the OVDP Preclearance denials is because many of these Foreign Financial Institutions have already reported US account holders to the IRS. Thus, the IRS already has Account Holder information within its computer system, and therefore when a person goes to apply for OVDP – they will be denied.

What Does an OVDP Denial Look Like?

When an OVDP preclearance is denied, it is a relatively brief correspondence from the IRS indicating that the person’s application is denied either because it was untimely or incomplete. The majority of the time, the reason why a denial is issued is not because the application was “incomplete” but rather because the application was “untimely.”

What Does Untimely Mean?

Essentially, from an IRS offshore disclosure perspective, Untimely refers to the taxpayer losing the race to submit the OVDP Preclearance prior to the IRS already having the Taxpayer’s foreign account, asset or investment information.

Many years ago, there was not much of an issue or concern with the IRS receiving Account Holder information prior to an OVDP applicant submitting a preclearance letter, since FATCA only began enforcement in 2014.

Prior to FATCA, many Foreign Financial Institutions were not reporting US account holder information to the IRS. Moreover, because most of these foreign financial institutions did not issue a 1099 — there was literally almost no record of the US account holder either having a foreign account, or receiving foreign passive income from the foreign or offshore account, asset or investment.

As a result, the taxpayer was able to fly below the radar and not worry about the IRS having the information. Fast-forward to the present, and with FATCA firmly in place — and more than 110 countries and 300,000 foreign financial institutions agreeing to report US account holder information to the US government — there is a much higher likelihood that the IRS may already have your information, resulting in an OVDP Preclearance denial.

What Happens if an OVDP is Denied?

If the OVDP preclearance is denied or rejected, the individual still has options. But, these options must be discussed in detail with your attorney (hopefully for attorney-client privilege purposes, you retained an attorney and not a CPA to prepare/submit the preclearance letter) before you make any representation to the IRS.

While the additional options may not have the warm and fuzzy comfort of knowing the IRS will not pursue a criminal investigation (as is common with almost all OVDP submissions), it is important to understand that it is not the end of the line, and a criminal investigation is not necessarily imminent.

The IRS is understaffed and underfunded. Typically, if your facts are not horrible, you may still be able to negotiate an agreement with the IRS (although the penalty may be higher than 27.5%).

Are You Already Under Investigation?

It is becoming more and more clear that the IRS, Department of Justice and the U.S. Government as a whole have made Federal Tax Crimes involving Tax Evasion and Tax Fraud that involve Foreign Income and Offshore Accounts a key enforcement priority.

Typical IRS Criminal Tax Investigations include:

  • Offshore Tax Evasion
  • Offshore Tax Fraud
  • Offshore Money Laundering
  • Offshore Structuring

If you committed one of these types of Offshore Tax Crimes and are audited by the IRS, you have to be very careful. That is because you may not know the extent of the information the IRS already has against you, which may lead to a referral to the Criminal Investigation Division (CID) of the IRS.

Moreover, when an IRS Audit ends and depending on the strategies or tactics used by the specific agent who examined you,an IRS Investigation or inquiry by the IRS Fraud Division may start before you even know it.

The following is a brief summary of the common key tactics the IRS may use in trying to build a case against you, and/or moving your civil audit to a criminal investigation.

Contacting Your Bank Manager

It is safe to say the IRS would have no legitimate reason for speaking with the manager at the bank that you currently use, unless the IRS is trying to build a case against you.

Otherwise, why would the Internal Revenue Service take the time to go visit your bank manager? Oftentimes, when the IRS agent visits your bank manager, it is to begin comprehensive research on issues such as transfers, moving money offshore, and other matters related to your bank account.

They may want to know how often you come to the bank, and how often you request cash as opposed to other transfers. They may also want to know if there any other non-primary individuals on the account, accessing your information and if there are other accounts that the IRS may not know about yet.

Showing up at Your Home, Unannounced

When a person is not cooperating with the IRS, or consistently avoids appearing before the IRS, the IRS can get frustrated. One way the IRS relieves its frustration is by visiting by a person’s residence to try to put pressure on them.

This can be done for two main reasons: The first reason is to put some pressure on the individual to let them know that the IRS is aware of where person lives and that the situation is not going away so quickly. Second, is so the IRS can monitor how the person reacts after the IRS appears at their home. For example, as a result of the IRS visiting their home unannounced, in a person begins making significant transitions or transfers of money from one location or account to another – it may help the IRS pursue a criminal investigation.

Showing up at your Employment or Place of Business

This is a little more intense, and is usually not protocol unless a person owns their own business. We have had many clients tell us, in the pre-criminal investigation phase that the IRS showed up at their place of business to ask themselves – and other employees – various questions.

Of course, other individuals at the place of employment not required to speak to the IRS if they are not under subpoena or summons. Nevertheless, oftentimes people are so scared that when the IRS approaches, that they feel like they have to answer the question — and do. The employees mistakenly believe that by simply answering the questions it will make it go away – usually, the reverse happens and it just gives the IRS more ammunition to go after you.

Sudden Stopping of Communication From the IRS

If you are ever in an audit and the audit ends, but you are unable to obtain a closing letter or any other documentation from the IRS it may be cause for concern. That is because when a civil audit is stopped either abruptly (or with a little more tact), before it seems like the audit is complete, it is because the IRS agent believes there is a criminal issues

In a civil situation, the IRS is absolutely prohibited from asking further questions. That is because in a criminal setting, a person has a right against self-incrimination. A civil audit is not a criminal investigation, and therefore the agent does not have the right to ask criminal type questions.

Interviewing your CPA

If the IRS believes the CPA has information regarding a potential criminal tax matter, the IRS will send them a summons and bring their own “court reporter” with them to a question-and-answer session.

While the CPA has the right to counsel, it is important to understand that if the IRS is taking these types of actions against people on your behalf, then chances are the IRS is at least trying to put together all the evidence he can to determine whether there may be a criminal issue at play.

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