WASHINGTON - The Internal Revenue Service (IRS) needs to improve its efforts to address the noncompliance of taxpayers who are denied access to or withdraw from its Offshore Voluntary Disclosure Program (OVDP), according to an audit report publicly released today by the Treasury Inspector General for Tax Administration (TIGTA).
The United States generally taxes its citizens and resident aliens on their worldwide income. Some taxpayers use offshore bank/financial accounts to hide assets and income outside the United States in an effort to evade their Federal tax obligations. Taxpayers who intentionally fail to report income earned on offshore accounts or who neglect to disclose foreign assets as required by law face significant penalties and possible criminal prosecution if discovered by the IRS.
Through its OVDP, the IRS allows noncompliant taxpayers to disclose their unreported offshore accounts and related income.
TIGTA initiated its audit to assess how well the IRS is managing the OVDP to improve taxpayer compliance and hold accountable those taxpayers who fail to report their offshore financial activities on their tax returns and Reports of Foreign Bank and Financial Accounts (FBAR).
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a stratified random sample of 100 taxpayers from a population of 3,182 OVDP requests that were either denied or withdrawn from the OVDP.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 Projecting the sample results to the population of denied or withdrawn requests, the IRS did not assess approximately $21.6 million in delinquent FBAR penalties.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.
"In an increasingly global economy, it is important that the IRS ensure that taxpayers with foreign-derived income comply with their U.S. tax obligations," said J. Russell George, the Treasury Inspector General for Tax Administration.
In addition, the IRS does not have a process to determine the appropriate skill level needed for revenue agents to work OVDP request certifications. OVDP cases are not equivalent to audits of taxpayers' returns and generally do not require as much technical analysis as traditional tax audits.
TIGTA made six recommendations in its report.
IRS management agreed with all six recommendations and has taken or plans to take corrective action on five of them. Although the IRS agreed with the sixth recommendation, to establish one mailing address for taxpayer correspondence, it is on hold until a decision is made about the future status of the OVDP.