MEANING OF CURRENTLY UNDER EXAMINATION FOR PURPOSES OF OVDP FAQ 14
Frequently Asked Question (FAQ) 14 of the 2014 edition of the Offshore Voluntary Disclosure Program asks:
Question: “I’m currently under examination. May I participate in the OVDP?”
Answer: “No. If the IRS has initiated a civil examination for any year, regardless of whether it relates to undisclosed OVDP assets (See FAQ 35), the taxpayer will not be eligible to participate in the OVDP. A taxpayer under criminal investigation by CI is also ineligible. In these circumstances, the taxpayer or the taxpayer’s representative should .discuss undisclosed financial account and assets with the agent.”
The disqualifying factor is not that an audit was initiated at some time but whether the taxpayer is currently under examination. Thus, if an audit has been initiated, the question becomes when is the audit deemed closed for purpose of qualifying for the OVDP.
According to one IRS agent on the OVDP Hotline, normally signing Form 4549 as an agreed case ends the audit. But, internally, the IRS does not view the audit as closed until the 4549 is reviewed by the manager and a letter confirming its acceptance has been sent. Thus, the taxpayer seeking OVDP protection should normally wait for the letter.
For an agreed case, Letter 987 is sent. For a no change case, Letter 590 is sent. This normally takes a couple of months. At about the same time, a Code 300 series entry should appear on the taxpayer’s account transcript.
If the taxpayer’s name is about to be turned over, however, he or she might submit names to CI with a copy of the signed Form 4549. The signed Form 4549 might be accepted as closing the audit if there were no items reversed by the reviewing manager.
I did not discuss the situation of an un-agreed case with the Hotline agent because I believe the audit would not be considered closed and I can only envision extraordinary circumstances leading one desiring OVDP protection to appeal a revenue agents report on domestic issues.
Filing a petition in Tax Court after submission to the OVDP would also be against interest because the commissioner would presumably have to counter-claim on the offshore issues raised in the OVDP submission. Thus, such action would be self-defeating.
REQUIREMENT OF FAQ 14 TO DISCUSS OFFSHORE ISSUES WITH THE AGENT
Regarding the last sentence of FAQ 14, if there are no questions asked during the examination about offshore accounts or income and the taxpayer does not volunteer that he or she has an offshore account or unreported income, the OVDP agent believed the taxpayer should still be eligible for the OVDP.
- Thus, if the agent never asked and client never volunteered – OK.
- Also, OK if examination questionnaire asked and client answered truthfully, but the agent never pursued the issue.
Caveat: Agents are generally now asking: Is there any income not reported in the return?
The OVDP agent suggested that a taxpayer may answer no to the unreported income question, and still be eligible for the OVDP if he can establish that he genuinely did not believe there was unreported income because he does not have the account statements. But, this is a slippery slope and could lead to additional charges if the taxpayer is not being truthful with his or her counsel about the examination questions and answers or even if his memory is distorted and there is income and very large income.
There are many moving parts to this question and whether the client is allowed to enter the OVDP will depend on specifics.
Bottom line: the taxpayer must exit the audit with clean hands.
© 2015 by Robert S. Steinberg, Esquire
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