Tax Law Center Blog

The Internal Revenue Service released new updated procedures for voluntary disclosures since the old Offshore Voluntary Disclosure Program (OVDP) closed on September 28, 2018. Last week, IRS deputy commissioner Kirsten Wielobob issued Interim Guidance Memo LB&I-09-1118-014, Updated Voluntary Disclosure Practice (PDF) on November 20, 2018 to supplement procedures regarding the voluntary disclosure practice. The updated procedures apply to all voluntary disclosures (both domestic and offshore) received by the IRS after the closing of the OVDP.

The new procedure updates the old Voluntary Disclosure Practice of the IRS to provide taxpayers with criminal exposure a way to come into compliance and potentially avoid criminal prosecution. The new procedure is “for taxpayers with exposure to potential criminal liability or substantial civil penalties due to a willful failure to report foreign financial assets and pay all tax due in respect of those assets.”

The memo does NOT terminate or modify the IRS’ Streamlined Filing Compliance Procedures (for non-willful taxpayers). Hence, taxpayers with offshore accounts who did not commit any tax or tax-related crimes and do not need the voluntary disclosure practice to seek protection from potential criminal prosecution can continue to correct past mistakes using the IRS’ Streamlined Filing Compliance Procedures or other procedures.

The updated procedures contain a new “Civil Resolution Framework” which addresses the scope of future voluntary disclosures and a new penalty structure.  Below we provide our general analysis of these newly-updated voluntary disclosure guidelines:

1.  The cost of voluntarily disclosing previously unreported foreign assets to the IRS avoid criminal prosecution could be higher and more unpredictable under the updated procedures. The new procedures mimic the old OVDP process with “preclearance” and “preliminary acceptance” stages. There is a six (6) year disclosure period, which is shorter that the old OVDP eight (8) year period.  Experienced legal counsel will be very important.

2. PROCEDURE: The process begins with taxpayers requesting “preclearance” for participation from the IRS Criminal Investigation Division (which is similar to the old OVDP program), after which civil examiners determine tax liabilities and penalties. The IRS will continue to use IRM 9.5.11.9 (no audit, no investigation, no illegal activity, etc.) to determine taxpayer eligibility for “preclearance”.

After “preclearance”, taxpayers must request “preliminary acceptance” (which is analogous to the old OVDP program) by submitting all required voluntary disclosure documents using a new revised Form 14457 (voluntary disclosure letter). This form will require information related to taxpayer noncompliance, including a narrative providing the facts and circumstances, assets, entities, related parties and any professional advisors involved in the noncompliance.

After “preliminary acceptance” is granted, the IRS Criminal Investigation Division will forward case for civil examination for submission of all tax returns, FBARs, etc.  The Criminal Investigation Division will not process tax returns or accept payments.

3. PENALTIES: The civil penalties could be higher and more uncertain than what would have been assessed under the old Offshore Voluntary Disclosure Program.

The civil fraud penalty, which is 75% of the tax due, is to be applied to the one single tax year with the highest tax liability. A taxpayer can instead request the lower 20% accuracy-related penalty (of tax due) instead of the civil fraud penalty. According to the memo, “granting requests for the imposition of lesser penalties is expected to be exceptional” and a taxpayer must present “convincing evidence” to justify lower penalties.  Persuasive experienced legal advocacy will be very important.

IN ADDITION, willful FBAR penalties (50% of account balance) will be asserted. Again, in exceptional circumstances with convincing evidence, the taxpayer can instead request the lower non-willful FBAR penalties (e.g., $10,000) instead of willful penalties. Again, compelling legal advocacy will be very important.

Generally, no other penalties for the failure to file information returns (i.e., Form 5471 penalty, Form 8938 penalty, etc.) will not be automatically imposed.  However, non-cooperative taxpayers can have more years’ of penalty imposition and greater penalties.