IRS has provided taxpayers who are concerned that their conduct is willful or fraudulent, and that it may rise to the level of tax and tax-related criminal acts, with a means to make voluntary disclosures and potentially avoid criminal prosecution. The voluntary disclosure procedures apply to both domestic and offshore matters and generally apply to disclosures that are made after Sept. 28, 2018, i.e., the date on which the last version of the Offshore Voluntary Disclosure Program (OVDP) closed.
Background. On Mar. 26, 2009, IRS announced its first OVDP, a form of a tax amnesty program. It permitted U.S. taxpayers with unreported foreign accounts to avoid criminal charges and pay reduced civil penalties by making a voluntary disclosure to IRS. The first OVDP ran through Oct. 15, 2009. Thereafter, IRS announced a second OVDP. The second OVDP closed on Sept. 9, 2011. On Jan. 9, 2012, IRS reopened the OVDP, which was modified in 2014 (the 2014 OVDP) and remained in effect until it was terminated, effective Sept. 28, 2018, by IR 2018-52, 3/13/2018.
Taxpayers with unfiled returns or unreported income who had no exposure to criminal liability or substantial civil penalties due to willful noncompliance could come into compliance using the Streamlined Filing Compliance Procedures (SFCP), the delinquent FBAR submission procedures, or the delinquent international information return submission procedures. IRS has said that, although they could be discontinued at any time, these other programs are still available.
The new program—the Updated Voluntary Disclosure Practice. In a memorandum, IRS has provided taxpayers concerned that their conduct is willful or fraudulent, and that it may rise to the level of tax and tax-related criminal acts, with a means to make voluntary disclosures and potentially avoid criminal prosecution. The voluntary disclosure procedures, called the Updated Voluntary Disclosure Practice, apply to both domestic and offshore matters.
The terms outlined in the memorandum are only applicable to taxpayers that make timely voluntary disclosures and who fully cooperate with IRS.
Processing of voluntary disclosure requests. The IRS memorandum sets out the following procedural aspects of the program:
IRS Criminal Investigation (CI) will screen all voluntary disclosure requests—whether domestic, offshore, or other—to determine if a taxpayer is eligible to make a voluntary disclosure. To accomplish this, CI will require all taxpayers wishing to make a voluntary disclosure to submit a preclearance request on a forthcoming revision of Form 14457. Internal Revenue Manual (IRM) 18.104.22.168 will, as it has in the past, serve as the basis for determining taxpayer eligibility.
Taxpayers must request preclearance from CI via fax or mail.
For all cases where CI grants preclearance, taxpayers must then promptly submit to CI all required voluntary disclosure documents using a forthcoming revision of Form 14457. 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. Once CI has received and preliminarily accepted the taxpayer’s voluntary disclosure, CI will notify the taxpayer of preliminary acceptance by letter and simultaneously forward the voluntary disclosure letter and attachments to IRS’s Large Business & International division in Austin, TX (LB&I Austin unit) for case preparation before examination. CI will not process tax returns or payments.
Once the LB&I Austin unit receives information from CI, LB&I will route the case as appropriate. IRS will not require taxpayers to provide additional documents to the LB&I Austin unit. If a taxpayer or representative wishes to make a payment prior to case assignment with an examiner, payments may be remitted to the LB&I Austin unit. Then, the LB&I Austin unit will forward cases for case building and field assignment to the appropriate IRS Business Operating Division and Exam function for civil examination.
All voluntary disclosures handled by examination will follow standard examination procedures. In general, IRS expects that voluntary disclosures will be resolved by agreement with full payment of all taxes, interest, and penalties for the disclosure period. In the event a taxpayer fails to cooperate with the civil examination, the examiner may request that CI revoke preliminary acceptance.
Resolution framework. The IRS memorandum provides the following framework for IRS to resolve noncompliance of taxpayers who make voluntary disclosures:
a) In general, voluntary disclosures will include a six-year disclosure period. The disclosure period will require examinations of the most recent six tax years. Disclosure and examination periods may vary as described below:
- In voluntary disclosures not resolved by agreement, the examiner has discretion to expand the scope to include the full duration of the noncompliance and may assert maximum penalties under the law with the approval of management.
- In cases where noncompliance involves fewer than the most recent six tax years, the voluntary disclosure must correct noncompliance for all tax periods involved.
- With IRS’ review and consent, cooperative taxpayers may be allowed to expand the disclosure period. Taxpayers may wish to include additional tax years in the disclosure period for various reasons (e.g., correcting tax issues with other governments that require additional tax periods, correcting tax issues before a sale or acquisition of an entity, correcting tax issues relating to unreported taxable gifts in prior tax periods).
b) Taxpayers must submit all required returns and reports for the disclosure period.
c) Penalties will be asserted as follows:
- Except as set forth below, the civil penalty under Code Sec. 6663 for fraud or the civil penalty under Code Sec. 6651(f) for the fraudulent failure to file income tax returns will apply to the one tax year with the highest tax liability. These penalties are referred to as the civil fraud penalty.
- In limited circumstances, examiners may apply the civil fraud penalty to more than one year in the six-year scope (up to all six years) based on the facts and circumstances of the case, for example, if there is no agreement as to the tax liability.
- Examiners may apply the civil fraud penalty beyond six years if the taxpayer fails to cooperate and resolve the examination by agreement.
- Willful FBAR penalties will be asserted in accordance with existing IRS penalty guidelines under IRM 4.26.16 and 4.26.17.
- A taxpayer is not precluded from requesting the imposition of accuracy related penalties under Code Sec. 6662 instead of civil fraud penalties or non-willful FBAR penalties instead of willful penalties. Given the objective of the voluntary disclosure practice, granting requests for the imposition of lesser penalties is expected to be exceptional. Where the facts and the law support the assertion of a civil fraud or willful FBAR penalty, a taxpayer must present convincing evidence to justify why the civil fraud penalty should not be imposed.
- Penalties for the failure to file information returns will not be automatically imposed. Examiner discretion will take into account the application of other penalties (such as civil fraud penalty and willful FBAR penalty) and resolve the examination by agreement.
- Penalties relating to excise taxes, employment taxes, estate and gift tax, etc. will be handled based upon the facts and circumstances with examiners coordinating with appropriate subject matter experts.
- Taxpayers retain the right to request an appeal with the Office of Appeals.
d) IRS will, in the future, provide procedures for civil examiners to request revocation of preliminary acceptance when taxpayers fail to cooperate with civil disposition of cases.
Effective date. Procedures in IRS’s memo will be effective for all voluntary disclosures received by IRS after the closing of the 2014 OVDP on Sept. 28, 2018.
All offshore voluntary disclosures conforming to the requirements of “Closing the 2014 Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers” FAQ 3 received or postmarked by Sept. 28, 2018 will be handled under the procedures of the 2014 OVDP.
At IRS’s discretion, this civil resolution framework may extend to non-offshore voluntary disclosures that have not been resolved but were received on or before Sept. 28, 2018.